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Linking the Budget to the Balanced Scorecard

For the most part, traditional budgeting has focused on the financial performance of an organization. However, many of these financial performance measures, designed to indicate the success of budget plans in contributing to increasing profits, were developed for an industrial world.

Times have changed, and new ways of approaching planning and performance evaluation have changed as well. With information technology and global markets becoming the model for the modern business environment and as nonprofit organizations grow in size and sophistication, organizations have to recognize and value their intangible and intellectual assets as well as the tangible assets represented in numbers on the balance sheet.

The balanced scorecard is a way for managers to view the organization from four interrelated perspectives of operational drivers for future performance:
  1. Financial perspective: How are we doing using traditional financial performance measures? How do shareholders view us?
  2. Customer perspective: How satisfied are our customers?
  3. Internal perspective: What ways do we, and in what ways should we, excel?
  4. Innovation and improvement perspective: How can we continue to improve and create value in the future?
The balanced scorecard gives upper management a quick and effective view of the critical factors affecting the organization now and in the future. The balanced scorecard also puts the strategic mission, rather than financial controls, at the center of the planning process.
The balanced scorecard is linked to the budget process in the following ways:
  • It highlights leading indicators, such as new product development, customer complaints, or direct mail response rates, instead of only sales or cost figures
  • It balances the four perspectives so that, for example, pressure to develop new products doesn't overshadow the need for quality products and customer satisfaction
  • It helps management to communicate strategic goals and mission to all the stakeholders in the organization
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