The balanced scorecard

The balanced scorecard tracks strategy through four sets of measures: financial, customer, internal business process, and innovation and learning. Each perspective has its own goals, measures and targets, so managers can see not only this year’s profit but the customer, process and capability results that will drive profit in later years.

Where does the balanced scorecard come from, and what problem does it solve?

The approach was set out by Kaplan and Norton in 1992. ACCA’s technical article on the balanced scorecard describes the problem it answers: financial reports often show little more than historical score keeping. Sales may have risen, but nothing in the accounts explains why, or whether the growth can last.

Single financial measures have further weaknesses. ACCA’s article on decentralisation and performance measurement notes that measures such as return on investment and residual income can be distorted by managers, can be confused with the objective itself, and say that performance has worsened without saying why. The scorecard adds forward looking, mostly non financial measures that explain the financial result.

What are the four perspectives?

Perspective	Question it answers	Examples of measures
Financial	How do we look to shareholders?	Sales, costs, gross profit percentage, earnings per share
Customer	What do customers value, and are we delivering it?	Active customer accounts, repeat business, delivery lead time, complaints
Internal business process	What must we do well to deliver that?	Rework, sales returns, warranty claims, days to fulfil orders
Innovation and learning	Can we keep improving?	New products launched, staff training, staff turnover

ACCA suggests reading the perspectives as a hierarchy. Good financial results depend on satisfied customers who return and are willing to pay. Customers return because the business performs well on what they value, which ACCA lists as time, quality, performance and service (including flexibility), and cost. Delivering that depends on internal processes. Keeping those processes ahead of competitors depends on innovation and learning.

How do goals, measures and targets fit together?

Each perspective needs formal goals and measures. ACCA distinguishes a goal, the general intention, from an objective, a specific measurable result. Its example is a goal of increasing brand awareness, with an objective of increasing website visits by 20%.

The choice of measure needs care. ACCA notes that a goal of strengthening the customer base could be measured superficially by counting receivables accounts, but is better measured by counting active sales accounts. Quality might be measured by reworked items, sales returns and warranty claims. Where something is hard to measure directly, such as staff morale, imperfect proxies like staff turnover, sickness days and customer complaints are better than nothing.

ACCA’s performance measurement article links this to critical success factors, the performance requirements fundamental to success, and key performance indicators, which measure achievement of those factors. It says KPIs should be specific, measurable and relevant to a critical success factor. For more on choosing indicators see KPIs for small businesses.

What does a scorecard look like for a small business?

Illustration only. A plumbing and heating firm with eight engineers wants to grow boiler servicing contracts, which give steadier income than one off repairs.

Perspective	Goal	Measures and targets
Financial	Grow recurring income	Service contract income up 15% on last year; gross margin on contracts of at least 45%
Customer	Keep contract customers	Contract renewal rate of 85%; complaints under 2 per 100 visits
Internal business process	Fix first time	First visit fix rate of 90%; average days from call to visit under 2
Innovation and learning	Build skills for new heating systems	Four engineers trained on heat pumps this year; engineer turnover below 10%

The links between rows tell the strategy. Training (learning) improves first time fix rates (process), which keeps contract customers happy (customer), which drives renewals and recurring income (financial). If renewals fall, the process and learning measures show where to look. The owner reviews the scorecard monthly alongside the management accounts.

What are the advantages?

ACCA’s articles list several:

• It shows how financial results are achieved and how weak performance in one area can damage future profit.
• It balances short and long term objectives. ACCA’s example is cutting research or customer facing staff to hit this year’s budgeted profit; the scorecard’s customer and learning measures expose the longer term damage.
• Poor performance is harder to hide when several measures are used, so managers are less able to distort results.
• It is flexible, since measures can change as priorities change.
• What gets measured gets done: managers pay attention to the areas on which they are appraised.

What are the main criticisms?

• Information overload. ACCA points out that five measures in each of four perspectives gives 20, so some prioritisation is needed to stop managers chasing easy targets.
• Choosing measures can be difficult and somewhat arbitrary, and obtaining the data can be costly.
• Conflict between measures, for example rushing a flexible order for a customer can harm quality.
• Inward focus. ACCA notes the framework gives too little attention to external factors such as competitor activity.
• Setting standards for each KPI is hard where there is no history; ACCA suggests benchmarking against other organisations. Deciding how to judge a manager who improves everywhere except profit is also difficult. One answer ACCA gives is to require improvement in all areas and not allow trade offs.

Does company law require a balanced scorecard?

No, but there is an overlap. Section 414C of the Companies Act 2006 requires the strategic report’s business review to include, to the extent necessary for an understanding of the business, analysis using financial key performance indicators and, where appropriate, other key performance indicators, including information relating to the environment and to employees. Section 414C(5) defines KPIs as factors by reference to which the development, performance or position of the business can be measured effectively. Under section 414C(6), a company that qualifies as medium sized need not comply with the KPI requirement so far as it relates to non financial information.

A company that already runs a scorecard often has a ready source for these disclosures, though internal targets are commercially sensitive and need not be published. See strategic report requirements.

What mistakes come up most often?

• Adopting the four headings but filling them with measures unconnected to the strategy.
• Too many measures, so nothing has priority.
• Measures without targets or owners. ACCA’s view is that without measures across all perspectives, no one knows what is expected or whether performance is adequate.
• Rewarding managers on profit alone while claiming to use a scorecard.
• Never revisiting measures once the strategy changes.
• Holding managers to measures they cannot influence; responsibility should follow the structure set out in cost, profit and investment centres.

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Related Accountapedia entries

• Customer profitability analysis
• Internal transfer pricing between divisions
• Asset turnover ratio
• Net profit margin
• Zero based budgeting

Sources

• ACCA: Balanced scorecard
• ACCA: Performance measurement
• legislation.gov.uk: Act 2006 c. 46, section 414C

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.