Many companies are using a Balanced Scorecard (BSC) and Economic Value Added (EVA) as a way to measure performance. I will provide a summary of both to determine if BSC or EVA is the better way for a company to determine performance.
Organizations need to be able to measure their financial and non-financial performance. The balanced scorecard is one way to measure the organizations past, current, and future goals and objectives and puts them into a set of performance measures that is easy to understand (Horngren, Sundem, Stratton, and Burgstahler, Schatzberg, 2008). A balanced scorecard is used to evaluate performance from the following four objectives:
• Learning and growth – It is very important to have qualified educated employees within an organization. We need to determine if our employees are trained and if there are any areas where they may need improvement.
• Internal business – Managers need to ask themselves if the organization is satisfying both the shareholders and their customers. This will help management determine how well the business is running.
• Customer values – It is important that our customers are satisfied. Companies will often send out a customer satisfaction survey to determine if customers are happy with the suppliers performance. Some areas that may be measured would be customer service or on time delivery of the product.
• Financial – It is very important to have up to date accounting information for our stockholders. We need to determine how we are going to make money in order to be a profitable company (BSC Resources, 2008).
More managers are choosing to apply the balanced scorecard because financial measures such as Return on Investment (ROI) are not sufficient enough to determine how an organization is performing (Horngren, Sundem, Stratton, and Burgstahler, Schatzberg, 2008).
Economic Value Added, or “economic profit”, measures an organization’s true profit after all the cost of invested capital is deducted from this number. EVA helps managers improve their decision making about a person, project, department, or company. The formula is EVA = adjusted after-tax operating income – (after-tax cost of invested capital (%) x average invested capital). A positive EVA means that value has been added to the company for the shareholders. A negative EVA means that the company has not contributed to the value of the organization (Harper, 2008). Managers can increase EVA by:
- increasing revenue
- minimizing operating expenses
- producing the same goods and services using less capital
- investing only in projects that will be productive
- reducing the cost of capital
Many companies are now using both EVA and the BSC. EVA is a good way to determine financial performance and BSC is a good way to determine not only financial performance of an organization, but the non-financial performance of the organization as well (Jalbert, Landry, 2003).
References:
BSC Resourceshttp://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx
Harper, D. (n.d.). Investopedia [EVA]. Retrieved November 29, 2008, from http://www.investopedia.com/university/EVA/
Horngren, C.T., Sundem, G.L., Stratton, W.O., Burgstahler, D., Schatzberg, J., Introduction to Management Accounting (14th Edition) Pearson, Prentice Hall, Upper Saddle River, NJ.
Jalbert, T., & Landry, S. P. (2003, Spring). Which performance measurement is best for your company? Management Accounting Quarterly. Retrieved November 20, 2008, from http://findarticles.com/p/articles/mi_m0OOL/is_3_4/ai_105997565/pg_8
