ACC202 Assignments Week 3 - Discussion 2

The Balanced Scorecard is a performance measurement design that seeks to focus performance measurement on operational efficiency. The Balanced Scorecard was developed since previous measurement standards that relied on Return On Investment [ROI] could be manipulated to indicate improved performance without any increase in operational efficiency as would have been expected by investors. For example, an underperforming manager could manipulate asset allocation to yield better returns on investment for those departments that are monitored as indicators for overall performance of the operation. Earning Per Share [EPS] could also be manipulated to provide what was required since the category of what classifies as earning is under the control of management. The Balanced Scorecard was therefore designed to embody key stakeholder interest in a firm and establishes a specific set of measures that link important operation drivers to financial performance. It involves analysis of four ‘perspectives’ in an organization: Learning and Growth, Business Processes, Customers, Finance.

Organizations that implement performance measurement based on the Balanced Scorecard are able to focus more on strategy and results as opposed to reports. They will be able to prioritize projects in a manner that best aligns them to the organization’s vision and overall strategy.

The Economic Value Added [EVA] considers that there should be a minimum return on all investment decisions and that each source of capital has its own minimum returns expected. As such, Economic Value chooses to focus on how each shilling invested from one source of capital compares to the cost of capital. The goal of EVA is to quantify the cost of investing capital into a certain project or firm, and then assess whether it generates enough cash to be considered a good investment. There are three key components to be considered under EVA: Net Operating Profit After Tax, Capital Invested, Weighted Average Cost of Capital which allow the organization focus on the true economic profit of a company and not accounting profits By using Economic Value Added, a firm’s management can consistently improve strategy to suit the needs of the shareholders to increase their wealth. Since Weighted Average Cost of Capital is used, then the firm is able to better plan for the capital structure around how they add economic value to the operations.

Corporate and Divisional performance measurement; Return On Investment and Residual Income are short-term measures which make management focus on short-term profits at the expense of sustainable performance in the long term. This is known as Sub-optimization. Compared to EVA and Balanced Scorecard, which require management to fine tune operations so as to improve performance. The holistic approach to performance that included financial and non-financial information and not blinding faith in financial performance is the strength of Balanced Scorecard and Economic Value Added

“Economic Value Added (EVA) - Formula, Examples, and Guide to EVA.” Corporate Finance Institute, corporatefinanceinstitute.com/resources/knowledge/valuation/economic-value-added-eva/ .

“What Is the Balanced Scorecard?” Balanced Scorecard Institute, www.balancedscorecard.org/BSC-Basics/About-the-Balanced-Scorecard.