The balanced scorecard and the small business

This article illustrates how Balanced Scorecard techniques are being used in small businesses. It is particularly relevant to students who are based in small practices or even small businesses where exposure to business techniques, frequently presented against a framework of large corporations, may be limited. After reading this article, students will be better able to relate what they have learned to their everyday business environment and thus understand the techniques and produce better answers in their examinations.

Debate behind the balanced scorecard

The student should remember that the primary criticism that has motivated the Balanced Scorecard is that traditional techniques over-emphasise financial performance often to the possible exclusion of other measures. Such an approach, it is further argued, is “short-termist”.

In considering the validity of the criticism, the student should remember two things. First, the famous R C Townsend quip, “if we are not in business to make money, what are we doing it for?”

Secondly, effective performance measurement is not confined to financial measures and that the inclusion of non-financial measures is conceptually correct.

Any attempt to include qualitative measures introduces an element of subjectivity. Such measures are best avoided.

In principle, the measures should:

  • cover all areas;
  • include all stakeholders;
  • be long term as well as short term;
  • be linked to strategy.

Objectives and strategy

Every small business should have an objective. However, this may depend upon what the small businessman actually wants. Small businesses start for a variety of reasons. Employees of large companies made redundant set out to market their skill, often because they are too old to find other, suitable employment. Others have an idea, or see a niche, and exploit it. McClelland suggests that:

  • the objective should be beyond satisifying basic needs ” perhaps at least two rungs up the Maslow Pyramid;
  • it should be demanding and bring out the achiever. Bank loan applications require a business plan and this requires the applicant to state short, medium and long-term objectives. Curiously, organisations such as the Prince”s Trust, set up to help fund new businesses which have been rejected by the banks, do not appear to require a statement of objectives.

Achieving the objective will dictate the strategy. Obvious points are:

  • the level of investment required;
  • cost of entry into the market ” a two edged sword. Low cost means ease of entry, it also means ease of entry for competition;
  • cost of entry versus on-going overhead costs;
  • how are customers to be obtained?

Table 1 introduces us to Dawn”s Pets. When the owner set out, she probably had no formal objective. Now, after five years of running the business, she has probably achieved her sub-conscious objective: a business that makes a small profit, contributes to living expenses and provides a few luxuries like family continental holidays.

The McClelland view would suggest a prima facie under-achiever.

By contrast, Dolomite Pets saw a niche in the pet market. There were basically two types of pet shop. One was small, scruffy, probably untidy but with corner shop convenience. The other was Petsmart, often out of town, clinically clean with mind-boggling choice for one stop shopping but effectively closed to customers who bought small and appreciated convenience. Dolomite set out to market a compromise ” a clean modern shop, with good quality selection but with convenience. His objective is to put that type of pet shop into larger shopping areas.

These points should be retained in the mind as we move through the four aspects of the balanced scorecard.

Financial perspective

Top of the list of financial measures is ROCE ” Return on Capital Employed. This has been a frequently criticised measure. Obvious difficulties are defining the capital employed, dealing with fluctuations, and the implications of low cost and low asset businesses. The only relevance capital employed might have to the small business is seeing it grow. As each balance sheet is drawn up, the traditional equation emerges: opening capital plus profit less drawings equals closing profit. Table 1 shows a typical example.

Table 1: Dawn”s Pets growth in capital employed 1995″1999
Year end 1995 1996 1997 1998 1999
B/fwd(£k) 2 2 6 13 17
Profit 1 4 9 7 13
Drawings (1) (2) (3) (7)
C/fwd 2 6 13 17 23

1994/95 was the first year. When Dawn set out, there were three pet shops in the village. She is now the only survivor. In surviving, she has had to deal with a large out of town Petsmart which is only 10 miles up the road. With perserverance, she is now able to make a small living off the business and she has seen it grow, despite the competition.

More useful, even if it is a mix of operational and strategic measures, is the control of cash. Fleche Taxis was a reasonable business, operating in a small town with a poor bus service. There was no railhead for ten miles. Fleche has one competitor for the business within the town and towards the railhead. However, the bank manager was unhappy about an outstanding loan and the continual requests for higher overdraft limits. He demanded that the business worked within its overdraft and sought to reduce it, and the directors were equally anxious to eliminate the loans. The bank manager insisted upon a monthly liquidity report. Table 2 shows the latest of these reports compared with the same period for two earlier years.

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