Tips in Developing a Financial Scorecard

Businesses have learned the hard way. It has taken years and years before certain management principles were developed. Add to this the actual processes in managing, such as a financial metrics and financial scorecard. Scorecards are used only not in the financial aspects of a company, but also in terms of performance and productivity. Scorecards are also used in clinics and hospitals. Wherever there is a job that needs to be done, scorecards are used.

In the financial world, scorecards are used to measure how well the company is performing in terms of revenue. There has to be clear targets set to allow the leaders of the industry or business to accurately and objectively gauge whether the business is earning or not. This is a key tool that will help business leaders to develop action plans and make wise decisions regarding the direction that the company should take.

Just about the same with other scorecards, measuring financial success has metrics. This may vary from one company to another, but these are all basically the same in the output or goal why this process and principle is being used. And that is to measure the company's actual strength in terms of financial stability and credibility.

First off, one needs to measure the overhead expenses and compare it against the gross sales or income. What others do is incorporate data in their balance sheets. Overhead expenses are things that a company paid for which are not attributed to business activity. An example of an overhead expense is rent. Even if this is not a money-generating expense, rent is necessary to be paid since without this expense, there will be no place for production. Another example of an overhead expense is insurance. Paying for insurance does not generate money, not even in the form of interest. However, this is necessary since no one knows when calamity would strike.

How a scorecard is presented is also a factor to consider when developing the tool. One may want to present expenses by division, gross and net earnings by division or department, overall billable headcount per division, and overall income per division.

The way data is presented is critical in understanding the figures. If the figures are presented in a convoluted way, this may lead to misunderstanding or misinterpretation of data. As an ultimate result, managers will look at a false solution, should there be pressing problems. One might think that lessening manpower in a certain division will lead to effective cost-cutting results; but in fact, this decision may not at all be helpful to the company's growth and development. Another issue that may come up is that managers may not see the potential of a specific product or line of business if the numbers are not shown right in the financial report.

Always remember that data is integral to the success of any company, especially money. If the data presented in the reports are wrong, then it may be concluded that the financial scorecard does not really measure performance. Rather, it dooms it.