An appropriate financial perspective for a balanced scorecard

Abstract

The balanced scorecard has proved itself as a valuable strategic tool in measuring not only the financial performance, but also the customer focus, internal business processes and learning and growth of a company. To date, very little has been done to incorporate new breakthroughs in financial management in the financial perspective of the balanced scorecard. In this study, new trends in financial management research are recognised in suggesting a ‘balanced financial scorecard’ comprising only five selected measures of financial performance. The statistical technique of principal component analysis is used to test the ability of these five measures to predict the market value added (MVA) of a company, compared to the predictive power of a range of accounting ratios. The results show that over the long term, the five suggested measures out-perform traditional accounting ratios, thus lending support to the contention that the five suggested measures better represent the drivers of shareholder value than do the traditional accounting ratios. The search for a balanced financial perspective is an ongoing process, but the suggested measures could make a constructive contribution in taking this process forward.