Balanced scorecard and economic value added are two measures used by businesses to measure their business performance. The performance measurement system is used to plan and control business activities to achieve strategic objectives. These two measures are widely used across the globe.
Definition of Balanced Scorecard
Balanced scorecard is a strategic planning and management framework used to align business activities to vision and objectives by using a mixture of financial and non-financial measures. This measure contains four perspectives, financial, learning and growth, internal business process, and customer perspective. On financial perspective, the balanced scorecard measures the profitability, cash flow and financial results of the company. On non-financial aspect, it measures the level of training obtained by staff, achievement from the training, level of staff turnover and job satisfaction. In terms of internal business processes, the balanced scorecard measures the level of job production processes, the quality of production and whether these meet the required quality. On customer perspective, it measures the level of customer satisfaction, customer services and percentage of customer retention.
Definition of Economic Value Added
Economic value added measures a company's economic profit by taking into account the net operating profit and capital cost. It shows the residual wealth the company has created for its shareholders. The economic profit is an amount earned by the business after deducting all operating expenses and a charge for the opportunity cost of capital employed. Economic value added equals net operating profit after taxes less the cost of capital.
The balanced scorecard measures a company's performance through financial and non-financial perspectives. The advantage of this measure is that it takes into account financial and non-financial factors in its performance measurement. These perspectives answer such questions as, "How do the shareholders measure the company's success?", "Is the staff training sufficient to improve efficiency?", and "Does the company have a good customer service system?"
In contrast to the balanced scorecard, economic value added measures a company by using a single indicator, a financial tool. A company uses economic value added to measure how efficient its resources have been utilised. The indicator shows the difference between return from investments and the cost of resources used. The figures taken from the indicator were derived from past transactions and may not give the true indication as to the future performance of a company.
Economic value added and the balanced scorecard do not share similar goals. While the goal of economic value added is to add value to the company, the balanced scorecard aims to ensure the company's activities are aligned to its strategic objectives. Balanced scorecard broadens the view of performance by including financial and non-financial factors of a leading and lagging nature, while economic value added provides a link among decision, performance measure and rewards. The combination of these measures helps managers to perform better and improve the company's overall performance.