An interesting way to determine the direction of your business is by using a business scorecard. A business scorecard is an evaluation tool that allows you to review and analyze specific areas of your business’s performance on a regular basis.
Given the many factors involved in operating a successful company, it can be difficult and time-consuming to evaluate how well each part of your business is doing. A scorecard helps you compare one area of financial performance against another so you can develop insights into which parts are strong and which need help.
A good example of a basic scorecard begins with six categories: sales, cost of goods sold, gross margin, expenses, profits before taxes, and profits after taxes. Within each category are key measurements that define how well your business is performing. Once you have developed the measurements, you can use a basic spreadsheet to track and monitor them.
Here’s an example:
It is important to know that not all businesses need to use a scorecard, and even those that do may not require one as extensive as this example. There are many other possibilities for categories and measurements than what we show here. For instance, your sales category could be broken down by different departments or product lines rather than just including all sales together. This approach might work better for companies with broad product lines such as car dealerships or office supply stores. However, if your company sells only one type of product, grouping all sales together works fine.
The key is to make sure the scorecard your design fits your company, and keep it simple. As you continue to track the measurements over time, you can see which comparisons are meaningful and which might not be worth your effort. Once you have decided on the scope of the scorecard, use it as a benchmark for evaluating future performance against past successes.
A business scorecard can help in more ways than just understanding where your business is today—it can guide your future decisions about growth or acquisition or even whether to stay in business. You’ll know if changes need to be made by comparing current results with what’s expected under each category. For example, if an expense line item is above budget, is that because costs were higher than anticipated? Do extra marketing efforts need to be added? Or should margins be adjusted to bring costs into line? If profits are low, is that because the economy is affecting your industry or because of problems with your business model?
The scorecard gives you a quick way to spot major trends and issues so you can take corrective action. By using it before results become serious, you can plan for change rather than having to react to it later. And if the problem proves to be short-lived, at least you will have gained some insight into how to handle similar situations in the future.
There are many different types of business scorecards that are relevant according to what discipline the team belongs under. For example, Sales & Marketing managers will find value in one specific type of spreadsheet whereas Operations managers may find more value in an entirely different type.