Balanced Score Card as a Valuation Tool

Balanced Score Card as a "Valuation Tool"!!!! "Are you kidding???". "Isn’t it a "Performance Measurement Tool????" Yes I know those are the questions which you will have in mind. And why only you? Even, experienced and so called finance and valuation whiz will ask the same questions. Well in our so called love and passion for finance and valuation, what we forget is - valuation is just not Discounted Cash Flow or forecasting thru various statistical tools. Its much in depth than that. Accuracy of valuation is a derivative of forecast accuracy and this means that it depends on accuracy of assumptions. So, when one does a valuation of a company / individual, strategies of the company from all the perspectives of a business, becomes very critical. So, before laying out the numbers on table / spreadsheet, it is important to know as much about the company that is needed to be known. In this regard, I feel Balanced Score Card (BSC) is the most holistic strategic tool that has ever been developed.

BSC has four business perspectives - Finance, Customer, Internal Business Process and Learning and Growth. Finance perspective is something which is a derivative of all the three perspectives. Now the first and the most important part is to get hold of the vision and mission statement of the company under the screen of valuation. This can be then trickled down to objectives under every perspective. For e.g for a manufacturing company the vision statement can be - To be the most admired company in terms of returns to shareholders, getting customer appreciation and contributing toward society in terms of Health and Education. Hence, we can assume the objectives under various perspectives.

Objectives under financial perspective:

• ROI
• EVA
• Free Cash Flow
• Sales Growth

Objectives under customer perspective:

• Customer Satisfaction Index
• Market Share
• New Product Introduction

Objectives under Internal Business Perspective:

• On Time Delivery
• Inventories

Objectives under Learning and Growth:

• Six Sigma
• Lean Manufacturing
• TQM

Now with these objectives clear, one can narrow down to the numbers in terms of sales, profit, cash flow and others....

Forecasting by overlapping with the economic outlook will be a piece of cake and more accurate. And the valuation is done in its "True Spirits".

Remember, valuation is a combination of science and art. Strategy should be the foundation of any valuation exercise.