Benchmarking is used by many business owners to assess the health of their businesses. An industry benchmark is typically a range of financial performance metrics in key areas, compiled by averaging data from a group of comparable businesses. These benchmarks provide a reference point for business owners to gauge the areas of financial success and measure progress against established goals.
When evaluating benchmarks to assess financial successes and progress the following should be considered:
Compatibility of data - When selecting comparable companies, the businesses selected should have many similar characteristics. For example, the comparable companies should be similar in size, offer similar products and/or services, have a similar corporate structure, and an equitable number of employees. Comparing a company with 500 employees to one that has 25 will not be a good comparison--even if they offered identical services.
Time period of data - It is imperative to understand the time frame of data comprising an established benchmark when comparing a business’ financial performance to that benchmark. For example If you have a retail store and you want to compare it against other retail stores that are similar in size, product, and corporate structure and the data from the benchmark was compiled for the period January 1 2008 through December 31, 2008 and the data collected for the retail store is January 1 2012 thru December 31,2012, the bench mark may be faulty because economic conditions may have changed substantially.
When evaluating benchmarks to assess financial successes and progress the following should be considered:
Compatibility of data - When selecting comparable companies, the businesses selected should have many similar characteristics. For example, the comparable companies should be similar in size, offer similar products and/or services, have a similar corporate structure, and an equitable number of employees. Comparing a company with 500 employees to one that has 25 will not be a good comparison--even if they offered identical services.
Time period of data - It is imperative to understand the time frame of data comprising an established benchmark when comparing a business’ financial performance to that benchmark. For example If you have a retail store and you want to compare it against other retail stores that are similar in size, product, and corporate structure and the data from the benchmark was compiled for the period January 1 2008 through December 31, 2008 and the data collected for the retail store is January 1 2012 thru December 31,2012, the bench mark may be faulty because economic conditions may have changed substantially.
Calculation methodology - When developing benchmarks, it is important to know how the comparative businesses arrived at the calculations so that the financials are a true comparison.
Key metric comparisons - There are several ratios that businesses use to assess financial performance which can be useful to benchmark. These include
- profit margin - measure of profitability
- current ratio - measure of liquidity, current assets/current liabilities
- quick ratio -measures immediate cash liquidity, cash, plus accounts receivable/liabilities
- debt/equity - measures how well a company is leveraging its debt
Financial benchmarking is a valuable tool for small to mid-sized businesses in assessing how they compare with their peers. Alan Neal & Associates is currently offering a free analysis of your business processes and accounting system. If you would like to learn more on how we can assist with your business processes, including benchmarking, please call me at 423-756-4076 or email me at alan@alanneal.com.
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