An important lesson one learns quickly is that the CEOs don’t ask innocent questions. They have something in mind.
When boss steps in and asks me “How are we doing as a business?”, you know that he had something on his mind. And one more lesson learnt is that bosses don’t give answers but they make you derive them.
When the boss asks this question, it is better to dig a bit deep into this.
I am sharing the process that one can use and the information that needs to be gathered trying to answer boss’s question.
What is Benchmarking?
Benchmarking is the practice of identifying, understanding, and adapting the successful business practices and processes used by other companies (or even other departments within the same company) to increase your own business success.
It involve learning from one’s competitors. Benchmarking measures specific performance gaps between a company and its competitors.
What is Financial Benchmarking?
Definition: Financial benchmarking involves running a financial analysis and making a comparison of the results in order to assess a firm’s overall competitiveness, efficiency and productivity.
For best results:
- Use data from similar size companies and, where possible, within your own geographic area.
- Use a source that represents a large universe of inputs so that one or two unusual companies don’t skew the numbers.
- Choose the industry group (usually based on NAICS code) that best represents your business.
Benchmarking results in significant improvements in your processes, leading to a dramatic increase in your efficiency & effectiveness. Improvements from learning by benchmarking can result in running a business more efficiently and much more cost effectively.
As an example, suppose you are comparing your company with another company X.
You find that your gross profit margin is 3% lower than company X
What does it imply?
- Is it because their prices are higher?
- Or because their costs are lower?
- Does their sales mix include higher margin items?
- Do they have some long term deal for raw materials?
- Do they spend more on advertising?
- How does their sales-to-marketing ratio compare to yours?
Do above questions provide you with some insights as to in what ways the company X is doing better and a realization that you it is well within your means to improve on those counts?
Generally, benchmarking refers to the process of comparing one’s business practices and performance standards to other firms within one’s industry. Quality, time, and cost are the most common parameters to compare.
Some of the more useful financial benchmarks involve:
- Gross, operating, and net profit margins
- Sales and profitability trends
- Inventory, accounts receivable, and accounts payable turnover
- Salary and compensation data
- Revenue per employee
- Cost per employee
- Marketing expense as a percent of revenue
- Revenue to fixed assets ratio
Comparing the financial ratios of a company to those of the top performer in its class is a type of benchmarking
- Debt ratio
- Debt to income ratio
- Interest cover
- Net profit margin
- Gross profit margin
- Return on assets
- Operating expenses to sales
- Sales per employee
- Working capital
- Quick assets ratio
- Stock turnover
- Debtor ageing ratio
- Creditor ageing ratio
Cost and Management Accountants compare past performance and set standards for future performance. For example, they might analyze the level of fixed and variable costs in a production process for the last three years.
Managers can then use the average costs over the past three years as a benchmark to judge the current performance against and find new way to improve.
A retailer might take an industry sales average as a benchmark.
If you have already started wondering – “well, I am well aware of Benchmarking. However, it is not practically possible to practice it”!
Now most companies work either with an ERP OR with EXCEL or BOTH – better Business Intelligence Tools can take data from both ERP or EXCEL and help your way up into providing a valuable insights, using benchmarking as a strategy. You can have your own data, get the external data in EXCEL and the tool will help you benchmark your data with this external data the way you like to – and facilitate arriving at useful inferences accruing from such benchmarking.
These bosses. They want you to read their mind and also come up with answers. Boy, I wish I had some way of staying one step ahead of my boss.