What are benchmarks in business?
Benchmark analysis is the method of comparing industry benchmarks in a particular business against its peer businesses to work out key areas that are strong or weak within a businesses performance. Comparing comparative data over time can assist in the areas which will provide the most benefit and allocation of resources to strengthen a business. The process of business benchmarking involves obtaining high-quality data from real businesses and then undertaking a detailed analysis to determine a range of best practice indicators.
Benchmarking for business
For businesses, it is important that benchmarking data not only compares business demographics such as size and income, but also performance metrics. There are many types of benchmarking which business owners can utilise to drive sustainable business growth, however, the most important are:
Performance benchmarking: undertaken to analyse overall business performance. This includes comparing overall revenue and expenses, profitability, business value and cost of goods sold.
Process benchmarking: to assess how a business performs operationally against industry peers. This includes analysing productivity, asset usage, employee performance, stock turn rates and investment decisions.
Strategic benchmarking: the process of analysing a competitor’s decisions. This includes comparing how much focus competitors have on products vs. services, how much do they invest in customer services, how many employees do they have to achieve high profits, how valuable is a good location and what areas of the business do they invest in.
Why should a business use benchmarking?
One of the most important uses of benchmarking is to assess a business’s performance against direct competitors. This enables business owners to keep a competitive edge in a growing economy.
Annually benchmarking a business against the industry enables business owners to gain a clear accurate picture of how their business is performing. This enables companies to see their real performance levels and identify opportunities for improvement.
Business benchmarking should also be used to assess spending habits to ensure management is investing wisely. For example, if a business is spending much less than the industry standard on information technology, it may be worth investing in systems to increase productivity.
It is also important for businesses to review the pricing of products and services regularly. This ensures companies know how much they should charge for products and services based on the industry benchmarks.
Benchmarking annually can further support businesses to address any issues with customer service by assessing how much to spend on servicing and value-adding for customers. This process can increase customer satisfaction and ultimately lead to increased repeat business
How are benchmarks analysed in business?
Benchmarks are worked out on a % basis compared to turnover. For example
Sales = $100
Cost of sales = $35
Wages = $40
Cost of sales = 35%
Wages = 40%
From this the range of acceptable cost can be analysed and then worked backwards to resolve the issue or strength key components of a business.
This method has been used in all circumstances of our business analysis and allows us to breakdown a business to work out its most effective action plan. Being business is not necessarily being productive. Ultimately bench-marking will help improve underlying profit of a business and identify areas that are consuming profit or cash flow.
Budget Vs Actual with benchmarking
Comparing your budget to your bench-marking is a great way of improving your business and enables you to create a tangible measure of how you are going particularly with the ability to compare pears. If percentages are variant from their goal a business owner is able to work backwards on the problem and the remeasure after a period of time to see if it has been resolved.
Where can I find benchmarks?
Benchmarks vary country to country as key costs can vary vastly particularly in rent / labor and cost of sales. In Australia they can be found on www.ato.gov.au or within data business books from your local store generally ones targeted for CFO work are great . An accountant can also be a great key source for this information as they will be away of what happens locally to your industry.