This article originally appeared in the January 2010 issue of Smart Business Philadelphia magazine.
When faced with the media storm of news surrounding the economy, many corporate leaders assume that a drop in sales and other business trends is the norm. However, if companies are not conducting historical trend analysis and industry benchmarking, they may not have all of the relevant facts necessary to prepare meaningful forecasts or measure performance against other businesses within their industry.
"Many businesses are falling into a similar thought pattern, assuming all businesses are experiencing the same troubles — and thereby, the same results. They assume this is the norm based on current market conditions," says Robert Olszewski, CPA, director in the Audit and Accounting Group with Kreischer Miller. "As we move through these volatile times, companies should be benchmarking against their industry group and performing a critical assessment of the historical trends of their own business. Historical trends tell the story of where you have been, where you currently are and assists in forecasting for where you would like to be."
Smart Business spoke with Olszewski about using both historical trend analysis of your business and benchmarking within your industry to aid in strategic decisions and help you stay ahead of the curve.
Why should companies use historical trend analysis and industry benchmarking?
Over the past year, businesses have routinely asked how everyone else is faring through the economic turmoil. Their questions can be quantitatively addressed using historical trend analysis and industry benchmarking.
Historical trend analysis provides the financial story of a business in recent years and assists in monitoring the impact of key decisions. Benchmarking is the process of comparing business performance metrics against other businesses operating within a similar industry, provides a snapshot of the performance of your business and aids in assessing yourself against the competition.
Benchmarking within a specific industry often tells a unique story. For example, over the past year, a business maintained consistent sales but the gross profit percentage eroded. The management team thought they were operating above average based on what they had routinely witnessed on the news. To their surprise, the industry benchmarking indicated that, on average, sales within their industry were up 5 percent and the gross profit percentage had remained relatively consistent.
Business leaders often find a great deal of value in historical trend analysis and industry benchmarking. Both processes provide an opportunity to step back, compare and subsequently monitor.
How can companies use historical trend analysis and industry benchmarking?
Businesses can utilize both processes to monitor performance, develop plans, adapt to change in a timely fashion and identify potential business risks. We operate in a fast-paced environment and both historical trend analysis and industry benchmarking provide management and those charged with corporate governance an overview of how the business is performing as a whole. Key business decisions are made on a regular basis inclusive of process improvement, staffing requirements and technology upgrades. Trend analysis and benchmarking provide the opportunity to measure the impact of those decisions that were rendered.
Historical financial trends provide a perspective on what the company may have looked like in terms of cost structure and staffing needs at certain revenue levels. This data provides the opportunity to go back to a period when the company was at certain revenue levels, quantify the number of full-time equivalents and make adjustments based on today’s numbers. Companies may also use industry benchmarking to evaluate labor costs, unemployment trends, average costs per full-time equivalent, or full-time equivalents compared to revenue.
What are some keys to making this process successful and useful?
Disaggregation of information can often be a useful tool within trend analysis. For example, reviewing gross profit percentage or inventory turnover within a specific product line may provide results that vary from the overall company. And, it can provide insight on where the company needs to focus its time and effort. For example, disaggregation of information allowed one company to identify that a significant amount of resources and efforts were being devoted to e-commerce, which accounted for 3 percent of total revenue. Upon obtaining this information, the owners and management redirected the focus of the company toward the product line that accounted for 45 percent of total revenue.
Industry benchmarking and historical trend analysis must also take into account key financial assets and liabilities. Balance sheet analysis can potentially mitigate the inadvertent assumption of business risks. For example, one of the largest assumptions of risk within a company is credit risk. By computing the average days outstanding and turnover ratios on accounts receivable, a business may uncover certain risks that were not previously identified in relation to customer credit. It is imperative to understand why specific fluctuations may have occurred in the early stages of the process.
Who should be involved in the process of analyzing and benchmarking?
A majority of accounting personnel have the ability to provide the historical financial data based on information obtained from the general ledger accounting system. Analysis of the data requires dedicated time and business acumen to understand the results in order to provide an action plan for the future. However, taking the time to comprehend and respond to the results is the critical component of this process. Companies may rely on their accounting firm or an outside consultant to assist in understanding the results achieved if internal staffing is not able to provide meaningful feedback. ●
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