Business owners often ask themselves the question, “How are we doing?” The problem is that many lack the necessary information to provide a clear answer. More and more, businesses are relying on benchmarking as a tool to gauge their business performance. Benchmarking serves as a scorecard by which businesses are able to assess their competitiveness, efficiency, and strength.
So how can your company get started with benchmarking?
When a company uses benchmarking, it is trying to determine the average level of performance for a given performance indicator; basically, where it stacks up against companies in its industry, including direct competitors. So the first step in the benchmarking process is to identify the key performance indicators (KPIs) that will serve as your basis of measurement.
KPIs vary depending on your company or industry, but a few common ones are:
- Gross profit
- Current ratio
- Inventory turnover
- Accounts payable days
- Accounts receivable days
Once you’ve identified your KPIs, the next step is to locate the industry data you’ll use to benchmark your company’s performance. This information is typically available; you just need to know where to look. A good starting point is trade or industry associations, as they will generally either have the information readily available or will be able to provide contact information for industry leaders that have compiled the information.
There are many things to consider when reviewing benchmarking data to ensure you are comparing apples to apples. The size of your industry is important because if there aren’t many companies in an industry, the data may be skewed and you may need to consider a similar but larger industry against which to benchmark. Also, determine how recent the data is; data in published reports is often a year old, but if the information hasn’t been updated for more than a year it will most likely not be relevant to your analysis. Another important item to consider is how the financial formulas are being calculated. There are various ways to calculate some metrics, especially those regarding profitability. Consistency is key in benchmarking.
Once data is obtained and reviewed for relevancy, you can begin to review your own performance against the benchmark data and determine what is causing the gaps in your performance, whether positive or negative. If a gap is negative, management should begin to review which areas of the business need improvements, and then develop an action plan to achieve those improvements.
Benchmarking can sometimes be best explained as a tool to help evaluate opportunities for improvement. Some of the main reasons to conduct the analysis include the following:
- Developing a better understanding of customer needs
- Identifying weaknesses and strengths
- Understand others in the industry to become more competitive
- Setting business goals and performance expectations
Implementing and utilizing benchmarking as a business tool takes some effort, but it can pay large dividends in terms of giving a business owner a greater understanding of how the business is performing.