What is financial benchmarking?
Benchmarks are financial tools you can use to evaluate the performance of your business in relation to best practice within your industry. In simple terms they’ll compare your numbers with those of similar businesses.
How will benchmarks benefit my business?
Benchmarks can help you develop strategies for improvement. Comparing business data to benchmarks may draw attention to areas of your business that need to be examined, and those that are performing above standard and can potentially be exploited. Benchmarks can also assist in preparing budgets.
Where do I get the information?
Many organisations that collect data provide financial benchmarking information for free: government organisations, banks (e.g. ANZ), industry associations, franchise groups, and universities. If you can’t find any comparative industry data that suits your particular business speak to your accountant.
The ATO provides small business benchmarks for over 100 industries. If your business is performing outside of these benchmarks you may be waving a red flag for a tax audit. For example, if your business income is low in relation to other businesses in the industry you may need to review the recording of cash income and bookkeeping practices and make sure that you’re fulfilling your tax compliance obligations.
Of course, it’s important to remember that not all businesses are the same. For financial benchmarking to be used effectively, the comparative data needs to be from similar businesses of a similar size. Other variations may distort comparisons within industries too. For example your individual location may result in higher rent and labour costs than your competitors.
Want more articles like this? Check out the measuring success section.
What are some examples of financial benchmarking?
As an example, take a look at the performance benchmarks provided by the newsagents. Here you’ll see a clear explanation of how the ATO defines a newsagency, and what business is included and excluded. In this particular example three ratios are provided, across three annual turnover ranges:
- Cost of goods sold as a ratio of turnover
- Labour as a ratio of turnover
- Rent as a ratio of turnover
Each of the three ratios examines the relationship between the business turnover and a key business expense: cost of goods, labour or expenses.
This exercise underlines why it’s important to measure what’s important to your business in order to have the data available for comparison.
How can I use the information?
- If the benchmarks identify your rent expense as being considerably higher than industry norms, you may want to try and renegotiate your rent with your landlord, or look at downsizing or changing location.
- Likewise, if your cost of goods or labour is high you may choose to review your staffing or spending habits, or may want to focus on introducing efficiencies.
- On the flip side, your benchmarks may show that you need to work harder to get sales or that you need to raise your prices.
Have fun comparing your performance to your industry standards. In my next article I’ll be expanding on this topic by reviewing different financial ratios: profitability, activity, liquidity and equity.
What benchmarks do you use to assist you in managing your business?