One of the best ways to keep your business operating successfully is by continually measuring and comparing its performance against competitor averages, a concept more formally knowing as: benchmarking.
Benchmarking is the process of comparing your business processes and performance metrics to competitor bests or, best practices from other industries. Dimensions typically measured are quality, time and cost.
In a business world, where things seem to change in a speed of light, more and more businesses are taking advantage of smart, industry-savvy benchmarking guides to beat competitors at their own game.
Benchmarking takes financial figures and converts them into ratios, that allows a comparison of your results to those of your competitors. Having these measures in place helps prepare businesses for taking the next step, whether it is for listing, sale or attracting new investment.
Whether you’re running a coffee franchise, supermarket, a printing franchise or a financial planning company, no business is too large or, too small, to benefit from the enormous potential a detailed benchmarking analysis can provide.
In essence, business owners can use their competition as the ultimate measuring stick for improvement.
Benchmarking also helps you understand who else sells in your market. You can’t easily describe a type of business without describing the nature of the participants.
There is a huge difference, for example, between an industry like broadband television services, in which there are only a few huge companies in any one country, and one like dry cleaning, in which there are tens of thousands of smaller participants.
This can make a big difference to a business and a business plan. The restaurant industry, for example, is what we call “pulverised,” which, like the dry cleaning industry, is made up of many small participants.
The fast food business, on the other hand, is composed of a few national brands participating in thousands of branded outlets, many of them franchised.
Benchmarking can also help you understand the nature of competition in your market. This is still in the general area of describing the industry, or type of business. Explain the general nature of competition in this business, and how the customers seem to choose one provider over another. What are the keys to success? What buying factors make the most difference–Price? Product features? Service? Support? Training? Software? Delivery dates? Are brand names important?
In the computer business, for example, competition might depend on reputation and trends in one part of the market, and on channels of distribution and advertising in another.
In many business-to-business industries, the nature of competition depends on direct selling, because channels are impractical. Price is vital in products competing with each other on retail shelves, but delivery and reliability might be much more important for materials used by manufacturers in volume, for which a shortage can affect an entire production line.
In the restaurant business, for example, competition might depend on reputation and trends in one part of the market, and on location and parking in another.
As you can see, more often then not, it’s about working smarter not harder, in order to be able to not just survive but thrive within your industry.
Financial benchmarking can provide you with the evidence you need to identify significant differences in resource management, which may suggest there is scope to do things better, to improve efficiency, reduce costs or identify potential savings.
To gain a deeper insight into the topic I recently spoke with Tim Farr, Founder of Midpoint Wealth. Midpoint Wealth specialises in helping directors of high growth companies drive their business for greater personal wealth.
Below Farr shares his top five tips when benchmarking your business:
1. Get the right data
There is no other method that is as effective in assessing business performance and, that will provide you insight as to what areas need your immediate attention. It is crucial to obtain the right performance data and Key Performance Indicators for your specific industry.
Different types of businesses will have different capital requirements, operating expenses and margins of profit e.g. accounting firm vs a manufacturing plant.
This data should include both average and benchmark result (top 20 per cent) for your industry i.e. the top performers (competitors) are able to achieve
2. Don’t ‘cook the books, so to speak
A common trap for most small to medium businesses, is to operate their businesses financials to minimise tax. Taxable profits are good and are a clear sign of a healthy growing business.
By increasing end of year expenses to reduce taxable profit, you will adversely affect your performance ratios, business valuation, ability to attract investment, demonstrate profitability and raise capital for growth.
When comparing your figures to that of your industry, you may need to adjust your financials to reflect your business’ true commercial level of performance
3. Aim for benchmark
No-one wants to buy, or participate in, an average business. How far off are you from performing at benchmark levels across profit, wages as percentage of salary, net return on investment etc?
Aim to achieve the same results as your industry benchmark.
4. Get a game plan
The benchmarking results will cut through like a knife, immediately revealing areas of underperformance in your business.
Then, develop your business plan specifically to ‘close the gap’ between the benchmark result and your current levels of performance in each of the different areas.
5. Time to take action
Performance benching against your competitors provides powerful business and planning insight. However, knowledge without action is wasted.
If you are like most business operators that are stretched for resources, engage a creditable business advisor that will work in your business. Choose one that has the financial management expertise to implement specific improvement projects that will see your business become a benchmark business or, will help you perform better than your competition.
In short, every business should have an advisor.
(Image source: Bigstock)
Alex Pirouz is an Entrepreneur, Author and Business Mentor who assists companies successfully start, grow and exit their business. Connect with Alex on LinkedIn.