Submit to Brett Shorts at Profit Soup. Brett.email@example.com
Envision this. The year is 2022 and you’re about to stand up to accept an award for outstanding achievement in business. You are about to thank your team for a job well done. In the past 5 years your sales have increased impressively, in spite of some challenges. Your business is financially efficient and extremely profitable. You have a happy team of employees that manage the business with little oversight from you and you’re pleased with the amount of personal cash reserves you’ve built. As you reflect on where you’ve been, you say to yourself, “everything changed when we really embraced Managing by the Numbers, started setting stretch goals with rewards and accountability, and became clear with the entire team about our financial expectations.”
Your business must continually change, adapt and improve its efficiencies to build value. A culture of continuous performance improvement creates more profit now and more wealth in the future. When building a better business, and improving profit and wealth is your goal, measuring performance is your starting point. That’s where the SC&R Foundation’s 2017 Financial Benchmark Study comes into play.
A benchmark is a point of reference from which measurements of any sort can be made. Benchmarking for business is the process of using business ratios to identify, understand, and adopt outstanding practices that improve financial performance.
You can use benchmarking to compare your results against what is possible, set goals and monitor your achievements.
Here are some ways you can establish benchmarks for your business:
Compare to your past performance: To get a sense for trend, look at a minimum of three years’ history – up to five years if it’s relevant. As a benchmark, consider selecting metrics from your best year in history.
Compare actual results to budget, target or goals: When you compare actual to budgets or targets you’re benchmarking against where you want to be. You can then investigate the difference or variances from what you planned and refocus your actions as needed to course-correct.
Compare to industry averages: Industry benchmarks give perspective from outside your own company. If you’ve always underperformed, benchmarks based on your own history may set the bar too low. Industry benchmarks are based on results for companies like yours – so in essence they assess how you stack up compared to your competition, or at least companies that are similar to your competitors.
Having access to industry benchmarks like those that will be published in the 2017 study helps put these questions in perspective:
How productive are you? Your most important resources are your equipment and your team. Metrics such as revenue per employee, revenue per direct labor hour and revenue returned on dollars invested in equipment measure the productivity or efficiency of your resources.
- How much profit are you earning? How much of the average revenue dollar remains after paying for direct labor, equipment costs, repairs and maintenance, sales and administrative wages and company overheads? Are any of these costs out of line as compared to similar companies?
- How are you managing your cash? It’s possible to have profit but no cash – particularly if you have money tied up in aging accounts receivable. How quickly do you collect? How does your experience compare to others’?
How financially strong are you? Over time business value is enhanced through a combination of profits and sound borrowing decisions designed to strategically create capacity to grow. How well have you managed assets and controlled debt? Benchmarking asset productivity in tandem with debt-to-worth and return on investment ratios tell the financial story of your business and offer a glimpse into your financial future.