Benchmarking: a tool for small- and medium-sized businesses

If you don’t know where you’re going you might not get there. — Yogi Berra

Now that the midterm elections are behind us and businesses are closing out the year, it’s time before lunging into 2019 for business owners to take a serious look at how their companies stack up against the competition. One management tool that large businesses have used for years is called “Benchmarking.” However, in the last few years, smalland medium-sized businesses are engaging in this management tool, as well.

Benchmarking is a process for obtaining a measure — a benchmark. It is a process designed to discover the best performance being achieved — whether in a particular company, by a competitor or by an entirely different industry. This information can then be used to identify gaps in an organization’s processes, operations and financials in order to achieve a competitive advantage.

Some of the more useful financial benchmarks involve: (1) gross operating and net profit margins; (2) sales and profitability trends; (3) inventory, accounts receivable and accounts payable turnover; (4) salary and compensation data; (5) revenue and cost per employee; (6) marketing expense as a percent of revenue; and (7) revenue to fixed assets ratio.

Suppose you learned from your benchmarking study that your gross profit margin is 3 percent lower than your competition. For every $1 million in annual revenue, that’s $30,000 a year that they’re making that you’re not. Is it because their prices are higher or their costs are lower? Does their sales mix include higher margin items that you don’t carry, but could? Do they have some sweetheart deal from their suppliers that you should know about? Do they spend that extra gross profit or does it fall to the bottom line? Finding answers to these questions, among others, could change your business strategies going forward.

Another example of benchmarking is considering the metric of “wait time.” It does not matter whether waiting for a car repair at a dealership or making a deposit in a bank lobby, customers do not like waiting in long lines. Similarly, whether waiting on a telephone help line of a cable company or a favorite online retailer, customers do not want to remain on hold. They want their concerns addressed quickly and efficiently.

The bottom line: Important information can be learned by going outside one’s own industry because many customer concerns are the same.

Benchmarking is a difficult, time-consuming process. Most business owners engage a consulting firm that subscribes to various business databases of diverse industries and asks them to evaluate the problems found, recommend solutions and measure results. However, some small-business owners prefer to take the time and learn for themselves.

For best results:

1. Use data from similar size companies and, where possible, within your own geographic area.

2. Use a source that represents a large universe of inputs so that numbers are skewed.

3. Choose the industry group that best represents your business North American Industry Classification System.

Below are 10 of the best sources for free or low cost financial data covering a wide range of industries.

1. Your Industry Association may be the best source for consolidated industry data and financial benchmarks.

2. The Internal Revenue Service Corporate Sourcebook offers summary balance sheets and income statement numbers for all industries by size of company.

3. Annual Reports of Public Companies in your industry as well as the 10K and 10Qs provide rich information and often compares their performance with their industry’s overall performance. Also, very important information is often buried in the footnotes, so read them carefully. Though these companies may be larger than yours, their numbers can offer significant insights.

4. The Bureau of Labor Statistics Labor Productivity and Costs shows output per hour and unit labor costs by industry.

5. The Bureau of Labor Statistics Labor Pay and Benefits provides information on wages, earnings and benefits by geography, occupation and industry.

6. Bureau of Labor Statistics Labor Producer Price Index offers production costs trend data by industry.

7. Department of Labor reports hours, wages and earnings reports by industry.

8. Census Bureau Economic Census provides annual and trend data on sales, payroll, and number of employees by industry, product and geography.

9. Census Business Expense Survey reports sales, inventories, operating expenses and gross margin by industry.

10. Census Annual Survey of Manufacturers covers employment, plant hours, payroll, fringe benefits, capital expenditures, cost of materials, inventories and energy consumption.

In addition, three other inexpensive sources of industry data that are useful for many business owners include:

• Dun and Bradstreet offers individual company data on sales, employees, net worth, nature of financing, credit worthiness, balance sheet/income statement/ratio data, law suites, public filings, liens and judgments • The Risk Management Association offers benchmarking data on a business’s performance. This is one source that your bank probably uses to benchmark your business’s performance, so it’s well worth the cost.

• Morningstar.com offers easy access to financial information about public companies. It also provides the same research information as financial professionals use.

No better evidence for the value of benchmarking exists than the Winter Olympic Games. When watching the games we repeatedly hear “the time to beat” as downhill skiers race for the finish line. That information drives skiers to shatter new records set just minutes before.

In business, benchmarking your performance against that of your competitors can propel you to greatness, too. It can help you establish internal goals, pinpoint market opportunities, exploit competitors’ weaknesses and create the kind of esprit de corps to unify and motivate your team.