1. Benchmarking “The Game”
Would you go to your favorite sporting event if they didn’t count the score? Sporting events may end in a tie, like in soccer or hockey, but the team’s intention was to win and a player’s goal is to stay healthy and off the bench. Generally, in business, a win is when a company is generating enough cash flow to make a distribution(s). Likewise, if a competitor of similar size and geographic reach has double the amount of distributable year-end cash flow would you still consider yourself winning? The short answer is it depends.
2. The Sand Trap
We should understand why many companies do not utilize common benchmarking methods and get caught in the ‘sand trap’. Unlike most sports, golf is a game of determination and above all else a lower score. Many golf enthusiasts have uttered a batch of some not-so-nice words after a beautiful shot landed them in a sand trap. I have personally landed in some of the most beautiful sand traps, such as the one above (although the sand trap was not so beautiful at the time). The task of benchmarking can appear daunting. Some primary reasons many business owners don’t benchmark is because (A) “It ain’t broke”, (B) they don’t have the time or (C) they don’t have the resources to benchmark to their competitors.
2.1. “If it ain’t broke…”
All else being equal, I personally consider a company that has enough cash flow to make distributions at the end of the year a victory. Almost everyone has heard the term “If it ain’t broke, don’t fix it,” which is a philosophy that many business owners follow. Well, I disagree!
Ongoing preventative maintenance and oversight into a business’s financial success ensures strong cash flow and a higher value of the underlying business. There are many instances where profitable companies fall short of achieving their full potential, which can accumulate to significantly reduced cash flows compared to their peers. By studying your competitors and comparing them to your company, you should increase the profitability of your business.
Benchmarking your company’s financial performance is more than preventative maintenance. It also provides insight to how your industry is performing relative to the economy in which it operates. Many successful and highly-profitable companies utilize benchmarking and financial analysis techniques to make better decisions for their company and to understand where financial opportunities lie. There is an entire profession dedicated to analyzing a company financial position and benchmarking called a Financial Analyst.
Almost everyone has heard the term “If it ain’t broke, don’t fix it,” which is a philosophy that many business owners follow. Well, I disagree!
2.2. Time and Resources
Compiling a comprehensive list of privately-held and publicly traded companies to benchmark to is not a simple or quick task. A comprehensive search requires creativity, ingenuity, and experience. Furthermore, successful benchmarking requires continuous monitoring as opposed to a one-time ‘litmus test.’ This is generally the more time consuming exercise because it should be performed on a monthly basis over the course of each fiscal year.
Believe it or not, financial data for privately-held companies, as well as publicly traded companies, are more than likely readily available. However, some databases that accumulate information for privately-held and publicly traded companies could cost upwards of $1,000 USD or more per year for each database. There are free financials available for publicly traded companies that can be found on the U.S. Securities and Exchange Commission website. These financial statements also include economic information that is pertinent to your business. However, extracting these financial statements from free resources are also time consuming as they require manual data entry.
3. Put me in Coach!
To understand benchmarking, we must first look at some of the common methods companies utilize to benchmark. There are generally two common methods for benchmarking your business’s financial success; historical benchmarking and industry benchmarking.
3.1. Historical performance vs. current performance
Historical benchmarking compares your company’s own figures over time. This is occasionally referred to as trend analysis. Reviewing your company’s own historical figures, say on a monthly and annual basis, provides insight and trends to seasonality and areas of improvement or deterioration. Historical figures may be tracked using actual dollars, percentages, and financial ratios. This type of analysis is generally more common among business owners utilizing accounting software. However, accounting software generally does not provide financial ratio analysis. Also, many business owners that have access to their own financial information do not perform their own trend analysis.
Reviewing your company’s own historical figures, say on a monthly and annual basis, provides insight and trends to seasonality and areas of improvement or deterioration.
3.2. Your business vs. your industry
As mentioned earlier, there are databases that accumulate information for privately-held and publicly traded companies. Although these databases cost money, they provide invaluable insight into thousands of companies and industries that operate throughout the country. Some of these databased collect information from privately-held companies that submit their financial information to the Internal Revenue Service, Banks, and private institutions. This information allows for a side-by-side comparison to similar companies of similar size. The issue is the business owners available time to synthesize this information and compare it to their own company becomes the dominating factor that prevents benchmarking.
4. Counting the Score
On average, a college or professional football game lasts just over 3 hours whereas a business owner typically works a minimum of 8 hours per work day. The time an owner/operator spends in their business is highly valuable and the idea of working more hours to perform benchmarking techniques may not sound appealing. Also, hiring an in-house Financial Analyst may be expensive. According to the Bureau of Labor Statistics, Financial Analysts salaries, in Texas, range from approximately $90,000 to over $105,000. The good news is, there is hope! Business owners can outsource their financial analysis and benchmarking needs to a qualified business consultant at a fraction of the cost while receiving the same benefits as having an in-house Financial Analyst.
Some of the benefits of outsourcing your financial analysis and benchmarking needs include the following:
If you don’t already have an in-house financial analyst, then let Caprock Business Consulting keep score for you and show you the value of outsourcing your financial analysis and benchmarking needs. Contact me at firstname.lastname@example.org to find out how your company can benefit from our financial analysis assessments, reports, and guidance.