By: Jim Ramstad, Business Consulting Manager
Sometimes, you just want to know how you stack up. Chalk it up to competitive drive or the need for constant improvement. Whatever the reason, utilizing benchmarking, especially in the business world, can be a powerful tool to assess performance and see how you compare to your peers. In fact, when used correctly, benchmarking can help you succeed and thrive as an organization.
Here are just a few reasons why benchmarking is so important:
It helps you understand your situation. Knowing how your company ranks relative to others empowers management to evaluate the company’s performance. Business owners can use peer group benchmarks to not only understand their current situation, but also identify new or future opportunities. To best do this, make sure that you’re using a peer group comparison rather than a one company comparison.
It can be used continually. Benchmarking is not a one-time solution. It can (and should) be used throughout the life cycle of the business. Assume the numbers and performance is always changing. The more frequently the benchmark analysis is performed, the sooner the business can identify trends and find solutions.
It provides you with real-time data. You’re only as good as your data. So make sure to look for benchmarking data that is:
- Accurate: In order for a benchmark analysis to provide meaningful insights, the business owner has to trust the accuracy. Heed Ronald Reagan’s advice and “trust, but verify” the data prior to relying on it for decisions
- Timely: Ensure the benchmarks being used are the most recent benchmark’s available to account for seasonality, economic cycles and other externalities.
- Relevant: Make sure to take into account your industry, geography and organization size. Each of these has their own trends and externalities to incorporate. This ensures an “apples to apples” comparison.
It helps you gauge success. Each industry (and even different companies within an industry) could have different measures of success. While only you can determine what success looks like for your organization, there are a few metrics that, taken together, will provide a quick and high level review of your organization’s health:
- Net Profit Margin=Net Profit Before Taxes divided by Sales
- Liquidity Ratio-Current Ratio=Total Current Assets divided by Total Current Liabilities
- Turnover Ratios, including accounts receivable days, accounts payable days and inventory days.
Benchmarking is a great way to gauge your current status and help implement changes that can grow your organization. By utilizing peer group comparisons you can work to find the solutions that make sense for your business.
Don’t really get how benchmarking can help? Or what benchmarking can do for you? NO WORRIES. We can help. Contact Jim at firstname.lastname@example.org or call 701.239.8500.