Benchmarking 103: Pitfalls to Avoid

While we think you really should be benchmarking (come on, how else will you know how you rate?), we also feel the obligation to tell you about some things to avoid when starting a benchmarking analysis. We’re nice like that.

  • Comparing Company A to Company B: Comparing your business to a peer group is helpful if the peer group is representative of the industry. However, if you begin to compare yourself to another, single company, there may be considerable differences that prevent true comparisons. Look critically at any benchmark analysis that restricts the sample size to only one other company.
  • Be careful with calculations and conclusions drawn from them: certain benchmarks (net profit margin, liquidity ratios, and turnover ratios) are common financial measurements, and their calculations are not generally refuted or changed. However, if you expand your benchmark analysis to include industry-specific key performance indicators (KPIs) (restaurant-sales per seat, for example), be sure to use the same calculation, period after period. If a subaccount is included for one period but then excluded for the next period, any trend analysis performed could be misleading.
    • Once definitions for the metrics are determined, be sure that all members of management and the finance team have this set of definitions. Also, be sure they understand what the metrics mean. There should only be one interpretation.
  • Assume that numbers and performance are always changing: Positions in a horse race are constantly shifting: first to third, fourth to last and so on. Comparing your business to its peers only once per year may not be optimal, given that the industry is always changing, even if your business isn’t. The more frequent the benchmark analysis is performed, the sooner the business can identify trends and react.
  • Recognize that the benchmark analysis doesn’t end with a variance report: Though it may seem that the work is complete once you have compiled a report showing variances between its financial metrics and its peer group benchmarks, the work is actually just beginning. And so are the opportunities! Each variance gives you a potential problem area to fix and the opportunity to improve the company’s overall performance. The variance report will show in which areas the business is really excelling. Take pride in these success, and see if the winning strategy can be implemented in other areas of the company.

Remember: the objective of benchmarking analysis isn’t to build a benchmark report. The objective is to illuminate successes and challenges for the company and give business owners actionable insights!

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