How Financial Ratios and Benchmarking Help Businesses Thrive

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Congratulations! You’ve just decided to run the Chicago Marathon. The only trouble is; you’ve run for fitness and on your high school track team, but never attempted such a monumental goal. So how are you going to get from a three-day-per-week runner to a long-distance athlete? If you structure a daily running routine, how will you know if you’re making any progress toward your goal? The answer lies in measurement. Most runners measure time and distance to see how far they’ve progressed.

Measurement is benchmarking in a nutshell. Legendary management expert Peter Drucker is credited with saying, “if you can’t measure it, you can’t improve it.” The same applies to every business, regardless of size or industry. You’ll never know where you stand and how far you’ve come if you don’t start measuring what’s going on in your business. To help, here are some ways to look at benchmarking, where to access quality benchmarks, what to do with them, and how to use benchmarking in financing and growing your business.

What Can Benchmarking Do for Me?

Benchmarking helps you keep track of your capital investments, margins, and cash flow. You can also use it to measure efficiency and productivity. In short, benchmarking helps you keep track of the health of your business. Comparing your benchmark to your industry’s benchmarks can show you how well you’re measuring up against the competition. Benchmarking is also important when it comes to financing. Lenders want to know how your financial ratios compare to other companies.

How Do I Implement Benchmarks?

You can set up as many benchmarks as you like for your business. But, it’s a good idea to focus on the areas that will help you improve the most. There are three types of benchmarks most businesses use: internal, competitive, and strategic. Let’s use the marathon analogy again.

Internal benchmarks help you measure what’s going on inside your company. If you’re trying to make progress as a runner, you need to measure how far you’re running each day. Then you know if you’ve run further than the day before. You also likely want to know how fast you can run. So, measure how long it takes you to complete a mile each day. Internal benchmarks measure your performance year after year or quarter over quarter. You can also use internal benchmarks to compare how one department is performing compared to another department.

Competitive benchmarks measure how well your business performs in comparison with others in your industry. If you want to finish the marathon in good time, you need to know how fast the other runners make it to the finish line. To find out, you could check records of the marathon and see the average finishing time of people in your age bracket. You can do this for businesses too. Industry standards are available from multiple sources. We’ll get into those more later, but keep in mind that it’s easy to find competitive benchmarks.

Strategic benchmarks help you see the top performers in your industry and across industries. If you’re a highly competitive person, you might look at the top finishing times of racers not only in the Chicago Marathon but also in the New York and Boston Marathons. Then, you can view those top times as goals to strive for. To beat your competition, you have to know where your competition is, in racing or business.

Whichever benchmarks you decide to implement, the key is follow-through. It doesn’t do you any good to measure your debt-service income ratio once and forget about it. Measure it, see if it’s within your industry’s standards, and create an action plan to raise or lower it if you aren’t satisfied. Then, measure it again the next quarter to see if your action plan is working. If it isn’t, stop wasting time and resources on that plan and create a new one. Measure, adjust, repeat.

Why are Industry Benchmarks Important?

Industry benchmarks (a.k.a. competitive benchmarks) show you where your business falls compared to similar businesses. They can tell you if you’re falling behind or leading the industry. Within industry benchmarks are opportunities to innovate. If you’re behind the rest of your industry, how can you implement changes that will bring you in line with the others? If you’re performing at the top of your industry, what are you doing to stay there? How are the leaders of your industry implementing ideas that drive the industry forward as a whole?

You, however, won’t be the only one concerned with what’s going on in your industry. One important set of eyes on your industry’s benchmarks is lenders. If you decide to seek a business loan now or in the future, your lender will want to know how you compare to others in your industry. The results could be the difference between being approved or denied and a high or low-interest rate.

Where to Find Industry Benchmarks

There are abundant sources when you’re seeking industry information. The Risk Management Association publishes Annual Statement Studies. You can find Dun & Bradstreet’s Key Business Ratios online. There’s also the Almanac of Business and Industrial Financial Ratios published by Wolters Kluwer. That last resource is best accessed through a university or public library as it’s a fairly large and expensive volume.

Another important resource is your loan broker. Because brokers work with many businesses, they can see how benchmarks actually play out in your industry and market. Marathoners and sprinters both run, but if either tried to hit benchmarks established across all runners, they’d have trouble remaining competitive. Translating benchmarks into best practices and finding ways to stand out are two different things. Loan brokers gain insights that can help you make choices for your business.

Benchmarks vs. Ratios

You’ll often see these two terms used together, but they’re not the same. Ratios are calculations that measure your company’s performance. For example, your Working Capital Ratio measures your business’s current assets minus current liabilities. These are internal figures independent of what other companies are doing in the industry.

Benchmarks are comparisons. Once you’ve calculated your Working Capital Ratio, you need to see what a good ratio is for your industry. If your industry standard is a ratio of 1.5, that’s the number you want to reach; that’s the benchmark. In essence, ratios are the facts, benchmarks can be the milestones, but only finishing the race in the right position is the end goal.

How to Use Benchmarks

Your main goal in implementing benchmarks is to strive for improvement. Finding a sustainable advantage is a process that requires thought and insight. The examples in this article are necessarily an oversimplification of the process. You’ll have several different benchmarks for your company. Some of them could be industry standards and some can be particular to you. Many of them might overlap. It’s a continuous balancing act that requires attention and innovation. Benchmarks aren’t set in stone either. They move, influenced by a myriad of economic factors. Benchmarking is a tool that helps you hone your business practice. The better your tools, the more advantages you can find.

How Do Brokers Help Businesses Benchmark Performance?

Brokers are a great source not only of financing but also of industry benchmarks and insights into overall performance. Because industry benchmarks are so often used by lenders, it benefits brokers to be familiar with them. A broker can not only show you how to identify your benchmarks, but how you stack up to your industry. A good broker won’t advise you to apply for a loan that uses a standard you don’t meet. If you’re not meeting or exceeding your industry’s standards, a broker can help you figure out why. When you’re looking for financial solutions, a broker will help you think outside the box.

Paying close attention to your industry standards and implementing benchmarks can strongly impact the success of your business. You won’t win the race if you don’t start measuring your time and distance. But many runners find they have more success when they have a coach. Let a broker be your coach when it comes to financial benchmarking and opportunities for success.





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