Benchmarking – How well are you really doing?
If your closest and dearest friend gave you a brand new iPad for Christmas, you’d be over the moon, right? At least you would until you heard that she’d won the lottery and taken a few of her other friends on an all-expenses-paid cruise around the world.
The weight of every bit of news, good or bad, is really just a matter of perspective. Statistics are the same, which is why politicians and marketing companies use them so ruthlessly to win opinion and persuade people to see the world from their point of view. In business, it’s so important to judge your performance by the right measurements: according to the market average and not just your own internal results, levels and ambitions.
Plodding along or powering towards potential?
Benchmarking is a way of judging standards among companies of a similar market, size and geographical location. It creates a kind of league table of all those companies according to key performance measurements such as gross profit margin, turnover growth, net profit margin, debtor days, stock days, employee costs per sale, etc. In fact, there are hundreds of accounting ratios on which a company’s performance could be measured: although we tend to focus on the twenty-five key indicators.
The reason benchmarking matters so much is that it identifies potential: and it is the knowledge of what can be achieved which often inspires mediocre businesses to become exceptional ones.
Let me give you an example. Imagine you are running a retail business which is growing in sales by around 10% per year, with a gross margin of 55% and an asset turnover of 4.1 (Most people, I think, would be quite pleased with those sort of figures, as it looks like a healthy business). Then, while talking to a few (friendly) competitors, at an industry get-together, you learn that most of them (even some of those you’ve always looked down on) are operating at closer to 70% gross margin. They are incredibly upbeat about the marketplace, and there is talk of 25% growth in sales last year and a soaring asset turnover.
Anything they can do…
Suddenly you’re comfortable ‘personal best’ doesn’t feel quite as satisfying, does it?
Whoever said, ‘ignorance is bliss’ didn’t actually know what they were talking about. The reality is that ‘ignorance is simply ignorance’ and that ‘knowledge gives you the power to unlock your potential’. There are two ways to handle the results of a comprehensive, professional benchmarking report. Feel sorry for yourself, or work with the person that produced the report to achieve the figures that you now know are possible because your competitors are doing it.
Just to be clear here, this is more than just discussing business results with your peers at the bar. A thorough benchmarking report with Meades & Co means comparing similar companies to yours from a database of around 100,000 businesses UK-wide. We then use the most relevant, market-specific, accounting ratios to measure exactly how well you are performing in key areas – against the market average.
Powering past your personal best.
Did you know that until Roger Bannister first broke the four-minute-mile in 1954 elite athletes from all over the world had been trying to reach the target for decades? Some medical experts had even declared it impossible. A month after this historic achievement, however, his great rival, John Landy, ran even faster and within a year another four runners had joined the club. Today club runners everywhere routinely finish a mile inside of four minutes.
Perception can hold people back, mentally and emotionally. Knowing what is possible can power you forward and help you match or even outrun your opposition.
Knowledge is power
Business owners, especially those in niche markets, often bemoan the fact that others don’t really understand the way that things work in their industry. With benchmarking, the concept of ‘understanding’ becomes less relevant because we can look at the market-generated facts and reach a definitive conclusion. If others are breaking records and performing beyond the average, anyone else should be able to do the same.
As business growth accountants we do more than simply hand you the report. We interrogate the benchmarking data to work out exactly what is happening elsewhere and how you can achieve the same results – or better. We get under the skin of the market and identify the key areas of improvement that will take you to the top of the league and setting the standard that your competitors will want to follow. We’ll even tell you what results you’ll get in your pocket from those improvements!
Now imagine that same get together in the bar next year!
If you would like to find out more about benchmarking in your industry, please get in touch.