Defined in the simplest terms, benchmarking is the process of identifying your company’s strengths and weaknesses by comparing its performance metrics to those of similar companies. Depending on what you wish to achieve, benchmarking might involve financial ratios, quality indicators, and/or cost information.
Thankfully, it doesn’t requirement much effort on your part. Your accountant can review your financials to extract relevant ratios, compare your ratios to industry data sets, and provide recommendations for addressing weaknesses and leveraging strengths.
Here are a few of the ways it could change your business:
Pinpoint your weaknesses
Have you ever looked at your bottom line and thought, “Shouldn’t this be higher?” Benchmarking gives you a way to determine what’s causing the problem. For instance, by examining industry averages for production or labor costs, you might find yours are much higher. Bingo! Now you know where to start your analysis.
Leverage your strengths
Benchmarking also lets you see where you’re ahead of your competitors. With this knowledge, you can modify the way you do business to leverage these strengths. Say benchmarking shows your gross margins are way above industry averages. This means you could be more aggressive on bids, and potentially gain more business if that aligns with your growth strategy.
Make decisions with confidence
Knowing how all aspects of your business are going, where they’re headed, and how they compare to competitors’ is critical to making wise management decisions. This is especially true when it comes to those that involve purchasing: Benchmarking can help you understand whether or not a purchase makes sense.
For example, through benchmarking, a manufacturing company realized its production costs were way above industry averages. It wasn’t long before the owners uncovered the reason for the discrepancy: the company lacked a piece of equipment owned by all of its competitors. Not having the equipment was starting to cost the company business—and eat up labor costs. Without knowing their production costs were high, the owners might not have recognized the importance of the equipment.
Benchmarking can be particularly helpful for staffing decisions, too. Knowing how your labor costs compare to industry averages lets you know if you can afford to increase wages or augment staff, or if you must do the opposite.
Know where you stand
It’s impossible to know where you’re going without knowing where you are. Benchmarking acts as a location pin, giving you the ability to chart your position within the industry—and plan your next move.
In light of these benefits of benchmarking, it’s easy to see why so many forward-thinking companies have adopted the practice. If you haven’t applied benchmarking to your business, it’s worth giving it a shot.