Why Is Benchmarking So Critical to Your Organisation’s Performance? Why do organisations benchmark?
Improving financial business management with benchmarking data
Improving Financial Business Management with Benchmarking Data. “Profits,” “the Bottom line” and “Overhead” are the fundamental elements of any business’s financial management strategy. All companies aim to maximize profits by reducing overhead and expanding their bottom line. So, the question is how to do benchmarking for a business’s finances so that all three of these significant elements can be improved? It is a very common question that we’ll attempt to answer in this article. However, it is essential to understand the below strategy isn’t a ‘one size fits’ all solution. Financial benchmarking will have to be tailored to your business.
Gathering the Right Data
Benchmarking is only possible when you have the right data. Most businesses have a balance sheet that’s usually generated on a computer. That balance sheet details all the sources of revenue and expenses, which is then narrowed down to profitability figures. However, you’ll not need the balance sheet to run benchmarks if you’re trying to improve financial management.
If you only run a profit or bottom-line benchmark with competing businesses, you’ll just learn a couple of things:
- Your business is as profitable as all the others
- Your business is in the top earner category
- Your business isn’t doing so well because the profits aren’t great
None of the above is going to tell you what’s going wrong with the finances and how things to hone finances further. Also, none of the above are reasons to benchmark. To do that you’ll need to pick up specific figures and benchmark those against the competition.
How much is your business paying the office staff as a whole? How much of that money is going directly to the staff and how much is in their indirect benefit, i.e. insurance, employee development, pension plan, paid off time, etc. It needs to be an accumulated figure which means everything relating to the staff salary and benefits.
The remuneration then needs to be compared and contrasted with other factors like employee satisfaction, responsibilities, capabilities, and retention. When you benchmark each one of these individually, you’re going to find out the following:
- Are you paying more, less or equal to the ambiguous industry standard?
- How well trained are your employees for every dollar extra you’re spending to them as compared to the competition?
- What sorts of remuneration is not factored into an employee’s decision to leave your organisation?
- What’s steps can be taken to improve employee retention regarding remuneration and workload?
Example: Your business runs a benchmark similar to the one above. The figures show that compared to the industry your retention rate is lower than others, which is why you spend more on trying to acquire employees. The figures also show that compared to the competition your employees are not as qualified for every dollar spent on them. The issue the benchmark has identified is that your business isn’t providing financial stability to employees which in turn is attracting only those who are looking for temporary employment perhaps as they are in between jobs. So, as soon as they find something better, they switch to another company.
The hypostatical solution would be hiring more qualified employees at a 10%-25% higher salary. You’ll be able to retain them longer and not have to spend as much on their skill development. In the long run, your business could end up saving a lot of money with this one small change in policy.
Operational Processes Should Be Benchmarked
How to use benchmarking for performance improvement especially with operational processes which have a direct link to your finances. It goes without saying that the support and operation departments are by far the easiest and quickest to improve. However, they are just as important to improve from a financial standpoint hence benchmarking them becomes imperative.
Every task is directly linked to your budget. For instance, buying raw materials depends directly on how much you can afford to buy. That said if the competition can buy better materials with the same budget, which is directly affecting their bottom line positively then there is some room for improvement. If anything, you’ve just learned something from benchmarking your operational processes with those of the competition.
Businesses should benchmark both input and output. Input is driven by the budget which determines how much a company or organisation can budget for a given task. The output when divided by the input results in effectiveness. So, by benchmarking both and putting together, the data gathered it is possible to see if there is a problem either with input or with the output. Those problems could be sorted out which directly and positively effects effectiveness. Afterall effectiveness is a big part of being competitive.
Tip: Many new businesses have a problem finding the right budget for specific tasks. Most companies try to allocate the largest budget for the most important task (like procurement, loan repayment or HR) to them. Benchmarking can be an excellent way to figure out the right budgeting range which has a huge effect on other aspects of a business’s finances.
Conduct Competitor benchmarking
So, what are the reasons to benchmark against competitors? Well when it comes to finances, you’ll want to look outwards more than you look inwards. The same can be said for mega-corporations like Microsoft, or Apple or even Acer that have multiple divisions and each has its source of revenue and funding. Large corporations are better off running so-called “Best in Class Benchmarking.”
Most small to medium sized businesses will want to run competitor benchmarks. To make things simpler, any business that has a single source of capital or funding will find out more with competitor benchmarking. Competitor benchmarks are also difficult to run because competitors will not openly share financial information. However, it can be organized through a trade association or even a consultant.
When you run financial competitor benchmarking it is possible to identify areas where your finances can be better utilized. Similar to the instances above, competitor benchmarking also gives you a bird’s eye view of just how bad or good your financial management is based on the raw data.
Reasons to Benchmark and What to Expect
Improvement in every possible area of your business is one reason to benchmark, but most businesses managers or owners reading this already know that. The big reason to run financial benchmarks is to improve the handling of finances. The allocation of funds to particular projects are better assessed when compared to the competition or the best in the industry.
Any business that runs these benchmarks should expect to change the way they do things. The data only shows what most good finance managers may suspect. It may perhaps even solidify their argument in a board meeting. But the only way to yield results from your benchmarking efforts is through implementation. The mistake businesses make is only comparing revenue and profits. If you want to find out how the competition is more efficient, leaner and in turn has a much larger profit margin it is essential to drill down and benchmark the pillars of your business’s financial structure.
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