Maybe it’s an inherent competitiveness or just the pursuit of improvement, but it’s commonplace for people to seek out benchmarks they can use to assess their relative position or performance. It interests people to know how they compare to their peers. Benchmarks have a place in business, too, and can be an invaluable instrument to help business owners succeed.
Compare running a business to running in a horse race.
Knowing how a company ranks relative to others—before the starting bell, halfway through the race and right before its conclusion—empowers management to evaluate the company’s performance. Armed with that contextual information, they can potentially adapt strategy and affect the company’s final ranking (if there is a “final ranking” at all in business).
Where to begin?
The most difficult step in financial benchmarking is acquiring benchmarks to use. Part of the difficulty stems from ambiguity around the word “benchmark”, which could be interpreted as either an average statistic (a “C” on a school report card) or an above-average performance grade (an “A”). Depending on the data available, a business may benchmark using either standard, as long as the business owner understands what the benchmark is and how it compares to their ideal performance.
When selecting benchmark data to use, it’s recommended to seek out data with the following characteristics.
(1) Accuracy. When possible, a business owner can ascertain the data’s accuracy through a little due diligence. Best practice requires that benchmarks come from a large enough peer group to be representative of the broader population and were collected using objective and error-free techniques. Heed Ronald Reagan’s advice to “Trust, but verify” the data prior to relying on it for decisions.
(2) Timeliness. The race businesses run is real-time, and industries shift financially over the course of a year. Consequently, if a company uses benchmarks from a previous year, the resulting analysis could be ineffective or altogether misleading.
(3) Relevancy. Race conditions vary track to track. This explains why, before a large event, race participants will practice to acquaint themselves with the environment. In a similar way, different industries, geographies and business sizes have their own trends and externalities to incorporate.
To learn more about financial benchmarking in business, where to get data and what to look for, download the whitepaper: Benchmarking Best Practices.