What is Benchmarking?
Benchmarking is a process of comparing your business metrics with other similar businesses. Not many business owners think of benchmarking their business. Most do not have access to data to be able to do this. At Succession Plus we identify the key performance indicators in your business and benchmark them against industry averages. This identifies areas of improvement, or ‘the profit gap’ between where you are and where you could be.
Benchmarking uses largely financial data but also uses statistics such as the number of employees, floor space utilised, total equipment or assets. Some of these measures of efficiency don’t stand out from your management accounts. But a buyer will want to understand how you are positioned in the market to assess your relative value.
If, for example, you operate an accounting firm, profit depends on billing time for services. Benchmarking would look at billable hours, total fees earned per full time employee (or equivalent) and overheads.
Benchmarking gives us a good starting point. It highlights where we need to look deeper to improve the future performance of the business.
What Does It Show?
When we benchmarked one of our clients, a professional services firm, we found the IT costs were significantly higher than its industry competitors. Digging deeper, we saw that all of the firm’s computers and systems were 15 years old. This meant the maintenance contractor was coming in almost every day to fix something. On the other hand, depreciation was much lower than the competitors as the assets were all fully written down long ago.
A buyer considering this business will need to factor in significant capital outlay to replace the IT assets but can expect to spend less in maintenance costs as a result, therefore increasing profit. When we benchmark a business, we calculate the potential profit gap. This is the profit you could achieve if you were operating at industry average levels. On a simple level, if you produce a product at £1 and sell it at £2 you are making £1 or 50% margin. If your competitor is selling the same thing for £2 but it costs £0.75 to produce, he is making £1.25 or 62.5% margin. The profit gap is 12.5% or 25 pence. Benchmarking assumes that you should be able to operate at roughly the same level as industry averages.
Sometimes there is a significant gap between the current profitability and profitability that could be achieved at maximum efficiency. Once we work out where the business is over or underperforming or overspending, we focus on resolving individual issues to close the gap. We work on improving profitability and value.
