Do you know how to benchmark your business? Benchmarking is a process of comparing your business metrics with other similar businesses. Most business owners do not have access to data to be able to do this.
At Succession Plus we identify the key performance indicators in your business. Your business is benchmarked against industry averages to identify areas of improvement. This shows ‘the profit gap’ between where you are and where you could be.
Just Numbers?
Benchmarking uses largely financial data as well as 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. The benchmark report looks at your business versus industry averages.
If your debt collection is slower than the industry average you will have more cashflow issues. Is your average net profit after tax (NPAT) per principal much lower than the industry average? If your business spends more of its total income on minor overheads than the industry average it will put pressure on NPAT.
This is largely driven by the size and profile of the firm. Additional analysis into pricing, volume of work, utilisation of staff and costs generates higher levels of profitability.
Your business may be too small to reach the industry averages. Benchmarking is a good starting point that highlights where you can improve the future performance of the business.
Case Study
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. They expect to spend less in maintenance costs as a result, therefore increasing profit.
Profit Gap
Benchmarking a business identifies 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.
Summary
Getting an investors perspective on your business value starts with understanding where the value is in your company. Benchmarking is a valuable part fo that process. Having benchmarked your business, what next?
Give us a ring, drop us an email to explore more.
