Planning2, Walker Wayland

Aug 2017 3 Minutes

Benchmarking Helps Business Performance

Benchmarking is a comparison of a business’s operating Key Performance Indicators and financial ratios with best practice and average performance data relating to similar businesses.

The key item to be analysed is profit.  Profit is driven by some key drivers, including:

  • staff;
  • equipment available in the business; and
  • the business’ customers.

Benchmarking can assist management to develop a strategy on how to move ahead because the management team would understand the strengths and weaknesses within the business.

In undertaking benchmarking, it’s important to ensure you’re comparing “apples with apples”.  This means that, if a business has its own property and employs an owner as the managing director on a very low salary, then a notional rent and a realistic market-based salary would be included for the CEO in the adjusted Profit and Loss Account.

It’s also necessary to ensure that any personal expenses paid for by the business are eliminated from the Profit and Loss Account.  If your business is involved in more than one activity, it's also desirable to split your business into separate operating activities.  This will enable the individual components to then be benchmarked against other similar businesses.

Benchmarking enables a comparison of the individual components of the business to be analysed, including:

  • gross revenue figure
  • qualified trades staff/professionals
  • number of staff
  • labourers and apprentices
  • salaries and wages per team member
  • office staff
  • salaries and wages on-costs
  • total personnel
  • calculation of gross profit percentages
  • key expenses
  • labour to turnover percentages
  • other overhead expenses
  • sales growth percentages
  • debtors’ days outstanding
  • return on investment
  • current ratio
  • net profit percentage of turnover
  • acid test
  • income per working owner
  • stock and WIP
  • hours worked per owner per year
  • capitals turnover
  • income per qualified tradesperson/professional
  • interest cover
  • working owners
  • sales per square metre of space

This will enable your business to then be compared against other businesses.

We recommend that you closely analyse the Key Performance Indicators revealed by the benchmarks and try to ensure your business develops strategies to match the best benchmarks in each category.

By undertaking a benchmarking exercise, your business will be in a far better position to build a game plan for the activities to be undertaken over the next few months, to try and rectify any deficiencies that have been identified in the benchmarking process.

If you would like assistance in the conduct of a benchmarking analysis on your business, please don’t hesitate to contact us.