Financial Benchmarking: How Do You Compare to Your Competitors
If you don’t know where you’re going you might not get there. — Yogi Berra
There’s no better evidence for the value of benchmarking than the Olympics. “The time to beat,” we hear repeatedly as downhill skiers race for the finish line. That’s what drives them to shatter new records set just minutes before.
In business, benchmarking your performance against that of your competitors can propel you to greatness too. It can help you establish internal goals, pinpoint market opportunities, exploit competitor weaknesses, and create the kind of esprit de corps to unify and motivate your team.
Some of the more useful financial benchmarks involve:
- gross, operating, and net profit margins;
- sales and profitability trends;
- inventory, accounts receivable, and accounts payable turnover;
- salary and compensation data;
- revenue per employee;
- cost per employee;
- marketing expense as a percent of revenue;
- revenue to fixed assets ratio.
So where do you find competitor information? If you were a Fortune 5000 company it would be easy. You’d hire an expensive consulting firm — one that subscribes to an expensive database of industry data — and send them off to evaluate the problem, recommend solutions, and measure results.
For a small business owner, that approach is not only cost- and time-prohibitive, it’s just too dang corporate. Besides, it’s far more fun to unleash your entrepreneurial cunning and sleuth the facts out on your own.
Below are some of the best sources of free or low cost financial data for a wide range of industries. For best results:
- Use data from similar size companies and, where possible, within your own geographic area.
- Use a source that represents a large universe of inputs so that one or two unusual companies don’t skew the numbers.
- Choose the industry group (usually based on NAICS code) that best represents your business.
Ten Free Sources of Industry Financial Data
1. Your industry association may be the best source for consolidated industry data and financial benchmarks.
2. Internal Revenue Service Corporate Sourcebook: offers summary balance sheet and income statement numbers for all industries by size of company.
3. Annual reports of public companies in your industry: order the annual report as well as the 10K and 10Qs; the good stuff often hides in the notes so read those carefully. Though these companies may be larger than yours, their numbers can offer insights into how they got that way.
4. Bureau of Labor Statistics Labor Productivity and Costs: shows output per hour and unit labor costs by industry.
5. Bureau of Labor Statistics Labor Pay and Benefits: provides information on wages, earnings, and benefits by geography, occupation, and industry.
6. Bureau of Labor Statistics Labor Producer Price Index: offers production cost trend data by industry.
7. US Department of Labor: reports hours, wages, and earnings reports by industry.
8. US Census Bureau Economic Census: provides annual and trend data on sales, payroll, and number of employees by industry, product, and geography.
9. US Census Business Expense Survey: reports sales, inventories, operating expenses, and gross margin by industry.
10. US Census Annual Survey of Manufacturers: covers employment, plant hours, payroll, fringe benefits, capital expenditures, cost of materials, inventories, and energy consumption.
Three Inexpensive Sources of Industry Data
1. Dun & Bradstreet: offers individual company data on sales, employees, net worth, nature of financing, credit worthiness, balance sheet / income statement / ratio data, law suits, public filings, liens, judgments. (Note: some records are more complete than others.)
2. The Risk Management Association: this is the one your bank probably uses to benchmark your performance so it’s well worth the money to know what it says.
3. Morningstar.com: offers easy access to financial information about public companies.
Suppose you learn that your gross profit margin is 3% lower than your competition. On $1 million in revenue, that’s $30,000 a year they’re making that you’re not. Is it because their prices are higher or their costs are lower? Does their sales mix include higher margin items that you don’t, but could, carry? Do they have some sweetheart deal for raw materials you should know about? Do they spend that extra gross profit or does it fall to the bottom line? If they spend it, what do they spend it on? Does it go into their marketing budget? How does their sales-to-marketing ratio compare to yours? If it’s higher, what can you learn from their strategy?
How do you use benchmarking in your business? Where do you find competitive information? What creative metrics have you found useful? Aspiring minds want to know!