Everything you need to know about financial benchmarking including best practises
Businesses constantly face changing conditions – Examples include softer demand in the market, increased competition, and more expensive money (hello 2023). So how can businesses move in sync with changes to their external environment? Well one tried and tested tool is benchmarking.
In this blog post, we'll take a deep dive into the world of benchmarking metrics, exploring the significance of key financial indicators, and unveiling best practices that can help fine-tune your finances for sustained success.
Benchmarking metrics are key performance indicators (KPIs) used to assess and compare an organisation's performance against industry standards, competitors, or best practices. These metrics span various aspects of business operations, including financial, operational, and strategic dimensions. Let’s now look at three key areas for benchmarking your business:
Just like anything in life, benchmarking is just another process. To learn more, I sat down with Joel Lister-Barker from the benchmarking platform CompanySights who knows this process well. Here’s what he thinks are the best practices for anyone benchmarking for the first time.
1. Define Clear Objectives
First and foremost, you must clearly outline what you want to achieve. Whether it's improving profitability, reducing costs, or enhancing efficiency, having well-defined objectives is a must because it ultimately guides the benchmarking process.
2. Select Relevant Benchmarks
Choose benchmarks that align with your industry, size, and business model. Finding and using benchmarks tailored to your specific context ensures more accurate comparisons, buy in from key stakeholders and real insights that you can act on.
3. Analyse Variances
Understanding why your metrics vary from benchmarks is the whole purpose of the exercise. It is this analysis that provides valuable insights into areas that require attention and improvement. These variances are like a big spotlight being shined on part of your business where you should look deeper to identify issues and opportunities.
4. Regularly Update Data
The external environment shifts all the time. It is good practice to regularly update your benchmarking data to stay relevant and ensure that your financial strategies are based on the most recent industry trends. For example, the higher interest rates seen in 2023 increased the borrowing costs for many UK businesses, ultimately reducing the Net Profit Margin.
5. Create a Culture of Continuous Improvement
Benchmarking is an ongoing process. Foster a culture of continuous improvement by integrating benchmarking into your regular financial analysis. Some metrics should be assessed as part of monthly financial reporting (e.g., Current Ratio to maintain liquidity in the business), while others can be on a less frequent basis (e.g., ROI for major investments). The frequency requires professional judgement, but remember that it is a recurring process, not a one-time exercise.
In the world of accessing business finance, being prepared is key. Benchmarking metrics offer a roadmap for navigating financial complexities, providing businesses with the insights needed to fine-tune their financial strategies.
By understanding and implementing best practices in benchmarking, organisations can not only keep pace with industry standards but will also result in a better business that is more attractive to lenders. Stay informed, stay competitive, and let your financial metrics guide you towards sustained growth.