Every business has some form of competition.
On a daily basis, you might not like to think about what the competition is up to. The only company that you’re in control of is your own, and that’s where your focus stays.
That said, every small business owner should remember this: the competition matters. Their successes and failures influence your own. That’s why it’s important to always keep an eye on the local businesses in your industry.
A productive way to consider where your business stands against the competition is to engage in financial benchmarking.
Financial benchmarking, also known as industry benchmarking, involves analyzing your company’s finances and comparing its performance to other companies that offer similar sets of goods or services. Benchmarking provides valuable insights into the health and direction of a business.
In this guide, we’ll review the process of completing a financial benchmarking analysis. If you work with an accounting team like Stratlign, you’ll receive expert guidance throughout the entire process in order to transform your results into a practical and meaningful action plan.
Here are the steps involved in financial benchmarking.
Get a Clear Picture of Your Current Financial Situation
The first step in financial benchmarking is to gain a thorough understanding of your company’s current financial situation. This includes documenting your revenue, profits, expenses, cash flow, and debts. Be sure to account for interest owed on loans and other future expenses that contribute to your business’s overall financial standing.
Set Realistic Goals for Business Growth
Once you’ve mapped out your business’s current financial situation, you can begin to set goals for growth. These goals should be:
- Specific
- Measurable
- Achievable
- Time-bound
For example, you may set a goal to increase revenue by 10% over the next year or to reduce your spending in a certain category by 5% over the next six months.
Find Other Businesses to Compare Against Your Own
The next step in financial benchmarking is to seek out a few other businesses to compare against your own. Try to find companies in your industry that provide similar services and are of a similar size to your business. You can use online databases such as Dun & Bradstreet Hoovers to perform your business search.
Compare Key Financial Metrics
After collecting the names of a few comparable businesses, you can begin the financial comparison process.
Create a spreadsheet that compares each business, including your own, on metrics such as revenue, expenses, profits, cash flow, and debt levels. You may also compare key ratios such as profit margins and return on investment (ROI). These comparisons will start to paint a picture of how your business’s financial health stacks up against other firms in your industry.
Identify Your Business’s Areas for Improvement
Running your benchmarking comparisons should reveal areas for improvement in your business’s financial performance. You may be surprised to learn that certain competitors are earning more, spending less, or growing faster than you expected. These revelations provide valuable insights into how well your own business is doing, paving the way for new strategies to improve performance.
Implement Strategies for Improvement
After identifying your business’s most pressing areas for improvement, you can begin to implement strategies for achieving your new financial goals. These may involve changing your pricing methods, boosting your marketing efforts, or addressing inefficiencies in your daily operations.
As you begin to implement changes, be sure to keep thorough records so that you can track the effectiveness of your strategies.
Review and Adjust Your Goals as Needed
As your business grows and changes, it’s important to always be willing to adjust your financial goals as needed. If growth is progressing faster or slower than you expected, then you may choose to set new targets for revenue or profit margins. By regularly reviewing and adjusting your financial goals, you’ll maintain targets that are both ambitious and achievable.
Start 2023 with Better Financial Benchmarking Accounting
At Stratlign, we’re a full-service accounting, planning, and advisory team that supports the financial goals of small and medium-sized businesses.
We specialize in the construction and trade industries, offering bookkeeping, payroll services, tax planning, and other essential financial services for business owners. We work with general contractors, landscapers, electricians, and other talented community business leaders.
To learn more about industry benchmarking and other accounting and financial planning tools, contact Stratlign today to schedule a 15-minute discovery call.
