Business Benchmarking: Are you leading your industry, or trailing it?
“My company made money this year, but how well did we really do compared to our industry?”
“How can I identify our company’s specific financial strengths and weaknesses?”
“Where should I start making changes that will improve our financial position?”
The Certified Public Accounts at Wilging, Roush & Parsons CPAs uses business benchmarking techniques to help our clients identify performance strengths and weaknesses when compared to the industry in which they operate. Comparisons to industry averages are helpful because they offer a starting point for planning.
Our unique business benchmarking reports interpret and explain industry benchmarks. The customized features of our business benchmarking reports include:
- Executive Summary highlights strengths, weaknesses and key points
- Industry percentile rankings shown for 20 major financial ratio comparisons
- Interpretation of variances from industry norms
- Bold graphs that illustrate comparisons with industry peers
- “Discussion ideas” section provides ideas for profit improvement
Clients are presented with countless strategies that impact financial position. These strategies focus on areas where they fall short of industry averages. Generally, we recognize there is no single strategy that will make a significant difference. The value of our bench marking process is to implement a combination of small strategies which collectively will have a meaningful impact over financial performance.
Areas of Strength
- Gross profit percentage is above average for similar-sized firms in the industry.
- The company has a higher than average level of net worth relative to assets.
- The debt level of the company relative to assets is low compared to similar-sized firms.
- The company has an acceptable day in accounts receivable.
- The company is creating an acceptable number of inventory turns.
- A relatively high level of sales is being created with the existing asset base.
Observed Areas for Improvement:
- Operating expense percentage is above the average.
- Operating profit percentage is lower than the average.
- Profit before taxes (as a percentage of sales) is less than the average.
- The company liquidity should be better.
- Sales to fixed assets is at a low level.
- The return on equity for the company trails industry norms.
- The company’s return on assets is below the industry median.
The company’s return on assets is below the industry median.
Operating expense percentage is above the average.
- Express and track cost categories as a percentage of sales.
- Examine individual operating cost categories to see if any are out of line.
- For detailed operating budgets, consider history and realistic growth but periodic zero-based budgets may make sense.
- Strive for easily understood actionable reporting systems. Avoid broad cost categories where possible, except for summary reports and subtotals.
- Ensure that operating cost information is reported in a timely fashion. Obviously the quicker problems are solved the better.
- Have “exception reporting” which highlights unusual expenses. Be able to track the exact source.
- Follow-up on recurrent (chronic) problem areas in operating expenses (and have a system to identify them).
- Work on feedback from employees, suggestion box meetings with management and so forth. Are your current methods successful?
- Reward improvements in reducing operating expenses through incentives and recognition. Solicit ideas from managers in the functional areas.
The Current Ratio is defined as total current assets divided by total current liabilities. It provides an area on how well the company can service its current obligations. Higher values within limits are better.
The current ratio for ABC Drug Stores is 1:4. This compares to the industry median of 1:7. The cash strength relative to assets for the firm is below average, trade receivables is below average, and inventory is below average. Current assets are only part of the liquidity picture, however.
Maintaining the low level of current liabilities also affects the firm’s liquidity. For ABC Drug Stores, short-term notes payable is below average, the current portion of long-term debt is above average and trade payables is below average.
The Quick (Acid Test) Ratio is similar to the current ratio, but it includes only cash, cash equivalents and accounts receivable as current assets, which are then divided by total current liabilities. It specifically excludes “inventory” in the numerator, and is therefore a more conservative measure of liquidity. The quick ratio indicates a firm’s more immediate capability for paying current obligations, since it would take some time to convert inventory into cash. As in the case of the current ratio, higher values (within limits) are better.
The quick ratio for ABC Drug Stores is 0:8. This compares to the industry median of 0:9. The firm’s inventory position is below the industry average. Both the current and quick ratios are less than the industry medians. Action steps to improve liquidity should be developed and implemented.