When you go to the doctor for a physical and your blood pressure is 120 over 80 and your temperature is 98.6, they’ll declare you’re healthy. This is because the average human has a blood pressure and a temperature that is in a certain range of healthiness. Likewise, determining the health of your business requires comparing it to other companies in the industry.
Also, when you have a physical, your doctor only runs a few tests. If something seems out of the norm, they may check additional areas. For instance, they might check your cholesterol or stress levels if your blood pressure is high.
“The same concept applies when looking at your company,” says Greg Manns, senior vice president of Industry Insights, Inc. “When looking at your financial ratios in comparison to the industry average, you don’t need to look at all the ratios. You need to look at some key things and that will dictate where you go from there. The detail allows you to further explore problems that you might find in a few key areas.”
The 2023 Financial Benchmark Study, sponsored by Aspire Software, provides a report card of 20 key ratios to regularly monitor. Manns says while these ratios are not all-inclusive, they provide a great evaluation of a company’s overall health and can let you know if you’re off track from reaching the goals you have set.
The 2023 Financial Benchmark Study is based on 2022 data from 159 responding organizations representing over 313 locations. In addition to the digital report, purchasers will receive access to Excel data tables containing all the data aggregates, including regional-specific data breaks (sample size permitting).
“An airplane in flight relies on navigational feedback and constant adjustments to finally reach its destination,” Manns says. “Benchmarking is much the same — it is providing the feedback necessary to let you know what areas might need further adjustment in order to reach your ‘destination.’ Whether it be increased profitability, increased cash flow, improving your close ratio, lowering your debt, etc.”
Manns encourages companies to benchmark their operational and financial performance at least annually.
“I would review your financial performance on a monthly and/or quarterly basis,” he says. “Many of the operating metrics should be monitored more frequently – quarterly, monthly, or even weekly. I would caution you to consider any seasonality in your business when reviewing more frequently than annually. Reviewing monthly data month-to-month helps identify seasonality and trends but looking at the same month in the prior year would provide a better ‘apples-to-apples’ comparison.”
Evaluating Benchmark Data
Benchmarking means to compare something against an established standard. Whether you realize it or not, you’re often benchmarking by comparing top-line sales to your historical performance.
“While evaluating your results against your historical performance is a good measure, it doesn’t necessarily tell the whole story,” Manns says. “A company who has reported an average net profit of 3%-5% of revenue for the last 10 years may feel great — that is until they discover the industry norm is 10% to 15%. This is where comparisons to industry ‘best in class’ performance is helpful.”
Another data point that can identify an area for improvement is your total payroll costs as a percent of sales. If it’s at 60 percent, it’s hard to tell if that’s good or bad for your industry. Knowing the average landscape company has payroll costs that are 50% of sales lets you know that 10% of sales could potentially go to the bottom line of your company.
Manns adds that with recent inflation, paying attention to ratios is much more useful than raw dollar figures.
“For example, if you tell me that your company had $100,000 in net profit, I don’t know whether that is good or bad,” he says. “If you had only $1 million in sales, that’s a very solid 10% profit. However, if you tell me that your company had $10 million in sales, this tells a completely different story — only 1% profit.”
Acting on Benchmark Data
While it’s great to know how your company is performing compared to the rest of the industry, you shouldn’t just leave it at that.
Manns views benchmarking as a cycle where companies are answering three questions.
- Where are we?
- Where do we want to go?
- How do we get there?
He says that often just the first step, the assessment phase, is what people consider benchmarking.
“This is not where the process should end,” Manns says. “As you move into phase two or the goal-setting phase of the benchmarking cycle, focus on identifying the goals that align with your vision for your company. I suggest focusing on the profit leaders in your industry to identify performance metrics goals.”
Keep in mind that when there are deviations between your results and historical or industry norms, this isn’t necessarily good or bad. It means more analysis is needed to explain the variances.
The last phase is the most challenging as you must identify how to reach your goals.
“Many conduct interviews with their peers or hire consultants to help with this phase,” Manns says. “I suggest leaning into your staff’s experience and expertise. They often can provide the greatest insights into process improvements, and it provides them with a sense of empowerment in contributing to their organization’s success.”
Manns encourages simply getting started and asking lots of questions. If you are small business owner, don’t be afraid to talk to your peers, your accountant, your banker or your team.
“Even a relatively simple analysis of your firm’s own figures using the data for comparisons can yield important insights into your business,” he says. “You do not have to be a financial expert to benefit from this information.”
Access the 2023 Financial Benchmark Study to gain insights and data for your company here.