Another in our series of articles helping people post company liquidation to run a tight ship moving forward.
Every business would like to earn more profit or have a little more cash in the bank but how can you achieve this without investing a huge amount of money?
A benchmarking exercise, whether you go for a simple low key approach or a more in depth proposition can allow you and your managers to identify areas that aren’t measuring up to industry standard and take effective and focused action to remedy these.
What is benchmarking?
Benchmarking is a method of comparing your company’s performance against a competitor, or internal departments against their peers. The aim of the exercise is to ensure that you identify and attend to areas that don’t come up to scratch but also make the most of areas where you exhibit real competitive advantage.
So how does this help save money or increase cash?
Imagine a company in a plant hire business. They identify half a dozen competitors and go about collecting data. Using the results of the first study they identify several areas to attack;
- Their gross margin is lower than their competitors
- Their Return on Investment (ROI) in plant is lower
- Their sales per asset is lower
- Their cost of finance is higher
As a result of this the company takes action to;
- Speed up the turnaround of items off hire so that they sweat their assets getting more hires per year
- Review their hire charges to increase gross margin
- Find cheaper ways to finance their plant making their cost of finance lower
Subsequently they carry out further monthly benchmarking to ensure that the actions they have taken results in the desired results – more profit and better liquidity ratios.
The benefit of benchmarking to our imaginary company is clear. If they weren’t aware that their ratios lagged behind that of their competitors then they wouldn’t have taken the action they did. By doing this they become more competitive, more profitable and more solvent.
Rules for effective benchmarking
- Avoid absolutes. The number of employees or the value of sales are likely to be unhelpful due to specific and structural differences between competitors. Instead choose metrics that will provide an instructive and comparable measure such as sales per employee or ratios like gross margin.
- Choose comparable firms. Comparing say a service provider with an engineering company won’t really be useful because it is likely to give false results. Similarly comparing a multi-national with a one man band is probably pointless. As an alternative choose similar sized companies in the same sector. They don’t have to be identical to your company but close enough to provide a meaningful comparison.
- Use metrics based on drivers and not effects. A driver is something that causes an effect. So for example the amount spent on marketing produces leads. So base your metric around the number of leads produced per £ spent on marketing and not simply on the amount of leads you may have at any one time.
- Choose a number of comparators. Comparing yourself against one competitor won’t give you any helpful data because you won’t know which figure is correct. Comparing yourself against say 6 other similar firms will show whether you are in the middle of the pack or an outlier.
- Measure regularly. Carrying out a single benchmarking exercise won’t give you the richness of understanding that will be available to you if you do the same thing over a period of time. By benchmarking say once a month or every quarter you’ll be able to see whether any changes you have made have had an effect. They will also show where your competitors have made changes for the better or worse.
- Take action. The value of any benchmarking exercise is in the changes in behaviour that it produces. Measure, adjust, measure. That way you’ll be able to see the effect that your actions have produced and know that they have made a difference.
Of course benchmarking effectively takes real skill and experience and you may feel that you don’t have the time or knowledge to put the above rules into practice. It may be worthwhile finding a consultant or asking your accountants to help devise a model for you to use on an ongoing basis.
Benchmarking can help a firm understand where they are doing well and where they can do better. Investing some time and money in a professional benchmarking exercise will almost certainly prove worthwhile and help give a progressive company the edge.