When it comes to gauging your business’s performance and strategies to improve it, you might be ready to seek a financial benchmarking analysis for your business in your industry niche.
If you are a small business owner or new to the competitive landscape, you might be at a loss for what this financial benchmarking term is referring to. You might assume that it is one of the excess strategies businesses implement, which you can choose or reject based on your current state. We can assure you that it’s not. Read on below, and we will get into further detail about exactly what you need to know and should expect when it comes to eCommerce benchmarking best practices for small businesses.
Knowing where your business stands and how it measures up to the competition is key! Wouldn’t it be great if you could get a company financial performance snapshot with customized key performance indicators and achieve immediate insight into your Gross Profit, Labor/Marketing, New Income, Fulfillment Cost/Labor, Cost per Employee, and more?
Good news! Our developers just launched a powerful new financial benchmarking tool, and we want to offer you a chance to try it out! Get a sneak peek at where your eCommerce business is and how you measure up to the competition! Benchmarking involves running financial comparisons of your prices to your competition and the industry as a whole to see where adjustments can be made. This is an incredible offer, and all you have to do is schedule a call.
What Is Financial Benchmarking?
The inspiration for financial benchmarking comes from the Japanese and the business practices they undertook after World War II to improve their economy compared to others. The same principle applies to the corporate world. In the past few decades, the ever-evolving competition in all kinds of markets and economies has made benchmarking necessary. Without having set standards, KPIs, and metrics, businesses nowadays don’t stand a chance against the globalizing competition.
So How Does Financial Benchmarking Work?
In its very basic essence, benchmarking compares your company’s performance with the best in the industry. The term itself goes down to the core of the word “bench.” Topographers define it as an elevated mark or center point made by one player in the landscape. Simply put, it is a mark that others in the same landscape can use as a reference point to adjust their direction.
When it comes to defining financial benchmarking in the business context, it is measuring the corporate landscape to identify which player is outperforming all the others. That particular organization’s performance is the benchmark. It is then up to other players in the market to improve their financial performance to match it.
But with all that said, financial benchmarking involves running more than just a simple anecdotal comparison between you and your competition. Combing through a global market with thousands of companies and numerous metrics can be a bit tricky. In addition to comparing business practices, it takes meticulous detective work, comprehensive self-examination, and analytically savvy skills to execute. While this might sound like a significant amount of hard work, in the end, it is worthwhile.
While competitive or industrial benchmarking is the central focus of this article, here is a very brief look at the four main types of financial benchmarking popular in the business landscape:
Internal Benchmarking
This type of financial benchmarking is pretty self-explanatory from the name. It refers to the comparison of one business operation with another within an organization. Unsurprisingly, it is one of the easier ones out of the four types of financial benchmarking in terms of both research and strategy implementation. With the right accounting software, internal financial benchmarking is even easier.
Functional/Industrial Benchmarking
Going up the scale of difficulty, functional benchmarking involves comparing your company’s operations with similar companies in the broad range of the industry you are a part of. For instance, if you are in the FMCG industry, you can compare one of your operational areas to any company in the industry. It doesn’t have to be a direct competitor.
Competitive Benchmarking
Competitive and industrial or functional financial benchmarking are quite similar. The main difference between the two is that competitive benchmarking compares your operational performance with your direct competitors. As expected, this is the hardest type of financial benchmarking, especially in regard to research, as legal technicalities have to be considered. That said, it is also one of the types that results in major improvements in organizational productivity.
Generic Benchmarking
Lastly, generic financial benchmarking involves comparison with players in unrelated industries. Operations used by most industries, such as warehousing, are applicable in this type as they are used by a variety of industries. The biggest advantage of conducting generic financial benchmarking is that it provides an increase in access to information. Since you don’t have to involve your direct competition, fewer legalities have to be considered.
Learning what financial benchmarking is and all its types, along with acclaiming its virtues, is not enough. It’s up to the organization’s leaders to develop a well-thought-out, specialized, and organized investment strategy to implement benchmarking. Like you would do to implement and enforce any other program, organizations need to establish it as a business practice.
Some steps that can help you during your benchmarking efforts include:
Determining the Processes to be Benchmarked
It makes sense that you start your financial benchmarking journey by identifying exactly what operations you want to benchmark. You’ll be wasting your time and resources without associating any direction or goals with the areas you want to benchmark.
So, start by asking yourself questions like: Have organizational and departmental priorities been established? What level of change is the organization looking for? Does the entire system need to change/improve, or just one particular process? What are your capacities and limitations in terms of implementing the financial benchmarking?
Having a clear objective in mind before starting the project makes it that much more efficient. This way, when taking more critical measures, you will be better prepared to make actionable decisions.
Determining Meaningful Metrics
There are endless ways for organizations to measure their financial performance while benchmarking. Different areas of business use a plethora of metrics to define their performance. These metrics are also referred to as KPIs or Key Performance Indicators.
Depending on your industry and the goals you want to achieve out of the financial benchmarking process, you need to stick to a few meaningful metrics. For example, you can use revenue, costs of goods sold, sales volume, conversion rate, etc., for benchmarking earning potential. The main idea behind doing this is to have a clear picture of what exactly you want to research and measure for a competitor.
- Operating Expenses: Tracks the costs required to run your business operations.
- Profit Margin: Measures how much profit your company makes for every dollar of sales.
- Net Income: Represents the total profit after all expenses and taxes have been deducted.
- Bottom Line: The final financial position of the company, reflecting total earnings.
- Cash Flow: Monitors the amount of cash moving in and out of your business.
- Converted to Cash: The process of turning assets or sales into liquid cash.
- Gross Profit Margin: Indicates the percentage of revenue that exceeds the cost of goods sold.
Finding Organizations to Benchmark
The competitive landscape for almost all industries has changed drastically in the past few years, which means more players in the market. With an increase in competition, it is essential that you identify the organizations that have processes that can adapt to meet your organizational goals.
It is quite obvious that the companies you choose to study should exhibit excellent performance in the very areas you want to target. But along with that, the business practices and the size and industry of the organization are relevant to yours. If you want to benchmark against your direct competitors, limit the list to the best ones. But if you are conducting generic benchmarking, you can think outside the box and venture into other industries as well.
Gathering Data
The next obvious step after determining organizations to benchmark is to do the research and collect relevant data. Keep in mind that whatever data you find and analyze at this stage, you’ll be using it to improve financial performance. So pay close attention to what data you come across and how you choose to analyze it.
Questions like – what are your competitors doing differently to distinguish themselves from the others? What kind of technology are they using to increase efficiency in their production? – and others like these will help you get the answers you were looking for.
You need to ensure that you are thorough with your research and cover every aspect you want in maximal detail. This way you’ll have relevant, accurate, and complete data in hand, allowing you to compare and construct actionable plans.
Analyzing Information
Simply gathering data is not sufficient for improving your company’s financial performance. To adapt strategies, you need to analyze and organize the data into meaningful information. This step involves analytical observation of the collected data so you can identify patterns and gaps in the processes.
The results that you achieve from the analysis will help you identify the areas where your organization might be lagging behind and the benchmarked one outperforms. This is the most important step of the entire financial benchmarking process as it is here where you’ll be able to get a clear picture of where your organization needs to improve compared to the industry standards.
This is essentially the moment for you to make pivotal changes in your business practices. You’ll know what relevant practices can be adapted and implemented in your organization, considering all limitations and constraints as well.
Determining Trends
In this step, you analyze all your findings of your competitor’s financial performance and your company’s past performance in comparison to it to make forecasts. Including the consideration of possible changes in the industry, you can make predictions as to how your organization’s performance will be impacted with and without the implementation of benchmarked changes.
By correctly implementing this step, you’ll be much clearer on the potential quantitative benefits of adopting the suggested financial benchmarking practices from the previous step. This step will also give you a clear picture of your performance without implementing the proposed changes.
Getting Consensus
Any change you’ll be implementing will have an organization-wide impact, whether directly or indirectly. Hence, it is important to get the consensus of the target audience, i.e., employees and management, for the need to implement changes. This step involves you doing just that and communicating the need and the potential outcome of enforcing the changes.
Having all the employees and management on board and on the same page will make the implementation much easier. No one will be left confused about the changes being made to processes. Seeking everyone’s consensus will create a sense of accountability in the organization, encouraging everyone to carry out the necessary changes.
Implementing Changes and Monitoring Progress
Once you’ve set an actionable plan, have consensus on the changes, and everyone is empowered to carry them out, all that’s left is implementation. Management and employees now need to execute the approved changes. This includes establishing timelines and ensuring that everything is undertaken within your company’s typical planning cycle.
While the changes might take time to present the anticipated results, you still need to ensure that you can chart the implementation and its progress accurately. Besides the timelines, control charts that record the measurements of the control factors should be prepared. They will allow you to track and monitor the changes and results.
If you correctly implement this step, you’ll be able to track the results and, based on that, retain or accept elements of the changes that were successful and reject the ones that weren’t.
Revisiting the Benchmarks
As you know, nothing is constant in this fast-moving and rapidly globalizing market. New developments are constantly added to it. To remain cutting-edge and make further improvements, one needs to revisit and recalibrate one’s financial benchmarking.
Staying on a continuous path of improvement and advancement is a commitment that requires a habitual reassessment of processes already in place. If an organization seems complacent with the implementation of these changes, it would create an assumption that one-time financial benchmarking provides permanent solutions. The reality is that this is a false sense of security that can cause serious damage to the company’s performance potential.
Ultimately, your organization’s commitment to improvements depends on the success of financial benchmarking. To sustain market leadership and have elevated performance, it’s necessary to include financial benchmarking as a permanent part of the company’s culture. Along with that, the realization that financial benchmarking will often only be temporary is also important.
Bonus Tip – Start Early On
When it comes to getting the most out of your financial benchmarking practices, starting early is conducive to improving financial performance. And no matter how cliché it might sound to say this, it’s never too early to start benchmarking. By doing so, you’ll have clear directions to spark positive changes in your organization and stay ahead of the competition.
While all kinds of businesses can benefit from financial benchmarking, e-commerce businesses need to pay closer attention. The industry as a whole, along with its sub-categories, is subject to changes daily. In order to garner success for your business, you need to stay ahead in the benchmarking game.
Our comprehensive guide on how to use KPIs to benchmark your business for success teaches you how to do that. You can find it here for free. Give it a thorough read to leverage your brand to grow and scale its business.
You can also take this opportunity to speak with one of our Award-Winning eCommerce experts and seize your complimentary benchmarking analysis by scheduling a call now!
