“You can’t manage what you can’t measure”, is an old management adage that still holds true today. Measuring what matters in your company is paramount in running a successful business, and cannot be ignored in today’s extremely challenging business environment.
There are different ways to measure business success. The most common type of measurement is usually based on cash-flow. That is, how much money is available at the end of an accounting cycle. This approach typically makes many entrepreneurs feel quite satisfied with what they have achieved. However, the most progressive and successful companies go beyond their cash-flow and ask themselves this question: How do we compare to others?
Benchmarking: A Key to Maximizing Efficiency
Measuring against industry standards, or benchmarking, is a method used by many profitable companies to evaluate their performance on various aspects of their business processes such as marketing and finance in relation to the best practices in the industry. Through this method, a firm can develop plans on how to adopt best practices, helping it improve the performance of some aspect of its business.
There are a lot of compelling reasons of why you should benchmark. In research by Pricewaterhouse Coopers, it was revealed that firms that benchmark boost their growth by 69% and their overall productivity by 45% compared to those who don’t.
As a management tool, benchmarking eliminates ‘paradigm blindness’ – a concept by which an organization is unable or unwilling to accept any challenge to their core ways of making sense of the world—in essence, their worldviews (or in the case of a company, we could call it a “work view”).
Benchmarking helps you to think of new methods, ideas, and tools that can improve the effectiveness of your business processes such as financial forecast. It helps break down the barrier to change by demonstrating and comparing the successful outcomes of a new method to the one that is currently employed in your business.
Moreover, benchmarking also draws the line between those who survive and even perform above industry average despite the harsh economic conditions, and those who don’t. When a company utilizes benchmarking, they can precisely pinpoint their strengths and weaknesses, allowing them to allocate resources on their core competencies and focus less on not-so-important areas. All in all, the key to effective benchmarking is to identify what processes are “key success factors” in your business and which ones aren’t.
Types of Benchmarking
After you identified the key success factors, you can choose between two major types of benchmarking procedures: the internal benchmarking, and competitive benchmarking.
Internal benchmarking, as the name implies, involves benchmarking within a company. It compares current performance against a previous time-period i.e. previous quarter, same quarter last year, etc.
On the other hand, competitive benchmarking compares company’s performance against similarly-sized companies in the industry. It is often called cross-sectional benchmarking because you are comparing against a “cross-section” of the industry.
Overall, the bottom-line in using benchmarking is to help make your business more effective and efficient than ever before. It ensures you measure what matters the most. Measuring what doesn’t directly impact your business profitability and performance only adds burden and takes your focus away from those truly important benchmarks.
If you need the expertise of a professional in benchmarking, seek out Joseph F. Fragnoli, CPA, PC. Call us at (615) 678-4751