Benchmarking is the practice of a business comparing key metrics of their operations to other similar companies. It can also be internal to compare the performance of employees or to compare the performance of business units against each other or against company objectives.
Benchmarking enables management to make decisions that will improve their business’ performance and therefore overall profitability.
Benchmarking is a common business practice however is often overlooked by small businesses. It can however be very insightful and enable the business
➢ Increase profitability – appropriate benchmarking will help you to identify business practices that need improvement, to be removed, added or tweaked and the inevitable outcome is likely to be a more profitable business, whether its through happier customers, reductions in costs or greater efficiencies to name just a few,
➢ Compare your business to competitors – this can provide very valuable information. Why are they doing well? What you doing well compared to them and why? What are their margins? Where do they get their customers from?
➢ Risk Management – all businesses face risk, but these vary widely from industry. These risks can often be benchmarked (e.g. number of injuries, website downtime) and the insights from them can then be used to change business practices.
➢ Identify areas for improvement – no business should ever be stagnant, but should always be looking for ways to improve. This could be improving staff performance, customer service, cost control and marketing practices.
➢ Health Check – some benchmarks will be indicators of the health of your business and its viability.
➢ Improve Resource Allocation – all businesses have limits to their financial resources and to time. Benchmarking your business practices can help a business to determine where limited finances can best be allocated and to also to ensure staff focus their time on dollar productive activities.
➢ Motivation tool for your team – you can set your staff Key Performance Indicators (KPIs) so you can track and monitor their performance and identify areas where people need additional training, strengths and weaknesses, determine suitable people for leadership and use it as a tool to celebrate when certain benchmarks are hit.
➢ Reduce Expenses – Expenses tend to rise each year. Benchmarking can include year on year tracking as well as determining which areas of a business are spending more and what expense areas are growing the fastest.
➢ Increase Management Effectiveness – benchmarking enables the business leadership to make more effective decisions based on genuine information rather than guessing.
➢ Focus – knowing your key benchmarks can help you to focus your energy on the areas and practices that are going to give the best results.
Example: My Financial Planning Business
My business was in the financial planning industry below are some of the measures that I regularly assessed. They were good guides as to how I was performing against my own personal objectives, the business objectives and where we stood relative to competitors.
• Funds under Advice / Investable Assets – for some financial planning businesses who charged asset-based fees this would have a flow on impact to their revenue. For businesses like mine it was more of a growth indicator.
• Average Funds per Client – this helped me to determine whether we were getting onboard the type of clients we were targeting.
• Adviser-to-Client Ratio – how many clients does each adviser have – if this figure gets too high, you know the adviser would struggle to maintain the relationships properly and the customer service would decline.
• Average Ongoing Fee per Client – this was helpful to ensure we were charging enough relative to the work we were performing as part of our service package and to benchmark against our peers.
• Average Upfront Fee per Client – plan fee / implementation fee – this helped us to ensure we were charging enough for the considerable work that was done upfront when taking on a new client.
• Initial Meetings per month – this was a valuable tool to see how many new sales meetings were getting each month. It was helpful to see if our prospecting strategies worked. From this it would then coincide with the next indicator that was….
• Plans per month – this showed me how many of these initial meetings translated into actual customers wanting work done.
• New Clients per year – how many clients did we successfully take on each year? Good year? Bad year?
• Revenue Growth – I monitored revenue monthly to look for trends and also annually to measure our year-on-year performance.
• Referrals – a critical component of most service businesses. Not only did I monitor the quantity of referrals, but also the source. Was it an accountant, mortgage broker or an existing client?
These were my benchmarks what are yours?