Optimize your financial benchmarking

Considering leveraging financial benchmarking to evaluate your organization's performance against industry peers? Follow the steps below to get started with the best practices.

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Optimize your financial benchmarking

What is financial benchmarking? Why is it important?

Financial benchmarking is a comparison of the financial performance of a company to another entity, like industry standards, other companies in the industry, or other companies that use similar strategy or supply chain methods. When properly done, it includes an analysis of financial rations like revenue and profit margins. The goal is to identify areas of success and improvement in order to set realistic goals. This process is important because it helps an organization compare financial performance to industry peers. Companies can evaluate their strengths and weaknesses, set realistic goals, and make informed decisions to improve financial performance.

6 steps to successful financial benchmarking

In order to do financial benchmarking, follow these steps to ensure the cleanest data and the purest comparison.

Step 1: Define strategic ambitions. To conduct effective financial benchmarking, identify specific areas of your company's operations to focus on. Your strategic goals will determine which financial benchmarks to pursue. Use these goals to set parameters for your financial benchmarking analysis.
Step 2: Define the ratios you need to look at. Choose key benchmarking ratios that align with your strategic ambitions. Identify metrics that provide depth and insight, such as direct competitor margins if your margins are low.
Step 3: Select your peer group. Choose whom to compare metrics with: similar or different operations? Similar is cleaner, but different companies offer fresh perspectives and show results of different choices.
Step 4: Collect data. Financial benchmarking relies on the company's Financial Statement, usually obtained from the annual report. Formatting the data to align with your own requires "data cleaning." After that, you can use a program like Excel to organize the data for easy comparison. Additional data from sources like qualitative and pricing information can enhance the analysis.
Step 5: Analyze the data for insights. Dig into the numbers to identify strengths and areas for improvement. Uniformity is key in interpreting data, including consistent time periods and multiple angles of approach. Consider trends and supplement quantitative data with qualitative data for a full analysis.
Step 6: Draw actionable conclusions. Use financial benchmarking to set realistic goals based on areas of success and improvement. Gain insights and develop informed strategies by analyzing the data in the context of your chosen strategic ambitions.

9 Financial benchmarking ratios to boost your performance

The goal of financial benchmarking is to identify areas for improved financial performance in order to set realistic targets for your company. Here are strongThese are strong benchmarking financial ratios to consider.

Metrics
Explanation
Net sales
This metric tells you about the relative size of a company compared to yours. It is one of the first metrics to consider when financial benchmarking for growth.
5-year CAGR
The 5-year CAGR reveals the direction a company is going. If this number is not provided, it can be deduced from the net sales over multiple years. Even if a company’s net sales are higher than yours, if that number is declining yearling, there is market share to be gained.
EBIT (DA)
If you want to measure operational performance, look at operational profitability. Note that exceptional costs and profits won’t be included in this number.
Cost of goods sold (COGS)
This is a crucial factor in determining profit drivers. As inflation continues to grow, COGS will become increasingly important to tell you whether a company is paying more than you for its inputs.
Total operating expenses (Opex)
Personnel and other operating costs will give you a fuller picture of what drives a company’s profit, and it can also provide a benchmark for total operating expenses. If you suspect your company is less profitable than a peer, this split can offer a reason for the lower efficiency.
Capital expenditures (CAPEX)
Looking at net investments in tangible fixed assets of industry peers can tell you if your industry is expanding its asset base or decreasing it. This can show what the future plans of your competitor might be, or what they expect from industry trends. If margins are under pressure, but the industry is expanding, that could signal trouble. The earlier you recognize this, the more power you have.
Net debt / EBITDA
One of the best markers of a company’s financial future is its ability to pay off debt.
Solvency
Is a company’s financial health solid? Are they set up for long-term success? This metric tells you pertinent information about a competitor.
Return on Capital Employed (ROCE)
Here you can compare the EBIT margin with the required operational capital, like fixed assets and working capital.

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