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Financial Benchmarking

Financial and Operational Benchmarking - The Most Critical Data Points

Jan 21, 2014 10:00:00 AM

Creating a benchmarking study, especially your first one, can look like a daunting task. As you begin to look at what data you want to collect, you should consider, first and foremost, what will your members find most valuable? What key performance indicators do you measure to give the most accurate, and meaningful, peer-to-peer comparisons? As a CFO, I tend to place a high value on financial and operational data. To me, they are the truest indicators of the health of an organization, are easy to quantify, and one of the most accurate ways to compare one’s performance against that of your peers. Basic financial statements are used worldwide as a means of assessing the value, performance and growth of businesses making them a great starting point for developing a successful benchmarking study. 

In the simplest of terms, financial statements focus on a company’s value – where its money comes from, where it gets spent and where it is now. A company’s financial statements are made up of two, basic components:   the balance sheet and the income statement. A balance sheet shows a company’s assets, what it owns, and its liabilities, what it owes. An income statement shows how much an organization has earned or lost in a year.  Combine these with some basic demographic information such as number of employees, geographic location and operational data and you have the basis for a very informative benchmarking study.

ASSETS

Assets are those things that add to the value of a company: equipment, real estate, accounts receivable, intellectual property and, of course, cash. The make-up of one company’s asset base can be drastically different than that of another even when their topline numbers are basically the same. To delve into those differences, be sure to include questions that address not only the TYPE of asset, but also questions that address the QUALITY of the assets. For instance, a company whose asset ratio include a higher average cash on hand balance is considered more financially stable than one whose assets are composed primarily of accounts receivables. Likewise, a company that collects its accounts receivables in a short period of time is deemed healthier than one whose customers take a longer time to pay or don’t pay at all.

LIABILITIES

On the other side of the coin are liabilities, those things that take away from the value of a company.  Accounts payable and debt are some of the more common items that make up a company’s liabilities and, just like with assets, have qualitative as well as quantitative value that can be measured. For example, a company that has more current, or short term debt, is viewed as less valuable or healthy than one whose liabilities are composed of more long term debt.

INCOME AND EXPENSES

An Income Statement gives you a clear picture of how much revenue a company earned, or lost, in a given year. This ‘bottom line’ number is very informative on its own, but taking a deeper look into how, specifically, money was earned and what it was spent on can provide insight into better decision making for management of any organization. Comparing revenue streams and associated expenses with like organizations can help identify areas where your company excels as well as areas in need of improvement. Identifying relationships between income and expenses can also be valuable to management’s strategic planning, future budgets and refining the company’s future growth and development.

PUTTING IT TOGETHER

By using the key components of financial statements as the basis for your benchmarking study you are providing your participants with a survey that’s not only straightforward and simple to complete, but also one that measures of some of the most vital indicators of a company’s health and performance. Businesses that monitor the following data points can easily compare themselves specifically to other businesses in a benchmarking survey or use these data points to calculate financial ratios and compare the results to their peers.  

  1. Total Revenue
  2. Revenue Components
    1. Service Fees
    2. Product Fees
  3. Total Expenses
  4. Expense Components:
    1. Marketing
    2. Labor
    3. Production Costs
    4. Travel
    5. Occupancy
  5. Number of Employees
  6. Facility size
  7. Number of customers, projects, etc. in a year
  8. Number of days of operation in a year
  9. Total Assets
  10. Total Current Assets
  11. Average cash balance
  12. Average accounts receivable
  13. Total Liabilities
  14. Total Current Liabilities
  15. Total Long-term Debt
  16. Average number of days A/R are outstanding
  17. Average accounts payable balance
  18. Average number of days A/P are outstanding
  19. Total Equity

For more information about creating a Financial and Operational benchmarking study that will yield the most meaningful results for your members, please read about some of the studies we’ve developed, or contact me or my team at Dynamic Benchmarking. Our experience in building successful Financial and Operational platforms includes both industry leaders and small, niche associations. We are happy to share our knowledge to help you unlock the power of financial and operational data for your organization!

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