Benchmarking is the process of continually looking for the best techniques, practices, and methods, and possibly implementing or trying to adapt their good attributes and executing them to become the best of the best.
Many business owners employ the strategy of benchmarking to assess the health of their company. Benchmarks give a frame of reference through which they can measure financial success and measure progress against an established goal. Generally, a business benchmark is an array of financial performance metrics in critical areas, compiled by averaging data from a group of comparable businesses.
Benchmarking is uncomplicated as a concept but considerably more involved as a process. The ultimate payoff is that you can become the best of what you do, and continuously improve upon that superiority.
Benchmarking is a means of identifying best practices and using this knowledge to continuously improve our products, services, and systems so that there is an increase in the capability of the business to provide total client satisfaction.
Today the performance is not of the same high-class standard as a benchmark business. The delta is the competitive gap
Benchmarking and enhancing the enterprise, as a result, means a rise in business overall performance and a Competitive Advantage.
Importance of benchmarking
What is the accurate valuation of benchmarking? Sometimes, the importance of benchmarking is ignored because the stakeholders do not fully understand the advantages and value of benchmarking. The key is to go much deeper than the surface level statistics to appreciate the full scope of the information useful benchmarks can give. An important principle often missed in labor benchmarking effort is this: The same performance reducing factors that produce unacceptable labor and other costs will generally generate unacceptable leads to the other critical outcome areas such as clinical and service quality, physician and patient satisfaction, employee dealings and community image.
This is true because the typical response of department professionals trying to compensate for the challenges that hinder productivity is to staff up. The popular belief that cost reduction efforts must unfavorably influence quality is merely wrong
Likewise, attempting to counteract overall performance limiting factors by increasing staff can be an ineffective management strategy.
Overall performance
Overall performance limiting factors typically negatively impact multiple areas of operational and financial productivity. Because the same factors that generate excessive labor costs also generate less than optimal results in the critical outcome areas of quality, physician and patient satisfaction, employee relations, and community image, staffing variances identified through the benchmarking process can be utilized as an indicator to determine prospective enhancement opportunities in all critical outcome areas, not just in labor costs.
Therefore, reducing staffing without first resolving effectiveness limiting aspects has the potential to adversely affect effectiveness in all crucial outcome areas, sometimes catastrophically. It is vital to the success of the organization to identify performance limiting factors within the organization that exert an adverse impact on other critical outcome areas. The moment the performance limiting factors are seen, some resources must be utilized to thoroughly understand the far-reaching impact they have.
After this evaluation has been created, it is essential to work to resolve the performance limiting aspects if possible. Some problems may not be able to be eliminated. In this instance, effort needs to be put to reduce the impact of the factors on efficiency. Systematically determining and resolving the effectiveness limiting factors that cause excess labor costs will develop performance in all critical outcome areas, including costs. This is the actual value of the labor benchmarking process.
In today’s economic climate, many small to mid-sized businesses may find it challenging to borrow money due to stricter financing manages, so it is even more critical to ensure that a business is functioning as efficiently as possible, reinvesting earnings to fund operations. Without the utilization of an industry benchmark, businesses may think they are performing efficiently while in certainty they have no foundation for comparison. When evaluating benchmarks to assess progress, businesses should consider the following:
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Source of data
One of the challenges in calculating benchmarks is the data source from which they are derived. Many small, privately held companies do not submit their financial data. Conversely, data such as income tax filings for publicly held businesses may be intentionally deflated or under-reported for tax purposes.
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Relevancy of data
When finding comparable businesses, businesses need to ensure that the companies are similar on multiple levels, as much as possible. For example, the same companies should offer related products and services have identical revenues, corporate structure, and the number of employees.
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Recency of data
When evaluating a company’s financial efficiency to an established benchmark, it is critical to understand the recency of the data comprises that benchmark. Financial figures from five years ago used to generate a benchmark need to be noted, as economic conditions have evolved considerably, and therefore the benchmark may be defective.
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Calculation Strategy
When developing benchmarks, it is usually vital to know how businesses arrived at their computations so that the financials are applied to assessment. For example, one business within the comparables may determine profit as earnings before income taxes while an additional may define it as earnings before income taxes, depreciation, and amortization.
Fundamental Metric Evaluations
There are several ratios that enterprises use to evaluate financial performance which can be beneficial to benchmark. These include;
- Profit margin– a measure of profitability,
- Quick Ratio – measures immediate cash liquidity, cash plus accounts receivable or liabilities,
- Current Ratio – measures liquidity, existing assets or current liabilities,
- Debt Equity Ratio – measures how well a business is leveraging its debt.
How is Benchmarking Used?
- Compare the performance of an existing process against other company’s best-in-class practices.
- Determine how those companies achieve their performance levels.
- Improve internal performance levels.
- A performance objective is determined by using short-term, benchmarking, or defect reduction goals.
- Benchmarking is a process of identifying best practices, measuring our practices against those best practices, and adapting the appropriate best practices to the processes.
- Revenue & cost implications are also due for benefit analysis.
Financial benchmarking can be an invaluable tool to small to mid-sized businesses in assessing how they compare with their peers. It is essential to acknowledge that although it is an important tool, the benchmarks are meant to exist as a guide in assessing how a business is trending more than a full measure of success.
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