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INTRODUCTION:
We can all aspire to be the best we can be in our businesses but like any competition whether it be the Olympics, NRL, AFL or dare I mention it the Wallabies versus the All Blacks, we should always see how we compare with the others. These days small business accountants and small business advisors are continually encouraging their clients to benchmark. So what are some of the benefits of doing so?
Figure1: Being in business can be like being in a football competition - you need to keep track of how you compare to improve. Photo courtesy Scolari Comerford Accountants Sydney & Dubbo
1. Underperforming May Highlight Problems & Pinpoint Them
As soon as we see a set of financials, we will check to see how they compare with similar industries by accessing research data we have subscribed to. If a client appears to have benchmarks that are under the average, these will raise a flag for us to discuss further with them as to why this might be. Now sometimes there will be many reasons why a client's benchmark's may not gel with the industry averages. However, quite often they do need addressing. For example, if wages as a percentage of revenue appears too high, it is worth investigating further. Are wages and rosters being efficiently managed? Are wages being paid at too high a rate? Does the industry have some labour saving techniques or machinery or technology you were notaware of?
If I'm underperfoming in an area to the average small business accountant I will want to know what they are doing that we mightn't be. It all makes good business sense.
2. Above Benchmarking Will Help With Business Valuation
Business valuers when performing business valuations will always look at benchmarks to assess risk of a business. Those that are above will tend to get higher values than those that don't. As part of due diligence, checking to see the numbers make sense will involve checking industry averages. If they don't, they could indicate the numbers are not accurate or have been 'fiddled'.
A great business valuer will go through this process of comparison and ask more questions.
Figure 2: Is your business above the average? Photo courtesy Lara Scolari gallery balmain
3. Below BenchMarks Can Lead To ATO Audits
As the ATO becomes more technology savvy, each time your business tax return is lodged they will compare it to the industry average. If wages look too low this could indicate that cash is being paid to employees and could trigger a payroll audit. If gross margins look too low, this could indicate that cash sales are not being put through the books and raise a red flag with them. There are other things they look at as well.
The ATO has benchmarks on its website that you can access. As small business accountants we like to check these against client tax returns when performing year end accounting work so we can alert them to any risks if these benchmarks look unusual compared to their tax return. If there is an error or reclassificaton that can be fixed, this can minimise the risk of a tax audit.
Figure 3: Being below benchmarks can sometimes trigger audits.
4. BENCHMARKING When Buying A Business Can Identify Opportunities
Just like when you are selling a business you would prefer to be above the industry average to get a higher business valuation, if you are looking at a business that is underperforming to the average you can not only ask for a lower purchase price but you can also identify that by fixing a few of the areas that are under, you can then make the business profitable and generating cash flow much more quickly meaning that you could be getting a bargain! This means you will be getting a much higher return on your investment.
You can then build these improvements into your cash flow forecasts for the bank if you are looking to finance the acquisition and may give yourself a much better chance of obtaining finance approval.
5. Aim Higher To Be With The Best
If you apply benchmarking and realise you are average or below average, aspiring to get to what the top businesses are doing will always provide a goal that you can work to and achieve. This can lead to much bigger business growth and better profitability.
CONCLUSION:
Even if you think you have a wonderful business I would still raise the question 'compared to what?'. Making sure that things are moving in the right direction will usually be confirmed by comparing your business to others.
If you aren't doing this currently, I strongly suggest that you move quickly!
