February 28, 2019
Six Benchmarks You Should Be Tracking
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You are being compared to others on a regular basis. Your bankers, your auditors, investors, the government all compare you to others on some level. They have a sense of how you perform relative to others, so why wouldn’t you want to know? It is a really important perspective to understand because people will only want to put money into your company or do business with you if you are financially stable. High performing companies know how they stack up to others and use that information to gain competitive advantage.
In this article, I’ll outline six financial benchmarks you should be tracking. There is a plethora of information available that will allow you to gain insights into how you stack up. In a separate article, I outline where this information can be found. This article will outline the measures you should be benchmarking.
Safety statistics are an incredibly illuminating insight into your business as it is an insight into your business as a whole. First, it sends a strong signal as to whether people are important. Any sort of injury should not be tolerated. The separation from a minor injury to a major injury is a short distance. When safety is a priority, many other details, including profitability, fall into place.
The cash conversion cycle is one of the most important metrics out there as it is a gauge of the effectiveness of management and the health of the company. It informs you in days how long it takes to build your inventory, pay your suppliers and get paid by your customer. It is a comprehensive measure and can be incredibly illuminating if you haven’t looked at your working capital this way before. When you compare to others in your industry, you can quickly see whether you are using more cash to fund your business than others.
EBITDA margin is a strong indicator as to how well you are running your business compared to others regardless of size.There can be a lot of noise in trying to benchmark financial results. Structural differences that impact interest, tax and depreciation, classification differences between overhead and cost of sales, etc. EBITDA (earnings before interest, tax, depreciation and amortization) removes those differences and gets to the operations of the company. This allows you to get a good starting point as to how your profitability stacks up against others. From there, you can start peeling back each component to narrow in on where you are doing well, or where you can improve.
Each industry has its own set of productivity measures. It may be how quickly a machine runs or how much work is accomplished in an hour. Whatever the measures are in your industry, you should be tracking how much is produced in a specified period of time. It is one of the largest drivers of your profitability.
Depending upon the business you are in, there are economic indicators that impact whether your business will be cycling up or down. It may be housing starts, or the price of oil, or consumer spending. Whatever that indicator is, you should be tracking it. Yes, you should be speaking with customers too. Understanding what causes your customers to start buying or stop buying will allow you to adjust the direction of your business and not get caught short.
Investors want a reasonable return on their investment. This measure informs you and your investors how efficiently management is employing the equity in the business to generate earnings. The idea is that management is balancing the assets used in the business, the debt undertaken and is efficient in generating earnings. ROE will vary based on industry and debt structure, so it is important to get a comprehensive view to determine whether your ROE is appropriate.
Understanding where you stack up relative to others is important. It gives you a gauge on the health of your company and the likelihood others will do business with you. Investors, bankers, customers and suppliers will all try to make this assessment and decide whether they want to partner or continue partnering with you. Benchmarking doesn’t need to be a massive, time-consuming exercise. It will likely take a little longer the first time you do it. But once you get it set up the first time, it can be quick and easy to stay up to date with how you stack up. What do you need to do to get started?
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