Peer Benchmarking: How to Get Started

If they can do it, we can too, right?

How are they getting seven inventory turns per year? Average receivables days-on-hand of 37? Revenue of $3 million on just $250,000 in working capital? Occupancy expense of just 9% of revenue? 46% gross profit margins?!

First of all, if it's possible, I want to find out.

Second, if another firm IS achieving these things, I want to know how so I can put it in place in my business.

Peer benchmarking may be the #1 tool available for business owners wanting to improve the performance of their business. It's simply an exercise in studying the financial performance of the companies in your industry and comparing them to your own.

Is this kind of information available? In most cases, the answer is yes. The first place to look is your industry or trade association. Call the executive director and inquire. If they don't currently gather and publish peer data, launch an initiative to get this important member benefit in place. It's not too hard. You get the members to agree to provide some basic data about their company along with financial statements, in a blind or confidential manner. Then somebody crunches the numbers, develops a report and publishes the data. Often, members who contributed the data get the report free while others have to pay a fairly handsome fee.

The second place to look is the Risk Management Association (RMA). I've been using RMA "Annual Statement Studies" data for years.

RMA is a not-for-profit that gathers the financial statements and relevant data of small and midsize private companies, aggregates them and publishes the results. A sample is provided herein.

The input data are provided by financial institutions such as banks that loan money to businesses and are members of RMA. The data are provided on a blind basis (i.e., identities of the businesses are not revealed), and the sole purpose is "to advance the use of sound risk principles in the financial services industry."

Comparing Peer Data to Your Company Data. Once you've obtained peer data, the first task entails understanding them. You'll want to spend some time immersing yourself in the way the data are compiled and presented. It can get a little complex, but the investment of time and effort is well worth it.

Second, organize your own financial statements in a manner that mirrors the peer data you obtained. Calculate the various ratios in the same manner as the peer data.

Third, identify areas where your business appears to underperform. We use the word "appear" because there can be many explanations for a large deviation. Give much thought to the possible explanations. Obtain assistance from your accountant because accounting policy and/or methodology can be a key factor.

Fourth, identify which area, if improved, would have the greatest positive impact on your business.

Fifth, develop a strategy for improving your business' performance in the area you target. This may include spending time investigating how some of your peers achieve better results than you. A great way for doing this is to attend your trade show or industry conference with peer data in hand. Ask around. Corner a few business owners and/or managers whom you respect or have in the past shown a willingness to be open and helpful. Make it your priority to leave the event with answers.

Sixth, track your company's progress. Garner your employees' support and assistance. Involve them in the pursuit of improvement, if not peer-leading performance. Set goals and consider offering incentives.

I'm completely convinced that peer benchmarking is vastly underused in the business world. But that's good for you and me. If all of our competitors were on the ball, we'd have a much more challenging row to hoe.