How Financial Benchmarking Can Save Your Business

There is one critical tool that many growing businesses overlook, or may not even know exists – financial benchmarking. This is a process in which you compare your financial data to aggregated data from your peers. Consider this a quick sanity check that can flag any issues before they become disastrous, much like getting routine bloodwork done at your annual physical. When you catch aberrations early, they’re usually easy to treat. When left unchecked, a small problem can grow into something much more serious.

Case Study: Uncovering The “Real” Profits Of A Growing Business

Recently, kept.pro conducted a benchmarking study for a new client that ended up catching a huge financial error. This client was a manufacturing company that was generating about $5M in annual revenue. It had been growing rapidly over the past two years, and they had seen their once stable gross profit percentage increase significantly at the same time. On paper, this sounds like a thriving model. However, when our fractional accounting team performed a benchmark analysis, we found that our client was wildly outperforming nearly 100 similarly sized businesses in the same industry. This anomaly went beyond any “secret sauce” explanation, and raised numerous red flags about whether the numbers we were seeing were really accurate.

We dived deeper into the client’s accounting policies and practices to see what was being missed. The kept.pro experts discovered the gross profit increase was actually accounting-driven – and that it would reverse when the company stopped growing. This benchmarking analysis revealed the existence of a major underlying problem before the CEO could reasonably catch it. The company was very likely saved from bankruptcy as a result of the changes made to their accounting, which allowed them to truly understand their profitability during periods of rapid growth.

Making The Most Of Benchmark Data

In addition to identifying potentially catastrophic issues, benchmarking can help assess the health of your revenue, gross profit, net income, liquidity, and long-term solvency prospects. Our fractional accounting experts can then dig deeper to surface the actual issues and prescribe a potential remedy to ensure the financial health of your business.

Benchmarking data is generally available from a variety of sources. But when conducting a benchmark analysis, it’s important to consider the following:

• Do you understand the data and its limitations? Make sure you know how many companies are included in the sample size, what the revenue range is, and take a look at any descriptive statistics available.
• Is the data compiled based on comparable companies? Don’t compare your $10M pipeline engineering consulting company to Halliburton. For an accurate analysis, you’ll need to find data from similarly sized businesses.
• Do you know your primary North American Industry Classification System (NAICS) code? This is not the NAICS you want to be in, or the code your attorney, office manager, or tax preparer thought might be correct. You need to be 100% certain you have the right code representing the majority of your revenue.

When conducting any benchmark activities, you’ll also want to make sure you have all the data you need from your own company to make an accurate comparison. Ideally, your financial data will be:

• Organized in an appropriate structure.
• Maintained on an accrual basis.
• Consistently curated over time by your internal or external accounting organization.
• Validated and quality-checked by competent oversight.

For some industries, benchmarking data may not be readily available. In those cases, companies should focus on ensuring their own financial data is maintained consistently with comparability in mind. This will allow for other trend analyses and/or flux analyses of their financial statements to illuminate potential issues.

Ensuring you have accurate data and efficient processes is the foundation of our work. If you need assistance with creating a structured finance function, kept.pro can help.