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FINANCIAL ANALYSIS AND BENCHMARKING FOR BUSINESS IMPROVEMENT!

by | Nov 27, 2024 | Latest

Imagine if you were to prepare for a race. You wouldn’t just believe yourself to be the best, will you? Instead, you would practise consistently, measuring and comparing the result (financial analysis) of each new attempt with the previous. Also, to have an idea of who you are going against, you will research the other competitors (benchmarking), and how prepared they are. You will also pay attention to their previous races and their positions in it. By doing this, you know exactly where you stand and how much more you need to improve to win.

WHAT IS FINANCIAL ANALYSIS AND BENCHMARKING?

Financial analysis is the process of evaluating your business’ finance-related transactions to determine its performance, so you can make guided business decisions. It focuses on key areas such as 

  1. Revenue concentration: What are the main sources of your company’s revenue? What percentage does each source contribute?
  2. Profits: Do you generate profit consistently? 
  3. Operations: Is your operational cash flow positive or negative? How effectively do you manage customer credit?
  4. Cash flow: Is there a healthy balance between funds coming in and funds going out?
  5. Liquidity analysis: How liquid is your business, and how much has changed over time? 

Financial benchmarking on the other hand. Focuses on your company’s KPIs and other financial data, which is run and compared to other firms in the same market, or to industry standards. This process determines your company’s place in the market competition, its productivity, and its efficiency. 

HOW DOES IT HELP BUSINESSES?

Benchmarking is a powerful motivator! It helps to reveal valuable insights about your business. By identifying your industry’s leaders, you can adopt practices that help you streamline operations, reduce costs, or improve customer satisfaction. However, benchmarking should not be done as a one-time activity. It is more beneficial for your business if it is done continually. 

IS FINANCIAL ANALYSIS THE SAME AS BENCHMARKING?

No, it is not. Although both are closely related, they serve different purposes. 

Financial analysis is about analysing and understanding your own business’ financial health and performance. 

Benchmarking is comparing the results of your analysis to industry standards or the performance of other businesses in the same market. 

5 PITFALLS TO AVOID WHEN BENCHMARKING

  • Unverified Sources: Don’t get so caught up in over-comparing that you forget to vet your sources. Even when the data you find is online, dig a little deeper to verify the information.
  • Improper comparisons of metrics: For example, when you compare your annual metrics with someone else’s seasonal metrics, instead of annual to annual metric comparison.
  • Infrequent benchmarking: Market performance is constantly changing, therefore, the a need to benchmark regularly.
  • Tracking too many KPIs: This is bound to distract you from the critical factors. Focus only on the KPIs that matter most to your business goals.
  • Inaction: The overall report is not the end of financial analysis and benchmarking. To see results in your company’s performance, and efficiency, you have to take action, and start making adjustments!

GETTING STARTED

Financial analysis and benchmarking help you keep your goals in perspective and help you make proactive decisions about your business. It may sound complex, but it is a necessary process to take for the growth of your business. Here are three simple steps that you can begin with:

  1. Gather a year’s worth of your financial data: 

Financial data should include your income and cash flow statements. Gathering a year’s worth will help you identify any meaningful patterns. 

  1. Choose the specific KPIs you would like to focus on:

Focus on KPIs such as liquidity, operational expenses, and revenue, for insights into your business’s financial health, operational efficiency, and profitability.

  1. Compare against the standards in your industry:

Seek out industry reports and data from similar businesses that you can benchmark against. Pay special attention to areas where you might be lagging.

As a financial advisory company, we are well experienced in providing tailored financial benchmarking services to you. We will analyse closely how your business is doing compared to its peers, and also offer actionable strategies to significantly improve your business processes.

Interested? Contact us to speak with an advisor and get started!