December 19, 2014

Small Business Advice

Why benchmarks are so important for your company

"All successful companies are constantly benchmarking their competition. They have to know what they have to match up with day-in and day-out if their company is going to be successful." ~ James Dunn

Jerry Osteryoung | 7/15/2013

One of the things that each and every business needs is a systematic way of evaluating their performance. Without quantifiable benchmarks, a firm has no idea if they are swimming ahead of the pack or just treading water.

Unfortunately, too many businesses use only last year or last month as their benchmark. Your own historical performance, however, just does not give sufficient perspective to objectively evaluate how your business is doing.

One entrepreneur I was helping had been growing his business over the last 20 years. In that time, he had been very successful in so many ways, but his revenues had recently stalled out. He knew he needed to grow but was struggling to make that happen.

When I asked the entrepreneur how he was doing compared to the industry, he just did not know. Next, I asked him if the industry was expanding, and he responded that he thought it was but was not sure.

I explained that being aware of how the industry is performing is necessary for him to truly understand how well his business is doing. For instance, if the industry is declining, his steady revenues are tolerable and actually pretty good by comparison. On the other hand, if revenues are increasing for his industry contemporaries, he is not doing very well at all.

After our discussions, he did some research and found that revenues across the industry were growing at a rate of 10 percent where his rate of growth was completely flat. After seeing that data, it was clear that his performance needed much improvement.

When I ask entrepreneurs why they do not use any benchmarks or comparables, the most common response I hear is that their firm is unique and there are not any other firms or industries out there that they can match up with. Additionally, they say that it does not make sense to compare their local performance against national data because their location is so different.

The fact is you are never going to find a perfect comparison. The data you glean, however, can give you a rough idea of how other firms are performing.

Benchmarking only provides an indication of how you are performing relative to the field. From there, you need to dig much deeper to determine why your firm is underperforming. For example, if revenues in the industry are growing at a rate of 12 percent and your firm is at 2 percent, you know that you will need to do some thorough analysis to find out why your numbers are so far below the industry –taking your own operating area into account, of course.

Now go out and make sure you have some benchmarking standards in place to help you measure the performance of your company.

You can do this!


Other small business advice columns from Dr. Osteryoung are here. Note: Articles older than 30 days require registration (it's quick and free).

Jerry Osteryoung is a consultant to businesses - he has directly assisted over 3,000 firms. He is the Jim Moran Professor of Entrepreneurship (Emeritus) and Professor of Finance (Emeritus) at Florida State University. He was the founding Executive Director of The Jim Moran Institute and served in that position from 1995 through 2008. His newest book co-authored with Tim O'Brien, "If You Have Employees, You Really Need This Book," is an Amazon.com bestseller. He can be reached by e-mail at jerry.osteryoung@gmail.com.

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