How to Use Industry Benchmarks for your Business Financial Plan

can industry benchmarks help financial forecasting

What are industry benchmarks?

Industry benchmarks refer to a set of standardized measurements used to evaluate and compare the performance of businesses within a particular industry. These benchmarks serve as a reference point for companies to assess their own performance, identify areas for improvement, and track their progress over time.

Each industry has its own set of benchmarks and they can vary depending on the type of business, the size of the company, and other factors. It’s important to note that industry benchmarks are not absolute standards and should be used as a general guide, rather than a strict target to be achieved.

Why do small businesses need industry benchmarking?

Small businesses need industry benchmarking for several reasons:

Competitor Analysis

By benchmarking their performance against the industry standards, small businesses can identify their strengths and weaknesses compared to their competitors and make the necessary improvements to increase their industry standing.

Market Awareness

Industry benchmarking helps small businesses stay updated on the latest trends, changes, and innovations in their market. This enables them to make informed business decisions and stay ahead of the curve.

Improved Performance

By measuring their performance against industry benchmarks, small businesses can identify areas for improvement and develop strategies to increase their efficiency, productivity, and profitability.

Better Decision Making

Industry benchmarking provides valuable data and insights that small businesses can use to make better-informed decisions about their business operations, marketing, and sales efforts.

Increased Credibility

Small businesses that demonstrate a commitment to benchmarking their performance against industry standards are more likely to gain the trust and credibility of potential customers, partners, and investors.

 

Why do small businesses need industry benchmarking?

Can benchmarks improve financial forecasts?

Yes, benchmarks can improve financial forecasts by providing a standard against which a company’s performance can be measured and compared. They can also serve as a basis for projecting future performance by identifying trends and patterns that can be used to make predictions. For example, if a company’s financial performance has consistently matched or exceeded a benchmark, it can be assumed that it will continue to do so in the future, which can help inform more accurate financial forecasts.

Compare your forecasts against industry benchmarks

Comparing your forecasts against industry benchmarks is an important step in evaluating the accuracy of your predictions. Industry benchmarks provide a standard against which to compare your own performance. Your business will need to gather data on the benchmarks, which could be obtained through industry reports, research studies or data collected by organizations. Once you have the data, you can compare your own performance against the benchmark.

For example, if you are forecasting sales for the next quarter, you can compare your forecasts against industry benchmarks to see if your projections are in line with what is typical in your industry. If your projections are significantly lower or higher than the benchmark, you can use that information to revise your forecasts and ensure that they are more accurate.

Comparing your forecasts against industry benchmarks can also help you identify areas for improvement. If your forecasts are consistently lower than the benchmark, it may indicate that your forecasting process needs improvement. On the other hand, if your forecasts are consistently higher than the benchmark, it may indicate that your company is outperforming the industry, and you can use that information to identify areas where you can continue to improve.

Compare your forecasts against industry benchmarks

What are the limitations of benchmarking in business?

Lack of Relevance

Benchmarking results may not be relevant to the specific business or industry. The benchmarks used may not match the business’s size, structure, or goals.

Cost

Benchmarking can be expensive, both in terms of time and money. It requires resources to collect data, analyze the results, and implement improvements.

Bias

There may be bias in the benchmarking data. The data may not be accurate or representative of the business’s actual performance.

Lack of Creativity

Benchmarking can limit creativity and innovation. By focusing on existing benchmarks, businesses may not consider alternative or new approaches to solving problems.

Resistance to Change

Some employees may resist changes recommended by benchmarking results. It can be difficult to get buy-in from employees, especially if they are used to doing things a certain way.

Stagnation

Benchmarking can lead to stagnation. Once a business has reached the benchmark, there is a risk of becoming complacent and not seeking further improvement.

Difficulty in Measuring

Some aspects of a business may be difficult to measure and compare, such as culture or customer satisfaction.

Contextual Differences

Benchmarking results may not take into account the unique context and circumstances of the business. For example, the benchmarks may not apply to businesses in different countries or regions.

How to use industry benchmarks for better financial forecasts

Industry benchmarks can provide valuable insights and data for financial forecasts. By analyzing industry benchmarks, businesses can gain a better understanding of how their financial performance compares to others in their industry. This information can help in making more accurate financial forecasts and developing more effective strategies for growth and profitability.

Industry benchmarks can be essential in helping to understand the financial projections of your business. However, it is worth noting that by using a financial modelling software tool, assessment of your benchmarks and understanding how to proceed becomes a much easier task.

Common MIS FAQs

Do all businesses use benchmarking?

Benchmarking is a widely used practice in many businesses. It is a tool for measuring and comparing performance and can be applied to various aspects of business operations such as financial performance, customer satisfaction, and employee productivity. However, not all businesses use benchmarking and some may choose alternative methods for measuring performance.

What’s the difference between benchmarking and market research?

Benchmarking and market research are two distinct concepts that are often used to gain insights into a business or industry.

Benchmarking is the process of comparing a company’s performance metrics against those of its competitors or industry leaders. The purpose of benchmarking is to identify areas where the company can improve and to measure its performance relative to others in the market. It’s a way to assess the efficiency, quality, and competitiveness of the company’s USPs.

Market research, on the other hand, is a broader process of gathering information about the target market and its customers. It involves the collection and analysis of data about customer needs as well as about the market environment, including industry trends. The purpose of market research is to understand the market and customers better and to inform business decisions related to product development, marketing, and strategy.

In summary, while benchmarking focuses on comparing a company’s performance against its peers, market research focuses on understanding the market and customers in order to inform business decisions.

What are the most common industry benchmarks?

  1. Gross margin percentage
  2. Net profit margin
  3. Return on equity (ROE)
  4. Return on investment (ROI)
  5. Debt-to-equity ratio
  6. Debt-to-asset ratio
  7. Days sales outstanding (DSO)
  8. Accounts receivable turnover
  9. Gross product per employee
  10. Operating expenses-to-revenue ratio
  11. Sales per square foot
  12. Gross product per square foot
  13. Employee turnover rate
  14. Customer satisfaction rate
  15. Market share
  16. Click-through rate (CTR)
  17. Conversion rate
  18. Bounce rate
  19. Average order value (AOV)
  20. Customer lifetime value (CLV)

Note: The benchmarks may vary from industry to industry.

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