Business Valuation • Business Brokers • M&A Brokers
Inland Empire • Los Angeles • Orange County • California
UNLOCKING THE WEALTH
IN YOUR BUSINESS™
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For most small and mid-size business owners, it is very easy to get caught on the daily treadmill of tending to daily operations. However, this tendency can lead to the risk of a company becoming stagnant from a competitive standpoint or worse, get left behind as competitors seek ways to improve, cut costs, add value and gain market share. Benchmarking done properly is very informational and a valuable exercise to identify opportunities to improve and increase the value of your business.
Entrepreneur Magazine defines benchmark as, “A standard or point of reference in measuring or judging the current value or success of your company in order to determine your future business plans.” By benchmarking your company against your industry peers, you will gain very valuable information about your business and most importantly, find areas you may not have realized could be dramatically improved. The utlimate goal of benchmarking should be to make sure you are a competitively viable business and find ways to maintain or build a competitive advantage.
Benchmarking helps a company identify its strengths, weaknesses, opportunities and threats. The process of benchmarking can be very complicated and time consuming but a simplified benchmark analysis should be adequate for most small and mid-size companies.
The first step to financially benchmark your company should be to prepare a common size income statement which shows expense items as a percentage of sales/revenue and a common size balance sheet which shows individual balance sheet accounts as a percentage of total assets. Industry average common size statements should be obtained and compared to your company’s results. More than likely, a side by side comparison will reveal some very interesting results that you may not have been aware of previously. For example, you may already know that you are spending too much on overtime labor costs but a simple benchmark analysis may help you see that you are spending 30% more on labor as a percentage of sales compared to your competitors. This small piece of information alone would help you understand in bottom-line terms that you need to improve productivity, improve production planning and manage labor costs better. Your accountant should be able to quickly prepare this analysis and provide you with a quick summary of important findings and opportunities for improvement.
Important financial benchmarks include key expense line items (e.g., labor or COGS) as a percentage of sales/revenue and profitability ratios such as operating profit margin, gross profit margin, return on total assets and return on equity. Other equally important ratios include liquidity ratios (good indicators of management of accounts receivable and ability to pay liabilities), turnover ratios (indicators of effective management of inventory and accounts payable) and leverage ratios (indication of the strength of a company’s balance sheet). The potential to identify operation and management improvement opportunities is tremendous and too easy to ignore. As an exit planning consultant and M&A advisor, I believe this analysis and the resulting improvements should substantially increase the value of your business and make this effort a great return-on-investment.
Typical sources for financial and operating benchmarks include:
Of course, identifying improvement opportunities is just one step. Developing and implementing strategies to actually obtain results is the next and more difficult step but identifying opportunity is still the first and most important step.
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