What is benchmarking and why is it important for my business?

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In simple terms, benchmarking is a tool to compare business performance against the industry. It is one of the ways to judge what the best practices are and how you can improve your business process. For example, if the industry is earning 10% return on assets, while your business is earning only 6%, you can pin point the problem areas. However, it is important to know that when you use benchmarking data it should be relevant to your industry, business size and region. In other words, you should be comparing apples to apples. Achieving parity against the best in the industry may not always guarantee success.

Another factor you should consider when you use benchmarking data is how accurate the information is. This can be a difficult task given the data dynamics, sources of the data, sample size, timeliness and NAICS classification. A challenge business owners face is to which specific financial metrics should we compare and which ones are important to achieve the strategic goals. Another issue is how to measure non-financial metrics. Benchmarking techniques can be used both in service and product based businesses.

Benchmarking can result in frustration and failure if the business matter is not selected strategically. In order to appropriately select and prioritize benchmarking tasks, corporations need first to understand their critical success factors and business environment. This helps them identify their key business processes and drivers. The whole process of benchmarking should be aligned to the corporation’s mission, vision, values and strategy. All leading-edge corporations such as Xerox, DuPont, and HP use benchmarking as a valuable tool to improve their competitiveness and effectiveness. It is an integral part of their strategic planning.

In order to be a successful business you need to implement benchmarking effectively. It allows you to evaluate your business performance and ensure that your business is operating at an optimal level. Outside professionals can be engaged to streamline the whole process who will carefully select the relevant KPI’s for benchmarking critical to achieve your business objectives and strategic goals.

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Nafees Chaudhry

Nafees Chaudhry is the founder of CNC. Providing accounting, tax, and consulting services to small businesses and individuals for 23+ years.

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