One important way to know how your business is doing financially is to know how the numbers for your business compare to other businesses about the same size as yours, in the same industry, in the same location. This is called benchmarking, and it provides neutral, objective data that’s useful in at least partially explaining your profitability, or lack thereof.
Businesses often want to benchmark things other than money (e.g., time and efficiency, customer satisfaction), but for the purpose of this post, I’ll focus on money – since I’m a bookkeeper!
If you have the revenue to blow, you can spend a lot of money with companies that provide vast amounts of data in great detail.
- Here is an example for plumbing and HVAC contractors – it’s 49 pages, and it can be yours for $1,995:
- Or also for $1,995, you can obtain this 60-70 page report for electrical, plumbing, and HVAC contractors:
- And for the “low” price of $990, here is a report for cement contractors, but it’s a market research report, and doesn’t contain much deep dive financial data required for benchmarking:
Drywall contractors, painting contractors, landscape contractors – your businesses are not the same, your labor and materials costs are different, and it makes a difference if you’re in flyover country or on the coast.
So where can small businesses get accurate, actionable comparative data on how they are doing financially relative to comparable companies?
Glad you asked. I know of two sources, the first one is free and provides very general information, and the second one is reasonable (compared to the prices quoted above) and provides detailed financial ratios comparing your company to a matched group of companies.
SizeUp through the SBA
The Small Business Association (SBA) has a link to SizeUp, the only free benchmarking resource I have found so far. The SBA website states, “SizeUp will help you manage and grow your business by benchmarking it against competitors, mapping your customers, competitors and suppliers, and locating the best places to advertise.”
You enter your industry and city, then click on “My Business” and enter your annual revenue, the year you started your business, and the average annual worker salary. You then sign in to see reports about how your business compares to others on these measures: the number of employees, cost effectiveness, revenue per capita, local turnover, healthcare cost, and workers compensation.
As an example of how you might use this information, let’s think about compensation. If you find you are paying your employees or independent contractors significantly more than the prevailing wage, unless they’re so good and so valuable that they’re worth that, it’s possible you’re cutting into your profit unnecessarily. On the other hand, if you’re paying less, your turnover could be higher, and guess what – turnover is expensive too, and also cuts into your profitability. Compensation is something you want to get right.
Admittedly, the data returned from SizeUp is not as robust as what you would obtain from paid sources, but it’s a start, and could be eye-opening. Go here to check it out!
Construction Financial Benchmarker from CFMA
Annual general membership in the Construction Financial Management Association (CFMA) is $355 for construction contractors and subcontractors (www.CFMA.org). With a membership, a peer group comparison report is then only $50. The 2018 report is not out yet, but will be available in September.
If you want to take data to another level, the CFMA also has an interactive online Benchmarker, with a steep additional $599 subscription cost. Here is the full CFMA benchmarking pricing page. The online Benchmarker would be of interest to those who want to see and analyze their financial ratios against a business peer group.
If the words “financial ratios” strike fear in your heart, this article from back in 2007 has clear descriptions of how some of the more common ratios are calculated and what they can tell you. Even though the article is over a decade old, the author’s descriptions are clear and still good.
“Profitability ratios gauge how successfully the company is able to produce a profit. Solvency ratios measure the company’s ability to meet financial obligations in a timely manner. Efficiency ratios measure how efficiently the company uses its assets (including people) in generating sales or profits.”
Profitability, solvency, and efficiency – those are good things for a business owner to be interested in! And benchmarking is a tool for maximizing them.
photo credit: skylarprimm <a href=”http://www.flickr.com/photos/73101728@N00/24341711428″>Observatory Hill Benchmark</a> via <a href=”http://photopin.com”>photopin</a> <a href=”https://creativecommons.org/licenses/by-nc-sa/2.0/”>(license)</a>