Benchmarking is the process of comparing the business processes and performance metrics including cost, cycle time, productivity, or quality to another that is widely considered to be an industry standard benchmark or best practice. Essentially, benchmarking provides a snapshot of the performance of your business and helps you understand where you are in relation to a particular standard. The result is often a business case and "Burning Platform" for making changes to make improvements. The term benchmarking was first used by cobblers to measure people's feet for shoes. They would place someone's foot on a "bench" and mark it out to make the pattern for the shoes. Benchmarking is most used to measure performance using a specific indicator (cost per unit of measure, productivity per unit of measure, cycle time of x per unit of measure or defects per unit of measure) resulting in a metric of performance that is then compared to others.

Also referred to as "best practice benchmarking" or "process benchmarking", it is a process used in management and particularly strategic management, in which organizations evaluate various aspects of their processes in relation to best practice companies' processes, usually within a peer group defined for the purposes of comparison. This then allows organizations to develop plans on how to make improvements or adapt specific best practices, usually with the aim of increasing some aspect of performance. Benchmarking may be a one-off event, but is often treated as a continuous process in which organizations continually seek to improve their practices.

(Source: http://en.wikipedia.org/wiki/Benchmarking)

A key element to growing your business is to keep a watchful eye over your industry...and to know the benchmark data to keep you profitable and competitive.

• What are your industry's financial metrics, such as gross profit margins and return on assets?
• What are growth metrics such as profit and sales growth?
• What about income and balance sheet data...why does that matter?
• What strategies do you need to put in place to guard against competitive inroads and help secure a profitable, leadership position? Industry research is especially imperative during economic uncertainty.

Staying informed with updated financial benchmarks and industry profile statistics help to eliminate guess-work and helps optimize your business performance and drive your success.

AAG now offers a way for you to compare your key performance area's against your peer industry group.  Visit our website for more information, http://www.allianceadvisorygroup.net/products.html 

The raw numbers on your balance sheet, income statement and cash flow statement are just that. They only have value when tracked and measured against some standard of performance (either internally oriented or externally generated). The secret to effective financial management lies in knowing which ratios to track and what they tell you about the state of your business.

Unlike the profit and loss (income) statement, which is a historical recording that never changes, the balance sheet is a living, breathing document that changes on a daily basis.  Three important balance sheet ratios to track are:

• Current ratio (Current assets/current liabilities)
• Quick ratio ([Cash + receivables]/current liabilities)
• Debt-to-equity ratio (Net worth/total liabilities)

The P&L statement focuses on revenues, expenses and net income (or loss) over a defined period of time. It measures the company's ability to turn sales/revenues into profits, a key ingredient for long-term success. Key P&L ratio's to track would include:

• Gross income (Revenues - cost of goods sold)
• Gross margin (Net sales - cost of goods sold)
• Net operating profit (Gross margin - SG&A expenses)
• Net profit (Net operating profit + income) - (other expenses + taxes)

Zaepfel considers gross margin the most important ratio on the P&L. "If you lose the gross margin battle," he cautions, "you can do a lot of other things right and still go out of business."

Key operating ratios combine information from the balance sheet and income statement to provide a more sophisticated look at what is happening with the business. These include:

• Gross profit ratio (Gross profit/sales)
• Pretax profit ratio (Pretax profit/sales)
• Sales-to-assets ratio (Total assets/sales)
• Return on assets ratio (Pretax profits/total assets)
• Return on equity ratio (Pretax profit/equity)
• Inventory turnover ratio (Cost of goods sold/inventory)
• Days in inventory ratio (Inventory turnover/365 days)
• Accounts receivable turnover ratio (Sales/accounts receivable)
• Collection period ratio (Accounts receivable turnover/365 days)
• Accounts payable turnover ratio (Cost of goods sold/accounts payable)
• Payable period ratio (Accounts payable turnover/365 days)

You should track and measure your performance ratio's at least monthly and compare them to internally generated standards of performance (i.e. budget) or against an external source of data (i.e. peer comparisons for your industry)

• 52 percent of owners say they have experienced cash flow issues in the past 90 days, up from 44 percent in October. Forty-one percent of owners say they have not experienced cash flow issues, which is the lowest response in this category since the Watch began. The remaining 6 percent said they weren't sure.
• 53 percent of small business owners see conditions getting worse in the next six months, up from 43 percent in October; while 19 percent report that conditions are improving, a sharp decline from 29 percent in October; 23 percent see conditions as the same, and 5 percent weren't sure.
• 62 percent of small business owners rate the economy as poor, an increase from 55 percent in October; 30 percent rate it as fair, and 8 percent say it is good or excellent.
• 53 percent of small business owners think the overall economy is getting worse, up from 44 percent in October but still significantly lower than the 69 percent of owners who felt that way in February 2009, the last time the Watch index was this low. For November; 28 percent say the economy is getting better, down from 35 percent in October; 16 percent see it staying the same, and 3 percent are not sure.