The use of business benchmarks can help you gauge where your business is in comparison to other like businesses. This isn’t about trying to be the same; it’s about trying to be better.
For example, if you find that your business is spending far more on labour as a percentage of your sales than most other businesses like yours, you need to ask yourself why. Is your business more labour intensive because of the type of jobs you do? Do you pay too much for your labour? Do you employ too much labour? Do you utilise your labour efficiently? Do you have a low cost of materials? Is your labour/material mix combined more or less than the industry average? While there could be genuine reasons for your specific labour percentage, it is critical you know not only what it is, but why it is.
Reflecting on where your business stands across a range of common benchmarks can give you tremendous insights into what needs to change, and how you can achieve your goal. In some cases, a small tweak might be enough to save thousands of dollars a year, and in others a major change might be required. The most important thing is that, once you look at the numbers, you’ll know what’s wrong and you’ll be able to make an educated decision about your next steps.
Which benchmarks should you be focusing on? The common ones include profitability and expense management and return on investment.
In the building industry, the main profitability measure is benchmarked on net margin, rather than gross margin, so it takes into account total expenses before tax.
As there are a number of different trades within the building industry, benchmarking against your specific trade is important. If you are spending 90 per cent of your turnover on expenses (therefore making a ten per cent profit), but businesses in your trade typically only spend 75 per cent on their expenses (therefore making a 25 per cent profit), that’s a sign that there are areas where you could improve. On the other hand, if you’re making 25 per cent profit in a trade that averages 15 per cent profit, that is a sign that you’re doing something right.
Here are some examples of the different business benchmarks for a few categories in the building industry (across Australia) based on turnover of greater than $500,000:
As you can see, there is a 10 to 15 per cent variation on each measure, as each individual business will have its own operational setup and processes. Irrespective of which trade you operate in, the philosophy is the same – you need to know where you fit and whether you are achieving the best returns you can for your business.
Note that the above figures are only a guide and not a definitive target you should work toward. Your main focus should be what you can improve to create a greater margin and, hence, a greater profit.
If you need assistance with measuring your benchmarks, we’d be only too happy to help.
You will see the impact these changes have on your profit margin, your asset turnover and ultimately your return on assets.
Now you’re starting to really see where your business is financially and what you need to do to get you to where you want to be.
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Tony has 33 years’ experience as an accountant, and 13 years’ experience as a CPA. His first 18 years’ experience involved financial, management and operational accounting roles at a senior management level, in the security, transport, and forensic accounting industries
https://adpartners.com.au/wp-content/uploads/2017/08/logo.png00Tony Dimitriadishttps://adpartners.com.au/wp-content/uploads/2017/08/logo.pngTony Dimitriadis2018-03-25 21:32:022019-05-14 17:45:37Benchmarking your business.....to be better.
Established in 2001, AD Partners is a boutique public practice Accountancy and Business Consulting firm situated in heart of Carlton, Melbourne.
We service all areas of Melbourne, and offer personalised service to business owners no matter how big or small.