Benchmarking

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Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on September 04, 2023

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What Is Benchmarking?

Benchmarking is a systematic process of comparing an organization's performance, processes, and practices with those of the best-performing organizations in the industry.

It helps businesses identify areas where improvements can be made, set realistic goals, and adopt best practices to achieve better financial performance.

Benchmarking serves several purposes and provides numerous benefits, including enhancing financial performance, identifying best practices, monitoring progress over time, assessing risk and return, and supporting strategic decision-making.

There are four main types of benchmarking:

  • Internal Benchmarking: Comparing performance within the same organization, typically between different departments or branches.

  • External Benchmarking: Comparing performance with other organizations in the same industry or sector.

  • Functional Benchmarking: Comparing similar processes or functions across different industries.

  • Generic Benchmarking: Comparing performance on a broader level, such as comparing customer service practices across various industries.

Importance of Benchmarking in Finance

Financial benchmarking plays a crucial role in enhancing financial performance, identifying best practices, monitoring progress over time, assessing risk and return, and supporting strategic decision-making.

By comparing financial performance against industry standards or competitors, companies can identify their strengths and weaknesses and work on areas that need improvement.

Financial Benchmarking Process

These are the steps involved in the financial benchmarking process.

Identifying Benchmarking Objectives

Before starting the benchmarking process, it is essential to identify the objectives of the benchmarking exercise. The objectives should be specific, measurable, achievable, relevant, and time-bound (SMART).

Selecting Relevant Financial KPIs

Key Performance Indicators (KPIs) are essential in the financial benchmarking process. Some common financial KPIs include:

  • Revenue Growth: The company's sales or income increase over time.

Choosing Appropriate Benchmarks

Selecting the right benchmarks is critical for a successful benchmarking process. Some common sources of benchmarks include industry standards, peer group comparisons, and target performance levels set by the company.

Collecting and Analyzing Data

Data collection and analysis are vital steps in the benchmarking process. Primary research, secondary research, and benchmarking software and tools can be employed to gather and analyze the data.

Identifying Gaps and Opportunities

After analyzing the data, companies can identify performance gaps and opportunities for improvement.

Implementing Changes and Improvements

Based on the findings, companies can develop action plans and implement changes to improve their financial performance.

Monitoring and Evaluating Progress

To ensure the success of the benchmarking process, it is crucial to monitor and evaluate the progress periodically.

Financial Benchmarking Process

Benefits of Financial Benchmarking

There are some benefits to financial benchmarking, including the following:

Identifies Strengths and Weaknesses

By comparing financial metrics with industry standards or peer organizations, companies can determine where they are excelling and where they may be falling short.

This analysis can help management make informed decisions about resource allocation, identify areas for cost-cutting, and prioritize investments to achieve long-term goals.

Improves Financial Performance

By identifying areas of weakness and implementing best practices used by top performers, companies can make changes to their operations that will result in improved financial outcomes.

For example, benchmarking can help identify inefficiencies in processes that lead to increased expenses, and the implementation of more efficient processes can lead to decreased expenses and improved profitability.

Keeps a Competitive Edge

By comparing financial performance with industry standards, companies can determine where they stand in relation to their peers and adjust their strategies to remain competitive.

This analysis can help management stay ahead of trends and identify emerging opportunities or threats that may impact their financial performance.

Common Challenges and Pitfalls in Financial Benchmarking

There are challenges and pitfalls involved in financial benchmarking, including the following:

Inaccurate or Incomplete Data

One of the main challenges in financial benchmarking is dealing with inaccurate or incomplete data. Only accurate data can lead to correct conclusions and undermine the entire benchmarking process.

Inappropriate Benchmark Selection

Choosing the right benchmarks can result in accurate comparisons and help the benchmarking process.

Lack of Management Buy-In

With management's support, implementing changes and improvements based on benchmarking results can be manageable.

Insufficient Resources and Expertise

Companies may lack the necessary resources and expertise to conduct a thorough and accurate benchmarking process, leading to suboptimal results.

Overemphasis on Competition

Focusing too much on the competition can sometimes lead to a narrow view of the benchmarking process, preventing companies from learning from non-competitive industries or sectors.

Benefits and Challenges of Financial Benchmarking

Conclusion

Benchmarking is a systematic process that compares an organization's performance, processes, and practices with those of the best-performing organizations in the industry.

Financial benchmarking plays a crucial role in enhancing financial performance, identifying best practices, monitoring progress over time, assessing risk and return, and supporting strategic decision-making.

The financial benchmarking process involves identifying objectives, selecting relevant financial KPIs, choosing appropriate benchmarks, collecting and analyzing data, identifying gaps and opportunities, implementing changes and improvements, and monitoring and evaluating progress.

The benefits of financial benchmarking include identifying strengths and weaknesses, improving financial performance, and keeping a competitive edge.

However, there are also common challenges and pitfalls involved in financial benchmarking, such as dealing with inaccurate or incomplete data, inappropriate benchmark selection, lack of management buy-in, insufficient resources and expertise, and overemphasis on competition.

Future trends in financial benchmarking include the integration of advanced analytics and AI, greater emphasis on ESG factors, increased importance of non-financial metrics, and evolving roles in a rapidly changing business environment.

Benchmarking FAQs

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About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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