Financial Benchmarking for Private Companies
By the iLumen Financial Information Network
Across the country, large public companies are closing out their accounting books for the year and taking stock of their performance – and for most this means comparing themselves to a group of key competitors. Indeed, for major public companies, the stakes of knowing where they stand can mean billions of dollars – in profits. For these organizations, this information has always been widely available. Wal-Mart can benchmark its performance versus Target by pulling up annual reports and 10-K filings from the SEC database. But, most private companies are in the dark.
For private companies, the need for financial benchmarking has not always been clear. Business owners have been focused primarily on cash balances in the checkbook and secondarily on revenue growth. If the business was growing and had enough working capital to grow, then things were going well. But, times have changed. Private companies, particularly in the general merchandise supply industry, are under tremendous pressure to compete on a global stage and to deliver retailers with high quality products hitting specific price points.
But while times have changed, attitudes have not. For many, sales and estimates of sales of competitors continue to be perceived as sufficient. Benchmarking data has not been available, because executives’ privacy concerns have translated into an unwillingness to share information with third parties. And the data that is available is out of date, often unreliable, and lacking detail. The reaction of many is benchmarking isn’t worth the effort.
could be a mistake, because the story below the sales line is often far more
important in measuring performance. All the major and many private companies
think there is a wide range of benchmarking metrics needed to run a business
- Did we grow as fast this period as the competition? Were we as
- Are direct materials and labor costs as a percentage of sales in
line with competitors?
- What are our peers spending on marketing as a percentage
- Are we managing overheads effectively, as measured by G&A as a percentage
- In terms of inventory management, are inventory turns and GMROI in
- Are we generating return on equity and assets that exceed competitors?
Solutions to private companies’ dilemmas are emerging, at least from the executional standpoint. New technologies are beginning to emerge that may assist in making such information available to private companies. These technologies enable private companies to submit, with ease, information electronically through a secure, encrypted channel from their accounting system. The issue now is to see if attitudes will catch up to technology.
Discussion questions: How important is accurate and extensive benchmarking for small and medium-sized companies? What type of information do they need? How will they use it? Should they take advantage of any opportunities to make industry data available such as new technologies?