Financial Benchmarking for Private Companies

Discussion
Jan 26, 2007

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 And the data that is available is out of date, often unreliable, and lacking detail.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.

That
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
productively:

  • Did we grow as fast this period as the competition? Were we as
    profitable?
  • 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
    of sales?
  • Are we managing overheads effectively, as measured by G&A as a percentage
    of sales?
  • In terms of inventory management, are inventory turns and GMROI in
    line?
  • 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?

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10 Comments on "Financial Benchmarking for Private Companies"


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Mark Lilien
Guest
15 years 3 months ago

Financial benchmarks have always been available for private companies to measure themselves against. Dun and Bradstreet has this data. CPA and consulting firms that specialize in certain industries compile this data. Certain industry associations also report this data by company size. Furthermore, it’s reasonable to compare privately-held retailers to publicly-held retailers, as long as the size and category are similar. Just because a regional supermarket chain is private or public should not change its gross margin or shrink or comp sales figures.

Bernice Hurst
Guest
15 years 3 months ago

The value of benchmarking was drummed into me the hard way when I had my business but, to throw my usual spanner into the works, I would like to add that in spite of what the rest of you think, it isn’t always possible. By their very nature, many small businesses are unique. As we say so often here, they need to differentiate and be different in order to survive. It is therefore difficult to find other businesses against which to measure. Some features may be shared but rarely all and frequently there are too many points of difference to make comparisons genuinely helpful.

jack flanagan
Guest
15 years 3 months ago

Three steps are essential:

1) Availability of the data (and don’t limit yourself to P&L or balance sheet data only.) As previous commentators noted, availability of the data is typically not the problem.

2) Interpreting the data accurately. There are many business models that work and others that are, at best, dysfunctional, albeit seemingly ‘profitable.’ The skill is to get behind the numbers and understand why they are what they are in the business model of each firm studied. Only then will you be able to draw meaningful conclusions.

3) Take appropriate action(s). Simply put, this is the “So what?” after you’ve completed the first 2 steps. Just because you truly understand the story behind the numbers in, say, a successful warehouse club model does not mean that those insights will readily translate into appropriate actions for a dollar store or supermarket. Finally if you do understand the insights and simply talk about them (rather than consider the implications for your business and and take appropriate actions) it’s not benchmarking…it’s a hobby.

David Livingston
Guest
15 years 3 months ago

Yes, there is plenty of information available to compare private companies. I’m not really sure why someone is saying there isn’t. One of the benefits of being private is not having to be compared. Sometimes private companies are successful because they don’t follow others standards. For example if Chick-fil-A followed the standards of other companies, they would be open on Sunday. If Publix followed the labor standards of most grocers they could lay off half their work force. As an individual or as a company, it’s not always healthy to use others as a benchmark.

Race Cowgill
Guest
Race Cowgill
15 years 3 months ago
I will break ranks again and propose that though there is a certain amount of important information you can get by comparing yourself to your competitors, every company we have studied (over 1300 at the moment) is under the mistaken assumption that if they are doing as well as their competitors in several key areas, that they are a strong organization. Likewise, private companies that decide they are strong based on sales growth and cash flow are making the same mistake. Companies everywhere perform according to how they fit in their environment. This fit is comprised of four elements: economy fit, competitor effectiveness, market fit, and regulatory fit. If any of these elements in the environment shift, the organization’s fit degrades, and it becomes much less successful. Every business faltering/failing we have ever studied (hundreds of them: Albertsons, Home Base, Pets.com, Kmart, Montgomery Ward, Arthur Anderson, Warner-Lambert, JP Morgan, etc.) is an example of this phenomenon. Our data shows that 94% of all business organizations have a critical problem they are not aware of, and… Read more »
Dick Seesel
Guest
15 years 3 months ago

I agree completely with the first two commentators. Any privately held company has investors, whether it’s closely held by family members or by a private equity firm. They have the same responsibility to those investors to demonstrate that their income statement and balance sheet compare favorably to the competition as if they were publicly traded. And they should be tracking comp sales against their competitors even though they don’t have to “please Wall Street” by reporting these figures every month. Many of today’s privately-held companies will eventually seek to go public and need a record of accomplishment if they intend to attract equity investors.

Bernie Slome
Guest
Bernie Slome
15 years 3 months ago

Benchmarking is always important. Whether the company is large or small or medium. It is not only a measurement of how they are doing, but how they are trending against the competition. Just as there is a need for financial benchmarks, so to for customer service and customer satisfaction. If a company doesn’t measure the competition, they really don’t know where they stand.

Bill Robinson
Guest
Bill Robinson
15 years 3 months ago

There are many amble sources of financial information that private companies can tap into to benchmark their own progress. That said, financial data often doesn’t go far enough to enable insight. A group of small or independent companies serving the same niche in different markets would be interested in a whole set of metrics that speaks to the core of their businesses: growth rate of web store, customer conversion rate, sales dollars per store labor hour, sales per square foot, shrinkage rates, customer retention rate, customer acquisition rate, GMROI at the classification level, and in-service level.

As Business Intelligence matures, emerging data services will will allow retail specialty chains to gain much more insight than with the financial information available today.

Ryan Mathews
Guest
15 years 3 months ago

The answer to the question is that obviously it is very important. But, aren’t best of class operators already doing that? Mark’s right, there is plenty of data out there and again I believe the best private companies have been using it for years.

John Lansdale
Guest
John Lansdale
15 years 3 months ago

One has to ask what’s new here? Financial data is from the past. With public companies, millions of prospective investors are passively trying to make predictions from whatever information they can get. Private companies don’t have this problem.

Looking for the spin in the spin here, I see what might be new though: ” technologies enable private companies to submit, with ease, information electronically through a secure, encrypted channel from their accounting system.” Someone’s got a new computer product for securely managing financial data. The question is, can we find a use for it, maybe analyzing some more ratios?

The dog has a tail.

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