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BENCHMARKING YOUR BUSINESS!

by Daniel Cloete
 

One of the best ways to keep any business operating successfully is by continually measuring and comparing its performance against industry averages, and to do this business operators are turning to benchmarking. More and more businesses are taking advantage of smart, industry-savvy benchmarking guides to beat competitors at their own game. Successful business owners realise that working smarter - not harder - is critical to both success and survival. With a franchising model this is even more relevant were franchisees can compare the performance of their business, using key performance indicators, with that of other franchisees in the same group. The best franchise systems also benchmark against others in the same industry and would use in depth industry studies by Accounting firms or Universities to provide a basis for comparison.

So what is benchmarking?
Benchmarking takes financial figures and converts them into ratios, which allows organisations to compare their results to those of their competitors. Having these measures in place help prepare businesses for taking the next step, whether it is for listing, sale or attracting new investment. These ratios can also help potential investors assess performance and discover areas for improvement.

What's in it for you?
Irrespective of whether you're running a coffee franchise, supermarket, a printing franchise or a financial planning company, no business is too large or too small to benefit from the enormous potential a detailed benchmarking analysis can provide. In essence, business owners can use their competition as the ultimate measuring stick for improvement.

The growing interest among SMEs seeking a variety of expert guides and assistance is evidenced from the 5,000-plus weekly requests the Entrepreneur Business Centre (EBC) receives Australia and New Zealand wide. Benchmarking has been successfully used in the corporate sector for decades and is a powerful financial assessment management tool. The EBC is in the process of publishing its latest benchmarking series of guides, which according to officials include industry averages, trends, financial solutions and statistics covering more than 80 industries across Australia and New Zealand.

What kind of information is delivered?
More sophisticated benchmarking analysis provides small businesses with commonly sought-after financial details and ratios. Information varies across industries and size, however the most common relate to financial ratios, administration, physical office or warehouse space and costs, staffing and product specifics, all the way through to how much of the budget is dedicated to advertising and marketing. These are usually expressed as a percentage of sales or profits, before abnormal items are taken into account. This information can be compared to other franchisees in the same franchise system or competitors on a national scale and also to those located within your business area. Benchmarking allow franchisees to use information from the other franchisees in the system to improve their own performance. For the franchisor benchmarking against the competition gives a standard to reach, and surpass. In this way, they are a source of information for improvement and survival, rather than an impediment.

Do you need to set the standard?
Determining whether you should invest in benchmarking your business really depends on how well you know your business. With franchise systems the franchisor would in most instance provide leadership regarding benchmarking. Ask yourself the following to establish whether you're on top of your business, its associated industry and, of course, your competitors:

  • What are the important measures and ratios for my industry?
  • What is my gross profit margin and net profit margin? How does this compare to the industry?
  • Am I spending too much on advertising (or not enough) compared to my competitors?
  • What is this as a percentage of sales? How does this compare to my competitors? In the case of Franchise systems you also want to look at local versus National or Brand advertising.
  • Salary & Wages: how much are my competitors paying their staff (both permanent and contract)? What is this as a percentage of sales and profits?
  • How much are my competitors charging for similar products or services?
  • What is my competitor's profit margin? Gross and net?
  • Am I paying too much in rent for retail, office or warehousing space? What is this as a percentage of sales and profits?
  • How fast is my delivery? Is this fast enough?
  • How much does delivery cost per sale? How does this compare to others?


Buying a franchise
When buying a franchise there are a lot of ways to put a value on the stock, fittings and goodwill of the business, which I do not want to cover in detail because of a lack of space. You can however learn a lot by scrutinising the financial ratios from an existing franchise business and comparing it to other franchises in the same group or industry. Except for profitability measures and return on investment calculations, looking at indicators like the rent as a percentage of turnover or wages will quickly point out fundamental problems and ensure that you do not buy a business that is likely to paint you into a corner financially in the future. Your specialist franchise accountant can help with this and if you apply for finance your franchise bank will definitely look at system and industry benchmarks to determine if they can finance the particular business.

Benchmarking Sources*
(*Information sourced from the Business Success Seminar Manual)

  • Talk with your industry body, the Franchise Association of NZ or local Chamber of Commerce for more information.
  • For franchisees the best source of benchmarking may be the management information systems of the Franchise System.
  • Obtain copies of any annual reports your competitors issue.
  • Talk to accountants, auditors and consultants who specialise, or have extensive experience in the franchise industry industry.
  • Seek out benchmarking guides.


New Zealand based sources of benchmarking information include:


International Sources of Reference:


Summary

Whether looking at buying a business, or to improve the operating performance of your business, comparing key financial ratios can provide a clear understanding of the financial situation of the business. It provides management information on which issues to address to improve the operation, and ultimately the financial performance, of any business.


Franchisors or franchisees who wants to get a fuller understanding of benchmarking as discussed above, the working capital cycle, the financial operating cycle, ratios and the business roadmap can attend one of the Business Success Workshops, which are offered by Westpac at different venues in the country, throughout the year.



Published first in 'Franchise New Zealand Magazine'

 
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Daniel Cloete is the National Franchising manager for Westpac Bank, New Zealand.

Contact:
You can contact the Westpac Franchise Team on 0800 177 377 or Email: franchising@westpac.co.nz
Internet: Westpac Franchising

 
 
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