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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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BENCHMARKING
YOUR BUSINESS!
