A benchmark is often considered as the optimum performance to be strived for, or, the average performance which is either outperformed or fallen short of.
The meaning of a benchmark, in a nutshell, is a reference point or a standard which something can be measured against.
In the context of business, there are many benchmarks, which are typically industry standards, that business owners or advisors can use to determine their relative performance. Business benchmarks can be analysed to make key operational decisions resulting in significant improvements in all areas of the business including but not excluded to: cash flow, cost of goods sold, expenditure, salaries, staff numbers and so on.
Benchmarking Example
An advisor wishes to help a Pharmacy improve their bottom line. Upon analysing the client’s expenses as a percentage of their total income, it becomes apparent the Pharmacy’s rent expenditure is 23% of the total income. This is significantly higher than the Pharmacy’s industry average of 12% for businesses within a similar cohort. On further investigation the advisor also notices the total floor area is about the same as similar business and the product display area is actually smaller. The meaning of these benchmarks reveals itself and the client is advised to increase their product display area in a well-positioned but cheaper location if possible. This supports the Pharmacy to increase its profit margins and positive cash flow.
This is just one example to illustrate the numerous ways in which accountants and business advisors are using quantitative benchmark data to give meaning to their clients financial and non-financial business data.
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