As a business owner, competition can be intimidating. However, it can also drive to achieve impressive results. The important factor is knowing how to beat the competition.
With this sentiment in mind, for business owners and advisors, gathering intelligence on a business’s competitors in a systematic and rigorous format is critical to success.
What are the benefits for my client?
The main benefit is the general advice given to improve certain aspects of business performance – identifying areas that aren’t working as well as they could and designing strategies to overcome those weaknesses. The owners obviously have a role to play in here; so do you, their advisor.
Benchmarks are also used in finance applications – sometimes to fund the purchase of a business; sometimes to justify an expansion. If you can demonstrate that the firm is a good one because it has good margins, good liquidity etc, that can be used as a bit of leverage to reduce the bank’s margins on loans, for example.
They are handy in Business Valuations as well. The trend data gives you a feel for the industry’s performance over a period of time. Has the industry overall been stable, or more volatile? How does this business sit within its industry? That type of information helps the valuer to select the right capitalisation rate for the business, to arrive at a fair value. The averages also help in the review of the business itself too – its operations, structure and profitability. Is this a good business or not? Should I buy it or not? If a client is looking at a business with very low profitability relative to the industry, then your client can go into the business with their eyes open: what is the ‘development potential’? How much could I earn from the business if I run it properly? And of course all these factors also affect the price that a buyer is willing to offer – it is then a matter of convincing the vendor to accept the offer price!
Which of my clients should do this?
Some accounting practices will benchmark all their business clients’ results, as a standard part of the annual accounting work. They sometimes put these benchmark reports at the top of the whole set of reports – they might have a little thank you or summary letter right at the top; benchmark reports underneath it; and then they put the financial statements, tax papers and corporate papers below that. These firms have realised that the ‘financials’ are just helping to drive the numbers they have used in the benchmarks and they use the benchmarks to drive the discussion about what the business has done. “So, you had a good year but it does come with a high tax bill. That’s great! But I’ve noticed that you’ve got too much money tied up in stock. Let’s talk about the stock first – if you fix the stock problem, you’ll find it easier to pay the tax”.
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