Benchmarking can be a very important and powerful tool in managing a business and improving financial and operation performance. We are often asked by our clients “what are you seeing in the industry” or “what do your other clients do”. An easy way to answer these and similar questions is through benchmarking.
Benchmarking in its simplest terms is comparing various ratios and metrics to those of similar companies. In the construction industry, these ratios are usually grouped into one of four general types, liquidity, profitability, leverage and efficiency. Two important considerations before starting the benchmarking process are 1) what are your key performance indicators (KPIs) and 2) identifying your peer group.
Relative to KPIs, these can focus on financial metrics (i.e., current ratio, return on equity, etc.), operational metrics (i.e., number of jobsite accidents, employee retention rates, etc.) or both. These metrics should focus on what is important to the stakeholders of the companies (i.e., owners, bonding company, banks, etc.). Identifying the appropriate peer group is also vital. Peer group could mean companies of the same size, companies in the same industry or companies in the same geographic region.
Benchmarking is most effective when performed over an extended period of time, ideally two to five years. This helps to better identify one-time events versus a potential trend. While comparison to your peers is important, it is also a good idea to benchmark your current performance against that of previous years. While you may trail ‘industry averages’ or ‘best-in-class’, showing consistent improvement should be viewed in a positive light.
Once you identified your KPIs, you can begin to develop and align your company’s goals accordingly. These ratios may help identify strengths and weaknesses of your company. Your company goals should be designed to maximize the ratios you identify as being important. Finally, periodically evaluate your KPI. As your business continues to evolve, certain KPIs may no longer be as beneficial and others may become more important.