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With
talk of Australia teetering on recession, there is no doubt that
businesses need to work smarter if they are going to keep their
head above water. SARAH CUMBERLAND reveals how benchmarking is becoming
an important part of managing a small business in today's economy.
Recession or
not, it is becoming increasingly important for business owners to
have an in-depth knowledge about their business so they can make informed
operating decisions.
No one can deny
that the business environment is tough for most small businesses so
it is even more vital that owners and managers know what is going
on in their own business as well as that of their competitors.
We can no longer
just say: "It (the economy) will come good. She'll be right, mate."
Business owners need to start looking at the KPI's (Key Performance
Indicators) of their business to see where they can improve.
This is called
Benchmarking - a term that you may associate with the Big End of Town.
Think again.
What
is Benchmarking?
Benchmarking
is simply the process of measuring yourself against others to identify
how you can improve your performance. Sure, big, successful enterprises
have been benchmarking for years. They monitor what their competitors
are doing, then they assess their own operation to see how they could
improve by using some of these ideas.
That doesn't
mean small businesses can't adopt these strategies to work toward
their own success. After all, many small businesses probably benchmark
themselves on an informal basis when they pretend to be a customer
of a competitor to find out about their products and services or if
they like a particular shop design and so try to incorporate some
of the same ideas into their own design.
Benchmarking is
not as scary and difficult as often thought," says Greg Hart, managing
director of the Entrepreneur Business Centre. "Used properly, it can
be one of the most powerful management tools to help ensure the future
viability of your small business."
Benchmarking is
an extremely valuable process for any business. Survival in today's
business climate requires you to spend more time working on your business
rather than in the business. This means that as the owner, you need
to consider your business as a whole and make decisions based on its
intended future direction.
Have you ever
wondered how your business performs compared to your competitors?
Are you charging enough for your products and services? Are you spending
too much on advertising? Are you paying too much rent? Are your staff
costs too high? What is the average bottom line of your competitors?
Know
Your Own Business First
Before you start
the process of comparing with others, you need to have a good idea
of the function of your own business. Ask yourself the following:
- Who are your
most important customers?
- What do they
expect from you?
- Why do they
come to you rather than your competitors?
- What are your
products/services and processes?
- Why are they
important to your business?
- By analysing
your own business thoroughly, you can then look at others in the
same industry, with the view to finding out how and why they do
well. That way you can adapt the strategies that have made them
successful into your own business processes.
Gathering
The Information
When benchmarking,
you really need sufficient information to compare your business to
your competitors. This information can cover a range of issues about
competing businesses, including financial processes, administration
procedures, staffing details and product specifics.
The most obvious
method of comparison is by visiting the competitor's business and
observing details such as how customers are treated, how the location
of the business influences the product it offers, and specifics about
pricing and product. You should read industry publications that might
give you information about your competitors, even just from the ads.
Don't forget to check out your competitors' websites.
If you need more
in depth information, you can go to the trouble and expense of searching
databases or releasing legal documents but make sure you really need
this sort of information as obtaining it can be time consuming and
expensive. Networking with other industry types may be beneficial
for talking about general ideas and trends, although it is unlikely
your opposition will want to discuss specifics.
KPIs
Obviously, for
effective benchmarking, you need to be able to compare similar information
from your business to that obtained from your competitors. This is
where KPIs become a vital part of the process. KPIs are statistics
based on crucial aspects of a business against which other statistics
or figures can be measured. They enable people to make direct comparisons
and so are particularly useful in identifying strengths and weaknesses
in a business.
KPIs might
include:
- Total income
of the business
- Gross profit
- Wages and
salaries of staff
- Rent of premises
- Stock turnover
rate
- Sales area
per sales assistant
By obtaining
industry statistics on each of these indicators, business owners can
develop strategies and goals to steer their business toward what the
successful ones are doing.
Apply
the Information
Peter Jordan,
from Jordan Financial Services, in Innisfail, Queensland, has been
benchmarking his business against others in the financial services
industry using an EBC Business Benchmarking Guide* written specifically
for financial planners and investment advisers.
"Before I started
going through this process, I had never looked at figures in relation
to my industry," he says. "It certainly provided some guidance in
terms of building our business plan. But you really have to apply
the information on an ongoing basis, otherwise the statistics just
provide a snapshot."
Jordan says it
is important to link up KPIs of the industry with those in your business.
"You can get a good indication of how your business is going, and
compare it with other businesses better. It has been an effective
tool in assessing performance standards, identifying both areas of
concern and areas of success within our business." Jordan and his
wife used to be insurance agents, but gradually moved into financial
planning. They sold the insurance side 18 months ago because they
realised that they couldn't run what was really two businesses.
Business is good,
he says. "It's a booming market for financial planners. People are
more educated and the market has become more complicated. As government
regulations become increasingly complex, there's more need for accountants,
lawyers and financial planners to make sense of it all."
Even when adjusting
for being home-based, the Jordan's business has lower expenses in
many areas than many of its competitors. "The figures give us an indication
of the workload we are taking on. It is interesting to see other businesses'
staffing costs so we know what we would have to incur if we were to
hire someone."
Assisting
With Decision Making
Phil Constantine,
who runs Constantine Constructions, a building company based in Macksville
on the NSW North Coast, says that he used benchmarking statistics
to make a decision to employ an extra member of staff.
"We've experienced
major growth this year," he says. "Our resources have been stressed.
I wanted to hire new staff but I didn't really know whether I could
afford it. Of course, I could look at my own cashflow to make that
decision but what really decided it for me was when I used the benchmarking
figures from my industry." Constantine discovered that he was paying
a lot more for materials than many of his competitors. This was due
to the fact that his staff were stretched and didn't have the time
to purchase wisely.
"It was all being
done at the last minute and you pay a lot more for product that way,"
he says. "My internal wages bill was also a lot lower than my competitors
which indicated that I might be understaffed. This confirmed my gut
feeling that we needed to hire someone to take care of purchasing.
I could see by the figures that a new person could pay their own salary
in the savings we could make."
Good
Statistics
Essential Constantine
says he had heard of benchmarking and knew it was quite prevalent
in the US but had not previously used it in his own business. Listening
to some financial management tapes one day, the term benchmarking
kept being mentioned. He decided to purchase statistics on the construction
industry so he could find out more about his opposition and do his
own benchmarking.
"Without this
information, you are just shooting blind," he says. "If you don't
know how The Brothers (your opposition) are doing, you don't really
know how you are doing either."
The main issue
with obtaining industry statistics is to have a large volume of businesses
involved. "As long as the data is substantial, the volume will sift
out the anomalies and your averages will be more accurate," says Constantine.
Don Goodair,
of Brisbane printing company, The Tartan Press, agrees on the need
for higher volume. "The more businesses that participate in the data,
the better the figures are," he says. He participated in an industry
survey some years back and could recognise his own figures in the
results as the sample was so small.
Goodair has been
using figures from the printing industry in America for some years.
"They have been quite a good guide, although it is much better to
use Australian figures," he says. "They are very helpful in showing
up your own shortcomings and helping you find out where you need to
put in the work."
Graham Cooper,
of Jackman's Garage, in Moonah, north of Hobart, Tasmania, had been
looking for information on the motor mechanic industry for years.
"Whilst we analyse
our own figures fairly closely each month, we were never able to learn
how we rated in the industry," he says. "I have always been curious
to understand how the others are doing."
Having purchased
his industry's EBC Business Benchmarking Guide, he is taking his business
through the benchmarking process.
"I have discovered
quite a disparity in certain areas of our business. The statistics
have shown me where to concentrate my efforts and how to look for
those areas that need improvement. It is also quite reassuring to
find out the areas where we are on track as it takes away any concerns
I might have had."
The
Four Steps Of Benchmarking
- See how your
business compares against your competitors
- Understand
how the rest of your industry works
- Analyse the
key performance indicators of your industry
- Develop your
own action strategies to improve your bottom line
*Entrepreneur Business Centre (EBC) has developed a series of
comprehensive Business Benchmarking Guides for more than 80 specific
industries. Each individual title takes you through the entire benchmarking
process step-by-step over 200 pages.
Up-to-date Australian
statistical data is provided by the FMRC Benchmarking Team so that
business owners can easily make financial performance comparisons.
The guides include an Excel based Benchmarking Financial Software
package so that you can enter your own financial data and analyse
it against your competitors. RRP: $215
Contact the
EBC on 1300 300 586 or visit the website at www.ebc.com.au
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