Financial Benchmarking as Easy as 1-2-3



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In these uncertain economic times, it has become imperative for organizations in public and private sectors to be accountable for their dollars and cents.

Benchmarking is one tool to help keep the ledger in the black.

In the recent economic crisis, these are times when the management of an organization is severely tested over the financial health of the company. Even large scale enterprises are susceptible to bad investor sentiment and tepid market during a downturn and their financial health too can plummet. Also an economic downturn can prove to be a handy excuse for some employees to justify the poor financial performance of a division or even the whole company.

In such a situation, financial benchmarking can come to the rescue of the management by giving a broad pointer on to how the overall industry is performing in the given scenario.

Financial benchmarking involves performing a financial analysis and comparing the results in an effort to assess your overall competitiveness and productivity. In order to measure effectiveness, a business will use benchmarking to review smaller processes or a large division. By starting with the small processes, businesses will discover deficiencies quickly and determine how to correct them; in turn, this will make the entire division more competitive.

In business, benchmarking your performance against that of your competitors can propel you to greatness too. It can help you establish internal goals, pinpoint market opportunities, exploit competitor weaknesses, and create the kind of esprit de corps to unify and motivate your team.

Some of the more useful financial benchmarks involve:

·         gross, operating, and net profit margins

·         sales and profitability trends

·         inventory, accounts receivable, and accounts payable turnover

·         salary and compensation data

·         revenue per employee

·         cost per employee

·         marketing expense as a percent of revenue

·         revenue to fixed assets ratio

In public sectors, grants and/or investments made on private businesses as part of the national agenda can be benchmarked against a set of companies that do not receive government funding – thereby measuring the effectiveness of the scheme based on various financial and non-financial variables.

The concept of benchmarking -- setting up statistical guidelines to identify best management practices -- can be a tremendous benefit to law firms. Financial benchmarking helps law firms measure their business effectiveness by analyzing profitability, cash flow and collections.

Appropriate statistical benchmarks can help you explore operating strengths and deficiencies, and help you understand where you are currently, relative to your goals. Benchmarks provide fact-based information to help firm colleagues establish consensus about future goals. On an individual level, lawyers who understand financial benchmarking can better assess the value they provide to clients, and better reflect that value in their bills.

While financial benchmarking in itself can to an extent offer a plausible understanding of the financial standing of your company in its own vertical, it is limited by lack of perceptive insights on specific trends. However when benchmarking is combined with KPIs, it offers a chance to stress upon specific aspects towards improving the financial standing of the organization.

Using a financial benchmarking scorecard further allows the management to isolate problem areas by checking them up with industry peers in a holistic manner and rationalise the corrective measure that need to be initiated.

Vector Scorecard (Asia-Pacific) developed such a tool called “FICRA: Financial Credit Rating and Assessment” Scorecard in 2006 and has been successfully applied to thousands of companies. Large Japanese and American corporations, financial institutions, trade associations, credit bureaus and government agencies have used FICRA for some of the following objectives:

·         are the earning levels adequate and sustainable?

·         are the subject companies achieving higher productivity / output versus industry?

·         Are the companies taking on higher risk levels and compensated by higher earnings?

·         Are the cashflows adequate to meet obligations, and what are they doing about it?

FICRA takes broad segments of a company's operations and breaks them down into small, complete processes that can be measured for overall effectiveness. While benchmarking takes time and detail to implement, FICRA rapidly utilises the artificial intelligence (AI) architecture as a key driver to address multiple parts of company's strategic management process to ensure industry competitiveness.

FICRA provides quantitative results for business processes. Measuring the financial strengths and weaknesses of a divisional process gives management a clear picture of whether goals have been achieved. Another advantage of FICRA is that it begins with smaller processes; once problems are identified, they may be easier to change than an entire division process.

For more details on FICRA, please contact advisory@vsapac.com .