The importance of benchmarking your financials: Does your business stack up?

In entrepreneurship, it can be difficult to know how you are performing. Unlike in large

Working at the office

businesses, there may not yet be year-over-year performance records, or any other internal way of knowing what financial numbers indicate good business management. Benchmarking against industry averages can help to fill this gap.

The Financial Performance Data Report is a free research tool available that has value to anyone starting, growing or facing challenges in a business. The tool, provided by Industry Canada, is used to benchmark revenue, expenses, profits and losses of Small Medium Enterprises (businesses earning between $30,000 and $5,000,000 dollars) in each industry.

How does this help?

During the business planning process, this tool will help provide some validation to the assumptions provided in the financial projections. It can help answer questions key questions, including:

  • Is the writer projecting realistic numbers for the first year of business, or have they guessed that they will earn much more than is typical?
  • Is the quote they got for their first purchase of a product or service reasonable?
  • Is there a line item they are budgeting way too much for?

A business that is struggling could use the tool to identify possible problem points in their financial model. Is their cost of goods higher than average? Do they pay more in rent than any other similar business? Narrowing the problem will help the entrepreneur work to fix the problem, or could even provide the needed information to challenge a vendor to offer better prices.

What are the limitations?

A benchmarking report will not necessarily be an exact indicator of how much you should make or spend on any given item. Geographical and operational differences will impact specific expense lines, for example rent expenses. Looking at financial ratios and identifying major discrepancies will be more helpful than trying to line-up expenses.

Some industry classifications will have more valuable reports than others. Specifically, this is because a classification with a large variety of business models, products, or level of quality will have extremely different businesses informing the one report. This could happen in the classification for “Full Service Restaurants”. In contrast, the business model and services of electricians are all very similar, making the report for – “Electrical Contractors” more reliable.

To use the tool:

  1. Identify your Industry Classification Code (NAICS Code) using the included search tool.
  2. Generate a report
  3. Identify the segment of the industry that most resembles your business by finding similar revenue, or a specific line of expenses (for example, a company that pays similar rent)
  4. Compare the performance to your projected or actual income statement

How does your business stack up? Knowing will help with building financial projections, adding credibility to business plans, and identifying areas for growth and improvement.

The Consultants at the Halton Region Small Business Centre are here to help with financial projections, business planning and benchmarking. For more information about resources, services, business events and seminars, contact us by dialing 311, 1-866-442-5866, online at halton.ca/smallbusiness, by email at smallbusiness@halton.ca or visit us at 1151 Bronte Road, Oakville. You can also follow us on Twitter and find us on Facebook.

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