Financial benchmarking is a process whereby the performance of a company is measured in comparison to the standards of the industry which it operates. The process relies heavily on the financial performances from the accounts of the organization. The use of accountants in this process is limited. The whole process is facilitated by financial and business analysts. The process involves the application of financial ratios, capital budgets and costs, cash flows and measures of risk standards among other ratios. Corporate, financial benchmarking can be conducted on monthly, quarterly or on a yearly basis depending on the needs of the organization (Bendell, Boulter and Goodstadt, 1998).
The key aim of conducting this analysis is to assess the performance of various departments in an organization in terms of improvements in capital expenditure. The business or financial analyst reviews all figures required by the executive and reviews them in the determination of the points of improvement to meet internal goals. There is no single procedure set up in financial benchmarking. However, different scholars and business analysts have come up with a twelve step procedure on how to implement the strategy (Boxwell, 2011).
The first step involves selection of the subject. This may involve a department that needs to be surveyed and the provision of the financial measures that need to be assessed. The definition of the process follows; this is derived from the analysis of the financial measures and the targeted result that the executive requires from the results. The process involves identifying the problematic areas suing various research techniques. This may involve interviews with the customers, analysis of variance reports, process mapping, financial ratio analysis etc. this is done to determine the base line performance before a review of performance indicators (Gildersleeve, 1999).
Thirdly, identification of potential partners is conducted. This goes hand in hand with the fourth step of identifying relevant data sources. Potential partners in this case can be other competing industries. The use of the competitors allows a collection of information on the strengths and tests of the subject. The fifth step involves a collection of data and a selection of partners that seem more reliable. The analysts then determine the gap that exists between the subject and the partners, which is the sixth step.
An establishment of differences in the processes follows. This is determined by a survey on the partner’s evaluations and practices to identify potential alternatives. With this information, the analyst has the capability of formulating a target goal, which is from the survey of the practices of the leading companies in the industry. The ninth step involves communication and follows up of the procedure to enhance proper implementation. This may lead to adjustments of the strategy at some point. The eleventh point is on implementation of practice and finally a future review and follows up of the practice. This is usually done to make sure that the intended goal is reached, and any changes thereafter are implemented (Bendell, Boulter and Goodstadt, 1998).
The idea behind corporate benchmarking is to measure internal procedures against external standards. The data provided can be evaluated by managers, investors, banks and managers in making corporate, financial decisions. Benchmarking allows managers in determining the most favorable practices and prioritizes on improvement opportunities. It also assists in meeting customers’ expectations thus improving on growth. Managers understand the most effective and accurate means of achieving a target, learn on how to cut down costs, and improve on competitiveness (Stephen, Randolph and Bradford, 2013). The use of risk costs and returns on the assessments enable managers to determine the most efficient capital and budget on the same to avoid loss. The assessments allow for short-term financial planning, whereby the company’s returns on such periods can be used by the managers in making long term solutions. The managers can also evaluate options on leasing, mergers and acquisitions from these assessments. The managers also determine the investors to work with using these results.
Financial analysis expertise use corporate benchmarking in providing qualitative results that can be used by the managers in the formulation of growth strategies. The analysts use the data from benchmarking to analyze and evaluate on the weak and strong points of a company and determine the best procedures that the company can implement (Boxwell, 2011). The analysts define the best practices that the company should use in order to meet the requirements of the competition.
Bankers and investors evaluate the performance of a business from the results of financial benchmarks. The data provided by capital ratios, NPV’s, financial statements, cash flows, and financial plans; allow the bankers and investors in assessing the capability of an organization. Bankers use such information in assessing the credibility of an organization. The statuses of the reports allow the banks in determining the best rates and lending ratios. Behavioral finance, liquidity levels and capital valuation benchmarks are among the assessments that bankers use in determining capacity of an organization. An organization’s performance assessed through such data, create the negotiating power of the organization with the banks.
On the other hand, stakeholders and other external investors use financial benchmarking in making decisions on investments. The level of capital, short and long term financial decisions, and bond valuations are benchmarks used in making such decisions. Individual and corporate investors often gauge their industry expectations and judge performance of an organization against appropriate benchmarks provided by analysts. The investors concentrate on the value and price of bonds in making their decisions. The financial flow and liquidity levels of the organization determine investor’s interest in an organization. Acquiring such investors in a competitive market means more growth and development in an organization (Gildersleeve, 1999).
The evaluation of corporate, financial benchmarking data is in overall an internal and external strategy of growth and development. The procedures prescribed by financial analysts from the data are used by the managers in formulating strategies that place an organization in a better financial position (Khan, 2010). This attracts more customers, investors and creditors. The evaluation of the data on tax, for example, ensures the investors on accountability of the organization. The process adds value of an organization both internally and externally. However, it has been criticized on resource constraints i.e. finance, lack of expertise, and time. Finding suitable partners from the evaluation of benchmarked financial results is also a challenge. Most investors view the data as inappropriate since it does not involve accountants.
Stephen, R., Randolph, W. & Bradford, J. (2013). Fundamentals of Corporate Finance Standard Edition. McGraw Hill Higher Education: New York.
Boxwell, R. (2011). Benchmarking for competitive advantage. McGraw-Hill: Princeton.
Bendell, A., Bendell, T., Boulter, L. & Goodstadt, P. (1998). Benchmarking for Competitive Advantage. Pitman: New York.
Khan. (2010). Financial Services 5E. Tata McGraw-Hill Education: New York.
Gildersleeve, R. (1999). Winning Business: How to use Financial Analysis and Benchmarks to Outsource your Competition. Gulf Professional Publishing: Burlington, MA.