How does your business compare? A practical guide to benchmarking your numbers

Suppose your business made a 7% net profit last year.

Is that good?

On its own, the number does not tell you much.

If comparable businesses regularly produce 12%, there may be an opportunity to improve.

If similar businesses generally produce 4%, your result might be strong.

The same applies to wages. A business owner might look at a $1 million annual wage bill and think: that's a huge amount of money.

But the more useful question is: what percentage of revenue are we spending on labour, and how does that compare with businesses operating in similar circumstances?

Benchmarking gives individual numbers context.

It helps move the conversation from “that seems high” to “this is where we sit, and this is what we need to investigate”.

There is no single set of benchmarks every business should track.

The useful measures depend on:

• your industry
• business model
• size
• stage of growth
• staffing structure
• products or services
• current priorities

Business Queensland identifies a range of areas that can be benchmarked, including operating costs, gross and net profit, sales trends, profitability, marketing expenditure, employee productivity, debtor days, quote conversion, stock turnover and maintenance costs.

For many of our clients, the following are a useful starting point.

Gross profit tells you how much revenue remains after the direct costs of producing or delivering what you sell.

For example, a business generates $2,000,000 revenue and $1,200,000 direct costs. Gross profit is $800,000. Gross profit margin is $800,000 ÷ $2,000,000 = 40%.

If businesses operating under similar conditions tend to achieve a stronger gross margin, that creates questions.

• Are your prices too low?
• Are supplier costs too high?
• Are jobs taking too long?
• Are discounts being given too easily?
• Is labour being used efficiently?
• Is the business selling too much low-margin work?

The benchmark does not answer those questions.

It tells you where to start looking.

Gross profit shows what remains after direct costs.

Net profit goes further and considers the wider cost of running the business.

This can help you understand whether:

• overheads have become too large
• the business is carrying excess administration
• rent or occupancy costs are high
• pricing is insufficient
• growth is actually producing a return

A business can increase revenue significantly while its net profit percentage falls.

That is one reason turnover should never be the only measure of growth. If you have not tested it recently, it is worth knowing how much the business needs to sell each month to cover its costs and produce a profit.

For many businesses, wages are one of the largest costs.

Useful measures may include:

• wages as a percentage of revenue
• direct labour as a percentage of sales
• revenue per employee
• gross profit per employee
• overtime
• subcontractor costs
• labour cost by team or department

If labour costs are significantly different from a relevant benchmark, the answer is not automatically to reduce staff.

You need to understand why.

The business may:

• charge too little
• have spare capacity
• be carrying roles ahead of future growth
• have inefficient processes
• be performing work that should be automated
• have the wrong mix of services
• need better productivity information

Benchmarking helps identify the gap.

Management still needs to determine what is causing it.

A business can be profitable on paper and still run short of cash.

One reason is slow customer payments.

Debtor days help measure how quickly customers are paying the business.

If your payment terms are 14 days but customers are taking substantially longer on average, the problem may sit with:

• invoicing delays
• unclear payment terms
• weak collection processes
• disputes
• customer quality
• the way deposits and progress payments are structured

Comparing debtor days over time and against businesses with similar payment models can help identify whether the problem is unusual. There are also practical ways to get paid sooner once you know where the delay is coming from.

Winning every quote is not necessarily a sign that pricing is right.

If almost every prospective customer accepts immediately, the business may be leaving money on the table.

On the other hand, an extremely low conversion rate could indicate:

• pricing problems
• poor qualification
• slow follow-up
• weak proposals
• the wrong target market
• competitive pressure

Track:

• quotes issued
• quotes won
• average quote value
• time to acceptance
• conversion rate
• gross margin on won work

Then look at what the numbers are telling you.

The goal is not necessarily to have the highest possible conversion rate.

It is to win the right work at an acceptable margin.

“How much should we spend on marketing?” is difficult to answer without context.

Instead of looking only at the dollar amount, consider:

• marketing spend as a percentage of revenue
• cost per lead
• cost per new customer
• conversion rate
• revenue generated by source
• gross profit generated by source

A business spending $200,000 a year on marketing may be performing exceptionally well if that spending produces profitable customers consistently.

Another business could spend $30,000 and receive very little return.

The amount is less important than what it produces.

Headcount alone does not tell you whether a team is productive.

Revenue per employee can help identify how efficiently the business converts its people into sales.

Gross profit or contribution per employee may provide even more useful information where business models differ.

This can be particularly helpful when deciding whether the business can afford:

• another employee
• another manager
• additional administration
• a new sales role
• additional operational capacity

Before hiring, understand what level of additional revenue or gross profit the role may need to support.

Businesses carrying stock may also benchmark:

• stock turnover
• stock days
• damaged stock
• obsolete stock
• stock losses
• gross margin by product category

Too little inventory can cost sales.

Too much inventory can tie up cash.

The right level depends heavily on the industry and the business model, which is why comparing against genuinely similar businesses matters.

External benchmarks are useful, but your own history is often one of the best places to start.

Compare:

• this month with last month
• this quarter with the same quarter last year
• this financial year with the previous year
• actual results against budget
• actual results against forecast

If you do not have a forecast to compare against, building a simple budget is usually the first step.

Look for changes. For example:

External benchmarking becomes more useful when the comparison group actually resembles your business.

Business Queensland suggests comparing against businesses such as:

• similar-sized businesses in your industry
• industry leaders
• related industries
• competitors
• recognised industry standards

Be careful with broad averages.

A $500,000 business and a $10 million business may operate in the same industry but have completely different staffing structures, purchasing power, overheads, management requirements, customer mix and margins.

Location can matter too. Rent, wages, freight and market conditions can vary significantly between regions.

The benchmark needs enough context to be useful.

Business Queensland identifies several possible sources.

The ATO publishes small business benchmark information for a range of industries.

These can provide useful reference points when reviewing how a business compares with others operating in a similar industry.

The ABS publishes economic and business data across industries and regions.

Industry bodies often have more specialised information about:

• margins
• staffing
• operating costs
• pricing
• productivity
• industry trends

Paid providers may offer more detailed or specialised information.

Before using commercial data, consider whether:

• it is current
• the comparison group is relevant
• the sample is large enough
• the information is reliable
• your own business data will remain confidential

Business Queensland specifically recommends checking the accuracy, relevance, confidentiality and value of commercial benchmarking information.

This is important.

Being outside an industry benchmark does not automatically mean something is wrong.

There may be a perfectly good reason.

Your wage costs might be higher because you employ more experienced people. Your rent might be higher because location is central to the business model. Your marketing spend might be above average because the business is deliberately investing in growth. Your gross margin might differ because you sell a different mix of products or services.

The purpose of benchmarking is not to make every business look identical.

The purpose is to identify differences worth understanding.

Ask: why are we different?

Then decide whether that difference is:

• deliberate
• temporary
• unavoidable
• an advantage
• a problem

An industry average is not necessarily a great business.

If everyone in an industry has poor margins, matching the average is hardly an ambitious goal.

Benchmarks are a reference point.

You should also compare performance against:

• your own goals
• your budget
• your forecast
• previous years
• stronger operators
• the return you expect from the business

Sometimes the appropriate goal is to be significantly better than the benchmark.

Suppose your wages are 32% of revenue and comparable businesses are closer to 25%.

Do not start by cutting wages.

Start by investigating.

You might discover:

• pricing has not kept up with wage increases
• staff are doing too much unbillable work
• jobs are being quoted incorrectly
• the team has unused capacity
• certain customers are unprofitable
• one service line has poor margins
• systems are creating unnecessary administration
• the business needs additional revenue to support the current structure

The action depends on the reason.

Business Queensland notes that benchmarking may reveal areas such as excessive operating costs, pricing issues or staff-cost problems that require further attention.

That is where the real value begins.

A spreadsheet showing your business against an industry average has limited value on its own.

The useful part is deciding what happens next.

For each material difference, ask:

• What is the number?
• What should we compare it with?
• Why are we different?
• Is that difference acceptable?
• What can we influence?
• Who is responsible for doing something about it?
• When will we review the result?

That turns benchmarking from an accounting exercise into a management tool, and it is a large part of how we work with clients through the year.

A benchmark is less useful when the comparison group operates under very different circumstances.

Low wages could indicate efficiency.

They could also indicate understaffing.

High marketing costs could indicate waste.

They could also be driving exceptional growth.

Look at the relationships between the numbers.

Business conditions change.

Wages, rents, interest rates, supplier pricing and customer behaviour can move quickly.

Use current information where possible.

A benchmark is evidence.

It is not an instruction.

There is little value comparing your gross margin with an industry benchmark if your own cost-of-sales accounts are inaccurate.

Good benchmarking starts with reliable accounting records.

A business owner should be able to answer more than: did we make money?

Useful questions include:

• Is our gross margin improving?
• Are labour costs producing enough output?
• Are customers paying us quickly enough?
• Is our overhead structure appropriate?
• Is our marketing producing profitable customers?
• Are we pricing work properly?
• Are we becoming more efficient as we grow?
• How do these results compare with businesses like ours?

You do not need to track 50 different ratios.

You need a small number of measures that tell you whether the business is moving in the right direction.

Wakefield Pacific can help you:

• identify the most useful financial and operational measures for your business
• make sure the underlying accounting information is reliable
• compare actual results with budgets and previous periods
• review available industry benchmark information
• understand why your results may differ
• turn those findings into practical actions and targets

The objective is not to make your business look like everybody else's.

It is to understand where you stand, what is driving the result and where there may be an opportunity to improve.

Speak with our team about benchmarking the numbers that actually matter to your business, or read more about the services we provide.