By Brad Schaefer, Analyst, Sageworks, Inc.
John, a professional golfer, is approaching the eighteenth hole in a major PGA tournament. His performance on this hole could be the difference between claiming the trophy or being forgotten. He eagerly looks to his trusted caddy and asks",How am I doing compared to the rest of the golfers?" The caddy reviews the leaderboard, benchmarks John's score in the rankings, and tells him",John, you're currently in third place. If you improve your tee shot performance and birdie this hole, you can increase your ranking to first and win."
But, what if the caddy didn't have the necessary data to benchmark John's score against his competitors' scores? At best, he could have said",I think you're doing just fine; you should be somewhere near the top." And John wouldn't have had an actionable plan to become first.
Helping your business clients with industry-specific financial benchmarking is as important as John's caddy being able provide John needed data on his performance. To provide real value, you need industry data that's accurate, up to date, and relevant to your client's size and location.
Benchmarking John's performance to his competitors' performance is only meaningful if the scores on the leaderboard are reliable. Benchmarking ratios to inaccurate data provides no real value to the client.
The caddy wouldn't benchmark John's current score to his peers' scores from the previous year, or even the previous day. The same goes for your business clients. As most industries shift financially over the period of a year, it's important to compare your clients' current performance to the industry's current performance to direct them through challenging financial environments.
Another important characteristic of data is that it's relevant and pertinent. For example, it may seem obvious that John's caddy should be comparing John's performance to the performance of the players in the same tournament as John. It doesn't do John much good to have his score in Florida's sunny and calm tournament benchmarked against the score of an amateur player at a windy Pebble Beach course. Think of the climate at the golf course as the geographical location of a business and the golfer's skill level as a company's revenue size. It's critical to compare your clients to other companies in the same geographic location (region or state) as well as in the same revenue bracket.
John's caddy helped John improve his game and increase his ranking by benchmarking John's performance to quality golf data. Clearly, John is made better by having the caddy as a trusted advisor, but the caddy benefits too as John wins more competitions and earns larger winnings. In the same manner, benchmarking your clients' performance to quality industry data and providing valuable recommendations for improvement will help your clients succeed. But, just like John's caddy, you'll also benefit from your clients' increased success as you continue to advise them while they grow.
About the author:
Brad Schaefer is an Analyst at Sageworks, a financial information company that provides financial analysis applications to accounting firms and private companies. He received his degree from the Poole College of Management at North Carolina State University where he graduated summa cum laude.