By Entrepreneur Staff


Benchmark Definition:

A standard or point of reference in measuring or judging the current value or success of your company in order to determine your future business plans

The process of benchmarking your business to evaluate your current success can be quite involved, requiring the collection, analysis and comparison of mounds of data on everything from your recent sales growth to production capacity. However, you may want to start the process by simply sitting down, looking around and asking yourself if your business seems to be where it should be right now. Your gut-level intuition of how the business is doing may be more valuable than even the most detailed analysis.

Then take a look at your sales. You probably won't have to consult any financial statements or even think for more than a second or two to recall your business' sales for the most recent month and year. Sales revenue is the most common measure of a business' size and level of success. However, don't stop after you look at your total sales figure. Break that figure down as much as you can. Looking at your sales by lines of business, product lines, individual products, varieties of individual products and price points of individual product varieties can be far more useful than just knowing that sales are up.

Next, you might want to take a look at exactly how profitable you are. And it's not enough to just know whether you are or are not making money overall. You should also look at your current profitability in light of several ratios, including gross margin (sales minus cost of goods), return on equity (profit divided by net worth), and return on investment (after-tax net profits divided by total assets).

And profits aren't the only way to measure a company's success. You should also be aware of how much your company is worth. One way to do this is to check out an updated balance sheet. That figure at the bottom for net worth, representing assets minus liabilities, is a good indicator of whether you've built value in your business--and if you have, how much.

Don't stop your valuation checkup with your balance sheet, either. There are a few other ways to measure value. One of the most important valuation techniques is based on expected future cash flow, or how much cash the company should be able to throw off for you in the next several years. Businesses are typically valued as a multiple of their future cash flows, but different industries and types and sizes of businesses use a variety of indicators. To find out what rule applies to your industry, check with your trade association.

Next, take a look at your market share. Try to break down your markets and products as finely as is practical to get a realistic view of your market share. The results can be an accurate indicator of the most likely direction you should head in to achieve growth.

You should also consider your employees. Having a work force of skillful, motivated employees is essential to a small company's ability to deal with globalization, shorter product cycles, evolving information technology, and the other challenges of modern business. At the same time, the pressures of competition mean that no company can afford to have more employees on its payroll than it needs.

When it comes to employees, the basic question you're trying to answer is this: Do my employees have the capability to carry out the work that is and will be required of them? You'll have to look at a variety of factors. Some key factors used in measuring work force quality include: number of years of education of a typical worker, average length of time a worker has been with your company, and average length of time a worker has worked in your industry. You may also look at defect rates, turnover rates and absenteeism records to determine the quality and motivation of your work force. Work force quality can't be expressed as a single number, but it's a key variable in plotting your company's future growth.

Location is your next element to evaluate. Entrepreneurs in fast-food and similar industries know that these businesses aren't just about providing good products, good service and good prices. They're also about real estate because the companies with the best locations tend to have better sales than their competitors, all other things being equal. Location is also important for companies in industries from transportation to health care. Here are five factors to use in evaluating your current location:

  • Quality of life. Does your current location provide a pleasant work environment?
  • Labor. Can you find the workers you need to prosper and grow?
  • Market. Will the local market provide adequate additional opportunity to grow?
  • Distribution. Can you get enough raw materials--and ship out enough finished goods--at your current location?
  • Business costs. Are the costs of doing business low enough to support growth where you are?

Before you can decide where your company's going, you need to know what your current capacity is. Here are some questions to ask to help you figure it out:

  • Labor. What's your average productivity per employee?
  • Equipment. What's the maximum throughput you can achieve with your existing plant and machinery?
  • Supply. Can you obtain more raw materials and supplies than you're getting now?

Different businesses will have different answers to these questions. They'll probably have different questions as well. For instance, a travel agency may have very little limitation on supply when it comes to the airline tickets it can sell to its customers. However, there may be significant limitations on average productivity per employee for that agency. So take a look at your capacity and try to measure it in the way that makes sense to you. The measurements you make will come in handy when you're studying how to grow in the future.

Finally, you have to remember that a business is not a static entity. It's always growing, shrinking or just about to change direction and do something different from what it has been doing. One of the most important measures of how you're doing is determining exactly whether and how you've been growing. This affects your future prospects for growth. If you've been growing at double- or even triple-digit percentage rates every year, then it may be time to take a breather rather than go in search of faster growth. On the other hand, if your business has seen declining sales, shrinking markets and overcapacity, then growth may be something you won't be able to accomplish without radically repositioning your company.

Don't stop after looking at the top-line sales growth you've experienced. Also examine whether and how fast you've been adding employees, expanding to more locations and taking on new customers. Find out which products and services have been growing at the fastest rates. Determine whether new staff positions have tended to be in administrative functions or in production or sales. Evaluate all the new locations you've added. Are they in high-traffic spots with strong demographics that are increasing the average quality of your outlets? Or have you been growing without careful planning? Answering these questions will do a lot to guide your plans for future growth.

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