Why benchmarking matters: how do you really compare to your industry?
Most business owners have a pretty good gut feeling about how their business is going.
Sales are up, or they're not. Margins feel healthy, or they're getting squeezed. The team is busy, cash flow seems okay and there appears to be plenty of work coming through the door.
But here's the problem with gut feel: there's no reference point.
You might look at your numbers and think your business is performing well, but how do you actually know?
Is your profit margin strong for your industry?
Are your staffing costs where they should be?
Are you generating enough revenue for the number of people you employ?
Are your overheads too high, or perfectly normal for a business of your size?
This is where business benchmarking can become an incredibly useful part of your small business accounting. By comparing your key financial numbers against relevant industry benchmarks, you can get a much clearer picture of how your business is really performing - and where there may be opportunities to improve.
What is business benchmarking?
Business benchmarking is the process of comparing key financial and operational measures in your business against similar businesses or recognised industry standards.
Depending on your industry, useful benchmarks might include:
Gross profit margin
Net profit margin
Revenue per employee
Labour costs as a percentage of revenue
Overheads as a percentage of revenue
Average transaction or job value
Stock turnover
Debtor days
Marketing costs
Productivity or utilisation rates
These are numbers you may already be reviewing as part of your regular small business accounting and management reporting.
Benchmarking adds another layer: context.
For example, imagine your business has a net profit margin of 15%.
Is that good?
On its own, it's difficult to say. If comparable businesses in your industry are typically achieving around 8%, you're potentially performing extremely well. But if similar businesses are achieving 20–25%, your 15% margin suddenly raises a different question:
What's happening in your business that's holding your profit back?
That's where benchmarking becomes valuable.
It's not simply about finding out whether you're above or below an average. It's about identifying the right questions to ask about your business.
Benchmarking can uncover the things you've stopped noticing
One of the challenges of running a business is that certain costs and ways of working gradually become "normal".
You've always had that number of staff.
You've always charged roughly those prices.
You've always spent that much on vehicles, premises, administration or software.
Nothing looks dramatically wrong, so there's no obvious reason to question it.
A benchmark can challenge those assumptions.
Let's say labour costs represent 38% of your revenue, while comparable businesses in your sector tend to operate closer to 30%. That doesn't automatically mean you have too many employees. Instead, it gives you somewhere to start looking. Perhaps your pricing hasn't kept pace with wage increases. Maybe too much employee time is being lost to administration. Perhaps there are processes that could be automated or streamlined. Maybe you're taking on too much low-margin work.
Or your staffing level could be completely justified because your business deliberately provides a higher level of customer service than your competitors.
The benchmark doesn't necessarily provide the answer.
It tells you where to start asking questions.
What numbers should a small business benchmark?
The right measures depend on your industry, business model and goals. However, there are several areas our Nelson accountants believe are worth examining as part of good small business accounting and financial management.
1. Gross profit margin
Your gross profit margin shows how much money is left after accounting for the direct costs associated with delivering your products or services.
If your gross margin is significantly below comparable businesses, it may be worth investigating your:
Pricing
Supplier costs
Discounts
Wastage
Productivity
Product or service mix
Even relatively small improvements in gross margin can make a significant difference to your bottom line.
2. Labour costs
For many businesses, wages are one of their largest expenses.
Looking at labour costs as a percentage of revenue can help you understand whether your team is generating sufficient revenue relative to its cost.
If your labour percentage is high, the answer isn't necessarily cutting staff.
The bigger opportunity could be improving productivity, changing your pricing, introducing better systems or ensuring your team spends more time on profitable work.
3. Revenue per employee
As a business grows, it's easy to assume that adding more people automatically creates more capacity and more revenue.
It doesn't always work that way.
Tracking revenue per employee can help identify whether increases in headcount are translating into increased business output.
If your team is growing faster than your revenue, it could be a signal to investigate productivity, workflow, pricing or how work is allocated.
4. Overheads
Rent, insurance, software subscriptions, vehicles, administration and other overhead costs have a habit of creeping upwards.
Individually, each increase may seem insignificant.
Collectively, they can quietly eat into your profit.
Comparing overheads as a percentage of revenue can help identify whether the cost structure of your business is becoming heavier than it needs to be.
5. Net profit margin
Turnover gets plenty of attention in business, but revenue doesn't necessarily tell you how successful a business is.
A business can generate impressive sales while producing relatively little profit for its owner.
Your net profit margin tells you how effectively the business is converting revenue into actual profit.
Benchmarking that figure against comparable businesses can provide valuable insight into whether your business model is delivering the return it should.
Don't look at one number in isolation
This is where experienced small business accounting advice becomes particularly important.
No single benchmark tells the whole story.
Imagine your revenue per employee is below the industry benchmark.
At first glance, you might conclude that productivity is the problem.
But perhaps your business deliberately employs more people because you've built your reputation around exceptional customer service.
Or maybe your revenue per employee is lower, but your gross profit margin is significantly higher.
Business numbers work together.
That's why benchmarking shouldn't be treated like a scorecard where every number needs to match an industry average.
Instead, benchmarks should help you understand the relationships between your numbers and identify where further investigation could produce better results.
Benchmarks are a guide, not a rule
Every business is different.
Your location matters. Your size matters. Your customers matter. Your pricing model matters. Your industry matters. And the stage your business is at matters.
A growing business investing heavily in people, technology and systems may look very different from an established business that has spent 20 years refining its operation.
Similarly, a business competing primarily on price will have a different cost structure from one offering a premium service.
So the objective of benchmarking isn't to make every number match an industry average.
The more useful question is:
Do you understand why your numbers are different?
If your labour costs are higher because you've deliberately built a premium service business and your customers are willing to pay for it, that's a strategic decision.
If they're higher because of inefficient systems, unproductive time or underpricing, that's a potential problem - and an opportunity.
Knowing the difference is what matters.
Where do business benchmarking figures come from?
Benchmarking information can come from several sources, including industry associations, government economic data, accounting organisations and specialist industry reports.
Accounting and advisory firms can also use financial insights and experience across industries to help business owners understand what their numbers are telling them.
But the quality of the comparison matters.
A small Nelson business may not gain much from comparing itself with a large corporate operation in Auckland. Likewise, two businesses operating in the same industry can have very different business models.
The closer your benchmark is to businesses with a similar industry, size, structure and market, the more useful the comparison is likely to be.
Turn your benchmarking results into action
Finding out that your gross margin is below an industry benchmark is interesting.
Finding out why — and doing something about it — is valuable.
Benchmarking could lead you to:
Review your pricing
Renegotiate supplier costs
Improve staff productivity
Reduce unnecessary overheads
Identify your most profitable products or services
Improve systems and processes
Reduce debtor days
Change the type of work you're targeting
Set more meaningful financial KPIs
It may also confirm that you're performing particularly well in certain areas.
That's valuable too.
Knowing where your business is outperforming gives you greater confidence when you're making decisions about hiring, investing, expanding or pursuing new opportunities.
Small business accounting should help you make better decisions
Good accounting shouldn't only tell you what happened last year.
The real value comes from using your financial information to understand what's happening in your business now — and making better decisions about what happens next.
At Go Accounting, that's how we approach small business accounting.
Our team works with businesses throughout Nelson Tasman and across New Zealand, combining accounting and tax expertise with business advisory, financial management and strategic thinking.
Rather than simply asking:
"Are we doing okay?"
we want business owners to be able to ask:
Where are we performing well?
Where could we be doing better?
Why are our numbers different?
And what should we do next?
Those are much more valuable questions.
Because once you understand not only what your numbers are, but what they mean in the context of your business and industry, you can make decisions with far greater confidence.
Looking for Nelson accountants who understand business?
If you're looking for Nelson accountants who can help you get more from your numbers, talk to the team at Go Accounting.
We provide small business accounting, tax, bookkeeping, business advisory and coaching to help business owners understand their financial performance, identify opportunities and build smarter, better businesses.
Want to know how your business stacks up?
Talk to our team about benchmarking your business and identifying the numbers that really matter.