Benchmarking your business for greater performance

Benchmarking can help you improve your small business's performance. It allows you to measure and assess your business against competitors in your industry and helps you identify areas for improvement.

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    Benchmarking to improve performance

    Understanding the basics of benchmarking your business will give you the information you need to monitor and improve your business's performance.

    Benchmarking analyses the details of how your business compares to competitors in the same industry. Doing this will help highlight improvements you can make to:

    • increase your profit
    • reduce your costs
    • better manage your business operations.

    There are many areas that you can use to benchmark your business, including:

    • gross profit
    • number of sales and customers
    • operating costs such as staff and rent
    • business performance.

    You may discover that:

    • you're overspending on operating costs—if you're spending too much on rent for example, consider negotiating lower rates
    • your inventory costs are higher than your competitors—consider reducing waste or negotiating better rates from your suppliers
    • you're not managing your staff costs—if your income per employee is lower than the industry average, examine productivity and training.

    Remember:

    • Keep your employees and customers informed as you make changes to your business.
    • Act on problems immediately. Learn more about managing people through change.
    • Benchmark your business regularly. This will allow you to see the results of any changes you have made.

    Benchmarking tips

    • Think creatively about ways to improve your business.
    • Ask staff for their input.
    • Study similar businesses and how their processes work.
    • Implement changes based on observations and research.
    • Evaluate the results of the changes you have implemented.
    • Review whether you have the business skills to improve your business.

    Benchmarking before you buy

    If you are considering buying a business, benchmarking is an essential resource.

    Benchmarking can help you to measure the past performance of a business to see how it performed against industry averages. The information you gain from benchmarking makes it easier for you to decide if:

    • the business is a wise purchase
    • the purchase price is reasonable.

    Find out more about buying a business.

    Developing relevant key performance indicators (KPIs)

    Setting key performance indicators (KPIs) that support your financial management needs is essential.

    When developing your KPIs you should think about:

    • your overall business outcomes, vision and goals
    • your business's outputs—these can be key business processes or specific areas of your business.

    KPI tip

    It's important to focus on KPIs that are relevant to your business. Assess what type of data can help your business and its operations.

    KPIs that align with your business's vision and objectives will also help the entire team to see how their roles contribute to overall company performance.

    KPIs that support business outcomes

    Your business plan will set out an overall vision and a series of objectives. Ideally these objectives should be:

    • specific to your business
    • easily measurable
    • achievable
    • relevant
    • timed.

    Your KPIs and benchmarks need to relate directly to these objectives. They will help you monitor:

    • essential performance results which underpin business vision and mission
    • current strategic goals or objectives.

    KPIs that support business outputs and processes

    A successful strategy to improve your business requires benchmarks to align with KPIs. It also allows you to direct your focus towards areas that need more work and supports reportable outcomes for teams and individuals.

    Effective KPIs—which are relevant to key business processes and function—can be used to monitor:

    • overall productivity of your business's end-to-end processes
    • the systems, operations and processes that have the greatest impact on business performance
    • specific performance of individual steps within your business process, and how critical these are to your results
    • the specific performance of teams and individuals.

    For example, if you run a bakery, efficiently turning raw materials into baked goods is essential to maximising your profits.

    KPIs that help the business assess the efficiency of the production process—like identifying wastage or spoilage—are important and relevant performance measures.

    Learning from benchmarking data

    Example: Cappuccino Craft

    In this example, Bernard has recently purchased a cafe called Cappuccino Craft. The example will show you how to use benchmarking to:

    • measure your performance against industry standards
    • provide new ideas and innovation
    • motivate you to introduce change into your business.

    Bernard owns Cappuccino Craft, a coffee lounge and gallery. He believes Cappuccino Craft could perform better but has followed the lead of the previous owner so far.

    He sees that benchmarking could help Cappuccino Craft improve, so he:

    • contacts his industry association to obtain information about industry benchmarks
    • buys financial data from a commercial benchmarking business
    • subscribes to a benchmarking service.

    A profit driver is a business factor that has a significant impact on your bottom line. Bernard identifies his profit drivers as:

    Bernard reviews his benchmarking data and puts the key information about his profit drivers into a table.

    (The percentages are of total income, except for those relating to 'Sales and display area %')

      Business 1 Business 2 Industry average Cappuccino Craft
    Total income $204,400 $210,000 $186,923 $154,400
    Cost of goods 45.20% 46.90% 46.78% 53%
    Total overheads 32.30% 29.40% 31.28% 27.50%
    Net profit 22.50% 23.70% 21.93% 19.50%
    Trading hours per week 46 48 44 38
    Sales and display area 90% 92% 87% 75%

    Bernard uses the data to take the following actions.

    Bernard sees areas where the business is performing well (e.g. overheads) and which areas are underperforming, including:

    • cost of goods
    • trading hours
    • display area.

    Most of Bernard's benchmarking data is financial. He can gain more information about opportunities by:

    Causative factors affect profit drivers in either a positive or negative way. For the purposes of benchmarking, consider factors that regularly occur or have an ongoing impact on your business operations.

    Bernard investigates which factors are causing Cappucino Craft to fall below the benchmark.

    Cost of goods: reduce

    Bernard learns his staff throw out a lot of uneaten food each week. He also conducts a series of stocktakes and talks to other local business owners. He discovers his stock losses are significantly greater than other stores.

    Causative factors:

    • an unsophicated ordering system leading to excess food wastage
    • stock loss through theft.

    Trading hours: extend

    Customer survey results show majority of his customers would like the coffee shop open on weekends.

    Bernard's staff also tell him they suggested to the previous owner that trading hours should be increased.

    Causative factor:

    • The previous owner played competition golf on the weekend and Bernard thinks that's why trading hours were not extended.

    Display area: increase

    The previous owner reduced the gallery display area to increase the office space.

    Bernard has a home office and doesn't need a large office in the gallery.

    Causative factor:

    • Bernard has made minimal changes to Cappuccino Craft, even though he does not need the large office that the previous owner did.

    Bernard is ready to make changes to the factors that are having a negative impact on his profit drivers. He plans to:

    • install a security system and cameras, and provide staff training on how to reduce shop theft
    • implement a more efficient, 'just-in-time' ordering system to reduce the amount of food spoilage and waste
    • open later in the day Monday to Friday and open on weekends, extending hours of operation to 50 hours per week
    • remove the office extension to increase the gallery display space.

    Bernard reviews his business plan and includes these changes, budgeting for the extra costs and projecting increased income from additional sales.

    Benchmarking helped Bernard to improve the performance of his business.

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