Discover How You Can Use These Metrics to Measure Performance, Increase Profit and Upgrade Your Financial Strategy
Every industry has financial benchmarks. Knowing what your industry benchmarks are (and how your business stacks up compared to your competitors) is not only a best practice — it’s a key factor in sound financial management.
Why Are Industry Benchmarks Important?
The primary reason to know these financial benchmarks is to help you monitor your company’s performance for your personal education and use.
But there’s another key reason why you should pay attention to industry benchmarks: Financing.
If you ever need to secure financing, lenders will use these statistics to compare your business performance against the industry as part of their loan underwriting process. This information can make or break your chances of securing conventional financing.
Use your industry benchmarks to set annual performance goals. Then, regularly benchmark your company’s performance against your industry. From there, you’ll be able to easily assess your progress and company’s health – whether or not you’re actively pursuing financing.
3 Critical Financial Benchmarks Every CEO Should Know
- Gross Profit
Gross Profit is the amount of profit that you can directly attribute to the product or service sold. To calculate your Gross Profit, take the price at which you sold your product or service, and then subtract any direct expenses associated with that product or service.
Once you’ve calculated your gross profit, compare it to your industry benchmark. If your gross profit ranks on the lower side, you may need to consider adjusting the prices on your products or services – or take a closer look at how much you’re spending to service clients.
- Net Profit
Net Profit is the amount of your profit left after paying all of your expenses, including overhead for items not specifically related to the cost of your product or service.
The category of “operating expenses” includes:
- Salaries that are not directly attributed to the cost of producing or delivering your product or service, such as a marketing manager or executive assistant
- Office rent
- Association membership fees
- Team training and education
After determining your net profit, compare it to the industry average. For example, if you are generating a net profit of 10 percent, but the industry average is 18 percent, you know that you have room for improvement. If you’re seeing a loss in net profit, the likely culprit is our next industry benchmark.
- Operating Expenses
Like gross and net profit, operating expenses are another industry average that is tracked. A general rule of thumb is to devote no more than 30 percent of your annual budgeted revenue to operating expenses.
If you want to know if you’re spending too much to run your business, determine your operating costs in relation to your competitors. Once you do, you’ll be able to see where you might be wasting money and potential areas where you can trim expenses.
6 Additional Important Financial Ratios to Consider
The top 3 critical industry benchmarks will give you an overview of your company’s performance. But there are other benchmarks you can use — and that banks use when evaluating financing applications.
Here are 6 additional financial ratios that will help you fully evaluate the performance of your business and identify potential problems.
- Debt-to-Asset Ratio – Shows the percentage of a company’s assets financed by creditors
- Debt-to-Equity Ratio – Measures how much debt a business is carrying as compared to the amount invested by its owners
- Quick Ratio – Indicates a company’s ability to meet immediate creditor demands, using its most liquid assets
- Current Ratio – Indicates whether a business has sufficient cash flow to meet its short‑term obligations, take advantage of opportunities and attract favorable credit terms
- Return on Investment – How much profit is generated compared to how much a company has invested to generate those profits
- Return on Equity – Indicates the amount of after-tax profit generated for each dollar of equity
Your Next Step to Use Industry Benchmarks
Understanding where your business stands in relation to your industry benchmarks is a vital part of any financial strategy. The sooner you know where you stand, the sooner you can take corrective action to get your company’s financials where you want them to be.
To benchmark your company’s performance against industry averages, start by identifying your North American Industry Classification (NAICS) code. You can look this up here.
Once you know your NAICS code, book a complimentary, no-obligation Financial Strategies & Solutions Session with one of our highly trained virtual CFOs. We’ll help you in identifying your benchmarks, how you measure up, and how to adjust your strategic financial plan.