In today’s episode of ‘From the eLearning Trenches,’ we asked one of our learners, a partner in public practice, to review the benchmark data available to their firm. To what extent do they believe this data is used for the purposes of financial analysis and reporting? What steps could be taken to get more value from this data.
Learner Reflection
Our firm holds a lot of potential benchmarking data: We have a plethora of similar industry clients, that have both performance information at an operational level, as well as historical data in the form of previous years’ annual accounts.
Although currently we are not using this information to the ability that we could, training to learn to reflect on our client’s performance, and analyse these tools and data to provide more analytical and benchmarking information to our clients.
When thinking about what steps we could take, the initial one would be to focus on GP% ratio.
The gross profit ratio is a critical financial metric that indicates a company’s profitability and efficiency in generating revenue. The gross profit ratio reflects how efficiently a company is using its resources to produce goods or services. A higher gross profit ratio suggests that a company is effectively controlling its production costs and maximising its revenue.
The gross profit ratio can be used to monitor a company’s performance over time. By tracking changes in the gross profit ratio, management can identify trends and take corrective actions if necessary. It also assists in making strategic decisions regarding pricing strategies, cost management, and product mix. A consistent and healthy gross profit ratio is indicative of a financially sound company. It provides assurance to creditors, investors, and other stakeholders about the company’s ability to cover operating expenses and generate profits.
The gross profit ratio can be used in financial forecasting and budgeting processes. By projecting future sales and estimating production costs, companies can use the gross profit ratio to forecast future profitability and cash flow. We can have most industry benchmark from Stats NS to compare the company’s gross profit ratio to the general figure of entire industry to monitor the business performance and health.
The following steps can be taken to get more value for clients.
- To help client understand what the gross profit ratio means for business, we can show the ratio in the report and add some explanations and comments to extract the figure.
- We can also compare the client’s gross profit ratio with industry benchmarks or competitors’ ratios. This comparison can highlight areas where the client may be underperforming or excelling relative to their peers, guiding strategic decisions.
- Track the client’s gross profit ratio over time to identify trends and patterns. Analyse the reasons behind fluctuations in the ratio, such as changes in pricing, cost structures, or sales volumes, and provide insights for improvement.
- Maintain open lines of communication with clients and collaborate closely to address challenges and capitalise on opportunities identified through the analysis of the gross profit ratio. Act as a trusted advisor and strategic partner in driving business growth.
Feedback from our experts
Benchmarking is a powerful tool for accounting firms, enabling them to compare a client’s financial performance against industry standards or historical data. However, like any tool, it comes with its own set of benefits and challenges.
The Benefits
- Performance Improvement: Benchmarking helps identify areas where a client can improve by comparing their performance to industry standards. It can highlight inefficiencies, opportunities for cost reduction, and potential areas for growth.
- Goal Setting: Benchmarks provide a reference point for setting realistic and achievable financial goals. This helps in crafting strategic plans that are grounded in industry realities.
- Competitive Advantage: By understanding where a client stands relative to their peers, accounting firms can offer insights that enhance the client’s competitive position.
The Challenges
- Diverse Business Models: Every business is unique, with its own operational nuances, market conditions, and financial structures. This diversity can make it difficult to find relevant and comparable benchmarks.
- Access to Accurate Benchmarks: Obtaining appropriate and reliable industry benchmarks can be challenging. The data may be outdated, not specific enough, or not entirely representative of the client’s business environment.
Value of Internal Benchmarks
When external benchmarks are hard to come by, internal benchmarking becomes invaluable. Here are two key approaches:
- Benchmarking Against Prior Year Performance: Comparing a client’s current financial data with their past performance helps identify trends and areas of improvement. It can reveal the effectiveness of past strategies and highlight consistent issues needing attention.
- Consolidating Similar Client Data: Aggregating financial data from similar clients within the firm can create a relevant benchmark. This internal data pool can be particularly useful for firms specialising in certain industries or sectors.
Steps to Get More Value from External Benchmark Reports
To maximise the benefits of external benchmarks, accounting firms can take the following steps:
- Select Relevant Benchmarks: Ensure the benchmarks used are relevant to the client’s industry, size, and market conditions. This may involve accessing specialised industry reports or databases.
- Regularly Update Benchmark Data: Industry standards and market conditions change over time. Regularly updating benchmark data ensures that comparisons are accurate and reflective of current trends.
- Integrate with Internal Analysis: Use external benchmarks in conjunction with internal performance data. This hybrid approach can provide a more comprehensive understanding of the client’s position and highlight areas that require attention.
Key takeaway: By carefully selecting relevant benchmarks, keeping data up-to-date, and integrating external reports with internal analyses, accounting firms can provide their clients with valuable insights that drive performance improvements and strategic growth.
This assessment task and response is taken from the Business Analytics for Managers eLearning course (assessment task 3.2). Click here to explore this course
Also, take a look at the Virtual CFO Essentials eLearning course.
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