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Benchmarking your business June 2019

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At June’s lunch and learn event, business expert T.D. Winters explored how you can effectively manage and measure growth for your company using the metrics that matter.

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Benchmarking your business June 2019

  1. 1. Benchmarking Your Business
  2. 2. WHY BENCHMARK? PURPOSE: Benchmarking your financial performance uncovers opportunities to improve your company’s profitability and cash flow. PROCESS: Comparing your company’s results on certain key performance measures against your past results or the against peer companies in your industry to identify opportunities for improvement. (Internal and External)
  3. 3. Types of Benchmarking Internal benchmarking: comparing key financial and performance indicators within your company, including comparisons to history, budgets and within divisions or even projects. External benchmarking: comparing key financial and performance indicators to other companies within your industry.
  4. 4. Key Performance Ratios *Liquidity* Efficiency & Profitability Leverage
  5. 5. Liquidity Liquidity ratios may be the most important tools a business owner can use to measure the financial health of their business. These ratios are important to internally and externally benchmark your business. The most utilized ratios are the Current, Quick and Days Cash on Hand. • Current ratio – measures your current assets against your current liabilities. Do you have what you need to meet the obligations in place? Current Assets ÷ Current Liabilities
  6. 6. Liquidity Ratios, continued Some current assets may be more liquid than others so it’s important to calculate the QUICK ratio. • Quick ratio - reflects the extent to which the more liquid assets are available to satisfy current liabilities. (Cash & Cash Equivalents, Short Term Investments, NET Trade Receivables) ÷ Current Liabilities The higher the ratio, the more cash a business has to pay it obligations and maintain a “cash cushion”.
  7. 7. Liquidity Ratios, continued • Days Cash on Hand - Days cash on hand measures the number of days that an organization can continue to pay its operating expenses, given the amount of cash available. Essentially it is the number of days a company can stay in business if it makes no sales and doesn’t collect any money from customers. The higher the number of days cash on hand, the better. Cash on Hand ÷ ((Operating Expenses – Noncash Expenses) ÷ 365)) This is an effective tool for planning, especially for season or cyclical businesses.
  8. 8. Efficiency ratios measure how effectively you’re using current assets and managing current liabilities. They include: • Backlog to working capital • Months in backlog • Days to liquidate (days in accounts payable, days in accounts receivable, days in inventory) • “Bank” efficiency ratio, which can be useful in other businesses as well. This is the ratio of overhead costs to net revenue (e.g. sales revenue less cost of goods). Profitability ratios, assess your ability to generate earnings compared to your expenses. In particular, you’ll Efficiency and Profitability Ratios
  9. 9. Efficiency and Profitability, cont’d Look specifically at Return on Assets (ROA) - (Net Earnings ÷ Total Assets) AND Return on Equity (ROE) - (Net Earnings ÷Total Net Worth) These two sets of information will help you get an idea of how well your company uses its money and assets to generate profit. This information is necessary when applying for a business loan, and can provide useful metrics for you to track your company’s health and growth year over year. A single set of ratios at one point in time might will be revealing, but tracking these trends over time will let you know if growth may be masking creeping inefficiencies or the erosion of profit margins.
  10. 10. What Next? • Understand the limitations of industry comparisons and the importance of historical comparisons. • Build a list of key performance indicators for your company and build goals around improvement. • Seek a second opinion from a CPA with experience in your industry if you have concerns about the accuracy of your data. • Ask your relationship officer at your bank for industry ratios for companies that are similar to your makeup.

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