How to Use Industry Benchmarks to Make Budgeting and Forecasting Easier
If you want to know how your business compares to the competition, you can find your answer in industry benchmarks. Benchmarks are industry standards, or guidelines, for key financial metrics. Basically, they represent the average of key numbers collected from many different businesses and then sorted by industry.
Industry benchmarks are a great tool to measure your company’s performance against similar businesses, but they can also be used to help startups and small businesses with forecasting and budgeting.
In this article, I’m going to dive into how you can use industry benchmark data to help you create your financial forecasts, and how you can then use benchmarks to drive growth in your business.
Check industry benchmarks before you start planning
How much should you spend on marketing? What should your profit be for each employee that you have on your payroll? How much should you be spending to deliver your product or service to your customers? How much should you allocate to spend on key areas of your business?
When you’re doing your first sales forecast and expense budget, it can be intimidating to be faced with these decisions.
This is where industry benchmarks come into play. Instead of just having to guess at your key business numbers, you can look at industry standards before you put your budget together.
For example, industry benchmarks can help you figure out what percentage of your sales most companies spend on marketing and what your margin should be on every sale.
If my friend Garrett were starting a bike shop, I’d have him take a look at his benchmarks. It turns out that sporting goods stores in the western United States have a 36 percent gross margin.
That means that the standard markup for everything Garrett sells should be at least 36 percent. So, when Garrett is building his sales forecast and expense budget, he knows that it’s a pretty safe bet to predict that his sales will be approximately 36 percent higher than what it costs to purchase inventory.
You can use this method for lots of other metrics, including profits, marketing spend, inventory to keep on hand, and cash flow metrics like accounts payable and accounts receivable.
Compare your forecasts against industry benchmarks
When you’re done with your initial forecast, you’ll want to check your numbers against industry benchmarks. How does your entire forecast stack up against the standards in your industry? Tools like LivePlan make it easy to do this with included benchmark data or you can buy industry benchmarks from companies like Abrigo’s ProfitCents.
If your forecasts are pretty close to industry benchmarks, that’s a pretty safe forecast. You know that well-managed businesses typically hit these numbers.
Don’t take industry benchmarks at face value
But, you don’t have to be just like every other business. Perhaps you’ve figured out how to run your business much more efficiently than your competition. Perhaps you don’t have to have the same kind of marketing expense as other companies because you’ve figured out a cheaper and smarter way to reach your audience.
In many cases, being different can be a good thing. If you can run your business better than the average business in your industry, that could make you much more competitive or help attract new investors.
The key here is to just make sure you acknowledge in your business plan how and why your business is different than the average business. If you’ve figured out how to run a better business, explain how and why you are different.
Why using industry benchmarks can help your business
If you’re still unsure about using benchmarks, here are a few reasons why it can help you launch your business successfully.
Investors care about benchmarks
When investors look at your business plan, there’s a good chance they’re going to see how your numbers compare to the standards in your industry. They simply want to make sure your projections are realistic. For example, if you forecast significantly more profit than is normal in your industry, they’re going to wonder why your numbers are different than industry norms.
Like I mentioned in the previous section, you don’t have to be a “normal” business. Being different is okay. Just make sure you acknowledge the differences and make sure your investors understand why your company is doing things differently than others in your industry.
Benchmarks can help guide your growth
When your business is up and running, you can keep using benchmarks to track your progress and manage your growth.
At this stage, you’ll want to compare your actual results from your accounting system to industry benchmarks and see how your results stack up to averages in your industry. If you find that your results are significantly different than the norm, you may need to dig into the reasons why things are different and perhaps consider changes in how your business is run.
Conversely, if your goal is to do much better than the typical business in your industry, you might look at your performance against benchmarks with an eye to see how much better than average you are doing.
It prepares you to run monthly plan reviews
Starting off by comparing your forecasts to industry standards is an effective way to make this type of review a consistent part of your business management. You can’t simply review industry benchmarks and your actual performance just once and expect your forecasts to remain accurate. It should be a regular process that helps you make active adjustments to your strategy and forecasts to stay on track.
As a rule of thumb, you should find yourself doing this on at least a monthly basis. In a crisis, or when first starting your business, you’ll want to do it more often to effectively manage any volatility. A few months in, you’ll likely utilize industry benchmarks less often but they can still be useful when making larger decisions or if you find your results varying wildly.
Industry benchmark examples for your business
While you’ll primarily utilize industry benchmarks for financial data, there are a handful of other components that can help you define your business strategy. These include:
- Technology — Performance metrics on a product-by-product basis that can be used for product development.
- Marketing — Budget allocation, customer satisfaction ratings, and advertising channels.
- Operational processes — Systems, tools, and supply chain metrics for production and internal operations.
- Market volatility — Changes in the broader market and how they directly affect your industry.
- Services — Average speed and satisfaction ratings for customer service, delivery, and any other customer-facing service.
- Government regulations — Healthcare, taxation, and other legislative costs and standards.
- Productivity — Automation, training, and other investments toward improvements in productivity.
Where to find industry benchmark data
Industry benchmarks are a fantastic tool for startups and existing businesses, but sometimes finding the data can be a challenge. Here are a few ways you can get the data you need:
- LivePlan: Our business and financial planning software includes industry benchmarks directly in the product so you can compare your forecast and your accounting data directly to the benchmarks. Comparisons are all automated, so once you’ve created your budget and forecast, you’ll see how you compare right away.
- Risk Management Association: This resource produces a regular report known as Annual Statement Studies. It covers balance sheets, income statements, and financial ratios compiled from over 250,000 financial statements from commercial borrowers. Banks and other financers leverage information like this to develop a baseline for financing applications, making it a great resource for those looking to apply for funding.
- BizMiner: Offers industry financial analysis benchmarks for thousands of business and industry market trends. You can narrow in on specific geographic areas and areas of business like accounting, valuation, credit analysis, and much more.
- Business Valuation Resources: A free online guide for business valuation resources compiled for appraisers, business owners, educators, and other professionals. This resource provides direct links to publications, individual trend guides, and much more.
- ReferenceUSA: Another resource for excellent industry data, but you’ll have to access this resource via your public library. Instructions for doing this are here.
- The U.S. Census: A great resource for broad industry data that is updated every few years. It does not have all the detail that the previous options have, but it’s a great resource, though, so worth a look.
Wherever you get your industry benchmarks, make sure to use them to make budgeting and forecasting easier for your business. Just knowing how you stack up to the competition can go a long way towards helping you grow your business smarter.
*Editors’ note: This article was originally published in 2019 and updated for 2021.