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How To Grow Your Business Using Key Performance Indicators And Industry Benchmarks?

Posted by Melinda Stevenson on 3 October 2021

How to Use Key Performance Indicators (KPIs) For Business Improvement, Risk Management, and Strategic Business Planning?

Using Key Performance Indicators (KPIs) for benchmarking helps you understand your competitors, assess how your business measures up, and find areas to improve.

You can use benchmarking to develop key performance indicators quickly, monitor your business performance, manage your target market changes more effectively, and understand your competitors to become more competitive. 

Using industry benchmarks in developing key performance indicators for the organisation will assist with risk management strategy and strategic business planning to grow your organisation.

How to Develop Key Performance Indicators (KPIs)?

The company's goals and objectives drive the key performance indicators (KPIs) of the business. KPIs are based on your business objectives and help you determine when you can achieve your organisational goals. KPIs are quantifiable components of your goals and objectives. It serves as the basis for monitoring and managing your business performance process.

KPIs used in benchmarking your business performance against industry standards is a way to assess the company's progress compared to competitors. Benchmarking data compared to the industry norms can also assist in implementing risk management strategies.

To ensure you stay on track, establish a KPI to determine if you will achieve your business objectives. Then examine the business performance monthly and use benchmarking to compare your progress against the industry norms. In this article, you will discover industry statistics and market reports to help you develop key performance indicators using benchmarking data.

According to Peter Drucker, regarded as the most influential management thinker of all time, if you cannot measure it, you cannot improve it. Peter Drucker is the book's author, Effective Executive: The Definitive Guide to Getting the Right Things Done. In this book, Peter Drucker identifies five practises essential to business effectiveness that can, and must, be learned, which are as follow:

1.      Managing time.

2.      Choosing what to contribute to the organisation.

3.      Knowing where and how to mobilise the company's strength for best effect.

4.      Setting the right priorities.

5.      Integrating all of the factors listed above with effective decision-making.

By using benchmarking and developing key performance indicators, you can take the organisation to the next level by tracking and achieving your company's goals and business objectives. It is also essential to review your progress ongoing against your competitors and industry standards.

How to Benchmark Your Organisation's Key Performance Indicators?

Suppose you are a small business owner who wants to grow your business and make it more profitable. In that case, you need to use the small business benchmarks for risk management and strategic planning. 

You can use this data for benchmarking your organisation and comparing its business performance against the competitors and industry average. This information will help in making strategic decisions for the business and provide guidance on improving the company's performance.

Business is inherently risky. Businesses grow and retain profitability when they can manage risks. Benchmarking your business enables you to discover potential threats to the organisation.

You can use the benchmarking data to develop a business plan to assist with strategic planning so that you remain focused and stay on track in growing your business. 

What is a Risk Management Strategy?

Risk management is a business strategy that identifies and assesses risks, which can either threaten your growth or reduce your profitability. A risk management plan helps you understand the potential risks, how they can affect your business development, and what you can do to avoid them.

To make it easier for you to implement a risk management strategy and ensure you comply with your industry's compliance regulations, consider using Compliance and Policies tools.

It will assist in streamlining the process to track and report on your compliance obligations easily. The Compliance and Policies tools can provide an early warning signal before a potential risk occurs by having centralised risk registers and developing KPIs to track business performance.

How Do You Determine Which Metrics (Key Performance Indicators) are Most Important for Your Business?

When you are assessing which metrics are the most important to track in your business, consider the following:

1. Use metrics that cover the essential aspects of the organisation using the Balanced Scorecard measures.

In general, what you measure is what gets done. According to the Harvard Business Review (HBR), the Balanced Scorecard measures drive business performance.

The HBR article discussed that senior leaders recognise that their organisation's measuring system significantly impacts managers' and employees' behaviour.

Additionally, executives acknowledge that traditional financial accounting measurements such as return on investment might provide deceptive signals for the ongoing improvement and innovation required in today's competitive market demands.

2. Develop key performance indicators to measure business drivers using the Balanced Scorecard.

The Balanced Scorecard enables managers to examine the business from four critical vital areas. The Balanced Scorecard connects performance measures based on the four fundamental questions as follow:

• What do our customers think of us? (From the customer's standpoint)
• In what areas do we need to excel? (From the company's internal point of view)
• Are we capable of continuing to improve and produce value? (From the organisation's innovation and learning standpoint)
• How do we present ourselves to shareholders? (From a financial perspective)

While the Balanced Scorecard provides information to top managers from four distinct perspectives, it minimises information overload by reducing the number of measures used. The Balanced Scorecard compels managers to prioritise a small number of essential performance indicators.

3. Consider how you can measure the company's progress towards its business goals.

4. Choose key performance indicators that show whether or not you are getting closer to your organisational goals or there is a lag in the business' progress.

5. Develop a guide and key performance indicators dashboards that only measure KPIs relevant to your organisation and specific business goals.

What is Benchmarking?

Benchmarking is a procedure that involves comparing your business' performance to that of a competitor in the same market. Using benchmarking will enable you to gain a complete picture of your business' performance and potential.

Benchmarking your business performance has several advantages as it enables you to perform the following:

  • Determine which aspects of your business can be improved and prioritise them.
  • Improve your understanding of your customers' needs.
  • Identify the strengths and weaknesses of the organisation.
  • Establish business objectives and assess the company's performance standards.
  • Properly monitor your business performance and manage change as required.
  • Assess who your competitors are to improve your competitiveness.

What Can a Benchmarking Strategy Do for Your Business?

Benchmarking your company's performance is a way to identify and analyse how well your business processes and operations work compared to your competitors. A benchmarking strategy can help an organisation compete more effectively by providing insight into improving the company's efficiency.

Benchmarking requires the business' key performance indicators to compare its internal resources and KPIs against the industry averages. 

What are the Benefits of Benchmarking Your Business Performance?

Comparing the business' performance using key performance indicators against other companies will assist in determining if problems are restricting the organisation's ability to make profits.

There could be specific restrictions in having a profitable business due to high operational expenses, inadequate sales, unpaid invoices, and other organisational process issues that must be addressed immediately as part of the company's risk management strategy.

How to Identify the Metrics That Matter Most in Business' Success Using Key Performance Indicators?

To identify the KPIs and critical metrics to use that matters most in building a successful business, compare the organisation to competitors by following these steps:

1. Decide on the benchmark you will use.

Create a series of targeted and specific questions that include the following:

  • Conduct research qualitatively or quantitatively.
  • Conform to the goals and objectives of your business plan.

When conducting market research, develop appropriate questions to ask your competition. The market research process will allow you to learn more about your customer base and industry. It enables you to target the right market better and help you in increasing your chance of success.

2. Identify your competitors.

Create a list of your competitors. The majority of organisations compare themselves to other businesses in their industry. Determine the following about the competition:

  • What are the effective strategies they utilise in their business?
  • What are the areas where their company excels?

3. Assess industry trends.

Analyse recent statistics to determine current industry trends, including the rate at which your industry is growing. Consider the developing trends that you are observing in your industry. Determine how you may plan to ensure that your organisation remains responsive to your customers' needs.

Where to Find Statistics Relevant to Your Business?

There are various ways to obtain data for benchmarking your organisation. Outlined below is a list of resources to find statistics and demographics data relevant to your industry and customers.

1. Contact Your Business or Industry Association

Contact your industry's business or trade association and request any information they may have regarding performance standards or benchmarks for the sector. Numerous trade associations maintain comprehensive data to compare your business' performance to industry norms.

2. Australian Taxation Office (ATO) Small Business Benchmarks

The Australian Taxation Office (ATO) small business benchmarks serve as a tool for comparing your business' performance to similar companies in your industry.

3. Yellow Social Media Reports

The Yellow Social Media Report is an annual publication that delves into Australia's small to medium-sized enterprises (SMEs) technology and eCommerce behaviours.

The report contains information about Australian consumers' experiences, such as their technology adoption and their capacity to use technology. The report can assist you in gaining a better understanding of consumer trends and buying behaviours and the Australian economy as a whole.

The Yellow Social Media Report is an annual survey of consumers and small and medium-sized organisations. It will help you determine how they use social media sites such as Facebook, LinkedIn, and Twitter.

The research data can help you determine how to reach your target customers on social media. It also provides an insight into how your competitors are marketing their products and services through different social media channels.

3.1. Consumer Report (Published in July 2020)

In the Yellow Social Media Report 2020 for consumers, you will discover how Australians use social media channels.

3.2. Business Report (Published in July 2020)

In the Yellow Social Media Report 2020 for businesses, you will discover how to grow your business in Australia using social media platforms.

The Yellow Social Media Report 2020 provides the survey results of over 2,000 Australian consumers and businesses. The report provides insights on how small and medium-sized companies can grow their organisations using social media.

According to the Consumer Report, nearly half of social media users (48 per cent) ignore advertisements on social media. About 53% reject sponsored posts from organisations that they do not follow.

Based on the research data, simply interrupting your target customers' attention on social media channels with promotional messages will become increasingly challenging.

4. Australian Small Business Key Statistics

The Australian Small Business Key Statistics demonstrates the critical role that small businesses play in the Australian economy.

The research analyses various factors such as business survival rates, small business exports, and innovation using data from the Australian Bureau of Statistics and other sources.

4.1. Australian Small Business – Key Statistics and Analysis Report

The Australian Small Business – Key Statistics and Analysis report published on 1st December 2012 gives an up-to-date snapshot of Australia's small enterprises, focusing on their characteristics and performance. 

The chapters cover various subjects grouped into two categories, namely, research and significant statistics.

4.2. Small Business Data Card

The Small Business Data Card published on 4th August 2017 contains critical information about Australia's small businesses, including employment, industrial sector counts, and economic output.

4. Clearly define your objectives.

After analysing the findings of your organisation's performance and the competition, establish some business goals. Based on the company's business strategy, your objectives should be as follow:

  • Specific
  • Measurable
  • Achievable

Ensure that your marketing plan includes a comprehensive summary of your business objectives.

5. Create a strategy for achieving your goals.

Define the actionable steps necessary to accomplish your objectives. In each action step, consistently include the following:

  • The task involved in achieving your business goals.
  • For each task designate an individual who will be responsible and accountable to complete the job.
  • Specify the deadline for completing each activity.

6. Monitor your progress, findings and outcome.

Monitor the results of the benchmarking efforts continuously and ensure consistent implementation of actions. Utilise an action plan which you can incorporate into your business plan. Refer to the action plan template shown below as a guide. 

 

 

Sources: MAUS and Business Victoria (State Government of Victoria)

 

Download Your FREE Implementation Action Plan and Strategy Plan Templates

 

Do you need help to collaborate with staff and keep your employees accountable easily? At the same time, project managing the implementation of your strategic plan.

If your answer is yes, systemising your organisation as a time-saving initiative using a business management tool could be the right solution for you.

How Can You Use Consumer Surveys to Grow Your Business?

The Consumer Report mentioned above highlights the balance required for businesses to deliver value through social media besides offering products and services to target customers. If the organisation is considered helpful and valuable, you will never go wrong in reaching your ideal customers.

Through ongoing value-added messages, you can organically increase your company's exposure to your target audience and thereby gaining more of their trust and respect for your organisation over time. The value-added information you provide makes your target customers more receptive when you promote your products and services to them.

When your target customers get exposed to your brand, they will notice you and enjoy and trust your brand due to the relationship you built with them over time. As a result, your sales offer will likely reach a more receptive audience.

It is essential to build rapport with your target audience before pitching to them on social media instead of advertising cold. It works best when you do it organically, which can take a long time.

Use social media advertising to promote non-sales related content to build familiarity and affinity with your target audience. It will assist in expediting the process of building rapport with your ideal customers.

How to Use Benchmarking to Improve Your Company's Performance to Grow Your Business?

Benchmarking enables you to determine whether your performance is superior or inferior to that of your competitors. It will demonstrate where improvements are required and how earnings can increase.

For instance, financial benchmarking data enables you to compare revenue and expenditures on advertising, rent, employees, and training against your competitors. By using benchmarking data, you could determine the following:

  • You are paying an excessive amount for rent and should consider negotiating a lower cost.
  • Due to your inventory expenses being higher than your competitors, you may need to eliminate waste or negotiate lower pricing with your suppliers.
  • Your income per employee is lower than the industry average, indicating that you may want to assess the staff's productivity and training required.

When using benchmarking data, conduct a thorough analysis of how your business is performing against the competitors once you have identified areas for improvement, design a strategy for implementing the changes.

Maintain communication with your employees and customers while you make business adjustments. Act swiftly to rectify the issue if any problems occur. Develop a better understanding of how to manage people during times of transition.

Benchmarking is a continuous process. After making improvements, re-evaluate your business to determine the impact on your key performance indicators. The ongoing evaluation of your business will indicate what is working and what areas need further improvement.

Benchmarking Guidelines

When benchmarking your business against competitors, consider the following:

  • Assess the innovative approaches you can develop to improve your business performance.
  • Solicit input from staff.
  • Investigate similar organisations' business process methodologies.
  • Make modifications to business processes based on your observations and research.
  • Evaluate the impact on the adjustments you have made.
  • Assess whether you possess the necessary business abilities to grow your organisation and seek help from a professional business adviser as required.

How to Use Benchmarking Before Purchasing a Business?

Benchmarking is critical if you are considering purchasing a business. Benchmarking enables you to evaluate the company's past performance in comparison to industry averages. Benchmarking provides you with information that allows you to determine if:

  • The organisation is an excellent investment.
  • The selling price is reasonable.

What are the Types of Benchmarking Available For Your Business?

To ensure that benchmarking produces the best results, decide which organisation to use to compare your business. Begin by selecting the areas of your business to benchmark and then look for companies that consistently perform well in these areas.

The businesses you choose to compare to your business may not necessarily be competitors if they are operating in another industry. You can consider measuring your organisation against the following:

  • Industry leaders
  • Comparable-sized companies in your industry
  • Comparable-sized companies in a related sector
  • Competitors
  • Industry standards

Identify business leaders by observation, word of mouth, reading published surveys, industry and business periodicals, and conducting online searches. By performing an online search for your industry, you can get a variety of benchmarking data.

Small company benchmarks published by the Australian Taxation Office (ATO) assists small business owners in assessing their performance compared to similar organisations in the same industry.

The ATO compiles typical benchmark ranges using data from tax returns and business activity statements. The financial ratios provide an easy way to compare a company's performance to other businesses in the industry.

How to Utilise the ATO Business Performance Check Tool?

Utilising the Business Performance Check Tool is the most straightforward approach to determining how an organisation performs compared to its competitors. When you submit your company's information in the tool, it will calculate and compare your data against the industry benchmarks.

To access the ATO Business Performance Check Tool, do the following:

  • Download the ATO app from the Google Play Store or Apple App Store.
  • Go to Business.
  • Select Business Performance Check.

How to Use the ATO Benchmarks?

Before filing your tax return, compare your company's performance against the benchmarks at least annually. You can then assess your organisational performance against your company's key performance indicators analysis.

Use the benchmark data as a reference to assist you in establishing and comprehending the industry standards. The benchmarking information is helpful, especially if you are new to the business.

How to Assess Your Business Performance Manually?

The basic formula for calculating each benchmark figure is as follow:

(Relevant Benchmark Figure ÷ Turnover) × 100 = Benchmark Percentage

How to Calculate the Cost of Sales to Turnover Benchmark?

To calculate the Cost of Sales to Turnover, divide the Cost of Sales by Turnover and multiply by 100.

Using the ATO's example, the Cost of Sales for a business was $137,983, while the Turnover was $456,790.

Calculate the Cost of Sales/Turnover benchmark percentage as follow:

(Cost of Sales ÷ Turnover) × 100

$137,983 ÷ $456,790 = 0.30207

0.30207 × 100 = 30.21%

What are the Best Metrics to Track for the Business to Predict the Problems Before It Happens?

Use the ATO's industry benchmarks metrics as a guide to track the business performance and assist in predicting potential organisational issues before they eventuate. The ATO's example below outlines how to:

  • Assess your business performance using the industry benchmarks.
  • Confirm that your business is performing within the industry benchmark range.
  • Determine what it means if your business' performance is outside the benchmark range.

The example uses the following terminologies:

  • Associated parties relate to the people and entities closely associated with you, such as relatives, partners in a partnership, directors of companies, or closely affiliated companies or trusts.
  • Cost of sales (excludes labour) is the cost of anything produced, manufactured, acquired or purchased, for either manufacture, sale or exchange in deriving the gross proceeds and earnings of the business.
  • Labour is salary and wage payments, including contractor payments (amounts exclude GST). It does not include payments made to associated parties such as labour provided by a business owner or business partner.

How to Calculate Income Tax Benchmark Ranges for a Coffee Shop?

The business operates a coffee shop with the following data on the tax return.

ATO Tax Return Key Benchmark Ranges

Calculate the key benchmark ranges as follows:

Calculate Cost of Sales to Turnover

Based on the tax return figures, the coffee shop owner's calculations are as follow:

Turnover is $705,200

Cost of Sales is $253,300

($253,300 ÷ $705,200) = 0.35918

0.35918 × 100 = 35.92%

The turnover of $705,200 places the coffee shop business in the highest turnover range (more than $600,000) for coffee shops.

The coffee shop's Cost of Sales to Turnover benchmark figure is 35.92%, within the benchmark range of 32% to 37% for the coffee shops industry.

Calculate Total Expenses-To-Turnover

'Total Expenses' is the total expenses reported on the tax return minus payments to associated parties. In the above coffee shop owner's scenario, the $50,000 paid to the associated party relates to the wages and superannuation payment.

Based on the example above, the calculations are as follow:

Turnover is $705,200

Total Expenses is $675,500 − $50,000 = $625,500

$625,500 ÷ $705,200 = 0.88698

0.88698 × 100 = 88.70%

The turnover of $705,200 places the coffee shop business in the highest turnover range for coffee shops.

The Total Expenses-to-Turnover benchmark figure is 88.70%, within the benchmark range of 87% to 94% for the coffee shops industry.

Based on the results, the business owner is confident that the company's record-keeping process and operations are in order.

Click here to discover the ATO benchmarks for your industry.

How to Review the Benchmarking Results?

Examine your benchmarking results and, if necessary, take action based on the data you obtain. After examining your benchmarking results, assess the implications of being above or below the benchmarks.

What To Do if Your Results are Outside of the Benchmark Range?

Excessive deviation from the benchmark ratio does not necessarily indicate that something is amiss. If your organisation falls beyond the industry's benchmark range, the ATO recommends doing the following:

  • Examine your record-keeping practices. Check if you excluded some income and expenses by mistake.
  • Verify that your tax returns and business activity statements accurately reflect your revenue and costs.

Suppose you discover errors after filing your tax return. In that case, they are simple to rectify by supplying the correct information through voluntary disclosure.

What To Do if Your Results are Inside of the Benchmark Range?

If your business operates within your industry's benchmark range, generally, there is no additional work required. In this instance, you can do the following:

  • Assess if you can find areas for cost and expense reductions and take profit margins into account to improve your business' performance.
  • Determine whether you need to improve accounting or business practices to boost profitability and improve the company's performance.

How to Track the Progress of Your Business Goals and Objectives?

Benchmarks are only part of the analysis of your business. You can also use business viability assessment tools such as business health check calculators, pricing calculators and financial ratios to help you stay on top of your business.

Cash Burn Calculator

Using a business health check calculator such as Cash Burn Calculator can help you closely monitor your cash position. The Cash Burn Calculator will help ensure your monthly income can cover your monthly expenses.

Source: MAUS

Pricing Calculators

Consider reviewing your prices using pricing calculators such as mark-up, costing and charge per hour if you deliver a service rather than a product. Refer to the templates shown below for more information on what pricing options are appropriate for your business.

 

 

Source: Business Queensland (Queensland Government)

 

Download FREE Interactive Pricing Calculators Templates

What are Some of the Best Metrics to Use for Tracking Small Business Growth?

Use vital financial ratios to determine the different metrics you should use to track the growth of the business.

Key Financial Ratios

You can monitor your key performance indicators by reviewing your financial performance, such as using different types of financial ratios. Ratios simplify financial and non-financial data to analyse and enhance your organisation's performance.

The following table summarises key financial ratios, what they mean, and how to calculate them.

Financial Ratios

Indicators

Calculations

Gross Profit Margin

% of Gross Profit on Sales

(Gross Profit x 100) ÷ Sales

Net Profit Margin

% of Net Profit on Sales

(Net Profit Before Tax x 100) ÷ Sales

Material to Sales

% of Sales Dollars Spent on Materials

(Direct Materials x 100) ÷ Sales

Labour to Sales

% of Sales Dollars Spent on Labour

(Direct Labour x 100) ÷ Sales

Overhead Expenses to Sales

% of Sales Dollars Spent on Overhead Expenses  

(Overhead Expense x 100) ÷ Sales

Stock Turnover

Number of Times Stock Turns Over

Cost of Goods Sold ÷ (0.5 x Opening + Closing Stock)

Debtors Turnover

Average Time to Collect Debts

(Debtors x Days in Period) ÷ Credit Sales

Working Capital

Liquidity of Business

Current Assets ÷ Current Liabilities

Liquidity (also known as Quick Assets Ratio)  

Solvency of Business

Current Assets (Minus Stock) ÷ Current Liabilities

Source: Business Queensland (Queensland Government)

Why Systemising Your Business is Important to Achieve Business Objectives?

The benchmarks reports and statistics outlined in this article highlight that managing risks effectively and growing a business could be challenging without the appropriate systems to ensure you have accurate record-keeping practices and efficient processes.

The different benchmark reports and statistics outline the importance of nurturing customer relationships while maintaining effective business operations. By systemising your business, you can provide a consistently high level of customer service when following the set of company standards and ensuring the service quality is maintained.

Having a systemised business will assist the organisation in quickly adapting to changing customer needs and embracing technological advancement as a sustainable way to grow the company.

Without appropriate systems in place, the business owner becomes the business. The fundamental idea is to concentrate on developing your business to where you are no longer required.

When distinguishing between working on the business and starting a business, it is critical to remember that it is not yet a fully developed business if your business is dependent on you.

Michael E. Gerber outlined this philosophy in his book, The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It.

 

Source: Amazon

Further Reading

Michael E. Gerber said in numerous interviews and presentations the statement below:

"If your business depends on you, you don't own a business – you have a job. And it's the worst job in the world because you're working for a lunatic!" – Michael E. Gerber, The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It.

The E-Myth Revisited book's concept is simple, which revolves around the idea that to become a successful entrepreneur, you need to work on your business, not in your business.

When business owners work on their business instead of in their business, they will see a difference in how to go about growing a successful company. The E-Myth Revisited is an excellent book for entrepreneurs looking to work outside, not inside the business.

The E-Myth Revisited is a book that guides creating and managing a sustainable and profitable business. It offers great tips for entrepreneurs and small business owners alike. It is a valuable guide for anyone wanting to start their own company and those serious about improving their ability to run their own business.

Conclusion

If you need help understanding how to improve your business performance, consult a business adviser or tax professional.

To achieve a long-lasting successful business, you cannot continue to be a technician who is the person doing the technical work in the company and the person who operates the business.

You cannot employ others to create your business on your behalf and then hope they do so correctly. It would be best if you concentrated your efforts on growing the company to its full potential. You must invest time in making the organisation system-dependent and for the business to not rely on anyone, even yourself, to operate effectively.

Recognise that a business has matured when it has a clear vision for the future and an operations manual covering all aspects of the business. This company development technique applies to any business in any industry. It can significantly relieve you of the burden of being the primary salesperson, marketer, bookkeeper, designer, and product developer.

First, you may need to do all these things as you start a new business. However, it is essential to focus on finding the appropriate individuals to delegate some of the responsibilities. You can remove yourself from those positions by delegating it to others, such as virtual assistants, and you can hold them accountable.

Disclaimer

This article does not constitute legal, business, financial, or accounting advice. All readers must seek the assistance of qualified professionals as required. This article contains affiliate links, and if you make a purchase using our links, we may receive a commission at no additional cost to you.

Author:Melinda Stevenson
About: Dynamic Zenergy provides specialist business advisory consulting services. Our mission is to accelerate your business growth by increasing your revenue streams and profitability. We help you in systemising, automating and improving processes by leveraging business management software and outsourcing services so that your organisation can thrive and to maximise the return when exiting/selling the business.
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