Benchmarking is an analysis where a company compares its performance against other businesses. Finance benchmarking relies mostly on the company’s fiscal performance as determined by accounting processes. Rather than use an accountant for this process, a business or finance analyst often engages in the finance benchmarking process. The use of financial ratios, cost of capital analysis, or other measures are involved. Companies can complete this activity as either a monthly, quarterly, or annual process depending on the needs and desires for this information.
Large organizations can create trends for the various departments and operations within the company. Finance benchmarking allows a company to assess whether or not each department is improving in terms of capital used for completing tasks. Operational and departmental managers often face requirements to achieve certain finance benchmarks in order to achieve bonuses. A business or finance analyst reviews the figures as required by owners or executives during this process. This allows the business to discover where improvements are necessary to meet internal benchmark goals.
Finance benchmarking often uses tools that are universal to all companies. The purpose for these tools is to strip away the differences between companies in terms of accounting figures or financial statements. For example, publicly held companies release financial statements and other monetary data that relate to a given period for business operations. It is often difficult to compare one company’s income statement to another's. The reason for this difficulty comes from the different accounting techniques or measures each company uses when preparing financial statements.
Financial ratios are a very common tool for finance benchmarking. Each ratio uses information from a company’s financial statement in order to achieve a result. The ratios strip away the differences in accounting policy by simply reducing the company’s financial activities to a single metric for a specific purpose. For example, looking at a company’s accounts receivable account may not produce very much usable benchmarking data. Computing an accounts receivable turnover ratio, however, can provide more insight when comparing two companies’ financial data.
The ultimate purpose of finance benchmarking is to discover current performance and how far it is from desired performance. For example, a company may desire a gross profit percentage of 30 percent. Computing information relating to this figure on a monthly basis allows a company to find out how far the company is from achieving its goal. Adjustments are then made in order to achieve the desired goal.