You already may have reviewed a preliminary draft of your company\u2019s year-end financial statements. But without a frame of reference, they don\u2019t mean much. That\u2019s why it\u2019s important to compare your company\u2019s performance over time and against competitors.
\nConduct a well-rounded evaluation
\nA comprehensive benchmarking study requires calculating ratios that gauge the following five elements:
\n1. Growth. Business size is usually stated in terms of annual revenue, total assets or market share. Is your company expanding or contracting? An example of a ratio that targets changes in your company\u2019s size would be its year-over-year increase in market share. Companies generally want to grow, but there may be strategic reasons to downsize and refocus on core operations.
\n2. Liquidity. Working capital ratios help assess how easily assets can be converted into cash and whether current assets are sufficient to cover current liabilities. For example, the acid-test ratio compares the most liquid current assets (cash and receivables) to current obligations (such as payables, accrued expenses, short-term loans and current portions of long-term debt).
\n3. Profitability. This evaluates whether the business is making money from operations \u2014 before considering changes in working capital accounts, investments in capital expenditures and financing activities. Public companies tend to focus on earnings per share. But smaller ones tend to be more interested in ratios that evaluate earnings before interest, taxes, depreciation and amortization. EBITDA ratios allow for comparisons between companies with different capital structures, tax strategies and business types.
\n4. Turnover. Such ratios as total asset turnover (revenue divided by total assets) or inventory turnover (cost of sales divided by inventory) show how well the company manages its assets. These ratios also can be stated in terms of average days outstanding.
\n5. Leverage. Identify how the company finances its operations \u2014 through debt or equity. There are pros and cons of both. For example, within limits, debt financing is generally less expensive and interest on debt may be tax deductible. Equity financing, however, can help preserve cash flow for growing the business because equity investors often don\u2019t require an annual return on investment.
\nSeek input from the pros
\nMost companies use an outside accounting firm to compile, review or audit their preliminary year-end financial results. This is a prime opportunity to conduct a comprehensive benchmarking study. We can help take your historical financial statements to the next level by identifying comparable companies, providing access to industry benchmarking data and recommending ways to improve performance in 2020 and beyond.
\n\u00a9 2020<\/p>\n","protected":false},"excerpt":{"rendered":"
You already may have reviewed a preliminary draft of your company\u2019s year-end financial statements. But without a frame of reference, they don\u2019t mean much. That\u2019s why it\u2019s important to compare your company\u2019s performance over time and against competitors. Conduct a well-rounded evaluation A comprehensive benchmarking study requires calculating ratios that gauge the following five elements: […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13],"tags":[],"class_list":["post-14332","post","type-post","status-publish","format-standard","hentry","category-aa"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/14332","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=14332"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/14332\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=14332"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=14332"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=14332"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}