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What Are the Different Types of Financial Benchmarking?

Geri Terzo
Geri Terzo

Financial benchmarking involves identifying some model to replicate. It is a practice that is used by corporations attempting to remain competitive among a field of industry participants. The process can be applied to compare results for sales, income, or market share, for instance. Investors also use this approach in order to establish acceptable expectations for returns, or profits.

A logical way for businesses to perform financial benchmarking is to compare performance with companies that adhere to a similar business model. This creates a fair analysis as to whether or not standards are being kept. Given that a number of factors can determine one company's finances, it may be prudent to create a universe of competitors that is as large as possible. The businesses should be similar in size to the organization that is performing financial benchmarking. Comparisons should be performed against businesses that operate in the same industry, as well.

Woman with hand on her hip
Woman with hand on her hip

One way to compare financial benchmarking is to draw an analysis between the quarterly income performance of a business to its rivals. The focus of the comparison could be on the profit margins achieved by individual companies. A profit margin ratio could be expressed as a percentage and it reflects income relative to sales. If one company's results are lower than the industry standard, this shortcoming should become evident through financial benchmarking. If there is a notable discrepancy in an analysis, it could mean that changes need to be made in a company's pricing structure.

Corporations invest in the future, including that of the individual employees who make up an organization, in a variety of ways. Financial benchmarking can be done by evaluating the compensation for staff members who fulfill similar roles. A company might use any differences as a selling point when attempting to attract new talent. This strategy could also be applied to the bonus structures that some employers use when rewarding personnel for achieving success.

Investors might use financial benchmarking as a means to judge the way that an asset portfolio performs. If the securities in a fund deliver similar results to that of some other barometer, the portfolio is probably meeting expectations. When returns are below the benchmark, however, the fund is under-performing. This use of comparison is useful for investors to realize whether or not a fund manager is producing the types of profits that were promised. A money manager could lose clients for failing to replicate returns in some other barometer.

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