How can companies use historical trend analysis and industry benchmarking?
Businesses can utilize both processes to monitor performance, develop plans, adapt to change in a timely fashion and identify potential business risks. We operate in a fast-paced environment and both historical trend analysis and industry benchmarking provide management and those charged with corporate governance an overview of how the business is performing as a whole. Key business decisions are made on a regular basis inclusive of process improvement, staffing requirements and technology upgrades. Trend analysis and benchmarking provide the opportunity to measure the impact of those decisions that were rendered.
Historical financial trends provide a perspective on what the company may have looked like in terms of cost structure and staffing needs at certain revenue levels. This data provides the opportunity to go back to a period when the company was at certain revenue levels, quantify the number of full-time equivalents and make adjustments based on today’s numbers. Companies may also use industry benchmarking to evaluate labor costs, unemployment trends, average costs per full-time equivalent, or full-time equivalents compared to revenue.
What are some keys to making this process successful and useful?
Disaggregation of information can often be a useful tool within trend analysis. For example, reviewing gross profit percentage or inventory turnover within a specific product line may provide results that vary from the overall company. And, it can provide insight on where the company needs to focus its time and effort. For example, disaggregation of information allowed one company to identify that a significant amount of resources and efforts were being devoted to e-commerce, which accounted for 3 percent of total revenue. Upon obtaining this information, the owners and management redirected the focus of the company toward the product line that accounted for 45 percent of total revenue.
Industry benchmarking and historical trend analysis must also take into account key financial assets and liabilities. Balance sheet analysis can potentially mitigate the inadvertent assumption of business risks. For example, one of the largest assumptions of risk within a company is credit risk. By computing the average days outstanding and turnover ratios on accounts receivable, a business may uncover certain risks that were not previously identified in relation to customer credit. It is imperative to understand why specific fluctuations may have occurred in the early stages of the process.
Who should be involved in the process of analyzing and benchmarking?
A majority of accounting personnel have the ability to provide the historical financial data based on information obtained from the general ledger accounting system. Analysis of the data requires dedicated time and business acumen to understand the results in order to provide an action plan for the future. However, taking the time to comprehend and respond to the results is the critical component of this process. Companies may rely on their accounting firm or an outside consultant to assist in understanding the results achieved if internal staffing is not able to provide meaningful feedback.
Robert Olszewski, CPA, is a director in the Audit and Accounting Group at Kreischer Miller. Reach him at (215) 441-4600 or [email protected].
