Benchmarks, standards and critical numbers can help you understand your business better and run it more effectively if you know how to use them. They not only can provide you with some measuring sticks, to help you measure what’s important but they also can provide you with context as you compare your business with others both within your market and outside. Here are some suggestions for using them.
Study (do your homework).
I was once told that the only place where “success” precedes “work” is in the dictionary. Many people fail in this industry because they refuse to put in the time and really work at their business. Don’t just go into business, grow into business. You need to prepare to own a business. I’ve seen hundreds of business owners who lack the discipline and refuse to study their business as they attempt to master it. You need to seriously study your business and all that it has to teach you. If you do, the rewards, both financially and personally, can be significant.
Benchmarks, standards (production rates), critical numbers and vital signs.
Benchmarks and standards are somewhat synonymous. They are industry averages of certain activities, ratios or functions. Production rates (e.g., the number of man-hours required to plant a 2” caliper tree) are also sometimes referred to as standards. Not all benchmarks are created equal. Some are more important to some people than others. Financial ratios are usually more important to bankers, financiers and vendors than they are to contractors. Profitability ratios are usually more important to contractors than they are to bankers, financiers and vendors. Vital signs are to a medical doctor what critical numbers are to a contractor. If vital signs exceed a certain viable range, you’re probably dead – literally. In business, if certain critical numbers exceed a certain viable range, you may also be dead – figuratively.
Analytical and objective vs. intuitive benchmarks.
Intuitive benchmarks are benchmarks that you personally know by direct experience. You know if you’re happy or not. You know if your chosen career is fulfilling or frustrating You don’t need a calculator to measure such things. Analytical or objective benchmarks are ones that are measurable and quantifiable. For these, you do use a calculator to determine them. Financial ratios are a good example.
Point of reference and point of departure.
By this I mean that a particular benchmark is a starting point – a number to use that may or may not be close to reality. But one has to start somewhere, and it’s as good a place to start as any.
Individual benchmarks need to be clearly defined. I spend a lot of time defining things like general and administrative (G&A) overhead, labor burden, direct costs, indirect costs, account managers vs. project managers, etc. Study these definitions as you analyze your business.
In business as in sports, you have to measure the dynamic of what is taking place. You need to know if you are winning or losing. In sports, if you don’t measure things, you’re merely exercising. It’s no more than “sweating to the oldies” or Jazzercise. In business, if you don’t pay attention to the numbers, it’s commonly referred to as “going broke.”
I’ll bet that you didn’t go into business to measure things and format data. It’s working outdoors, designing and creating beautiful landscapes, maintaining a beautiful property, fine gardening, installing an efficient sprinkler system, etc., that turns your crank. Unfortunately, you have to understand the numbers. To do so, you have to format data properly so that it makes sense and is operationally meaningful to you and your staff. So get used to it!
The study of benchmarks, standards and critical numbers is a study of past performance for the purpose of improving future performance. Once they are understood, one can project into the future more accurately and confidently. For instance, if you study and understand the historical data in your profit and loss statement, you can then project your growth and profitability for the upcoming year with much greater accuracy.