An Introduction to Benchmarking: Part 2

Posted by Wendy Li on Jan 27, 2022 8:00:00 AM
Wendy Li
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In Part 1 of this three-part blog series, we introduced benchmarking and chose four staffing companies from clients in the employment services industry to demonstrate the financial metrics that we used for benchmark analysis. In part 2, we will take a look at the key findings from this analysis.

Key Findings/Results

Comparison can be the thief of joy, but when you are trying to grow your company, comparison with competitors and industry benchmarks can be illuminating and essential. Here are benchmarks analyses that we performed for our client staffing company:

  • Quick Ratio. This ratio measures a company's ability to meet short-term obligations with liquid assets. The higher the ratio, the better; a number below 1 signals financial distress. The employment service industry benchmark was 1.3. Four companies all performed better than the benchmark with quick ratios between 1.43 and 1.99.
  • Current Ratio. A ratio between 1.5 and 3 is generally considered healthy. A ratio value lower than 1 may indicate liquidity problems for the company. A ratio over 3 may indicate that the company is not using its current assets efficiently or is not managing its working capital properly. The industry had a ratio 1.57. Four companies had ratios between 1.48 and 2.02, indicating a healthy condition.
  • Current Liabilities to Net Worth. This benchmark ratio is also called current liabilities to equity, indicating the amount due creditors within a year as a percentage of stockholders' equity in a company. A high ratio (above 80 percent) can indicate trouble. The whole industry had a high benchmark 0.97. Four companies even had higher ratios between 1 and 2.04, indicating their equity couldn’t cover their current liabilities due in a year.
  • Days Accounts Receivable or Days sales outstanding (DSO). This is a measure of the average number of days that it takes a company to collect payment for a sale. The fewer the days, the faster the collection. Four companies all took much longer (between 53 and 83 days) than the benchmark (50 days) to collect sales payment. This is an area they all need to improve.
  • Working Capital Turnover. This benchmark is also known as working capital to sales, a measure of how efficiently a company uses its capital to generate sales and support growth. The higher, the better. The industry benchmark was 11.9, meaning $1 of working capital produces $11.9 in revenue. Four companies had ratios between 5.83 and 10.85, indicating low efficiency of using short-term assets and liabilities to generate sales.
  • Total Assets to Sales. This ratio helps to determine the efficiency of a company in managing its assets to generate enough sales. The benchmark ratio is 36.1%. Three companies performed very well and had ratios between 28.43% and 31.49%, but one company had a very high ratio of 45.34%, indicating a low efficiency in asset management.
  • Pre-Tax Return on Sales. This is also called pretax profit margin, a financial accounting tool used to measure the operating efficiency of a company. It is a ratio that tells us the percentage of sales that has turned into profits before deducting taxes. While the whole industry had a very low ratio 0.8%, four companies surpassed the benchmark and had great performance with ratios between 4.6% and 8.88%.
  • EBITDA to sales ratio. Also known as EBITDA margin, this is a financial metric used to assess a company's profitability. A higher value indicates that the company is able to produce earnings more efficiently by keeping costs low. Given the industry benchmark 5.5%, three out of four were doing very well with ratios between 7.07% and 9.05%. The company that underperformed still had a ratio 4.95%, almost the industry level.
  • Interest Coverage. This is a debt and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. The higher the ratio, the better prepared it is to pay its debts. A lower ratio may be unattractive to investors because it may mean the company is not poised for growth. The industry had 2.63 interest coverage. Four companies overperformed with ratios between 10.44 and 89.55.
  • Glassdoor Recommendations/Stars. This is a free inside look at company reviews and salaries posted anonymously by employees. 5 is the perfect score. One company had a five-star review, while the other three got between 3.7 and 4.8 stars.

With these key findings in place, we can begin to think clearly about how to improve performance. Please stay tuned for Part 3 of this benchmarking blog series, in which we will discuss the solutions!

Our CAS team is helping businesses of all sizes gain a competitive advantage by focusing on specific practices and operations that are centered around your needs and goals. We offer insight and support to help you make critical business decisions that lead to improved profitability. If you have any questions about benchmarking in your industry, please leave a comment below or feel free to contact me directly. I’m happy to help!

Topics: Accounting, Business Advisory, Small Business, Client Accounting Services, Benchmarking