Using financial benchmarks to measure the financial performance of your business can be useful. If you don’t know, benchmark data is a comparison tool. They show how the average business in your industry is performing. And they seem to give you targets to achieve.
Don’t get me wrong, benchmarks can be good if you are new and unsure what to expect with your practice. But be aware there are several reasons why you should not rely too much on benchmark data.
1. Data Collection
There are several ways firms and organizations can collect data to develop benchmarks. Be sure to know how the data is collected and confirmed.
Collecting financial data from public companies can be easier than for private companies. Public companies report their financials in a standardized process. They are available to the public and reviewed or audited by larger CPA firms. This lends some consistency and comparability to the data.
Private company financial data is not reported with such a standardized process. This can lead to inconsistent data. Which will have an impact on the comparability of the final results.
2. Unverified Data
Usually, a company or trade association gathers financial data through the use of informal surveys. Most private companies do not have an independent CPA review their financials.
They send surveys that are may be completed by one of several people. Sometimes it’s the owner themselves, their spouse, or an office manager or bookkeeper.
The problem is each of these people may have a very different understanding of what is being asked. And the quality of their bookkeeping system and current financial reports may vary. All this inconsistency can lead to bad results.
3. Working To Be Average
My biggest argument against financial benchmarks is relying on them for too long. The benchmark data I have seen is not weighted for the success of the individual owner.
So you get the best performers mixed in with average and mediocre companies. Those who are prospering and meeting their life goals on one end. Mixed with those who are failing or barely getting by.
The result? You set targets for your business based on the averages of all these businesses. This does result in a true average across an industry. But why bust your tail in your business to wind up being average?
I would much rather work harder and smarter to achieve and transcend what the TOP performers in my industry have accomplished. Not the average owner who is barely getting by or not making enough money.
An Alternative Approach
Don’t set goals based on inconsistent data and average results. Benchmarking is good for those new to an industry. But use them to set a starting point, or minimum baseline to achieve.
Once you transcend those baseline results, don’t stop! Continue to look for ways to improve the financial performance in your practice. In the end, it doesn’t take comparing yourself to others to confirm your success.
You can achieve your personal goals without compromising the quality of service to your customers. Leave the comparison game behind.
If you liked this post, check out our Independent Optometrist’s Guide To Financial Freedom.
Eric Levenhagen, CPA CTS is the only financial consultant who helps private practice optometrists improve the financial health of their practice with a simple, proven process called Financial Harmony which will reduce their taxes and increase their after-tax profits by at least $10,000 in the first year, guaranteed.