Financial Benchmarking And Its Importance

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If you have even a cursory knowledge of the financial world, then you would have definitely come across the term ‘financial benchmarking’. However, do you know what exactly is financial benchmarking?

Financial benchmarking – definition

Financial benchmarking can be defined as a process that involves carrying out a financial analysis and comparing the results with the objective to the overall productivity, efficiency, and competitiveness of a firm. It basically refers to a process wherein the business practices and performance standards of one’s firm are compared to those of other firms within the same industry. The divisions that are commonly measured during the process of benchmarking include cost, time and quality.
Thus financial benchmarking can help a firm to improve its efficiency by gathering a clear picture about its performance and help a firm to thrive in the long run.

How Financial Benchmarking Works?

Financial benchmarking works by focusing on one or multiple indicators in order to evaluate the performance of a firm. The indicators might include things like productivity, cost per unit, defects per unit etc. This measurement of performance is then compared to that of other firms in the same industry. Benchmarking is used by strategic management and the firms evaluate the different aspects of their process and compare it to the processes of the leading firms. The information gathered through financial benchmarking will allow a firm to understand and rate its performance in comparison to other leading firms and help it to make better plans to improve its performance.

The stages of benchmarking include:

• Selecting the subject
• Defining the process
• Identifying potential partners
• Identifying data sources
• Collecting data and selecting partners
• Determining the gap
• Establishing the process differences
• Targeting future performance
• Communicating
• Adjusting the goal
• Implementing
• Reviewing or recalibrating