For manufacturers, maintaining financial clarity is essential to
staying competitive in an increasingly data-driven industry. Performing a
benchmarking study can help. It compares your company's financial performance
against industry standards and the competition.
By identifying underperformance in key metrics — such as return
on assets and inventory turnover — you can uncover inefficiencies, set
realistic performance goals and make more informed strategic decisions.
Monitor the right metrics
A benchmarking study starts with identifying relevant metrics
and calculating them from your financials. Because manufacturing is asset
intensive, it's critical to evaluate whether you're managing assets efficiently
— and not taking on too much debt to acquire them.
Many of these financial metrics will be in the form of ratios.
One key ratio to monitor is your debt-to-assets
ratio (total debt divided by total assets). More debt results in a
higher ratio. Banks typically consider this ratio when you apply for a business
loan. Creditworthy applicants generally have a debt ratio of 1:2 (50%) or less.
Lenders won't necessarily deny loan applications from highly leveraged
companies, but they may offer less favorable loan terms, such as higher
interest rates, or require personal guarantees from the owners.
Another key ratio is return
on assets (ROA, net income divided by total assets). It shows how
much profit you're generating for each dollar invested in total assets. A
higher ROA generally means greater efficiency because you're earning more money
on less investment.
Here are some additional metrics to benchmark:
Current ratio (current assets divided by
current liabilities). This is a working capital metric that
indicates whether liquid assets are sufficient to meet short-term obligations.
Quick ratio (cash plus accounts
receivable and marketable securities divided by current liabilities). This
is a more conservative working capital metric that excludes inventory and
prepaid assets.
Inventory turnover ratio (annual cost of
goods sold divided by inventory). This shows how many times
your inventory is sold (or turned over) during the year.
Times interest earned ratio (net earnings
before interest and tax divided by your interest expense). This
reflects your company's ability to meet interest expenses from operations.
Benchmark against your industry peers
The next step in a benchmarking study is to compare your
company's financial ratios and other metrics to those of similar manufacturers.
These might include businesses of a similar size, geographic region or
specialty.
By comparing key metrics, you can uncover areas that might
warrant attention because you're falling short relative to your peers. For
example, if your ROA trails the industry average by several percentage points,
it might be time to examine overhead costs or production efficiency. Or if your
debt-to-equity ratio is higher than that of similar businesses, you might want
to reassess your financing strategies.
On the other hand, outperforming your peers can reinforce
strategic decisions such as investing in automation or expansion and provide a
compelling story for stakeholders. You can also take steps to further leverage
the competitive advantages identified in the study. For example, you could use
your demonstrated financial strength as a selling point for large contracts
requiring stability.
Crunch the numbers
A benchmarking study can provide your manufacturing company with
the context it needs to interpret its numbers, turning raw data into insights
that highlight strengths, expose inefficiencies and lead to smarter
decision-making. Contact us to learn more about conducting a benchmarking
study, including where to find relevant industry data. We can also help you
determine how to best apply your findings to strengthen and grow your company.
