Meaning and definition of Financial Benchmark
A benchmark, basically, refers to a standard used to measure the performance of a mutual fund, security, or investment manager. Generally speaking, broad market and market-segment stock and bond indexes are used for this objective. As explained by Investopedia, while evaluating the performance of any investment, it is essential to compare it with an apt benchmark. In the financial field, there are numerous indexes used by analysts to determine the performance of a particular investment.
Initially, the term benchmark was an assessor’s mark indicative of a specific height above sea level. However, in the present day’s uncertain economic times, it has become essential for public and private sector organizations to be accountable for their cents and dollars. Benchmarking is, therefore, considered as a tool that helps keep the ledger in the black.
Moreover, in the present day economic crisis, these are times when an organization’s management is tested severely over a company’s financial health. Besides, even large scale companies are also vulnerable to bad investor sentiment and tepid market during the course of a downturn and also their financial health can crash down. Moreover, an economic downturn can also prove to be a versatile excuse for some employees for justification of poor financial performance of a company or a division of the company.
In such circumstances, financial benchmarking can be helpful in rescuing the management by providing a broad pointer on the performance of the whole industry in a given scenario.
Examples of Financial Benchmark
Some of the common financial benchmarks include gross, operating and net profit margins, sales and profitability trends, inventory, accounts receivable, accounts payable turnover, salary and compensation data, revenue per employee, cost per employee, marketing expense as a percent of revenue, and revenue to fixed assets ratio.
Stages of benchmarking
The twelve stage approach of benchmarking includes:
- Select subject ahead
- Define the process
- Identify potential partners
- Identify data resources
- Collect data and select partners
- Determine the gap
- Establish process differences
- Target future performance
- Adjust goal
- Debt ratios
- Liquidity ratios
- Profitability ratios
- Asset management ratios
- Cash Flow Indicator Ratios
- Market value ratios
- Financial analysis
- Business Terms
- Financial education
- International Financial Reporting Standards (EU)
- IFRS Interpretations (EU)
- Financial software