How To Compare Apples to Oranges

January 29, 2011 by  Filed under: Management 

Do you compare your organization’s performance to other organizations? Many organizations don’t. If your company doesn’t you are passing up a valuable tool for improving and growing your business.

Wouldn’t you like to know whether your performance is due to your actions or the general economy?. Or what numbers are achievable when you are setting your goals? Or what is the trend in a Key Performance Indicator (KPI) from successful companies?

Our Company is Unique

Why doesn’t everyone compare their numbers to the performance of others? The main reason companies state they see their organization as unique. They believe are no comparable companies that they can compare themselves to.

While your company has a unique set of characteristics, it is not so unique that you can’t find another organization for comparison.

There are two useful techniques for finding comparable companies:

  • Look for similar business models in a different industry
  • Look for businesses with the most effective functions

Similar Business Model

To find companies with a similar business model in a different industry, you need to distill down what basic needs you fill for your customers. Then look for organizations that fill the same needs in different industries.

For example, a client of mine started up a new business in the packaging industry. The company buys cardboard boxes from large cardboard box manufacturing companies and distributes them on demand to a group of small companies that need the boxes.

Because they were the first in this niche, they thought there was no way to compare their organization. However, when we looked for organizations that bought from manufacturers and sold to commercial end users we found several large companies.

Most Effective Companies

Sometimes you can’t find a publicly traded company with a similar business model. An alternative is to focus on one or more business functions. Find a company know for their performance in the same function. You may want to use a different company for each function.

For example, if your goal is to shrink your Accounts Receivable number, you would look for public companies who are known for low receivables

You Have Comparable Companies, Now What?

Once you have found your comparable companies you have three issues to address.

First, you must determine what numbers you should use. Not every single number is comparable. Companies account for things differently, so you need to select those which more directly match yours. Limit yourself to numbers you use to measure your current priority goals. This will drive results quickly.

The second issue is size differences between the other companies and yours. If your sales are around $5 million and theirs are $345 billion, it will be hard to see the comparison. To remedy this, create a ratio. Several examples are Sales per Employee, Accounts Receivable to Sales, and Returns to Sales. Using a ratio will help you compare the rate of performance across companies of different sizes.

The last issue is timing. Your numbers are available weekly or monthly, but the publicly traded organizations only report quarterly. You can’t get more frequent numbers from a publicly traded organization, so you need to use what you have.

Using a ratio makes this is less of an issue than if you were using actual numbers. You may want to extrapolate from the ratios you have using a trend line. Projecting the trend line into the next three or four months gives you a measure you may compare your own trend line to.

Use Comparisons To Drive Your Results.

No matter how unique your organization, you can gain value from comparing your performance to others.

Look for companies with a similar business model or the most efficient function that matches what you are trying to improve. Download numbers from the SEC web site for companies you want to compare every quarter. Create ratios from the numbers to resolve size differences.

Compare your selected ratios to the performance of your selected companies and you will push your company to achieve better results..

For more information about how to achieve million dollar results on a small business budget become a member of the Do It Yourself Business Intelligence Community.

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Article Source:

http://EzineArticles.com/?expert=Warren_Hayford

Warren Hayford - EzineArticles Expert Author

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