When you’re a small business owner, monitoring your financial performance is an important way to measure your success. Comparing your company’s financial performance to your competitors will help you determine whether you’re keeping up with the competition, pulling ahead, or lagging behind.
While it’s always good to have a baseline performance indication, it’s also a good decision-making metric. Smaller businesses typically have smaller margins than large corporations—you have to do more with fewer resources. When you measure your financial performance against your competitors, you’ll have a better idea of where you should focus your efforts and where you can cut expenses.
Here’s how to make the comparison.
General tips
When you’re comparing your performance against a competitor, make sure that you’re picking an analogous one. In other words, don’t compare your solo family law firm to a corporate law firm with multiple offices. Your competition is other family law solo practitioners, who have been in business for about the same time, in the same general geographic location.
The easiest way to get this data is if you can find a comparable public company: the Securities and Exchange Commission requires all public companies to file and publish an annual Form 10-K.
Your revenue vs. the competition
The first way to compare your company against the competition is to simply compare revenue. How does it stack up to yours? Even if it’s significantly higher than yours, keep in mind that this is just a starting comparison. The competitors may not be investing funds in the right areas, like product development, equipment, marketing or new employees.
Cost of goods sold vs. revenue
You probably know that the cost of goods sold (COGS) is how much it costs to sell your products and services. Compare your COGS to how much revenue you’re making. What percentage of your revenue accounts for COGS? Once you know that number, perform the same analysis on your competitors, then compare the rates.
The percentage of COGS vs. revenue can tell you a few things. For example, if your rate is significantly lower than the competition, that indicates you’re not spending as much to deliver services. It might also indicate that you’re charging too much—if your COGS percentage is lower but the competition’s overall revenue is higher, that could indicate a price discrepancy.
Expenses vs. Revenue
Finally, compare your expenses vs. revenue in the same way. Expenses may include equipment, payroll, rent, utilities and more. If the percentage of expenses vs. revenue is higher than your competitor, but you’re still bringing in around the same amount of money, you may want to consider making cuts. Of course, if your rate and your revenue is lower, that could indicate you need to spend more to bring in more business.
Staying on top of your financial performance is just half the battle. Understanding how your business measures up to the competition can provide helpful insight into where to channel your company’s resources.
Tracking financial performance starts with detailed and accurate financial records.
For assistance with bookkeeping and tax preparation, contact MCG Solutions today.