Financial Benchmarking and its Significance in Your Business
Having a robust business plan is not enough for you to take your small business in Dubai to the next level. You must know how your company performs against your competitors in the market to develop a better strategy. The process of benchmarking allows you to measure your business performance against your peers across key performance indicators. Thankfully, you need not put much effort into benchmarking as accounting firms in Dubai can do it on your behalf.
Benchmarking, in simple terms, is the process of identifying a company’s strengths and weaknesses by comparing its performance metrics with that of similar firms. Even though there are hundreds of benchmarks in use, it is essential for you to understand some of them to determine what performance metric is right for your business. Here are a few lists of metrics you can use for benchmarking:
Profit margin is a common metric used by businesses for benchmarking and it indicates how much of each the dirham in sales ends up as profit. Even though profit margin may seem like a great tool for benchmarking, SME owners should be cautious while using it. Most of the available benchmark data will be large and publicly traded, which may not be the best representative for comparison with your small business. This is because large companies have economies of scale, which enable them to buy goods and services at lower prices due to their size.
Such a benefit will increase the profit margin of the large companies. Moreover, the publicly traded companies may have additional costs related to financial reporting that may reduce their profit margin. Given these facts, accounting firms in Dubai advise you to take the results with a grain of salt even though the profit margin is useful for benchmarking.
Return on Assets
Return of Assets (ROA) gives you insights into how effective are your business assets in generating profit. ROA can be calculated as net income divided by the average total asset balance over the year. To exact effective results from using ROA for benchmarking, you need to find a company with a similar capital structure for comparison. Asset structure can be found as a mixture of assets on your firm’s balance sheet.
The companies that you use for comparison should also have the same percentage of assets on the balance sheet. For example, comparing a labour-intensive company with a machinery-intensive company would make no sense. Such a comparison makes no sense as the companies may differ from each other in patterns of expense, influencing the net income used in the calculation.
Inventory turnover ratios measure how fast a company sells through their inventory balance. The inventory turnover ratio can be calculated as the cost of goods sold divided by the net income of the firm. The result will tell you how many times your company sold through the inventory balance during the given period. Companies with a decreasing inventory turnover ratio will face a tough time selling goods than in the past, which could signal less demand for the company’s products. Consult with accounting companies in Dubai to know further about using inventory turnover for benchmarking.
Companies, including manufacturing firms, can use inventory composition for the purpose of benchmarking. The firms must report the composition of the inventory balance in the notes to the financial statement. Usually, businesses break down the inventory account into raw materials, work in process and finished goods inventory. The relative percentages in such accounts can be more informative over time.
For example, a company with a large balance in finished goods compared to the other two accounts can have a build-up of inventory. On the other hand, companies with low finished goods inventory compared to raw materials inventory will face issues keeping up with demand. However, SMEs need to interpret the information from these benchmarks in the best possible way even though jumping to conclusions is not advisable. Accounting firms in Dubai can help you sensibly interpret the results of these benchmarks.
Significance of Benchmarks in your Business
Accounting firms in Dubai can review your financials to extract relevant ratios, compare your ratios to industry data sets, and provide recommendations for addressing weaknesses and leveraging strengths. By doing so, you can leverage the following benefits:
- Pinpoint your weaknesses
- Leverage your business strengths
- Make business decisions confidently
- Understand where you stand in the market
Consult with the Best Accounting & Bookkeeping Firms in Dubai
Carrying out financial benchmarking allows you to measure your company’s performance and its potential. However, entrepreneurs busy with planning their revenue strategies may fail to dedicate time to this crucial process. Accounting firms in Dubai such as Jitendra Chartered Accountants (JCA) can do it for you along with other key accounting requirements.
JCA can play a key role in enhancing the performance of your business by delivering essential accounting services in Dubai such as bookkeeping, filing tax returns, corporate tax advice, ICV certification services, corporate financing advice etc. We also provide the best advisory services on mandatory regulatory requirements related to Economic Substance Regulations (ESR), Ultimate Beneficial Ownership (UBO) and Anti-money Laundering and Combatting Financing of Terrorism (AML-CFT).