The benchmarking process in brief
Fall 2004
The Challenge
After doing her annual business review with her CIBC business advisor, a small business owner realized that her business' profitability had been declining. Cash flow had always been a problem for her manufacturing company, and she suspected that her costs were higher than they should be.
Information collected
Using the NAICS code (formerly the SIC) provided by her CIBC business advisor, she was able to gather key financial information from the Internet, including:
- Debt to equity ratio
- Cost of sales
- Collection period for A/R
The business owner then was able to obtain a detailed table comparing her business with others in the industry.
Analysis
- Her operating expenses were on par with those of others in her industry.
- At 8.5, her debt to equity ratio was slightly higher than the industry average.
- However, her cost of sales (direct expenses) was much higher than the average of all her competitors. Wages and materials both seemed to be trouble areas.
- Her A/R collection time averaged 43.5 days, as opposed to the industry average of 14.8.
Solution
The business owner focused on two key areas:
- By sourcing alternate suppliers and consolidating orders to receive a discount, she reduced the cost of her materials by 15% in the first year.
- By moving to an automated billing system, she shortened her average collection period by 10 days, which improved cash flow.
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