Monday, February 1, 2010

Improve Cash Flow with Benchmarking: 5 To-Dos

Imagine swimming from one end of the pool to another in 30 seconds.  Is that good or bad?  How do we determine how we are doing, what is going well, and what we should try and improve?  It primarily has to do with comparing our performance to ourselves and others.

Staying with the swimming analogy, what if 5 other people swam from one end of the pool to the other at the same time as you?  In the context of the others, you can measure your performance.  What if you made the exact same swim 100 times before, and you knew each of your times?  Now you could understand your performance in the context of your past.  What if swimmers all over the world made the same swim every day and you could compare your time to theirs?  Again, this gives you another perspective on how you are doing.

In sports we seem to track every number and every statistic feverishly.  It seems like every night some individual or team is breaking an obscure record of which I have never heard.  Maybe tomorrow a college basketball team will break the winning streak for a team's consecutive wins in January when there is a full moon :-)

In business, we sometimes forget to use our numbers and stats to measure our performance.  That's where benchmarking comes in, and, generally speaking, entrepreneurs tend to under-utilize this tool.  With this in mind, I am writing on some of the ways that entrepreneurs have and will continue to use benchmarking to improve their businesses and, ultimately, their cash flow.

First, here is a sample report that can be used in benchmarking.
Request a Free Industry & Data Report

How can we gather this and other information, both quantitative and qualitative, to make a difference in our businesses?  When approached with an attitude of humility and genuine desire to improve, here are five suggestions to use benchmarking to help you take your business to the next level:

1.      Refine Key Performance Indicators (KPIs) - Some companies aren't sure what they should be tracking and benchmarking.  As a general rule of thumb, there are main categories of data that need to be addressed.  I wrote about these at length in my blog post: The Key Business Metrics every Entrepreneur should know.  As we research industry data and talk to others in our industry, we typically find new numbers and/or ratios that make sense to track.  For example, after doing some benchmarking at a trade-show with companies from around the world, one CEO learned that these other companies were tracking some operational efficiencies down to the level of daily employee activity.  This CEO quickly implemented this KPI into his dashboard and now feels he has a much better handle on productivity, which is a major driver of both cash flow and profit in his company.

2.     Enhance the Business Model -  Benchmarking means we mine through a lot of data and information, find what is relevant, and then try to use it in some way to make us better.  This process inherently leads to insights into improving the business model a company currently employs.  For example, one company that uses our CFO services learned through benchmarking that it was taking much longer than others in its industry to collect on its receivables.  With a little more information and the discovery of some "best practices" it has overlooked, the company accelerated its collections, which had a significant impact on cash flow.

3.     Emphasize Internal Benchmarking - When we discuss benchmarking, we traditionally think about comparing ourselves to others.  Sometimes some of our most helpful information actually comes when we compare ourselves to ourselves.  As sales grew in one company, the CEO failed to keep an eye on her inventory relative to the growth.  Once analyzed against the company's historical data, the CEO learned that inventory crept way too high relative to sales.  Empowered with this information, the company quickly addressed the issues causing the problem, inventory returned to regular levels in context to the history of the company, and cash flow increased.

4.     Mobilize & Harmonize Improvement Initiatives - This is often the trickiest part of benchmarking - actually implementing positive change.  We have found that when managers and key employees are included in the benchmarking process they tend to take more ownership of the ideas for improvement that arise from such efforts.  They work together to bring about positive change, which means it gets done more quickly and effectively than if everyone continued to work in their relative "silos."  While with a Fortune 500 company with over 300 branch locations throughout the world, benchmarking between branches was encouraged.  The branches that benefited the most from benchmarking were those that involved more than just their General Manager in the process.  Not surprisingly, those same branches were also consistently among the best-performing business units in the entire company.

5.     Make it an Ongoing Part of Your Business - Benchmarking is not unlike anything else that requires consistent attention to makes its biggest impact.  Benchmarking once and trying to implement a few new ideas will create minimal, if any, sustainable results.  By making benchmarking a part of monthly, quarterly, and annual conversations and meetings, it will become more and more meaningful and helpful.

Whether you are a swimmer, entrepreneur, or into something else, numbers tell a story about our performance and they help us know what we need to do to improve.  Benchmarking is a critical ingredient to a well-run business.  Chances are your cash flow will benefit if you do it.