Why You Should Forget About Creating Benchmarks

real estate investingIn our Kelowna accounting firm we get asked all the time by clients for benchmarking, comparisons to others and things of that nature. As an accountant, it might seem strange that over the years I haven’t relied on them too much. Although Stats Canada releases data regularly that you can obtain online fairly easily to learn about different industries, I personally find that every business is unique.

You need to know approximately where you’re at but does it really matter to compare yourself to a vague average of completely different companies?

What matters is how you’re measuring up to what YOU want. I have contractors who want a bottom line of 5% per year and I have others that want 10% or even 20%. They’re all in contracting but when you go to look at your benchmarking or statistics, which one is right?

None of them.

If you really want to frustrate yourself, start averaging real estate statistics. Real estate statistics are horribly unreliable because average gains within Canada (or even just within the province) mean nothing for you if you’re in a market that’s declining or a market that is blowing through the roof.

Every Market & Business Is Unique To Itself

kelowna accountantWhat you have to do is decide what you want to do, determine if it’s reasonable or achievable and work towards that as a benchmark. It’s a bit different than the answer you might expect from an accountant but I think that if you start relying on benchmarks, you can get caught up chasing your tail or somebody else’s numbers.

Now that said, if a client or someone is set on finding a benchmark, we can certainly find one for them. My point is that benchmarking off of statistics is not solid for most businesses in Canada, specifically because of the size of the market.

When I’m asked for benchmarking from a client, I get it from reliable external sources that specialize in this area but I always tell them not to rely on it. Take your time and determine what you want.

If you come back and tell me you run a construction company and you want a bottom line of 50%, I’m probably going to have to chat with you about whether or not that’s realistic. If you come back and argue that it is realistic because of X, Y and Z that are going to make it happen, I’ll be likely to agree because you clearly have a plan to pull it off.

But if you say you want a 50% bottom line because that’s what you think you need, that’s not the right answer.

Avoid Bar Room Business Planning

Kelowna accountantsIf a client is looking to utilize benchmarks, I do my best to first get them focusing on themselves. Often times when they come in with an expectation for a benchmark, it’s a result of what I like to call “bar room business planning”.

I hear this stuff all the time…Well, gee, I heard on the street that this type of business should have a bottom line of 10%!

Well, what street did you hear that on?

Always be cognizant of the person giving you the advice and their background before you take it seriously. The benchmarks you hear on the street from random friends or family has to be taken with a grain of salt. You have to look at who’s giving them to you…do you want what they have?

If the answer is no, then don’t let them create benchmarks for your business.

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