Where to find industry benchmarks for financial ratios
3 minutes read
Before giving you a loan, a banker will ask about your business’s financial ratios and how they compare with benchmarks in your industry.
Ratios are used to examine different aspects of a company’s performance, and benchmarks show how the company stacks up within a particular industry or region. How does your business compare to the competition? Is it performing less efficiently? Does it have higher costs?
These are important questions because they are linked to how profitable your company is and how healthy it will be over the long term. But surprisingly few entrepreneurs have the answers.
What is benchmarking?
Benchmarking involves choosing performance measures you can use to compare yourself against other companies.
Financial ratios are just one of many benchmarks you can use. Some measures are more general, such as sales per employee or productivity per hours worked. Others are specific to your industry. For example, a restaurant might track revenues per table. A warehousing business could follow costs per square foot.
But no matter what kind of business you run, financial ratios are a simple and effective way to get a snapshot of how you’re doing in terms of productivity, cost control and other areas. They indicate information, such as whether you have accumulated too much debt, have stockpiled too much inventory, or are not collecting receivables quickly enough.
Once you know where your business stands, you can start improving and reaping the benefits on your bottom line.
Where do I find financial ratio benchmarks for my industry?
Your first source for where to start should be your banker, who can tell you what ratio values are used by the bank.
You can also try BDC’s business productivity benchmarking tool to take a first step at benchmarking your business.
This free online tool will allow you to compare your productivity levels to those of other companies in your sector. Your information will be kept strictly confidential.
Where can I find Canadian ratios and benchmark data?
Statistics Canada maintains a very thorough library of financial performance data relevant to the Canadian economy, including current ratio values for most industry sectors. This data can be search using keywords or specific NAICS codes.
Information on specific financial ratios is also available through Statistic Canada’s Quarterly Survey of Financial Statistics.
You can also consult your local Board of Trade or Chamber of Commerce for ratio values specific to your geographical area, or the industry association for ratio values specific to your industry sector.
There are many other established sources listing the industry standards for financial ratios. You can use these to compare your business's operating results with those of competitors, and to identify your business's strengths and weaknesses relative to its industry.
While many of these sources are U.S.-based, all provide valuable insight into how well your business is performing in comparison to industry standards.
Most of these are available at university and larger municipal libraries. They can also increasingly be found online, where they can be purchased.
Annual Statement Studies is published by the Risk Management Association (RMA). Banks use this data as a standard to evaluate businesses applying for financing. RMA provides balance sheet and income statement data, and financial ratios compiled from financial statements of more than 240,000 commercial borrowers, classified into three income brackets in over 730 different industry categories.
Dun & Bradstreet’s Key Business Ratios provides online access to benchmarking data. It provides 14 key business ratios, including solvency ratios, efficiency ratios and profitability ratios for over 800 types of businesses arranged by industry categories.
Wolters Kluwer publishes the Almanac of Business and Industrial Financial Ratios. It lists 50 performance indicators for 199 industries in all of North America (Canada, U.S., and Mexico).
Why are benchmarks important to bankers?
Bankers will often make financial ratios part of your loan agreement. For instance, you may have to keep your equity above a certain percentage of your debt or your current assets above a certain percentage of your current liabilities.
The bank will do its own review of your ratios to spot any negative trends or underperformance versus industry averages. You must be ready to confidently and credibly address any concerns your banker may have.