Question

Explain the concept of benchmarking with respect to the analysis and interpretation of profit. Discuss the advantages and disadvantages of the different ways of monitoring profit.

Answer 1

BENCH MARKING:-

Bench marking is the practice of a business comparing key metrics of their operations to other similar companies. Bench marking occurs across all types of companies, including private, public, nonprofit, and for-profit, as well as industries e.g., technology, education, and manufacturing. Companies use bench marking as a way to help become more competitive. By looking at how other companies are doing, they can identify areas where they are under performing. Companies are also able to identify ways they can improve their own operations.

Companies compare the operating profit margin of a company with the operating profit margin of industry competitors or a benchmark index. Operating margin is considered a good indicator of how efficiently a company manages expenses because it reveals the amount of revenue returned to a company once it has covered virtually all of its fixed and variable costs except for taxes and interest.

The different ways of monitoring profit are preparation of key financial statements, aged debtors trial balance, inventory records, working capital statements and financial ratios , preparation of cash flow statements etc. The advantages and disadvantages of the monitoring of profit are:-

i. This helps to assess the company's financial performance and judge whether the company is one of the best investment option for the equity shareholders of the company.

ii. It helps to monitor the efficiency in utilizing assets.

iii. It helps to judge the managements performance,set plans for future, to assess the business growth.

iv. Companies from different industries cannot be compared on the basis of net profit margin.