Question

7. What makes a good benchmark for doing financial analysis, and how are these benchmarks used? (2)

I need this answered in detail at least a paragraph.

Answer 1

Answer:

A benchmark is a standard yardstick with which to measure performance.

Financial benchmarking involves running a financial analysis and making a comparison of the results in order to assess a company's overall competitiveness, efficiency and productivity

The term ‘benchmarking’ refers to the process of comparing the business practices and performance standards of your company to that of other firms within the same industry. Quality, time, and cost are the most common values that are measured.

It's essentially using the best practices of other businesses in the same industry as a 'benchmark' to improve the practices of your own company.

Financial ratios are the most important tools when conducting this analysis. The use of financial ratios removes any difference in accounting methods or preparation of financial statements.

Some of the Good financial benchmarks involve:

1 Gross, operating, and net profit margins - Gross profit margin, operating profit margin, and net profit margin are the three main margin analysis measures that are used to analyze the income statement activities of a firm. Each margin individually gives a very different perspective on the company’s operational efficiency.

2 Sales and profitability Ratio - Profitability ratios are the financial ratios which talk about the profitability of a business with respect to its sales or investments. Since the ratios measure the efficiency of operations of a business with the help of profits, they are called profitability ratios.

3 Inventory, accounts receivable, and accounts payable turnover ratio- It is crucial that a company effectively manages its accounts receivables, inventory positions, and accounts payables. If not, the company could find itself in a consistent loss-making position, which will place doubts on its ability to continue in business as a going concern.

4 salary and compensation data- Useful in analysis the financial capability of the company, whether it is able to meet its expenses or not.

5 Revenue per employee - Revenue per employee (also called sales per employee) is a financial ratio that measures the revenue generated by each employee of the company on average. It equals the company's total revenue divided by the average number of employees for the period.

6 Cost per employee

7 Marketing expense as a percent of revenue - Marketing Expense as a Percentage of Total Revenue measures the expense incurred by the Marketing Department (wages, benefits, overhead, campaign expenditures, etc.) in relation to the total revenue earned by the company over the same period of time.

8 Revenue to fixed assets ratio- Fixed Asset Turnover (FAT) is an efficiency ratio that indicates how well or efficiently the business uses fixed assets to generate sales. This ratio divides net sales into net fixed assets, over an annual period. The net fixed assets include the amount of property, plant, and equipment less accumulated depreciation