Benchmarking essentially involves an attempt to improve the performance of processes and practices of an organization by the way of comparison with the similar acts of "own" or "another" organization
However, this comparison is a complex activity which mandates that indicators that are relevant and therefore reflect the movements being made in the direction of benchmarking are "accurately" employed. These are then assigned the appropriate values to give the whole exercise the very essential "analytical look".
One can benchmark the processes, with either or both of the "internal" and "external" outlooks. Benchmarking is "internal" when it is carried out against "own previous performances" and external when "it is against a competitor".
"Financial Benchmarking" results when this concept is superimposed on the financial aspects of the organization. This is to adopt and implement a "multi-directional" approach for improving the financial health of the company. It is an immensely important act as successful establishment of this job can do wonders for the "financial front" of the company.
However, this is a "double-edged" sword; in the sense that underestimating the pitfalls of this path can land the group in serious troubles. This calls for opting for a "balanced strategy" to obtain the maximum returns.
The true challenge lies in identifying the indicators that can help in accurately spotting and correcting the performance gaps. One should decide in favor of only those "countable parameters" that "count" as "not everything that counts is countable and not everything that is countable counts". A detailed screening has to be done to save oneself from these "measurable illusions and mirages". Further, because of the fact that benchmark partner is not always from "own industry", incorporation of the best practices can be a bit tough. In other words, the difference of sectors to which the "benchmark partner" and "company being benchmarked" belong can pose hurdles in bringing the best practice in the latter.
However, with a well-planned and structured course of action, one can put the funds available to maximally-paying applications.
On the whole, Financial Benchmarking should be done taking into account the interests of all the stakeholder groups. Keeping the people associated with the organization happy and aware of the happenings at the company will ensure its "long term success".
The actual job of tracking the process of Financial Benchmarking is possible via the framing of KPIs (Key Performance Indicators) on a BSC (Balanced Scorecard). The aspects that are important in obtaining an insight into this process are- Stakeholders" Returns, Expenditure, Financial Health and Improvement. The specific indicators to be put under these categories can be- Annual Revenue Rise, Average Return on Stocks, Mean Rate of Stocks and Rise in Social Contribution for "Stakeholders" Returns". Expenditure can be had with indicators like "Salary and benefits expenditure", "operational expenses", "Recruitment and Training" and "Capital Expenses: Revenues". Further, the Financial Health can be obtained with "current ratio", "Inventory Turnover" and "Debt: Equity Ratio". Improvement in the position can be obtained with indicators like "increase in recognition", "% rise in EPS", "% increase in s urplus funds" and "drop in instances of mismatch between sources and application of funds".