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How to Help Small Businesses Compare Their Financials to Their Industry

Posted October 15, 2019 by Bobby Martin

“Are we keeping up with the Joneses?” Owners of small and mid-sized businesses (SMBs) are always interested in how their competition is doing…and how they compare to them financially. Yes, it may be about ego to some degree, but it also tells a business owner how their company is faring financially. Are they middling, above average, behind the eight ball? 

Comparing apples-to-apples

If you are calling on SMBs, you have an opportunity to provide a tremendous gift to these business owners by not only showing them how their financials compare to their peers, but by also interpreting the financial comparisons for them, and providing insights about how they are calculated and what factors influence their results. Finally, when you’re able to compare your customer or prospect’s business, you’re then able to teach them what these financial statistics mean and help them consider improvements to their business – which is the main goal for an advisor. 

For professional service providers like accountants, financial planners, attorneys, and more, comparisons also are useful information for you to know about your SMB clients to help assess risk or to choose an attractive niche to pursue.

But there are some considerations to keep in mind when looking at a company’s comps to ensure you are doing a true apples-to-apples comparison.

Integrating financial data

If you are calling on SMB clients and prospects, there are a number of ways that you can incorporate financial comparison data into your meetings, presentations, and other communications. A few suggestions:

  • Gain credibility with prospects by providing industry-specific financial benchmarks as a value-add leave-behind on calls.
  • Print and share relevant industry financial content with business owners and offer to do a side-by-side comparison. 
  • Improve prospect presentations with relevant, industry-specific financial statistics that lead to strategic conversations about their business. 
  • Incorporate information on pertinent red flags and potential strengths into your internal financial analysis or risk assessment.

How a business is financially managed is circumstantial and highly personal 

Each industry, especially mature ones, has unique fundamentals that influence how profitable and efficient it can be run. However, it’s also important to keep in mind that each individual business has its own circumstances and influences that drive financial success. 

For example, one important factor is how fast the owners of each business desire to grow. If the owner or owners are looking to grow fast, then they’ll often invest their profit into investments that help it grow such as marketing, research and development, inventory, new physical locations, new equipment, more staff, and other things that help drive growth. 

Local competition may also be an important factor for profits and financial efficiency. For example, due to unforeseen and unpredictable circumstances, one city may have very few HVAC companies; another may have several that have been around for years, which all affect grow margins. 

Access to real estate may be another factor for many industries. For example, a business that has owned its own real estate for years and operates in a good location can compete very effectively against newcomers that don’t own their real estate and must pay rent in a less desirable location. 

The point is this: There are unlimited factors. Your job as a small business advisor is to use financial industry averages just as a starting point. The most important part of your job is to cull through the factors that create industry differences and to make suggestions for ideas that could improve their business without being judgmental with regards to their financial results. 

Which comparisons should you use?

To accurately compare a client’s financials with their peers, you’ll want to take into account factors like cash intensity, inventory intensity, labor intensity, profitability, and capital intensity. 

A few of the main providers of financial statistics by industry are Powerlytics, The Risk Management Association’s (RMA) Annual Statement Study, and BizMiner. You also can check with the industry’s trade association because it’s not uncommon for them to publish comprehensive financial studies with industry-specific details. 

Vertical IQ also offers comprehensive financial comparisons in our Financial Insights chapter of each of our 450+ Industry Profiles. You can apply filters to align with Small Business, Medium Business, and Large Business. There also is a Financial Summary section found at the top of each industry’s Just the Numbers chapter.

When it comes to which financial statistics to show your client, in addition to the regular financial ratios such as operating profit margin, current ratio, and total debt/equity, you may also want to dive into more specific statistics such as rent or advertising as percentage of overall revenue. 

Be sure to consider sales size and other factors

Ideally, when conducting any financial analysis, you should try to consider the variables within the data population that could skew how a company’s data compares to their overall industry. Examples of variables might include the breakdown of companies within each sales segment, the geographic market in which they are located, the seasonality of the location, etc. 

I hope this helps you navigate how to best share financial data with your clients. If you’d like to see samples of any of the data described in this post, please contact Vertical IQ, and we’ll be happy to help you. 

>> Start sharing valuable financial comparison data with your SMB clients and prospects. Visit https://verticaliq.com/ to get started for free today!

 

Tags: banker, small business owner, small business, adivsor, small to medium sized business, financials, industry information

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