How do you use benchmarks in budgeting analysis?

Benchmarking is crucial in ensuring budget closeness to the possible reality. In both traditional and zero based budget, benchmarks facilitate easy defense, more understanding and strong variance analysis. In some industries like real estate, construction, manufacturing and so on, the competitors prices, estimated cost, market share and government policies are germane in arriving at the prices to apply in budget preparation. Therefore, benchmarks in budget preparation, interpretation, analysis and presentation can not be overemphasized.

I agree about the benefits of using benchmarks in budgeting analysis when you have available useful information and you know how the data was collected and compiled, standards or criterial utilized and really the information is trustable, because the benchmarking will be used to compare how we are doing in the industry / sector / competitors, showing possible improvements in different topics (revenue - costs & expenses - profitability - others). We must know our business first, what we are doing well and what are not, looking for in the most important players of our industry doing and how we can implement any change to improve our company.

Benchmarks can be a very helpful tool for budgeting in any business as they not only require a business to benchmark itself internally, but also externally with its competitors and the changes in the environment within it operates. Tracking advancements in the environment within which the business operates allows for the business to grow in line with its environment effectively providing the goods and services that the consumers need, thus increasing profitability. Another benchmark that can help the business reduce costs is following and aligning with the technology changes which can help improve efficiencies and effectively improve productivity.

A company must also check its funds. When overcapitalized, it needs sufficient revenue generation to meet costs & there's scope to trade more. Vice versa, it'd need funds or should subdue scale of operations. Benchmarking is not just evaluation but aims to perpetually eliminate risks, jeopardizing the sustenance & business efficiency. It is critical to identifying gaps, ensure correct decision making, improve budget efficiency & credibility. But, in sectors, with volatile business & unprecedented market situations (luxury goods, travel, entertainment etc.) rightful estimation is tough. Other reasons, why benchmarks may prove unreliable are oblivion to competitors’ game plan, lack of product USP, deficient strategies to attract new business.

The company's variance analysis will take this approach: compare budget with benchmarks (best practices/standards) instead of the usual approach of comparing budget with actual performance. Reporting and communicating your findings and recommendations to managent to support their decision making, is an important aspect. Variance analysis will now be seen as determing the root cause and amount of difference between the budget and best practice/standard. Benchmarking is the process of studying the best-in-class external parties, products or processes, if appropriate, they can be implemented and used.

Energy & Downstream industry invest heavily in knowing their position comparing with industry's top players. Benchmarks are important instruments to measure your standings while setting budgets & measuring forecast comparing with set benchmarks considering the region and plant type along with capacities & $ maintenance cost / ton.

I'd like to share a noteworthy professional experience. My first major project with a top client came about thanks to a recommendation from a bank executive I'd assisted previously. While it was initially meant for him, he entrusted the project to me. My client, a retired state attorney, exploited my inexperience in negotiation to his benefit. This project was unique, requiring resourcefulness due to limited resources and technical expertise. I used a combination of methods, with benchmarking playing a key role, to establish a practical budget. Leveraging real-time comparisons with similar firms' budgets and utilizing SAAS big data and AI for predictive analytics resulted in a highly accurate projection, with less than a 10% deviation.

I believe all the different types of benchmarking could help to improve our budgeting analysis, in special to understand what are the competitors doing similar and different of us. Sometimes, when we work in an industry with strong benchmarking information and data, we could track the tend of the past and see possible strategic goals of the competitors.

As I said before, when you work in a specific segment or niche of the certain industries, is very difficult to find benchmarking data applicable to compare our business and see where we are at. For some industries, it is easier (specially because a good number of the main players are public companies) and helps a lot to find kpi's of the industry comparable and helpful to improve the business or at least, know where we have improvement areas to work in the future and consider for the coming budgets.

Determine whether internal historical benchmarks or external industry benchmarks are appropriate for the best comparison. Determine what the explanation is for the variances. Did you have a higher salary expense than you expected? Is that because you hired someone or they were promoted? Make sure the story the numbers are telling you is making sense.

In my career I was able to use the benchmarking when I worked in the hotel industry, because the information that we could manage to compare different topics helping in our budgeting process, were reliable and easy to obtain. We focused (my team and I) the use of the benchmarking information to compare operational ratios (housekeeping - front desk - F&B) with our performance, looking for new ideas to help us improve and be close of the industry ratios (in the Country, Region and Segment (travel-corporate)). Analyzing the information, we found the way to understand better and make modifications in our process and procedures that produced important benefits and created new standards for our company in the region.