Are You Average?
By: Jessica Rickard | June 30, 2021
How would you describe the taste of frog legs to someone who has never had frog legs? Some may say that it tastes like chicken or it tastes like whatever you cook it with. You would compare frog legs to something more common that that person has probably experienced.
Now, how would you compare your client’s business to others? And why would you even want to do that?
The first question is easy to answer – you use industry averages to compare your client’s business to other businesses in their industry. It is important to know which industry your client falls into. It wouldn’t make sense to compare an ice cream shop to a hotel staffing company – your numbers would be way off! In order to make an accurate comparison, you can use your clients NAICS code. You can head over to https://www.census.gov/naics/ to find out which NAICS code they fall into.
Now that you have their NAICS code in hand, you need to find some industry averages. The Risk Management Association has a whole library of industry benchmark data that you can sift through here (Or, just buy a Path by Simplex subscription and gain access to industry averages using our industry comparison tool). Now you can start to compare your clients’ numbers to others in their industry.
That sounds like a pretty simple process, but why would you even want to give your client industry comparisons? What is the point? If you’re anything like me and most of the population, you strive to at least be normal and if you’re really working hard, you strive to be better than normal. Everyone wants to believe that they are on par or better than everybody else. It doesn’t matter if you’re running a business or eating frog legs. What if the average number of frog legs eaten by a person was 10? How would you stack up? And how hard would you try to be better than average? When you compare your client’s business to others in the industry, you are equipping them with valuable decision-making information!
For example, if your client has an ice cream shop and you compare their gross profit to others in the industry and find out that your client has a higher gross profit than everybody else in the industry, that means they are doing well! They are making more money than others in their same field and that is awesome!
In the same breath, you may find something where they are performing worse than the industry. This tells you where you should focus your conversation and try to find a way to become average or better than average.
More than just numbers, it is important to perform an industry analysis of your client’s business. This analysis may reveal some things that their competitors are doing that they aren’t which is leading to an increase in sales or cash flow. Once you find out where you are different, you can start making the change and getting their business on the same page as others in the industry.
Industry comparison and analysis is an important part of a business plan and you can provide valuable information to your client if you add this to your advisory arsenal.