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What Is Cash Flow Benchmarking?
Managing cash flow is one thing and while it’s important, cash flow management benchmarking is only achieved through not just comparing your own history, but another company’s history and achievements or failures to gain insight and implement new plans. Often cash flow benchmarking uses a specific industry and compares success and achievements, and whether they harm or hurt the industry in order to make changes.
In my experience with cash flow management, at least in the auto dealership industry, we utilize what we call a Dealer 20 Group. Each month, dealerships that participate review each other’s financial statements, including cash flows and exchange ideas and offer suggestions. This falls more under the heading of “informal benchmarking."
According to QFinance, best practice cash flow management benchmarking offers the same comparison situation, however, “using performance data obtained by studying similar processes or activities and identifying, adapting, and implementing the practices that produced the best performance results."
With informal benchmarking, an analysis may be performed but no new processes or practices are implemented. Informal benchmarking is also done through networking, reviewing other company’s websites, and hiring experts that are familiar with your industry.
Actually implementing the results of benchmarking is the key here.
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Using Benchmarking for Cash Flow Management
Think of benchmarking as goals you need to achieve to have the cash flow you want. British guitarist Dan Hawkins said of benchmarking, “You can muck around with different guitars for certain bits, but you have to have your own sound. That's your benchmark, that's your sound."
The same is true to reach your goals in cash flow management benchmarking. The final results must be uniquely applied to your company in an appropriate way and through endeavors determined by actual research.
Let’s look at an example I have come across using the auto industry’s Dealer 20 Group as a benchmarking source:
During a Dealer 20 Group meeting, I revealed that my inventory of large heavy duty trucks was higher than I wanted it to be and the insurance, flooring, and interest to keep those trucks on my lot was hurting my cash flow.
Another dealer in the same state as mine, but located extremely south of my dealership noticed that my truck inventory consisted of heavy duty trucks loaded with all the extras, meaning a much higher price. He pointed out that the heavy duty trucks he ordered were base models and sold like hotcakes. We then determined that we both lived in an area where a certain culture desired and could afford only base model heavy duty trucks so most likely, that’s why mine weren’t selling.
Instead of doing nothing with this revelation to help increase my cash flow management, I dealer traded the loaded trucks to a metropolitan dealer who had an audience that needed them and replaced them with base model trucks that did indeed sell like hotcakes; hence improving my cash flow.
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Don't Drop the Ball
The biggest mistake most business owners make when using cash flow management benchmarking is once a problem is identified and a solution found, the solution is never implemented or in other words, the business owner drops the ball and continues on with normal practices.
Effective cash flow management is a challenge all by itself and if you can find a way to utilize cash flow benchmarking to improve how you manage your cash and control it, you need to implement those ways to see true results.
If you find you have problems controlling the cash flow for your business and want improvements, try and connect with competitors that are not direct competitors in your area first. Also utilize the Internet as a research tool to review websites and join business forums such as Linked In; business ideas are more commonly shared on this social networking site.
Begin with an honest reporting of your cash flow and then once you find ideas that you feel will work for you, write those down, and then analyze how those ideas can be implemented to improve your cash flow—and be sure to implement them! Give the implemented practices at least three months to see if you notice a difference. If not, it’s time to hit the benchmarking research path again and complete some more comparisons to gain new insights.
Cash flow management benchmarking can be achieved it you don’t drop the ball once you identify ideas and instead, use those ideas to make improvements.
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- QFinance: (Robin Mann) Accessed 7/28/10 - http://www.qfinance.com/performance-management-best-practice/everything-you-need-to-know-about-benchmarking?full
- Dan Hawkins Quote - http://www.brainyquote.com
- Money Hand (Morgue File)
- 20 Number (http://commons.wikimedia.org/wiki/File:Bundesstra%C3%9Fe_20_number.svg)
- Football Player (Morgue File)