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Business Financial Benchmarking.

BENCHMARKING is a well-known management technique that businesses use to measure their performance against their competitors or industry norms. Financial benchmarking employs industry financial data and ratios to estimate a company's performance in comparison to its peers. These types of data help companies understand industry averages, set goals, predict or evaluate their own cost structure and revenue levels, and position themselves strategically when requesting a loan.

Government statistical agencies collect data on business and economic conditions. Leading agencies which release data that can support business financial benchmarking include the Internal Revenue Service (IRS), U.S. Census Bureau, Bureau of Labor Statistics (BLS), U.S. Department of Agriculture (USDA), and U.S. Securities and Exchange Commission (SEC). Trade associations gather and aggregate data for financial benchmarking, while several secondary sources publish calculated financial ratios. Results vary depending on the data gathering methodology.

INTERNAL REVENUE SERVICE

The IRS's Statistics of Income (SOI) Program complies corporate tax statistics based on stratified probability samples of income tax returns or other forms filed with the IRS. Sample classes or strata are based on criteria such as industry, total assets, and total receipts (irs.gov/pub/irs-soi/sampling.pdf). The main publication for business financial benchmarking is the "SOI Tax Stats--Corporation Complete Report" (irs.gov/statistics/soi-tax-stats-corporation-complete-report), which is a collection of aggregate statistics, sorted by industry, size of total assets, and size of business receipts. It provides statistics on selected balance sheet, income statement, and tax items as reported by corporations. The IRS also provides separate statistics for S Corporations, Partnerships, and International companies (irs.gov/statistics/soi-tax-stats-business-tax-statistics).

More granular data is provided by the SOI Tax Stats--Corporation Source Book (irs.gov/statistics/soi-tax-stats-corporation-source-book-us-total-and-sectors-listing), which collects selected items from balance sheets and income statements, organized by major and minor industry groups. Industry detail is based on the North American Industry Classification System (NAICS). The Corporate Source Book package offers downloadable tables from 2000 on. Since 2004, the Corporation Source Book has provided a new format for downloading the data in one file (irs.gov/statistics/soi-tax-stats-corporation-source-book-data-file), which is also readable by most statistical software packages. The SOI also developed a Tax Stats Table Wizard (taxstatsta blewizard.com) to query the tax data and export the data tables based on the queries.

U.S. CENSUS BUREAU

A series of U.S. Census Bureau surveys can be used for business financial benchmarking. The U.S. Census Business Expenses Program compiles statistics on business operating expenses for retail trade, wholesale trade, and service industries. These surveys include the following:

* Annual Survey of Manufactures (census.gov/programssurveys/asm.html)

* Annual Retail Trade Survey (census.gov/arts)

* Annual Wholesale Trade Survey (census.gov/awts)

* Service Annual Survey (census.gov/programs-surveys/sas.html)

The surveys provide industry-level statistics on annual payroll, employer's cost for health insurance, benefit pension plans, contribution plans and other fringe benefits, annual wages, cost of materials, resale, fuels, capital expenditure, rental payment, operating expenses, expensed computer hardware and software, advertising and promotion services, and more. However, the level of detail varies by surveys and industries.

The Economic Census (census.gov/programs-surveys/economic-census.html) is conducted every 5 years. The 2017 Economic Census was conducted during 2018, and the data will be released between September 2019 and December 2021 (census.gov/programs-surveys/economic-census/news-up dates/updates/key-dates.html). For some industries, it provides data related to product lines, concentration ratios that are not included in the annual surveys. It also expands some of the annual survey data to the regional and state levels. For example, see the Economic Census Data table Construction: Summary Series: General Summary: Detailed Statistics by Subsectors and Industries for U.S., Regions, and States, which provides state-level, NAICS six-digit data.

The U.S. Census Bureau Industry Statistics Portal (census.gov/econ/isp) provides a holistic view of data programs that are available by industries. Other data programs that could be potentially helpful for financial benchmarking include Quarterly Financial Report (QFR): "Manufacturing, Mining, Trade, and Selected Service Industries" (census.gov/econ/qfr/index.html); Annual Capital Expenditures Survey (census.gov/pro grams-surveys/aces/about.html), which provides business spending for new and used structures and equipment; and Information and Communication Technology Survey (ICTS; census.gov/programs-surveys/icts/about.html), which provides non-capitalized and capitalized business spending for information and communication technology equipment and computer software.

BUREAU OF LABOR STATISTICS

The BLS also provides a series of products that measure major sector and industry-level productivity and labor costs. Labor Productivity and Costs (bls.gov/lpc) publishes quarterly and annual measures of output per hour and unit labor costs and industry-level labor compensation costs. Current Employment Statistics (bls.gov/ces) produces "detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls." National Compensation Survey (bls.gov/ncs/) provides comprehensive measures of employer costs for employee compensation, including benefits.

U.S. DEPARTMENT OF AGRICULTURE

The Census Bureau surveys and reports do not cover the agriculture, forestry, fishing, and hunting industries. The agriculture surveys and census are done separately by the USDA. Here are some of the information sources that can help financial benchmarking in the agricultural industries:

* Farm Production Expenditures Annual Summary (usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1066)

* Farm Income and Wealth Statistics (ers.usda.gov/data-products/farm-income-and-wealth-statistics)

* Farm Labor Survey (nass.usda.gov/Surveys/Guide_to_NASS_Surveys/Farm_Labor)

* Census of Agriculture (nass.usda.gov/Publications/AgCensus/2012)

U.S. SECURITIES AND EXCHANGE COMMISSION (SEC)

Another major source for financial benchmarking is financial statements from public companies. Public companies are required to file their financial statements with the SEC (sec.gov/edgar/searchedgar/companysearch.html).

The Form 10-K includes a company's financial statements such as the balance sheet, the income statement, and the cash flow statement. It often provides more detailed financial reports than a company's annual report. For foreign-based companies, the Form 20-F contains their financial statements. These types of data allow companies to do one-on-one comparison, with public companies within similar industries.
Secondary Sources Summary

                                  RMA: FRB
                                  (print)/eStatement
                                  Studies (online)

Industry Index                    NAICS
Number of Industries or Lines of  800
Business Covered
Number of Asset Sales Brackets    Six asset brackets and six
                                  sales brackets

Coverage of Financial Data Items  Balance-sheet item with
                                  selected income data

Number of Financial Data Items    26
Number of Financial Ratios        19
Number of Companies /             260,000
Statements in the Samples
Sampling Sources                  Financial statements
                                  from fnancial institutions'
                                  borrowers and prospects
Availability of Historical Data   5 years in print edition; 19
                                  years online
Geographic Subdivision            Not available in print; by
                                  region data available online

                                  CCH: Almanac
                                  (print)


Industry Index                    NAICS
Number of Industries or Lines of  200
Business Covered
Number of Asset Sales Brackets    13 asset brackets


Coverage of Financial Data Items  Income statement data
                                  with selected balance
                                  sheet items
Number of Financial Data Items    29
Number of Financial Ratios        21
Number of Companies /             5 million
Statements in the Samples
Sampling Sources                  Corporate tax returns


Availability of Historical Data   Not available in current
                                  print edition
Geographic Subdivision            Not available

                                  D&B: Industry
                                  Norms (print)/KBR (online)

Industry Index                    SIC and NAICS
Number of Industries or Lines of  800
Business Covered
Number of Asset Sales Brackets    Varies by industry;
                                  up to eight assets
                                  brackets
Coverage of Financial Data Items  Balance-sheet data
                                  items

Number of Financial Data Items    21
Number of Financial Ratios        14
Number of Companies /             1 million
Statements in the Samples
Sampling Sources                  Financial statements
                                  of public and private
                                  companies
Availability of Historical Data   Up to 5 years
                                  available online
Geographic Subdivision            By region available
                                  for two-digit SIC only

                                  BizMiner Industry
                                  Financial Reports
                                  (online)

Industry Index                    NAICS
Number of Industries or Lines of  5,000
Business Covered
Number of Asset Sales Brackets    Varies by industry; up to 15
                                  sales brackets

Coverage of Financial Data Items  Balance-sheet and Income
                                  Statement data items with
                                  selected cash fow analysis
Number of Financial Data Items    42
Number of Financial Ratios        34
Number of Companies /             13 million
Statements in the Samples
Sampling Sources                  Company data and secondary
                                  statistical sources

Availability of Historical Data   3 to 10 years

Geographic Subdivision            National, state, and metro
                                  level data available


TRADE ASSOCIATIONS

Trade associations often conduct surveys among industry members and offer their own financial benchmarking reports and data. The Construction Financial Management Association's Construction Financial Benchmarker (cfma.org/resources/content.cfm?ItemNumber=957) allows construction companies to compare their financials versus the industry benchmarks. National Restaurants Association publishes "Restaurant Operations Report," which provides crucial data on cost of sales, gross profit, direct operating expenses, and other performance measurements (restaurant.org/News-Research/Research/ Operations-Report); the Specialty Equipment Market Association offers financial benchmarking reports for specialty equipment manufacturers, retailers, and distributors, respectively (sema.org/categories/keywords/sema-financial-benchmarking-program).

MAJOR SECONDARY SOURCES

Secondary financial benchmarking products aggregate data from government data sources or collect their own.

Annual Statement Studies (rmahq.org/annual-statement-studies) is published by the Risk Management Association (RMA), a nonprofit professional organization serving the financial industries. The RMA collects data from its members, which include about 2,500 banks of all sizes and nonbank financial institutions. It also reproduces some of the data from Construction Financial Management Association's Construction Industry Financial Survey. Each year, RMA updates two Annual Statement Studies: Financial Ratio Benchmarks (FRB) and Industry Default Probabilities and Cash Flow Measures (IDP). Both are multi-volume, released in print format, and combined in an online database called the eStatement Studies. The eStatement studies provide access to 19 years' worth of historical data and break out the data by six different regions.

The FRB is derived from analyzing more than 260,000 financial statements from financial institution borrowers and prospects. The FRB data represents both public and private companies, while a vast majority are from private companies (rmahq. org/statement-studies-frequently-asked-questions). The FRB features data for about 800 industries organized by NAICS. However, not all NAICS industries are covered due to the small sample size or questionable data.

The FRB contains composite financial data from balance sheets and income statements in common size format, which allows for easy analysis between companies or between time periods of a company (investopedia.com/terms/c/common size financialstatement.asp). The data for each industry is sorted by both assets and sales, with a breakdown by six size categories with comparative historical data for all sizes for the past 5 years. The benchmarking data includes 26 common financial statement items under assets, liabilities, and income data and 19 of the most widely used financial ratios, including various types of liquidity, coverage, leverage, and operating ratios.

ALMANAC OF BUSINESS AND INDUSTRIAL FINANCIAL RATIOS

The Almanac of Business and Industrial Financial Ratios, introduced in 1971 and published by CCH Inc., ceased publication in 2018. The most recent Almanac is based on data computed from the IRS statistical sampling of corporate tax returns collected from 2014 through 2015. The values on the Almanac are derived from nearly 5 million corporate tax returns, representing both public and private companies.

It covers 199 industries organized by NAICS. The enterprises in each industry are divided into 13 asset size groups, a more granular approach than other sources. For each size group, the Almanac provides 50 comparative norms for revenues, operating costs/income, selected balance sheet items, financial ratios, and other financial factors. The values on revenue and balance sheet items are presented in actual dollar amounts in thousands. Operating costs and selected financial factors are presented in percentages. The Almanac provides critical financial ratios and financial factors, including current ratio, quick ratio, turnover ratio, debt ratio, return on assets, return on equity, and profit margin before/after income tax.

Since the Almanac is derived from IRS raw data, which is based on stratified probability samples of corporation income tax returns, it is a more reliable representation of industry norms. The data from income statements is also more detailed than other sources and includes common-size analysis for rent, advertising, interest, employee benefits, and officers' compensation.

INDUSTRY NORMS AND KEY BUSINESS RATIOS

Industry Norms and Key Business Ratios and the online version, KBR, are published by D&B and available on the Mergent platform (www.mergent.com/solutions/research/key-busi ness- ratios-(kbr). The data is based on more than 1 million financial statements in the D&B financial information base and represent median statistics derived from D&B's financial statement database of public and private companies.

The print version contains five major industry segments: 1) Agriculture, Mining, Construction/Transportation/Communication/Utilities, 2) Manufacturing, 3) Wholesaling, 4) Retailing, 5) Finance/Real Estate/Services. It covers more than 800 lines of business organized by Standard Industrial Classification (SIC) code numbers and subdivided into four geographic areas (Northeast, Central, South, and West) for two-digit SIC industry level. For each industry, it includes 21 typical and common-size financial statement items and 14 key ratios that provide information about industry performance with respect to solvency, efficiency, and profitability. D&B has gradually shifted its focus to the online version. KBR offers the function to search by both SIC and NAICS code and allows users to enter their own information and compare it with industry benchmarks.

BIZMINER

BizMiner (bizminer.com), developed by the Brandow Co., Inc., derives its data from a wide range of public U.S. government statistical sources along with private statistical sources, including InfoGroup, Inc., credit reporting agencies, and business directories. It maintains a database with more than 13 million active businesses. Historical data and BizMiner algorithms are used to inform and test projections for non-reporting firms (bizminer.com/resources/technical/our-data.php).

The content is organized by NAICS code, but BizMiner has also developed an in-house segmentation system which allows BizMiner to classify and report on 5,000-plus industries. BizMiner also manages BizStats.com, a free online source for financial statistics.

The typical BizMiner Financial Reports include Industry Financial Reports, BizBenchmarker, and the Micro Firm Profit-Loss Reports. The most noticeable benefit of the BizMiner industry financial report is its granularity. It breaks the enterprises down to state and metro level with up to 15 sales brackets. The Industry Financial Reports includes 24 typical and common-size income statements, 18 balance sheet items, and 34 financial ratios on performance evaluation in solvency, profitability, efficiency, and turnover for 3-10 years. The BizBenchmarker offers comparative analysis function for businesses with 23 financial ratios and 3-year reports at U.S., state, and metro levels. The Micro Firm Profit-Loss Reports provides profit-loss with benchmarks for startup or sole proprietorship with eight ratios and 3- to 5-year reports.

MORE CHOICES

There are also many other products that offer financial benchmarking data or tools, such as MicroBilt Corp.'s Integra benchmarking data (microbilt.com/product/integra-industry-reports), Sageworks' ProfitCents (profitcents.com), and IndustriusCFO (industriuscfo.com). These products are geared toward financial professionals (including accountants and bankers) and business owners. Rarely do libraries subscribe.

Some industry research reports or databases may integrate secondary financial benchmarking data in their analysis. For example, the IBISWorld database provides industry ratio analysis based on RMA's statements. Mergent First Research Industry Profiles integrate MicroBilt's company benchmark information. In addition, in some other countries, such as Canada, the financial benchmarking data is released by the government. Innovation, Science and Economic Development Canada releases financial performance data every year which includes more than 30 performance benchmarks for more than 1,000 industries across Canada (ic.gc.ca/eic/site/pp-pp.nsf/eng/home).

USING FINANCIAL BENCHMARKING DATA

Use of financial statements information from companies may raise privacy concerns, but under the CFR Sec. 7216, a tax return preparer may use tax return information to produce a statistical compilation without client consent under certain conditions. The compilation must be anonymous as to taxpayer identity, and it may not disclose an aggregate figure containing data from fewer than 10 tax returns (law.cornell.edu/cfr/text/26/301.7216-2).

Another concern is reliability. Data gathered from actual tax returns or filing documents differs from that collected based on statistical sampling. IRS SOI data "tends to give conservative and unrealistically low numbers for operating profits" ("Understanding and Using Benchmark Data," 2008; account ingweb.com/technology/accounting-software/understanding-and-using-benchmark-data). Plus, the data often doesn't have the granularity that businesses expect to have, and the statistical data tables or databases are often hard to navigate.

RMA is considered to be one of the most authoritative sources for financial benchmarking. However, RMA recommends the data be used only as "guidelines" instead of "absolute industry norms." Since the FRB data is not selected in compliance of statistically reliable methods, some of the industry samples have very small sample sizes, which makes the data not representative for that given industry. Sometimes, the extreme or outlier statement can be present in a sample, "causing a disproportionate influence on the industry composite." Other factors, such as operational differences, different labor markets, geographic location, and different accounting methods, influence the comparability and accuracy of the data.

For Industry Norms and Key Business Ratios, although it has financial statements for 1 million companies, many of the very large group samples have been randomly reduced in order to facilitate the many calculations and rankings. This results in some very small samples that may not represent an entire line of business. D&B advises users that Industry Norms and Key Business Ratios "be used as yardsticks and not as absolutes."

Another noticeable drawback of financial benchmarking products is the long publication cycle. As of October 2018, the most recent SOI data is for the tax year 2013. BizMiner's data usually trails by 12 months, but it expects to update some content for calendar year 2018 in March 2019.

Lack of transparency is a common problem for secondary sources. Most of the sources just briefly mention their pools of companies or samples, but don't specify how the pool is managed or what algorithms are used to create the financial benchmarking data. Some of the secondary sources consult other sources to calculate industry norms, but the statement is usually too broad to understand how these sources are used in the data analysis.

WHAT'S THE BEST?

So, what financial benchmarking source should you use? The answer is not obvious. BizMiner reports have the most granular data with wide coverage of financial data items and more local level data. RMA collects data from its member financial institutions' clients, which largely cover private companies. If you are doing benchmarking for a private company, you may find the RMA-FBR more relevant. CCH's Almanac is currently statistically the most reliable source and provides detailed income statements for a number of items, but won't be so going forward, as it has been discontinued.

Most of these secondary sources are sold to libraries as print books or database packages. RMA sells its single industry benchmark report (PDF version) for $155. BizMiner sells single industry financial reports for around $110. If possible, businesses should use multiple reports, do a cross-examination, and evaluate the sources based on the sample size for the specific industry. Businesses need to take a skeptical stance when applying these data and ratios into their benchmark analysis and business planning.

By Grace Liu

Grace Liu (yan.liu1@maine.edu) is business reference librarian, University of Maine.

Comments? Email the editor-in-chief (marydee@xmission.com).
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