In order to understand what we are trying to do at smallbusinessbenchmarks you may need to consider some key definitions and how we apply them. So here are our thoughts on what you might need to know.

Defining small business for this study

There are a range of terms used to describe various forms of small businesses. These include terms such as: Small Firms. Small and Medium Enterprises (SMEs); Family Business, Home Based Business, Home Business, Micro Enterprise, Entrepreneurs, Sole Traders, Micro Firms...the list goes on. For the purpose of this benchmarking tool we use the term small business and limit our focus to businesses with turnover less than 10 Million dollars per annum and less than 20 employees (full time equivalent). In addition the business must be one where the owner(s) take an active part in managing the business and the business is not a passive investment (such as a share trader or real estate investment).

Types of benchmarking

Benchmarking is an often used and sometimes abused term. Prior research has shown that even where companies do assert that they are using benchmarking techniques nearly half are only comparing financial performance, not broader management practices.  In fact, in different contexts benchmarking has been represented as anything from a broad scoping study of an industry to a long-term partnership between two organisations who study each other in search of best practice. There are four distinct approaches to benchmarking that may be applied to SMEs, these include:

• Internal benchmarking, which has a narrow scope contained within functions and departments of an organisation either within one geographic location or across multiple locations.
• External best practice benchmarking, whose aim is to identify best practice no matter what the sector or location. It is broad, change stimulating and holds out the possibility of breakthrough discoveries.
• Competitive benchmarking, that focuses on competitors within the sector. Once ethical concerns over privacy are addressed it holds out the promise of being relatively easy to apply because of the similarity of issues between the businesses being benchmarked.
• Sector benchmarking, which is a broader type of benchmarking that makes the data broadly available to all, making it simple to identify industry trends but difficult to derive specific recommendations.

Our SB² tool is a novel form of competitive benchmarking and our periodic snapshot reports are sector benchmarks.

The six factors measured in our Small Business Success Index

All results are reports as a factor score, showing whether you are better or worse than the norm. If you get a negative score that means on average your competitors are doing better than you for that factor, if you get a positive score you are ahead of the norm in that regard.  Here is an explanation of the six factors and how to interpret your scores.

Turnover (TO): this factor is not hard to interpret, if the number is negative you are selling less than is the norm for your industry. Of course this may not be such a problem for you if you only run the business part-time, choose to occupy a smaller outlet or you are out of the main area of customer traffic. Many small business owners do trade off turnover for a preferred location or lifestyle.

Profit per owner hour worked (PPHW): this factor is compiled using an estimate of profit before tax and then shared between the total effort of all business owners. This is a key ratio in the SB² method since it is a clear indicator of who is working hard and who is working smart! If turnover (sales in your business) is also at acceptable (to you) levels, then a positive score here is suggestive of a good business model returning you superior results.

Perceived overall success (POS): this factor is based upon a bank of questions that measure your beliefs about how successful the business is (or will be) in terms of reaching your personal and business goals. The POS has been proven a reliable measure of success in prior studies we have conducted. A positive score on this factor should be considered in light of which other factors are also in positive territory. If for example, you have a POS of +1 but no good scores (positive) on  profit, turnover or return on asset (ROA) factors it is possible that you would tell others that you love the ‘lifestyle’ and don’t really want to be a millionaire, you just like being self employed. The value of the exercise in this case would be to reflect upon your motives for being in business and then realign your strategies accordingly.

Capacity Utilisation (CU): this factor is an estimate of how close you are to producing and selling your product or service at your maximum capacity. From a purely economic perspective you may wish to aim for close to 100% CU which would cause you to occupy the equal highest factor score in your industry. However, in terms of setting your own goals, some small business owners may opt for a CU target less than 100%. You may do this to be in harmony with your own desires for a slower paced ‘lifestyle’ business. Of course the impact of accepting lesser levels of productivity will have an adverse effect upon other factors such as your profitability, turnover and return on assets.

Lifestyle Score (LS): the meaning of lifestyle benefits is self defined in WASB2. In prior studies many owners have conveyed to us a perception of the benefits that being in business have bestowed on their life outside of the business. For some it is about operating in an enjoyable, positive and sustainable environment. For others, lifestyle advantages relate to family friendly business hours and hence to attainment of ‘work-life balance’. There were also some owners who connect the financial rewards they get from running their own business to their ability to buy nice things, travel to exotic locations and to simply not have to worry about money. Some also consider the advantages of having the time and means to get involved in community and charitable causes.

Return on Asset (ROA): this factor compares your estimated profit (before tax and owners wages) to your tangible and intangible business assets. Intangible assets are included in this calculation because often the largest intangible for a small business will be the value of the goodwill tied up in the business purchase or sale price.