Michelle’s Successful Consulting Corner - September 2010
Finding Industry Averages
In my article last month, I showed you how to use ReferenceUSA to create your own mailing or contact list for free to help with your marketing efforts. This month, I’ll show you how to find industry averages in ReferenceUSA, the library or www.bizstats.com.
You can add value for your clients by providing reports with key financial ratios compared to industry averages. This benchmarking can help clients see how their business is doing compared to others and identify areas for improvement. Plus, it is a great way for you to deepen your relationship with the client enhancing your position as their trusted business advisor.
There are some companies which provide reports with industry averages (such as ProfitCents), but these can be quite costly. Depending on the size and profitability of your business, you may not want to spend that much money. I’ll show a couple of ways to get industry averages for free or some lower cost options if you choose.
RMA Industry Averages from OneSource in ReferenceUSA
Login to the library website (look at for details about the ReferenceUSA database and how to access it) and go to the ReferenceUSA database and click on the OneSource database as shown below.
If your library does not have the OneSource database, you might want to check with some other libraries. In my area, only one out of three local public libraries subscribe to the OneSource database. After this section, I will show you other ways to get industry averages if this does not work for you.
Once you are in OneSource, you want to search for the appropriate industry. As shown below, I searched for restaurants.
The search results provide me with more details to select the specific type of restaurant – whether it is full service or limited service (see image below). Look through the search results to determine which most closely matches your client (or whatever).
When I click on the NAICS code in front of Limited Service Restaurants, I get the screen below where I can click on the Market Research Report to get the industry averages.
When you first see the pages with the averages, it is somewhat overwhelming so let’s break it down and first analyze the headings. RMA provides the two pages of averages—one based on assets and the other based on sales of the companies. This helps to compare companies of similar size. In the image below, on the right you will see this page is based on sales and the column headings indicates the range of sales. For example, in the image below for companies with sales < $1 million you would use the averages in the first column on the right (for the current period) and $1-3 million in sales would be the 2nd column. Note there is no breakdown based on sales (or assets) for the historical averages.
There are averages on both sides of the page – the left is historical and current data is on the right. You can see the period dates in the column headings.
In the image below, you can use the ratios in the section labeled Income Data (circled in blue in the below) to calculate the ratios for Gross Profit, Operating income and net income. Then, in the Ratios section, there are several other ratios provided for you such as the Current and Quick Ratios, Debt/Equity and more. You can use the ratios provided to calculate the Accounts Receivable and Inventory turnovers and days in receivables and/or inventory.
There are 3 averages for each ratio. For example, looking at the Current Ratio below for <$1 million in sales (i.e. the first column) the top number (1.9) represents the top 25% while the bottom (.2) is the lowest 25% of the companies that comprise the averages. I usually use the middle one (.7) – which is the median or average.
If you cannot access the OneSource database via a library for free you may want to go to the library (as discussed below). If you choose, you can get reports from RMA for $135 for non-members as shown below. Here’s the link
If you would like to read more about the ratios, how they are calculated, etc. here is the link to Financial Ratio Benchmarks – Definitions of Ratios which is a 15 page document which is helpful. Here’s the direct link: http://www.rmahq.org/NR/rdonlyres/15D21745-3F7C-478D-86EE-061F5E9AD888/0/Definition_of_Ratios_200910.pdf
RMA Industry Averages at the Library
If you cannot access the OneSource website to get the industry averages online, then you can go into your library. Most libraries have the book RMA (Risk Management Association) Annual Statement Studies in the reference section. It will save time if you know the NAICS Code before you get there. You can look up the NAICS code online (http://www.naics.com/search.htm). Otherwise there usually is a book of NAICS Codes in the Reference section of the library. Don’t forget to take change to copy the industry averages.
Note: Some people may remember using SIC codes. The Standard Industry Classification (SIC) codes have been replaced with the North American Industry Classification (NAICS) codes http://www.naics.com/search.htm
Free Industry Averages from BizStats
You can get industry averages for free from BizStats (www.bizstats.com) too. You would want to click to see the financial benchmark reports as shown below. However, I’d suggest you check out the other stats they have available too. The stats on risk show what percentage of firms are profitable or not for an industry and more.
BizStats allows you to select whether the entity is a C or S Corporation or Sole Proprietor as shown below.
Next you need to indicate which industry. Also, notice you can purchase the BizMiner Micro Firm Profit & Loss Profiles with more information for $69 (for a 3 year report or $99 for a 5 year report).
Then you will see the average for the industry selected. The nice thing about the averages from BizStats is there is more detail by expense account. For example, you can see the % of sales spent on advertising, insurance, etc. The bad thing is the information is from 2007. However given the current economic conditions it may not be a bad idea to use ratios from a few years ago since that may be more ‘normal’. Below you will see all the financial benchmarking averages available for free. Remember there are other stats in the website which you may be interested in as well.
I usually use averages from both RMA and BizStats to get as much information as possible. Industry associations and organizations may provide industry specific averages (like sales per square foot for retail, etc.) which are useful as well. Keep in mind that you really only need to look up the industry averages for a client once a year. Clients like to see how they compare to their competitors. Plus, it provides a great consulting opportunity to discuss the numbers with clients, what the ratios mean and what they can do to improve the profitability of their business. I find this is a good way to differentiate myself and add value for the client. I hope it will help you too!
Michelle Long is a well respected leader in QuickBooks consulting and helps coach entrepreneurs and small business owners to start and grow their own business. Her first book, Successful QuickBooks Consulting: The Comprehensive Guide to Starting and Growing a QuickBooks Consulting Business, has helped thousands of consultants launch their business. If there is a topic you would like to see addressed in a future column, please email questions and suggestions to Michelle.