Energy & Petroleum Articles
Why Benchmarking is Essential for Survival
By Joe Ciccarello, CPA
Gray, Gray & Gray, LLP
“You can only manage what you can measure.” This statement is more than just another business adage — it highlights the absolute necessity of understanding and tracking the day-to-day operations of your oilheat company in order to successfully manage it.
The days of managing an oil business by “gut feeling” are long gone. With the sophistication and huge costs involved today, as an oil company owner you must have a firm grasp on what is happening within your business at all times. And you must be able to track and measure progress, and to identify potential problem areas.
The process of measuring your company’s performance is called benchmarking, and the investment of time and money you put into the process will be repaid many times over. But only if you are diligent in tracking your company’s “vital signs” (key performance indicators) and are then willing to take steps to fix problems or take advantage of opportunities.
Benchmarking is the process of comparing your company’s performance today with its previous performance or, in some cases, measuring your activities against industry standards and “best practices.” The most common measuring stick is year-to-year changes, but some companies “drill down” their benchmarking to measure quarter-by-quarter or even month-by-month performance.
Key Performance Indicators
With so many activities and variables in your business, you may be bewildered about what to measure and how to measure it. Quite simply, you must “follow the money” to determine you company’s vital signs.
Every business needs to identify and track its key indicators in order to monitor the health of the organization and identify favorable and unfavorable trends. These indicators can provide signals that growth and development are occurring on schedule, or that new actions or programs are needed. The trick is to select the proper indicators, understand them, and review them regularly.
A growing business will have different key indicators than a mature one. Some of the numbers may be abstracted from the financial records. Others may be measures of operating activities or business processes. Some may evolve from objective setting activities such as an annual budget or short term improvement plan.
You can measure almost anything through the benchmarking process: gallons sold per customer, cost per service call, sales per employee, advertising efficiency. The key is to select operations and expenditures that provide a snapshot of performance and activity that affects profitability. It is also important to make sure your measurements are consistent, and that your month-to-month or year-to-year comparisons are evaluating the same item.
Getting Started with Benchmarking
Setting up a benchmarking process involves several steps:
- Determine what you will measure. Key performance indicators vary from company to company. Decide which operations are the most important to your business and measure them.
- Be specific. Be very detailed in defining the operations or processes you wish to benchmark. This will help keep you stay focused on what is important. While you may measure a number of aspects of your performance, key in on an important few to monitor frequently.
- Run the numbers. The best way to track performance in a meaningful way is to measure profitability. Every employee, every department, every expenditure you make can be tracked and measured, and its contribution to profitability determined.
- Be willing to make changes. Once you've determined where you need improvement, make sure it gets done. Use continued benchmarking to determine progress toward your goals.
Comparing Your Company to Others
At some point, you should seek a broader perspective on your company’s performance. A logical extension of internal benchmarking is going outside your company to compare your performance to other businesses in the heating oil industry.
One way is to find a benchmarking “partner,” a non-competing oil company of similar size and operating in a similar market. By sharing benchmarking statistics, you may be able to help each other gain important perspective.
Another way to see how you measure up is by comparing your company’s key indicators with industry-wide statistics. For many years our firm published a FuelTrack™ study that provided industry averages for a broad spectrum of key performance indicators. Your state oil associations may also be able to provide similar information.
Make Benchmarking a Priority
Many of us are so busy today that we overlook or bypass the routine monitoring and reviews that are necessary to stay on top of a business. A disciplined, regular review of key performance indicators is a basic requirement for financial success today. The computer technology and systems available now allow any business, regardless of size, to stay healthy by tracking vital signs.
The next step is even more important. Once you begin to measure key indicators and compare your company’s performance with past efforts (or other, similar companies), you need to have the courage to implement changes where and when they are necessary. For example, if you see that your service department payroll as a percentage of service sales is creeping up, you may need to trim your service staff, or increase the price you are charging for service or service plans. Or if you discover that insurance costs have risen dramatically over last year, you may want to shop around for more affordable coverage.
By tracking the flow of money in and out of your company through benchmarking, you will be able to make more informed and better decisions that affect the future of your business
Joe Ciccarello is the Managing Partner at Gray, Gray & Gray Certified Public Accountants, Westwood, MA (www.gggcpas.com). Gray, Gray & Gray has served the accounting, tax, valuation and business advisory needs of businesses in the oilheat industry for over 60 years. Joe can be reached at (781) 407-0300, or via email at jciccarello@gggcpas.com