Until recently, Greg Smith, president and CEO of the $1.5-million systems integrator the Petra Group Inc., based in Corning, N.Y., rarely examined how his company compared with the rest of the IT nation. Why would he? Sales and profits had grown every year since the company's inception, in 1993.
But in 1998 sales flattened. Petra faced unprofitability for the first time. Though it was easy to attribute losses to the sales slump, Smith felt there was more to the story -- he just couldn't pin down an answer. Was he overspending in ways he couldn't see?
In passing, Smith mentioned the problem to his lawyer. The lawyer gave Smith the name of an accounting firm in the area, Kirby Beals Maier, that was familiar with private-company growth issues. The firm's Nancy Kirby suggested that Smith benchmark Petra's numbers against those of other IT-services companies of the same size. Specifically, she wanted Smith to examine payroll as a percentage of sales, which is crucial in an employee-dependent services company.
Smith quickly obtained two industry studies. One was from Robert Morris Associates, a nonprofit group in Philadelphia whose studies are used regularly by bankers and loan officers. The other came from the Chalfin Group Inc., a consultancy in Metuchen, N.J., which Smith found through various Internet searches.
That was only the beginning. Armed with industrywide information, Smith quickly saw a problem: payroll and related costs for his 15-employee business exceeded 60% of company sales, a marker that the Chalfin Group generally designates as a red flag for companies trying to stay in the black. "At certain points you have to face the music to remain profitable," Smith says. Part of facing the music for Smith meant reducing his head count by two and using contractors instead of staff employees.
At Kirby's prompting, Smith also checked Petra's assets-to-liabilities ratio. It was .82 -- too low, in her view. "He had too much short-term debt," Kirby says, most of which came from having to pay down a $100,000 line of credit every year. Smith shifted the majority of his debt from the credit line to a seven-year note, reducing his line of credit to a mere $35,000. Although such a small line may mean future cash-flow troubles, Smith isn't worried: Petra bills biweekly, and its accounts receivable turn over 10 times a year. In one study that Smith looked at, the average turnover of receivables was 5 times a year.
Smith used the numbers as guides rather than as absolutes. That's an approach most research groups recommend in order to take into account the vagaries of individual businesses. "There are so many variables," says Robert Chalfin, president of the Chalfin Group. Chalfin adds that the survey process itself often skews information in favor of profitable companies. "They're happier to talk about their results," he says.
Smith has also become a lot more scrupulous in other areas, paying more attention to the company's weekly break-even point of $23,000 and charting sales in relation to it. He's learned that a big part of financial discipline is in monitoring the simple things. "Losing money for a year is a good wake-up call," he says. --Ilan Mochari
"No single ratio tells the whole story," says Robert Chalfin, president of the Chalfin Group Inc., in Metuchen, N.J. Still, that doesn't keep consultants from compiling -- and businesses from buying -- industry statistics. Where can you find the benchmarks for your industry? Here are some likely sources:
Industry groups and trade associations. Many trade groups have statistics readily available because they often do their own surveys of member companies. Most groups also have a handle on who else is tracking the industry.
Prominent corporate partners. One giant computer company conducts surveys at the regional workshops or conferences it arranges for its partners and resellers. Your big-name partner most likely has good industry information; if not, it can't hurt to attend the workshops and ask colleagues.
Regional groups. Since industry numbers -- such as salaries -- vary widely, regional statistics often paint a clearer picture. Some organizations, such as the Greater Phoenix Economic Council, keep data about such factors as wage rates.
Accounting firms. If your accounting firm works with many small private companies, chances are that it knows where to find information on your industry. One oft-cited group that provides statistics is Robert Morris Associates (www.rmahq.org), a nonprofit in Philadelphia whose numbers are used by bankers to size up the credentials of loan applicants.