In what three ways can a financial manager choose a benchmark?

QUESTION

In what three ways can a financial manager choose a benchmark?

A financial manager can choose a benchmark on the basis of trend analysis, industry analysis and peer group analysis. A trend analysis is the study of the patterns in the movement of the variable under consideration. The financial manager studies the trend and compares the actual results with the trend and finds the deviations and thus control process is decided. Second way to choose a benchmark is industry analysis. The financial manager identifies some companies in the industry in which she works and those which are similar to the firm under consideration in terms of the product lines, size, target market etc. Data for such companies is gathered and the benchmarks are set based on their averages. Thus the company expects to achieve at least as much as other companies on an average. The third way to choose a benchmark is peer¦

oup analysis. In this method, basically the competitors with similar products, size, target customers are identified. These form the peer group of the firm under consideration. The financial manager identifies and calculates the performance standards of the peer companies and averages them. This average of the peer group forms the benchmark for the company which makes a goal to achieve this level of performance. The manager can also directly compare its performance with industry leader to know the possible strength areas as well as those of weakness.

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