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Introduction
This refers to a process where a firm evaluates reviews and compares its internal departmental performance against the set standards and where there is deviation a necessary step is taken accordingly. Any strategy adopted by a firm will have a direct impact on the performance and hence its survival. This explains why the management is always under intense pressure more so when setting strategies for their enterprises.
Financial benchmarking
Financial benchmarking refers to a comparison of an enterprises financial performance over time against the firms standard target. This could be achieved by analyzing different consecutive financial reports from different financial periods. It can be in the form of financial ratios, cash flows, and etc.
Its advisable for an enterprise to compare its financial performance over a period of time. This can help in setting a new strategy, especially where an enterprise is operating in a competitive environment and the performance achieved is below the average compared to its arch business rivals.
Impacts of strategic benchmarking on financial benchmarking and traditional accounting methods
Strategic benchmarking will override financial benchmarking on the following ways;
Staff
In a business environment where competition is so stiff firms will employ a highly qualified professionals who are unique as well as multi-skilled in different fields to counter rivals strategies. This will enable a firm to enter a market niche or lock in all its clients. If a firm does not become innovative then its competitors will take advantage. When this happens the firms share will fall and the value highly depreciates. This will have a direct impact on the basic financial ratios like ROCE and ROI respectively.
Motivation
When a firm compares its employees motivational level over time and finds that they are less motivated, the effect on financial benchmarking is that there will be less output level. The enterprise might experience stock-outs which will eventually lead to lost sales and hence low profits recorded.
Organizational structure
An organizational structure refers to the sub-total ways in which a firm divides its work with respect with its core functional objectives. In times of unprecedented uncertainties a flexible structure is desirable, this will enable an enterprise to adjust to the environmental changes so that it matches it, competitors. Adopting this management style might enable a firm to benefit from economies of scale arising from this nature and hence record higher margins. This will make profitability ratios rise favorably and thus affecting financial benchmarking.
On the other hand, a rigid and bureaucratic organizational structure will leave no room for change. This structure will make the company to be static and susceptible to attack by business rivals, in this situation adjusting to uncertainties becomes very difficult and the firm will always be over taken by it rivals. In this case penetrating a market niche or maintaining the already attracted clients will be cumbersome. The firms value might begin to fall gradually. Liquidity and profitability ratios will eventually fall.
Traditional accounting methods
Traditional accounting methods have come under immense criticism. This is because they do not give the accurate information and are therefore misleading. Some of these methods include: historical cost accounting and activity based costing. Current strategic benchmarking in most cases will be in conflict with traditional accounting methods. This is because modern day managers are dynamic and are ever conscious on company strategies, certain accounting policies and concepts which are not consistent with international accounting standards and international financial reporting standards would be abolished immediately.
Conclusion
Its important for a firm to carry a benchmark on its strategies at the end of every financial period. This will act as a communication channel to the management to act immediately incase of any deviation from the target plan.
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