Performance benchmarking: how can it help my business stay ahead of competitors?

You might have a good sense of how your business is doing, but how does it measure up against the competition? This isn’t just about curiosity. Performance benchmarking - the process of understanding how your business compares with other similar businesses - can help you pinpoint areas to improve, uncover hidden opportunities and make smarter, data-driven decisions that keep your business ahead.

In this guide, you’ll learn what performance benchmarking is, why it matters for small businesses, and how it can give you the insight you need to boost results and maintain a competitive edge.

What is performance benchmarking for small businesses?

Performance benchmarking (sometimes also called business benchmarking) is the process of comparing your business’s key financial and operational metrics to those of similar businesses.

That might mean looking at how your profit margins, overheads or cashflow stack up against those of other businesses of similar size, operating in your industry.

Performance benchmarking is a way to see your business through a wider lens, using real-world figures from your peers to guide your next move.

Rather than relying on guesswork when it comes to how your competitors might be doing, you can use business benchmarking to gain data-driven insight and can act with confidence, knowing your choices are backed by real market data.

What business questions can performance benchmarking help me answer?

Performance benchmarking gives you a simple way to access insights about competitor performance without having to perform complex analysis. It’s a practice that can help you answer important questions, such as:

Are my business costs too high?

Comparing your expense ratios or actual day-to-day running costs with industry averages can help you assess whether your costs are creeping up compared to those of your competitors. For example, if the owner of a small construction firm discovers they’re spending 20% more on materials than similar businesses, they might decide it’s time to renegotiate with their suppliers, or consider new suppliers.

Is my business as profitable as it could be?

By looking at net profit margins across your industry, you can spot whether you’re performing below, at, or above the average. This kind of insight can turn vague concerns like “I think we could be doing better” into actionable steps, backed by real data.

For example, a small graphic design studio might discover that while its revenue is increasing, its margins are slimmer than most. This discovery might prompt the business owner to review their project pricing or their client terms.

How can my business operate more efficiently?

Benchmarking highlights efficiency gaps, prompting workflow improvements or automation to free up time for higher-value work. For instance, a small accountancy practice might notice its admin costs are significantly above the industry norm and decide to implement more streamlined processes as a result.

Where are the opportunities for business growth? 

Benchmarking uncovers opportunities, guiding investment in e-commerce or digital marketing to reach customers who competitors are already capturing. A family-run retailer might see its online sales lagging behind sector averages and therefore decide to ramp up its digital marketing activity. 

How can performance benchmarking give my business a competitive advantage?

The insights you gain from benchmarking don’t just help you understand your position in the market. They help you strengthen your competitive edge. 

These are some of the tasks that will be easier once you understand how your business stacks up against similar companies.

Setting realistic performance goals

Benchmarking allows you to set targets grounded in industry standards backed by real market data.  

Prioritising your efforts

Identify which areas (e.g. costs, pricing, efficiency, growth) offer the biggest opportunity for improvement. 

Focussing on strengths

See where you’re outperforming your competitors so you can double down on what’s working.

Spotting trends early

Anticipate challenges before they affect your business by tracking seasonal shifts in your peers’ performance.  

How can I get started with performance benchmarking for my small business?

If you use modern accounting software, you may already have access to a report comparing your business performance to those of your competitors.

FreeAgent’s Performance Benchmarking report pulls data from anonymised, aggregated accounts of similar businesses to yours. This gives you a live snapshot of how your business is performing against competitors across key financial measures.

If you don’t use accounting software like FreeAgent, you will find performance benchmarking more complicated. These are some of the ways you can manually gather data from similar businesses.

Collect industry benchmarks

Use reports from trade associations, government sources or industry publications to find average profit margins, overhead ratios and other key metrics for businesses of your size and sector.

Track your own financial metrics

Record key figures like your sales, day-to-day running costs and profit margins, and compare them to the industry averages you’ve collected. Over time, this will reveal trends and areas for improvement.

Network with peers

Join professional networks, local business groups or peer-to-peer forums where owners may offer insight into their own business performance. This can help you gauge how your business is faring compared to others in your sector.

Inside FreeAgent’s Performance Benchmarking report

FreeAgent’s Performance Benchmarking report displays your operating profit for each quarter, broken down into your quarterly income and quarterly costs. 

You can also view a breakdown of the income and costs – which make up your business’s operating profit – for each quarter.

This information gives you a baseline understanding of how your business is performing against the three most recent quarters. For example, you can spot seasonal trends in your income and day-to-day running costs – like higher costs in summer or slower sales in winter – and plan your cashflow accordingly.  

You can also see whether recent changes, such as a new pricing strategy or marketing campaign, are having the expected impact on your operating profit. 

How your performance compares to competitors

FreeAgent can also show you how your business’s quarterly performance compares to similar businesses in your industry. 

If you’ve opted in to anonymously share your data and FreeAgent has enough data to provide a meaningful comparison, your Performance Benchmarking report will include an orange line graph to show the data values of similar businesses.

This data allows you to see whether your business is keeping pace with your competitors, and take action if your growth or profitability start to lag behind.

This insight also takes the guesswork out of setting objectives for your business. You can benchmark your performance goals more realistically, setting targets based on real-world results from similar businesses.

You can also spot areas where you’re outperforming your peers, so you can do more of what you know is working.

Find out more about FreeAgent’s Performance Benchmarking report in our Knowledge Base article.