Latest / VoraPrep Audio — Professional Licensure & Certification Exam Prep / [CMA] CMA2: Benchmarking and Industry Analysis: Finding the Story Behind the Numbers
Transcript
- Hey, welcome to VoraPrep Audio. Glad you could join me. We're going to cover a paradox that shows up all the time in business, and definitely on the exam. Imagine this scenario. A company’s CFO gets up at the big quarterly meeting. He announces a 10 percent jump in net profit. Solid numbers. Everyone’s feeling good. But then, that afternoon, the stock price tanks. It drops five percent. What happened? Later that day, an analyst report comes out. It shows the industry as a whole grew its profits by 25 percent. So that 10 percent gain… it wasn’t leadership. It was actually falling behind. And that’s the point of today's topic: benchmarking. Numbers in isolation are totally meaningless. As a management accountant, your job isn't just to report the numbers. It's to tell the story behind the numbers. And you can't tell that story without context. To get that context, there are two main camera angles you'll use. Think of it like analyzing a race. First, there's cross-sectional analysis. It's a fancy term, but it's simple. You're just comparing your company to other companies in the same industry. And you're doing it at the same exact point in time. This is competitive benchmarking. In our race analogy, it's like a high-speed snapshot. You see all the runners at the 50-meter mark. You can see, right now, who's ahead, who's behind, and how you stack up against your rivals. The other angle is time-series analysis. This is where you look at your own company’s performance over several periods—say, the last five years. We call this trend analysis. Is our performance getting better? Or is it getting worse? In the race analogy, this isn't a snapshot. It's like reviewing a video of just one runner. You're checking to see if they're speeding up, getting tired, or holding a steady pace. You need both to get the full picture. Now, a big problem comes up right away. How do you compare a little five-million-dollar company to an eight-billion-dollar giant? The raw dollar amounts are useless. It's like comparing a motorcycle to a freight train. The tool for this is called common-size financial statements. It's a simple but really powerful idea. You just convert every single line item into a percentage. For the income statement, everything becomes a percentage of total revenue. For the balance sheet, everything becomes a percentage of total assets. Suddenly, size doesn't matter anymore. You can put that motorcycle and that freight train side-by-side and see which one is more efficient. You get a true, apples-to-apples comparison of their strategy and their cost structure. Let's apply this to a typical exam question. Seeing it in action really makes it click. You’ve got two companies, Apex Manufacturing and Zenith Industries. They're direct competitors. You're the management accountant for Apex, and the board wants to know how you're doing against Zenith. First, you look at the raw numbers. Apex has revenue of 5 million dollars, and Zenith has 8 million. Zenith’s net income is 784,000 dollars, while Apex's is only 455,000. Just looking at that, you might think, "Well, Zenith is bigger and more profitable. End of story." But that's not analysis. So, step two is to standardize. We create common-size income statements. We take every single line item for Apex and divide it by its 5 million in revenue. Then we do the same for Zenith, dividing everything by its 8 million in revenue. Now we can really compare. So, what story do these percentages tell? First line down, Cost of Goods Sold. For Apex, COGS is 55 percent of its revenue. For Zenith, it's 60 percent. This means Apex gets to keep 45 cents of every dollar in revenue as gross profit. That's its gross margin: 45 percent. Zenith only keeps 40 cents. The industry average, by the way, is 42 percent. So right here, Apex looks fantastic. It’s more efficient in its production or it has better pricing power. That 45 percent gross margin is a huge advantage. It's a clear win. But you have to keep reading the story. We go down to the next major expense: SG and A. That’s Selling, General, and Administrative costs. And this is where the story completely flips. Apex is spending 30 percent of its revenue on SG and A. Thirty percent. Look at Zenith—they’re only spending 24 percent. The industry average is 25 percent. So that beautiful gross margin advantage that Apex had? It's been completely wiped out by high overhead. And when you get to the bottom line, the net profit margin, the final score is in. Apex's net profit margin is 9.1 percent. Zenith's is 9.8 percent. And the industry average is 10.5 percent. So despite being a star in production efficiency, Apex is actually underperforming both its main rival and the industry as a whole. The conclusion you'd give the board is clear. The problem isn't making the product. It's the cost of running the company. The key recommendation is to investigate and control those SG and A. expenses. That's the one thing holding them back. See how that works? The tempting but wrong answer on the exam would be to see that 45 percent gross margin, declare Apex the winner, and move on. The exam is testing your ability to see the entire picture, not just one good number. This brings up a really common pitfall—what I call the 'Good Ratio' Trap. You see a number that looks good in isolation and you jump to a conclusion. For example, you see a company with a current ratio of 4.0. You might think, "Wow, great liquidity!" But what if the industry average is 2.0? That 4.0 ratio might actually be a sign of a serious problem. It could mean the company has too much cash just sitting there, doing nothing. Or it could mean they have bloated, slow-moving inventory they can't sell. A number being 'high' isn't automatically good, and 'low' isn't automatically bad. You always have to ask: is this number different for a good reason or a bad reason? The answer is always in the comparison. Of course, making these comparisons in the real world has its challenges. You've got to be a bit of a detective. For instance, are the companies using the same accounting methods? Say Apex uses LIFO for inventory, and Zenith uses FIFO. Their cost of goods sold isn't directly comparable, especially when prices are changing. You also have to think about the business mix. It's hard to compare a diversified company to a 'pure-play' that only does one thing. Then there's geography. Different countries have different tax rates and economic conditions. Even having different fiscal year-ends can skew the data, especially if the business is seasonal. You have to be aware of these things to make smart adjustments. To build a complete analysis, you need to look from several angles. First, compare the company to the industry average. Second, look at the trend over time. Is performance getting better or worse? Third, benchmark against key competitors, like we did with Zenith. And finally, compare the company's current performance to its own history. Looking at all these angles gives you a truly comprehensive view. So, on the exam, remember this. You won't just be asked to calculate a ratio. They want you to interpret it. Don't just say 'Apex's gross margin is higher.' A better answer is, 'Apex's higher gross margin suggests more efficient production, but this competitive advantage is completely eroded by poor overhead control, as seen in its high SG and A. percentage.' Connect the number to a business reason. That’s what shows you truly understand it. Remember, financial numbers need context. That context comes from comparing them to industry averages, direct competitors, and your own company's history. Use common-size statements to compare companies of different sizes. And always look for the story behind the numbers. 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