Problem With Industry Standards

Industry standards tend to create more problems than they solve. They:

1. Lead to complacency.
2. Identify problems without offering solutions.
3. Are based on inconsistent accounting measurements.

Then there’s the possibility that some companies are “rounding up” even though industry standard reports provide anonymity to the reporting companies.

Let’s explore the three problems listed above in greater detail.

Complacency

If I had a nickel for every time a client said “Well, we meet that standard.” I’d be a hugely wealthy man. Why is it that so many of us are satisfied with being average?

My retort to the “we meet that standard” is “Why not be in the top quartile? Why aren’t you raising the bar for the industry? Someone is going to do it, why not you?”

To me, complacency is the earliest stage of decline. When we become comfortable with where we are, what we’ve accomplished, we stop learning and growing. We see that in employees who are categorized as “retired on the job.” We see it in companies who quickly lose ground to their competitors, then have a devil of a time making up that ground.

As if complacency wasn’t damaging enough, industry standards often highlight problems without offering solutions.

Problems without solutions

When companies find that some of their metrics are below the industry average, they realize that they have a problem. What the industry report isn’t providing is a solution to the problem…unless the report includes best practices…which few do.

While awareness is the first stage of problem resolution, it’s far from solving the problem.

Inconsistent accounting

As someone with both CPA and CFO experience, I can tell you that accounting rules offer options that can dramatically impact the numbers seen in the financial statements. Here are a few examples to illustrate this point:

• Companies can use either the cash or accrual method of accounting. The cash method records transactions only when cash changes hands while the accrual method records transactions when they occur whether cash changed hands or not. It’s possible for a company to show a profit using the cash method and a loss using the accrual method or vice versa.
• Inventories can be valued based on first-in first-out, last-in first-out, average cost or standard cost. Each method impacts not only inventory value, but the profit being reported as well.
• Equipment repairs can be an expense or they can be added to the asset cost if they extend the life of the equipment. Who makes that judgment? The leaders of the company who are involved in reporting their results to the industry association.

It’s difficult to assess how your company is doing against others in your industry when you don’t know which accounting rules they’re using.

Takeways

To me, industry standards are only helpful in establishing goals to outperform the industry. Having said that, the same can be accomplished by continuously improving your existing metrics…a more apples to apples comparison. My Financial Awareness & Strategy program helps you identify which metric improvements will produce the greatest results with the least effort..

Resources

Making the EXCEPTIONAL Normal program helps you identify and nurture emerging leaders who elevate all around them to higher levels of performance and greater job enjoyment.

Financial Awareness & Strategy program where employees learn to identify opportunities to improve financial results and prioritize these opportunities on the basis of which produces the greatest impact with the least effort. Greater financial awareness = Better decisions.