6.3 Inter-Firm Comparison

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What Is Inter-Firm Comparison?

Inter-firm comparison means comparing the financial performance of one business with another business. "Inter" simply means "between", and "firm" means "business" — so you are looking at how two or more businesses measure up against each other.

This is a very useful tool for business owners, managers, and investors. Instead of only asking "did our business do well this year?", inter-firm comparison lets you ask "did our business do well compared to our competitors?"

For example, imagine two bookshops — Shop A and Shop B. Shop A made a profit of 20,000 dollars this year. That sounds great on its own. But if Shop B made a profit of 80,000 dollars with a similar size of business, suddenly Shop A's performance looks much weaker. This is exactly what inter-firm comparison helps you see.

The most common and reliable way to compare two businesses is by using accounting ratios (numbers calculated from financial statements that show how well a business is doing in different areas). Ratios are better for comparison than raw figures (plain numbers like total profit) because they put performance into proportion — so even businesses of different sizes can be fairly compared.

Why Do Businesses Use Inter-Firm Comparison?

• It helps a business see how it is performing relative to its competitors (i.e., compared to rivals in the same industry).
• It helps managers identify weaknesses — for example, if a competitor has a much better profitability ratio, the business knows it needs to improve.
• It helps investors decide whether to put their money into a particular business rather than a competitor.
• It helps managers set targets — for example, aiming to match or beat a rival's ratio next year.