Being in business can be filled with uncertainty, especially during years where volume fluctuates. Business owners yearn to know that they’re on the right track, that their business is doing OK, and that their hard work is yielding desirable results. This is where benchmarks come in. It’s comforting to learn that your business is performing similarly to others or that maybe you’re even doing a bit better than average.

However, you need to look at what the benchmark is measuring before drawing any conclusions. Here are three examples showing why you need to look behind the numbers.

Let’s first look at an example taken from construction. Each of these shapes represents a 2,000-square-foot structure, but in order to understand what it would take to construct each, you’d need to know more. For example, the perimeters are all different, so the amount of plywood required to create a subfloor will be different due to differing waste factors.

Now let’s examine how underlying factors also can influence your interpretation of benchmark figures applied to finances. These differences may be harder to identify.

Consider these two ways of defining cost of goods sold (COGS) and overhead:

Company A classifies workers’ comp insurance, liability insurance, the cost of company production vehicles, and field workers’ paid time off as COGS, while Company B classifies these as overhead. As a result, their respective gross margins are completely different; A’s is 28.21% while B’s is 35.4%. But if you check the net margin, they both show the same: 6.41%.

Finally, let’s consider tax structure. Company C is structured as an S Corporation. There is one officer compensated via a salary of \$80,000. Company D is structured as a single-member LLC and the member receives \$80,000 via draws. Keep in mind that member draws do not appear on the profit and loss statement but are classified as equity accounts appearing on the balance sheet instead. The net margin for Company D is just over 14%, while that of Company C is less than 8.5%. Does that mean that Company D is really more profitable? Actually, these companies are identical.

Benchmarks certainly can be useful, signaling cause for concern, satisfaction, or delight. So, while the goal of 35% gross margin and 10% net margin is often thrown around, it’s important to know how those numbers are generated. That way, when you compare your company to other similar companies, you can see whether you are all categorizing the numbers in the same way.