The standard industrial classification is a four-digit code developed by the U.S government to assist in categorizing businesses (Vallabhaneni, 2014). Initially, businesses and industries used different methods and tools unknown to others to analyses their performance. The codes were developed to simplify the collection, preparation and to analyze data collected by various agencies to promote standardization and comparability in the presentation of information.

Businesses are assigned the codes depending on the similarities of their services, products, methods of production and delivery system (Vallabhaneni, 2014). The database is regularly updated to provide a list of companies that an organization can use to benchmark with. The codes are used to accurately help in tracing companies that are in the same sector. Thus, one can get a list of organizations that features in their industry of choice.

One needs to evaluate the stability and performance of the business and compare it with other companies. For instance, an individual can use the common sizing financial statement to compare the performance of the companies and trends within them. In this case, I will use account receivable ratio calculation when analyzing Company X’s account receivable turnover of four times per year versus a SIC rate of eight times per year. Therefore, I will divide sales revenue by average accounts receivable. With this approach, the company can determine the best between a four or eight times per year. A higher turnover ratio indicates efficiency in debt collection as well as customer’s credibility (Vallabhaneni, 2014). Conversely, a lower turnover indicates high chances of recovering old debts that are a burden to the working capital. In our case, a company with a turnover of eights implies it is two times likely to recover its debts compared to a company with a turnover of four.

Reference

Vallabhaneni, S. R. (2014). Wiley CIAexcel Exam Review 2014: Part 2, Internal Audit Practice. Hoboken, New Jersey: John Wiley & Sons.

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