Everyone likes to know how they’re travelling compared to their peers and business owners are no different.
To help you know how your business is doing, the ATO annually compiles a range of small business benchmarks that allow you to compare your results and decide if any changes are needed.
Benchmarking is a useful tool to help you understand how your business is performing within your industry. It compares your actual performance against averages for similar businesses.
The ATO’s benchmarks cover a wide range of industries across Australia and are based on data from two million businesses.
Industries that are included are:
- accommodation and food
- building and construction
- education, training, recreation and support services
- health care and personal services
- manufacturing
- other services
- retail
- professional, scientific and technical services; and
- transport, postal and warehousing.
The benchmarks allow you to check common business ratios such as your cost of sales to annual turnover, total expenses to annual turnover, rent to turnover and motor vehicle expenses to turnover.
It is also an important way of assessing the value of a business when you’re considering buying it. You can check how it’s performed in the past against industry averages both to see whether it’s a wise purchase and also if the purchase price is reasonable.
Why check benchmarks?
Think of benchmarks like your annual health check, says ATO assistant commissioner Tony Goding. They help to highlight strengths and diagnose early warning signs.
“Whether you’re running a pizza shop, pet store or a plumbing business, the benchmarks can help you see how your business stacks up. If your numbers are outside of the benchmark range, compared to others in your industry, it may be time for a closer look at your business plan,” he says.i
This includes identifying where adjustments can be made to costs and expenses and reviewing profit margins to improve your business performance.
For example, you may note that your expenses are high relative to sales when compared with others in your industry. You may discover that you’re overspending on operating costs, such as rent or insurance and that your input costs are higher than your competitors. This could possibly be caused by high levels of waste or high supplier costs; or perhaps your staff costs are too high.
This useful independent data could help you to find ways to improve your business by increasing your profit, reducing your costs and better manage your operations.
Importantly, businesses that remain within industry benchmarks are generally less likely to attract the ATO’s attention.
“While we never use the benchmarks in isolation, small businesses who fall outside the ATO’s benchmarks are more likely to trigger a closer examination from us to identify if they are making mistakes or deliberately doing the wrong thing,” says Goding.
Checking where your business sits in relation to the benchmark range means you can gather any necessary information to explain and support why your business is reporting outside the normal range if you receive an ATO query.
Case study: Anna’s pizza shop
Anna operates a pizza shop as a sole trader and wants to know how her business compares to her competitors and how she can improve it.
Entering her details into the ATO Business Performance Check tool, Anna learns the key ratio of cost of sales to turnover for her shop is 44 per cent.
While this is within the range for businesses in her industry with a turnover of $550,300, Anna sees that the range for cost of sales starts at 37 per cent. She realises some of her competitors have a lower cost of sales figure.
As a result, Anna looked for other suppliers and got a better deal to reduce her business expenses and improve profits.
Where to start
Getting started is simple. You can enter your figures into the Business Performance Check tool and instantly see how you compare to similar businesses in your industry and turnover range.
Regularly reviewing benchmarks helps you to stay competitive by making informed decisions about pricing, cost control and operational efficiency.
If you need help understanding how to improve your business performance, contact our office today.
i ATO releases new small business benchmarks for 100 industries | Australian Taxation Office
