Now that you’ve got all your numbers from last financial year it’s time to compare them with your industry standards because your business metrics provide you with a goal to compete with (See my post on “How Marathon Training Got me Thinking About Business Metrics. These benchmarks are calculated by the ATO from the income tax returns and activity statements from over 1.3 million small businesses across more than 100 industries.
You’ll need last year’s figures for:
• Cost of sales
• Total expenses
• Labour costs
• Sales per employee
• Activity statements
AND you’ll want to download the ATO App here to get the Business Performance Check Tool.
In the App go to ‘Business’ then ‘Business Performance Check’ and enter the information they request. The App will compare your data with the key benchmarks and ratios for your industry.
What Do the Benchmarks Mean?
The benchmarks give you an objective idea of how healthy your business is in comparison with other businesses like your own. Ideally your business will fall inside the key ratio for your industry. When the ATO sees a business which is outside the key ratio for their industry they are more likely to ask for further information.
Why Might Your Numbers Be Above the Benchmarks?
If your numbers are above the benchmarks you could well attract queries from the ATO. They will be checking to ensure that you have recorded all your sales and your internal cash controls are sufficient. Other reasons why your business may be reporting above the benchmarks are:
• Your inputs are more expensive that your competitors’
• Your mark-up is not high enough
• Your volume of sales is too low
• High wastage
Why Might Your Numbers Be Below the Benchmarks?
If your numbers are below the benchmarks then your expenses are low relative to sales. This may indicate that:
• You have recorded your expenses incorrectly or omitted some of them
• Your mark-up is high compared to your competitors
• Less wastage
What Should You Do With Your Benchmarks?
If your key ratios are higher or lower than the benchmarks then you may want to re-check your figures and ensure that you have included everything in your accounts.
This is also a good opportunity to evaluate each of your metrics and consider what steps you can take to improve them including:
• Increasing turnover (volume of sales)
• Raising mark-up
• Reducing expenses
The start of the financial year is an excellent time to consider these measures so that you can work on increasing your business profitability right from the start of the financial year, rather than waiting until later.
What if You Can’t Find a Comparable Business to Benchmark Against?
If you don’t find a comparable business then you can create your own benchmark system by identifying your key metrics and competing against them quarter by quarter. Your bookkeeper or accountant should be able to provide some indication of how healthy your business is and you should be able to improve it steadily.