The Australian Tax Office (ATO) provides a tool to benchmark your business. It allows you to compare your company’s performance against a range of businesses in the same or similar industries. There are three main purposes behind the ATO Small Business Benchmark Tool. These aims are:
It will encourage business owners to perform annual health checks to see if their costs are above or below their peers. This then will lead to more profitable businesses in our economy. It means more business owners will know their numbers and we know that you are more likely to succeed if you do!
It will enable businesses to assess whether there are any discrepancies that may be flagged for an audit by the ATO. This means the ATO need to do less work while businesses remain compliant!
It flags up and allows the ATO to investigate businesses that fall outside the benchmarking norm.
Financial benchmarking has been an invaluable tool for businesses across various industries for some years now, decades in fact. It is an effective way of identifying issues within a business. Benchmarking helps business owners to make educated and reliable business decisions based on correct information. Although the ATO has access to a large number of records the benchmarks themselves are limited to only a handful of metrics.
The metrics utilised are:
- Tax return benchmarks
- cost of sales to turnover (excluding labour) – (where applicable to the industry)
- total expenses to turnover
- rent to turnover
- labour to turnover
- motor vehicle expenses to turnover.
- Income activity benchmarks
- non-capital purchases to total sales
- GST-free sales to total sales.
To conduct a detailed analysis, business owners and advisors who want to assess business performance will need to utilise other benchmarking services. This is because of the fairly small selection of metrics that are utilised. When assessing performance businesses should review all expenses and investments. They also need to include Cost of Goods Sold (COGS), personnel/employee productivity and asset usage. Stock turn rate and industry-specific performance metrics should also be included in an in-depth assessment. The added benefit of other benchmarking services is they will process your data for side-by-side comparisons with like businesses.
It is suggested that the core function of the ATO Small Business Benchmark Tool for small businesses is simple. It allows them to assess any discrepancies against the industry standards that will then be flagged. Any flags will set them up for an audit by the ATO. Businesses are required to process their own data to determine if they fall outside the industry norm result. If they do, they need to be prepared to explain why this is the case to the ATO.
As far as the ATO is concerned, the main purpose of the ATO benchmarks is very straightforward. It is presumably to alert them that a business may need to be investigated for irregularities based on these metrics.
The ATO says:
“When we see a business significantly outside the key benchmark range for their industry, it doesn’t necessarily mean you have done anything wrong. But it does indicate something is unusual and may prompt us to contact you for further information.” You can read more about this at:
If your business is reporting above the benchmarks it suggests your expenses are high relative to sales.
This may show that your:
- wastage is higher than research says is best practice for your industry
- goods taken for personal use have been counted as business stock – There is an estimate guide here provided by the ATO
- the cost that you are paying for the stock may be higher than your competitors. It could be an indicator that you need to be sourcing lower priced stock
- volume of sales is too low to justify your rent and (possibly) labour cost – for example, you may be paying too many staff hours during off-peak times
- mark-up is lower than your competitors – check average sales prices and consider raising your prices
- haven’t recorded all your sales – check till tapes or point-of-sale (POS) reports. It may be that cash is going straight into the till without being rung through
- internal cash controls may need to be examined – ensure cash taken for expenses are recorded as sales.
So, the ATO Benchmark Tool is a useful resource for small businesses. it is particularly helpful in identifying if your business might be contacted by the ATO for further information. If you are looking for a detailed analysis of your business performance this is not the way to get it. The limited scope of metrics available means that you will need to look elsewhere. It is worth talking to your bookkeeper or your accountant to establish how they would recommend you do this. They will have access to software that means they can give you a much clearer idea on the performance of your business. This will be more detailed than what the ATO expects as far as your expenses and profits are concerned.
We suggest that this should be part of your overall planning and budgeting and readdressed maybe at the end of each quarter. If you would like to chat with Liz and her team about their approach, please do get in touch. You can email Liz here or give her a call on 0405 801 119 for a discussion about where you are right now and where you would like to be.