Measuring your SME by ATO standards is important to stay on the good side of the Australian Taxation Office (ATO). An unexpected letter in the mail or phone call from the tax man can be somewhat unnerving. One of the reasons that you may receive a communication from the ATO could be because you have fallen outside of the standard industry benchmark ratios. This is why we are showing you how Calxa can create ATO benchmark ratios for small businesses. It will help you monitor these to avoid an uncomfortable ‘please explain’.

Check out our tips to effectively manage these ATO benchmark ratios.


Performance and Input Benchmarks

With the advent of increased data processing technology and electronic communication, the ATO are now able to harvest and analyse an enormous amount of data from all businesses across Australia. With this comes the ability to provide Small Business Benchmarks based on historical information and trends. These benchmarks are broken down into performance benchmarks and input benchmarks.

Performance benchmarks provide financial ratios to help businesses work out how they compare to other businesses. Obviously, this is mostly within the same industry. It offers guidance on how the business may be able to make improvements. These ratios are calculated based on information provided on tax returns and activity statements.

Input benchmarks show an expected range of income for tradespeople based on labour and materials. This is calculated based on information provided by industry participants and trade associations.


Beware if you Fall Outside the Benchmarks

The ATO promote the fact that these benchmarks have been developed to assist businesses. In other words, they help to compare against other similar businesses based on industry and size. The truth is, they also use this information to try and identify businesses that may not be doing the right thing.

An example of this is where businesses supply goods and services directly to consumers using cash payment methods. These businesses have demonstrated previously that they have a higher likelihood of deliberately using cash transactions to hide income and evade taxation obligations. This is just one example of where the ATO is trying to crack down on the ‘cash economy’. The Cost of Sales to Turnover ratio is used to identify businesses that fall into this category. If for some reason, you fall outside of the industry benchmark ratio, then you may have some explaining to do.

There may be a valid explanation as to why you fall outside the ratio. For instance, this can include things such as business location or a change in trading conditions. Regardless of the reason, it pays to be prepared to provide answers.


Use Calxa to Monitor your SME Benchmark Ratios

There are ATO benchmarks available for the majority of businesses based on industry and turnover. This includes from air conditioning businesses to veterinary businesses, and everything in between. For example, for a Restaurant Business, the key ratios include:

  • Cost of Sales/Turnover
  • Total Expenses/Turnover
  • Non-Capital Purchases/Turnover
  • Labour/Turnover
  • Rent/Turnover

The Cost of Sales/Turnover ratio and Labour/Turnover ratio are default KPIs that are already included in Calxa. New customised KPIs can simply be created for the other ratios and then either reported on separately or added to other reports. And as per our tip for Financials for Bank Loans, simply use a naming convention so that they all appear in the order of your choice and grouped together.


ATO Benchmark Ratios List to select in Calxa


So, if you are involved in an industry that the ATO has identified as being one that has historically had a high level of cash transactions and for some reason you happen to fall outside of the standard industry ratios, then it would pay to monitor your activities. Be prepared to answer some questions. Or you may simply just like to see how you compare to other businesses in your industry.


Comparing your Ratios to the Benchmark

Using Metrics you can add in the ATO Benchmark Ratios and easily compare it to your own results. For example, if you’re running a coffee shop with a turnover of $500,000, the ATO benchmark ratio for Cost of Sales is 34% – 40%. Add a Metric for the lower ratio, entering it as .34 (Tip: enter 4.08 in the total and it will spread it evenly for you) and another for the higher one and then create a KPI for each that is simply using that Metric.

You will find an in-built KPI to calculate your Cost of Sales. You can then simply combine these 3 on the KPI Spreadsheet Comparison to track your performance against the benchmark. This will help you see when you stray outside the guidelines.


ATO Benchmark Ratios Comparison in Calxa


In the example shown, the café had a Cost of Sales ratio above the guidelines at the beginning of the year. After that, it took steps to change their buying and pricing practices to reduce it to within the ATO guidelines. In addition, this really improved their bottom line at the same time.


Getting Started with Benchmark Ratios

If you want to start tracking these ratios, read some of these articles. They guide you on how you can create KPIs and Metrics to build your own swag of ATO Benchmark Ratios and other performance KPIs. Have a look at these articles 7 KPIs for Retailers and Metrics and KPIs for Hospitality.

Whilst for NFPs these articles Current Ratios in the Not-for-Profit Sector and Importance of KPIs for Not-for-Profit Organisations are a good starting point. And, those bookkeepers that want to grow, KPIs for a Bookkeeping Practice  gives some ideas on benchmarking against the rest of the industry.