Do you ever wonder if you’re at par with your competition? Is your business operating within the industry standards or are you behind or ahead of others? One way to know your business position is through benchmarking — a process that gives you insights into where your business stands compared to other businesses in your industry. 

In this article, we’ll discuss small business benchmarking — a specific type of benchmarking required by the Australian Taxation Office (ATO).

 

What is small business benchmarking?

Small business benchmarking is a type of benchmarking process developed by the ATO. It uses key financial ranges drawn from the tax returns and activity statements of over 1.9 million small businesses across Australia. In addition, these small business benchmarks “account for businesses with different turnover ranges across more than 100 industries,” the ATO stated.

Each financial year, the ATO updates the small business benchmarks ensuring that metrics:

  • are current,
  • reflect the performance of businesses over time and
  • demonstrate the changes that occurred within the industry each financial year.

 

Why are small business benchmarks important?

To understand the importance of small business benchmarking in Australia, let’s view it from two different perspectives:

For your business

Small business benchmarking helps you:

  • Determine if your business costs are similar to other businesses in your industry.
  • Ensure that you operate within the ATO standards to prevent possible penalties and charges.
  • Find key areas for improvement (e.g., be more efficient, improve financial reporting, cut costs).
  • Identify industry best practices to improve your business performance.

 

For the ATO

The ATO uses small business benchmarks to:

  • Encourage small businesses to conduct annual financial health checks, especially during the new fiscal year.
  • Identify businesses that may be knowingly or unknowingly avoiding their tax obligations by not reporting some of their income sources. 

In general, small business benchmarks let you and the ATO see if your business costs are above or below the industry average. The ideal result is to be within the benchmarks for your industry. Otherwise, your business may be investigated for potential irregularities.

Before it happens, you must examine your own data to see if you fall outside the benchmark range. If you fall outside the financial range, don’t fret. It doesn’t automatically mean that you’ve done something wrong but you must be prepared to justify why it happened.

 

Understanding the small business benchmark ranges

As we’ve mentioned earlier, the ideal result of small business benchmarking is to be within the benchmark range set by the ATO. But if you find yourself outside your industry benchmark, here’s what it possibly means.

Above the benchmark range

When your business is above the benchmark range, your expenses may be high compared to your sales. This can mean: 

  • Your business is not efficient, resulting in high wastage. 
  • You have low sales volume relative to your rent, utility and labour costs. 
  • Your raw materials are more expensive than what your competitors are sourcing.
  • The markup of your products is lower compared to your competitors. Make sure to follow average sales prices.
  • Unrecorded sales. Reconcile your books and check your point of sale (POS) system to check for any issues.
  • You have listed goods for personal use under business expenses.

 

Below the benchmark range

If your business is below the benchmark range, your expenses can be low compared to your sales, which can mean:

  • Your business is more efficient than your competitors.
  • The markup of your products is higher than the average sales prices.
  • You might have missed recording some expenses or recorded them under the wrong label.

Small business benchmarking, especially if performed before lodging your taxes, can prevent the hassle of correcting a mistake or being audited. But if you’ve already lodged your returns, correct the mistake to reduce penalties. Here’s how.

 

Types of small business benchmarks

The three types of ATO business benchmarks are as follows:

1. Performance benchmarks

Considered key financial ranges for your industry, performance benchmarks help you determine how you differ from other businesses and figure out if you need to make any changes. Here are two examples:

a. Tax return benchmark ranges – it covers information such as:

– Cost of sales to turnover (excluding labour)

– Total expenses to turnover

– Rent to turnover

– Labour to turnover

– Motor vehicle expenses to turnover

b. Activity statement benchmark ranges – these financial ranges refer to your: 

– Non-capital purchases to total sales

– GST-free sales to total sales

 

2. Key benchmark range

The key benchmark range is best for comparing your performance against others in your industry. It aims to protect honest businesses and find out the amount of tax a business must pay in events where records are insufficient or unavailable.

It’s also valuable for providing useful information for business turnovers.

 

3. Input benchmarks 

The ATO describes input benchmarks as essential information showing “an expected range of income for tradespeople based on the labour and materials they use to undertake domestic projects.” 

It can assist you with:

  • Finding your industry’s benchmark range
  • Ensuring all records are accurate in your income
  • Estimating turnovers based on labor and materials used

 

Read Next: SME Guide: How to Write a Financial Planning Report

 

Get professional consultation

If you need help benchmarking your small business, contact us today. Our accountants at ABJ Solutions have extensive experience in processing financial records and reports for the benchmarking process.