Benchmarking In Business

What is Benchmarking?

Benchmarking is the process in which organisations evaluate various aspects of their processes in relation to best practice companies’ processes, usually within a peer group defined for the purposes of comparison. 

Some financial benchmarking data is available from the Australian Taxation Office.  The ATO’s Benchmarks are key financial ratios developed from information provided by businesses on activity statements and tax returns. The Small business benchmarks are a guide to help you compare your business performance against similar businesses in the same industry.

 You can find your business’s benchmark at:

https://www.ato.gov.au/Business/Small-business-benchmarks/In-detail/Benchmarks-A-Z/

Benchmarking as a Tool

Benchmarking is a process for obtaining a measure – a benchmark. Simply stated, benchmarks are the “what,” and benchmarking is the “how.” But benchmarking is not a quick or simple process tool.  When making use of benchmarking, a company should not limit the scope to its own industry, nor should benchmarking be a one-time event.

The small business benchmarks are financial ratios to help you compare your business performance against others in your industry. This then allows organisations to develop plans on how to make improvements or adapt specific best practices, usually with the aim of increasing some aspect of performance.

The ATO uses them as a guide on industry trends to identify businesses that may be avoiding their tax obligations by not reporting some or all of their income.

The ATO benchmark formula

The basic formula is (benchmark figure / turnover) x 100 = benchmark ratio percentage.

Not all the benchmark ratios apply to every business. Check the benchmark specific to your business for the benchmark ratio you will need to calculate.

https://www.ato.gov.au/Business/Small-business-benchmarks/How-benchmarks-can-help-your-business/The-benchmark-formula/

What it means to be outside the ATO benchmark

Your calculated benchmark might be above or below the range for your business turnover in your industry. If you have included all your income there may be reasons for this difference, such as higher costs or lower selling prices than your competitors.

Reporting above an ATO benchmark range

If your business is reporting above the benchmarks, it means your expenses are high relative to sales.

This may indicate that:

  • you have high wastage
  • your competitors may be able to source inputs at lower cost than you
  • your volume of sales is too low (for rent and possibly labour)
  • your mark-up is lower than your competitors
  • you haven’t recorded all your sales
  • Your internal cash controls may need to be examined.

Reporting below an ATO benchmark range

If your business is reporting below the benchmarks, it means your expenses are low relative to sales.

This may indicate that:

  • your expenses may be recorded under the wrong label
  • some of your expenses may have not been recorded
  • your mark-up is higher than your competitors
  • You have less wastage.

Overall Benchmarking is a helpful tool to help you to determine how your business is tracking in your industry. Once you have your Business ratio you will use it to help you identify any insufficiencies or great aspects of your business and thus ultimately help you develop business strategies on how to fix or improve your benchmark ratio and in the end your business processes and procedures.

For help with benchmarking for your business and determining insufficient areas in your business procedures and processes contact our team today at Best Bookkeepers Australia.

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