Last year the Australian Taxation Office released their ATO benchmarks for Cash Business. The reasons why these have been implemented are obvious. They will help the ATO identify business to be selected for review or auditing, my assumption is with an emphasis on identifying those businesses that are avoiding their tax obligations by only reporting some of their income. There has been a lot of time obviously put in by the ATO in developing these benchmarks and consequently they have presented us with a great resource to compare and benchmark our own business. The three major benchmarks provided on their website are: Cost of goods, Labour & Rent. These are all calculated as a percentage of net turnover. They have gone so far as to undertake these benchmarks for various business including: Bakeries and hot bread shops, Cake shops and patisseries, Catering services, Chicken shops, Coffee shops, Delicatessen, Fish and chips shops, Ice cream retailing, Kebab shops, Pizza shops – takeaway, Pubs, taverns and bars, Restaurants, Sandwich shops, Sushi takeaways and Takeaway food services
I definitely recommend you find your industry and compare your Profit and Loss percentages against those the ATO have suggested for your industry.
If your labour percentage is higher than those identified in the benchmark you should consider some of the following causes:
Excessively high wages: Are you paying too much for staff? Have your staff out priced themselves for their positions though regular wage increases?
Is your establishment well set out so that staff can multitask and integrate roles? An example of this is having a coffee machine and till close to each other so when things are quiet the same person can take and make the orders.
Have your staff and managers become comfortable? Staff are always demanding more hours even when they’re clearly not available. Managers are often happy to take the path or least resistance and not chop rosters. By setting wage KPIs your managers will have no choice but to meet them by making the changes that are needed in the roster.
If your cost of goods percentage is higher than those identified in the benchmark you should consider some of the following causes:
Your cook or kitchen staff not having being involved in the costing process and not understanding the impact of additional ingredients or correct portioning.
Your service staff not portioning correctly. This needs to be fool proof, set up your containers and utensils so that only prescribed volumes can be allocated to dishes.
Theft. CCTV if you don’t already have it, install it, in both your front and back of house. A stock take should identify if this is an issue that needs addressing.
Suppliers not delivering all your stock. It isn’t uncommon for things to ‘fall off the back of trucks’ and if your staff do not check deliveries against invoices you may find drivers aren’t too worried about it either. This can drive your costs up significantly.
Your prices are too low. Do you know what your Gross Profit on everything you sell is? I often find people like to match prices with their competition as a way of price setting. BIG MISTAKE. Your prices need to be set in accordance to your minimum required gross profit on each item. There’s no point selling at the same price as someone else when you’re making no money on the item. If you cannot make a good Gross Profit on an item, find a way to purchase it cheaper or consider selling it for more. If neither of these suggestions in an option, stop selling it and find an alternative item.
Your cost of each item is too high. Are you keeping your suppliers honest? Ensure on a regular basis you collect pricing from other suppliers to ensure you are getting the best price on your stock.
Too much inventory. No kitchen employee ever wants to run out of stock, and consequently, without vigilant effort kitchens have a tendency of accumulating stock. This can be a problem especially where seasonal impacts on business see a slowdown in trade and staff continue working on standard par level ordering.
Too much wastage. How much stock is being thrown away at the end of the day? What mechanisms are in place to track this and who in your business is accountable for reducing this waste cost? Is excessive wastage deliberately undertaken to feed staff at the end of the day?
A combination of the above. When speaking to other business owners I use the above as a general checklist when advising on cost of goods problems, and often find it can be a combination of a few of these items if not all.
If your rent percentage is higher than those identified in the benchmark you should consider some of the following causes:
Your trading hours. Are you only operating your business during weekdays when you can be earning a revenue in the evenings and weekends also?
Rent is too high. Have you assessed the rent in your area and others to establish if you are in fact paying too much for your rent?
I can’t stress the importance of using Benchmarking or Key Performance Indicators (KPIs) in your business. Without them you cannot identify many of the solutions required in running your business as outlined above. Nor can you make the changes required in your business in a timely manner. If you’re waiting for your accountant or bookkeeper to question your cost of goods, rent paid or labour costs as a percentage of your turnover, you might be waiting until it’s too late.
WARNING: Shameless plug follows 🙂
For those of you who are new to the idea of benchmarking, I suggest the system I utilize in my cafes. An easy to use excel spreadsheet I’ve designed to help me on a daily basis establish whether or not I have met my KPIs in all areas. Now I stress here the word DAILY. I cannot afford to change the way I do business on a monthly or quarterly basis when I sit with a fine tooth comb and analyse my profit and loss statements. I need my managers to make changes to the way they order stock or roster staff daily, and so do you. If this is something your business is missing visit the Ten Minute Manager to learn more.
End Shameless Plug Here