Maximising Profits: How ATO Benchmarking Can Help Your Cafe Business

Back in 2010 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.

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.

Key Points to Understand ATO Bench Marking for Cafe Businesses:

• ATO bench marking is a set of financial ratios that represent the average financial performance of businesses in a particular industry.
• The ATO has specific bench marks for cafe businesses that cover revenue, cost of sales, and expenses.
• Cafe businesses can use ATO bench marks to compare their financial ratios against the industry average and identify areas of strengths and weaknesses.
• The ATO uses the bench marks to identify businesses that may be at higher risk of tax evasion or under-reporting their income.
• To avoid being targeted for compliance checks or audits, cafe businesses should ensure their financial ratios are in line with the ATO bench marks.
• Cafe businesses should regularly review their financial performance against the ATO bench marks and make changes to improve profitability and compliance.
• Some specific benchmarks for cafes include the cost of goods sold (COGS) as a percentage of turnover, wages as a percentage of turnover, and rent as a percentage of turnover.
• Cafe businesses should consider factors such as location, target market, and menu offerings when comparing their financial ratios against the ATO bench marks.
• The ATO publishes updated bench marks each year, so it’s important for cafe businesses to stay up-to-date and adjust their financial strategies accordingly.
• Consulting with a financial advisor or accountant can help cafe businesses interpret and apply the ATO bench marks to their specific situation.