In any large population being analysed, there will be cases which, if included, would tend to produce misleading results. For example, where income tax return labels have either not been filled in or not been used correctly, or the ratios for an individual entity are exceptional and would distort the calculation of a true industry average.
In an attempt to remove these cases from the calculation of the ratios and thereby improve the quality of our industry benchmarks, we apply certain exclusion criteria. The exclusion criteria used and the reason for using them are detailed below.
Despite applying these exclusion criteria, it is still important to recognise that the benchmarks developed are not definitive and should not be used in isolation. For example, there are a range of legitimate reasons why businesses vary from industry averages and, conversely, why businesses with ratios close to the industry average may have compliance problems or other financial difficulties. Also, an average ratio calculated using a large population is generally more reliable than one calculated from a small population.
The selection criteria we have used to extract data for our industry benchmarks follow:
Financial ratio |
Data item |
Criteria - all entities |
Criteria - "profitable" entities |
|---|---|---|---|
Net profit |
Total business income |
Greater than or equal to $10,000 |
Greater than or equal to $10,000 |
Total expenses |
Greater than $0 |
Greater than $0 |
|
Net profit ratio |
Between -100% and +100% |
Greater than or equal to 0% |
|
Gross profit |
As for net profit ratio PLUS: |
|
|
Cost of sales |
Greater than $0 |
Greater than $0 |
|
Total expenses |
Not equal to cost of sales |
Not equal to cost of sales |
|
Gross profit ratio |
Between -100% and +100% |
Greater than or equal to 0% |
|
Wages to turnover |
As for net profit ratio PLUS: |
|
|
Salary and wage paid |
Greater than or equal to $20,000 |
Greater than or equal to $20,000 |
|
Less than or equal to total expenses |
Less than or equal to total expenses |
||
Activity statement ratio |
Data item |
Criteria - all entities |
Criteria - "profitable" entities |
Wages to sales
|
Total sales |
Greater than $50,000 |
Greater than $50,000 |
Total salary & wages |
Greater than or equal to $10,000 |
Greater than or equal to $10,000 |
|
Expenses to sales
|
Total sales |
Greater than $50,000 |
N/A |
Total salary & wages |
Greater than or equal to $0 |
N/A |
|
Net GST to sales
|
Total sales |
Greater than $50,000 |
Greater than $50,000 |
Greater than GST on sales |
Greater than GST on sales |
The reasons we exclude certain data from the calculation of our industry benchmarks are explained below:
Data item |
Reason for exclusion criteria |
|---|---|
Total expenses |
It is expected that most businesses would have some expenses (such as rent, motor vehicle, depreciation). Cases where total expenses are less than or equal to $0 have therefore been excluded due to doubts about the quality of the data. As businesses would normally have other expenses such as bad debts, rent, interest and motor vehicle expenses, cases where total expenses equals cost of sales (in the gross profit ratio), have also been excluded. |
Net Profit ratio |
There were a small number of cases that had a net profit ratio less than -100%. These values are considered to be statistical 'outliers' and while they could legitimately exist, they were excluded as they tend to unfairly skew the end result. |
Cost of sales |
While technically possible to be less than $0, in these cases the gross profit ratio would be greater than 100% and therefore were excluded. Where cost of sales equals $0, these cases were excluded due to doubts about the quality of the data. |
Gross profit ratio |
A few cases that fell into this range were excluded for the same reason as the net profit less than -100% cases. |
Salary and wage expenses |
Entities with salary and wage expenses < $20,000 are unlikely to have permanent full-time staff and were excluded. Cases with salary and wages expenses > total expenses were excluded due to doubts about data quality. |