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# How we calculate our industry benchmarks

Last updated 23 September 2020

## Financial ratios

The financial ratios tables contain the following:

• net profit ratio equals (total business income less total expenses) divided by total business income
• gross profit ratio equals (total business income less cost of sales) divided by total business income
• wage to turnover ratio equals salary and wages paid divided by total business income.

The tax return labels used to calculate the ratios are:

Data item

Entity type

Tax return label

Individuals

Companies

Total income, Item 6, label S

Partnerships and trusts

Cost of sales

Individuals

Cost of sales, Item P8, (label K + label L – label M)

Companies

Cost of sales, Item 6, label A

Partnerships and trusts

Cost of sales, Item 5, label E

Total expenses

Individuals

Total expenses, Item P8, (label S + label T)

Companies

Total expenses, Item 6, label Q

Partnerships and trusts

Total expenses, Item 5, label O

Salary and wages paid

Individuals

Total salary & wage expenses, Item P13, label G

Companies

Total salary & wage expenses, Item 8, label D

Partnerships and trusts

Total salary & wage expenses, Item 44, label L

## Activity statement ratios

The activity statement ratios tables contain the following:

• expense to sales ratio equals (non-capital purchases plus total salary & wages) divided by total sales
• net GST to sales ratio equals (GST on sales less GST on purchases) divided by total sales
• wages to sales ratio equals total salary & wages divided by total sales

The activity statement labels used to calculate the ratios are:

Data item

BAS label

Total sales

Total sales, label G1

Total salary & wages

Total salary, wages and other payments, label W1

Non-capital purchases

Non-capital purchases, label G11

GST on sales

GST on sales or GST instalments, label 1A

GST on purchases

GST on purchases, label 1B

## Exclusion criteria

In any large population being analysed, there will be cases that, if included, would tend to produce misleading results, as examples, when:

• tax return labels have either not been filled in or not been used correctly
• 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 improve the quality of our industry benchmarks, we apply 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.

Selection criteria we have used to extract data for our industry benchmarks

Financial ratio

Data item

Criteria – all entities

Criteria – 'profitable' entities

Net profit

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

na

Total salary & wages

Greater than or equal to \$0

na

Net GST to sales

Total sales

Greater than \$50,000

Greater than \$50,000

Greater than GST on sales

Greater than GST on sales

Why we exclude some data from the calculation of our industry benchmarks

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.

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