ATO benchmarks for bakeries

The ATO's group covers businesses that bake bread, cakes and pastries and sell what they bake, hot bread shops among them. Bread delivery runs and cake shops that focus on cakes alone fall outside it. For bakeries the ATO makes cost of sales against turnover the key range, the ratio it judges to predict turnover most accurately here, and a bakery reporting little or no cost of sales uses total expenses instead.

Businesses are sorted by main activity. The ATO then removes those under or over its turnover limits, those that report several activities, those that have not yet traded for a full year before the financial year starts, and any statistical outliers.

Turnover here is takings from counter and trade sales, excluding GST. Total expenses covers the bakery's costs except payments to associated persons, such as wages to a relative who serves at the counter. The ATO measures cost of sales with salary and wages stripped out.

Sugar, yeast, seeds, meat and cheese for pies, and any drinks or packaged goods bought in to resell are cost of sales, and they count towards total expenses too. The bakers on early shifts and the counter staff count in total expenses only, as their wages are kept out of cost of sales. So do gas and electricity for the ovens, shop rent, mixer and oven repairs, delivery van costs, card fees and cleaning.

In its methodology the ATO picks out cost of sales as a sound pointer to a retailer's sales, since that cost tends to grow or shrink as sales do.

Each range is the band of bakeries gathered around the mean ratio for its turnover range, not a level to beat or a limit to stay under, with every edge rounded to a whole number. Bakeries get turnover ranges of their own.

Total expenses take a bigger share as turnover rises, in both years, while the band narrows from the bottom range to the top. Comparing years, the lowest range is lower at both edges in 2023-24, the middle range has a lower floor under the same ceiling, and the top range is unchanged.

Cost of sales behaves differently. It rises from the lowest turnover range to the middle one, then drops in the top range: in 2023-24 the top band sits below the lowest at both edges, while in 2022-23 they share a floor. Its band is narrowest in the middle in both years. In 2023-24 the lowest range has a higher floor, the middle range is identical and the top range has a lower floor, with every ceiling as it was in 2022-23.

Above the range, costs are heavy against takings. In a bakery that can mean more unsold or spoiled product binned at day's end, loaves and pastries that went home for household use but stayed in business stock, ingredients costing more than rival bakeries pay, bakers rostered on through slow trade, a thinner mark-up, or counter sales missing from the till. Cash taken from the till to pay a supplier or a casual is still a sale.

A result under the range can mean ingredient purchases posted to a general expense heading instead of cost of sales, cash purchases or cash wages never entered, a mark-up above other bakeries', or tighter control of waste. Checks to run first:

• Each ingredient supplier's invoices for the year agree with that supplier's statement.
• The year-end count of flour, ingredients and finished goods is done and dated.
• Daily till reports match the cash and card deposits in the bank.

Work from a full financial year in the profit and loss statement. Divide cost of sales, with any wages taken out as the ATO does, by turnover. Then divide total expenses, leaving out anything paid to associated persons, by turnover, and compare each result with the bakery's turnover range.

A short trading year, an opening year or a year with a heavy one-off bill, such as a major oven repair, can read differently, because the ATO's figures exclude new businesses and set extreme results aside. A business built mostly on bread deliveries or dedicated cake making falls outside this group, and one reporting several activities is outside the figures altogether.