ATO benchmarks for cake shops

In the ATO's grouping, businesses make cakes, pastries and the like and sell them; bakeries and coffee shops are left out. Here the key range is cost of sales to turnover, the measure the ATO considers most accurate at predicting a patisserie's turnover. A business reporting little or no cost of sales is pointed to total expenses to turnover instead.

Shops are sorted into the group by the principal activity each reports. The ATO sets aside very small and very large shops, those combining activities and those with less than a year's trading behind them when the year began, then filters out outliers.

Turnover is counter and order sales excluding GST. Money paid to associated persons, a family member who boxes and decorates orders for instance, sits outside the ATO's total expenses. The ATO works out cost of sales without salary and wages, so what the pastry cooks earn sits in total expenses and not in cost of sales.

In a patisserie, cost of sales is driven by what goes into the product, chiefly butter, cream, eggs and chocolate. The ATO's methodology describes cost of sales for retailers as a cost that rises and falls broadly in line with sales. Total expenses takes in those ingredients plus everything else: kitchen and counter wages, shop rent, power for ovens and display fridges, packaging, and the running costs of a delivery van for celebration cakes. The ATO's own page also lists labour, rent and motor vehicle ranges as a guide only, and each of those costs is part of that total.

Every band shows a portion of shops gathered near the mean of their turnover range rather than a minimum or maximum, rounded by the ATO to whole numbers. Turnover ranges are fixed per industry; for cake shops they are the same in both years.

The cost of sales band hardly moves across the turnover ranges, though its lower edge sits higher in the upper ranges than in the bottom range. It is narrowest in the middle range in 2023-24 and in the top range in 2022-23. Total expenses behaves differently: it climbs with turnover in both years, and the lowest band is far wider than the bands above it.

Comparing years, the 2023-24 cost of sales band is wider in the lowest range, lower and narrower in the middle range, and reaches higher in the top range. The 2023-24 total expense bands are higher in the lowest and top ranges and lower in the middle range.

With cost of sales as the key range, the ATO's explanations for a high result show up in the bakehouse and at the counter. Unsold cakes thrown out at closing, and cream or fruit that spoils, are wastage. Cakes taken home for family occasions while their ingredients stay in business costs are goods used privately. Paying more than other shops for butter and chocolate raises input costs, and cake prices that leave a thin margin over ingredients amount to a lower mark-up. Counter takings or cash balances on celebration cakes missing from the books, and till cash used to pay a supplier without the sale being rung up, lift it too.

A low result can mean ingredients booked under another heading such as general expenses, ingredients bought with till cash and never entered, a higher mark-up on decorated cakes, or less waste. These checks clear the recording causes:

• each ingredient and packaging supplier invoice for the year is entered
• ingredients and packaging left over when the year closes are counted
• daily till totals are matched to bank deposits and card settlements

Take a complete financial year from the profit and loss and divide cost of sales by turnover excluding GST; repeat with total expenses less payments to associated persons. The ATO takes wages out of cost of sales, so kitchen wages recorded inside that line are set aside before comparing. Each result is then set against the matching band for the shop's turnover.

The ATO's population omits new shops and businesses with mixed activities, so a shop in its opening year, figures for only some months, or a patisserie that also reports a cafe as a separate activity reads against a different group. A major oven repair or similar one-off spend lifts total expenses while leaving cost of sales untouched.