How does your business measure up?

Cost of living pressures and rising business expenses are squeezing profit margins for many of Australia’s 2.5 million small businesses.

The construction, hospitality and retail sectors are recording the highest level of insolvencies in a decade. More than one-third of small business owners can’t pay themselves and one-quarter use their personal savings to support the business.i

Challenging business conditions

The conditions are “arguably the most challenging in living memory”, according to The Small Business Perspectives report, published by the Council of Small Business Organisations of Australia.

“Small businesses are under colossal pressure, managing spiralling business costs, including rises in energy, rent, insurance, interest rates and complex industrial relations changes,” the report says.

It found that 57 per cent of small business owners experience stress due to financial pressures, 50 per cent experience anxiety and 48 per cent have trouble sleeping.

Running a small business can be so absorbing that it’s difficult to stand back and look at the big picture, to think about how the business is really performing and whether it can remain viable.

Benchmarking your business

Understanding how your business compares with other similar organisations, may provide some comfort when times are tough, knowing that you’re not alone. It can also be a wake-up call, letting you know that your business isn’t matching up to others in your industry and giving you a chance to cut costs, improve productivity or dial up your marketing.

So, benchmarking your business is a way of giving you confidence to continue on an already successful path, or to indicate that your business plan may need some adjustment to redefine your goals and manage any possible risks. Having good data about where you sit in relation to other businesses in the industry may also help when applying for finance or seeking investors.

The Australian Tax Office has crunched the numbers from 1.9 million small business tax returns across 100 industries to provide a set of benchmarks you can use to see how your business measures up.

You can check your performance on a range of measures including gross business income, salary and wages, vehicle operating expenses, interest payments and cost of sales. You can use the ATO app on a phone or tablet to run the numbers, after first gathering your details to input. Alternatively, you can make the calculations manually using the ATO’s instructions.

The ATO’s business viability tool

Another useful ATO tool checks whether the financial position and performance of a business shows it is surviving.

The business viability tool looks at whether a business is returning enough of a profit to meet its commitments and provide a return and that it has enough in the bank or in assets to make it through the times that profits are low.

The tool considers a range of indicators including gross margin, cash flow, your assets and liabilities, liquidity, debtors and creditors and availability of funding.

It might be useful to know that the ATO says the information you enter into the business viability tool is only used for your purposes. The ATO does not record or store any of the information you enter.

The ATO also points out that the business viability tool is not a comprehensive business analysis. If you have any concerns about your business or would like a more detailed analysis, you should speak your accountant or business adviser.

“Seeking advice at the earliest opportunity helps to ensure you address financial issues before they escalate or become unmanageable,” the ATO says.

To make the most of both the benchmarking and business viability tools, you will need to gather quite a few numbers from your current operations to use as inputs. The more up-to-date detail you can provide will lead to a more accurate result.

We can assist you in developing a clear picture of your business’s current position and provide tailored advice to support you in making strategic decisions which work towards achieving your vision for the business. Please give us a call if you would like more information.

i The small business perspective report | Analysis & Policy Observatory (apo.org.au)