The formula
Cost of sales percentage is your cost of sales divided by your turnover, times 100. Cost of sales is what the things you sold cost you: stock, ingredients, materials. Usually that is your opening stock, plus what you bought, minus your closing stock.
Two details matter if you want to compare yourself with the ATO’s figures. The ATO uses turnover without GST, and it takes salary and wages out of cost of sales, even when a business reports them inside it. Do the same before you compare.
A worked example
| Café, one year | Amount |
|---|---|
| Opening stock | $8,000 |
| Plus stock and ingredients bought | $152,000 |
| Less closing stock | $10,000 |
| Cost of sales | $150,000 |
| Turnover, without GST | $400,000 |
| Cost of sales percentage | $150,000 ÷ $400,000 × 100 = 37.5% |
For a coffee shop turning over between $250,000 and $600,000, the ATO’s range is 35% to 41%, so 37.5% sits inside it. The flip side is gross margin: 100% minus 37.5% leaves 62.5% of every dollar to cover wages, rent and everything else, before profit.
What’s normal: cafés, restaurants and food
For these industries cost of sales is the ATO’s key benchmark, the one it says best predicts turnover.
| Industry | Cost of sales, by annual turnover |
|---|---|
| Coffee shops | $65k to $250k: 34 to 42%$250k to $600k: 35 to 41%Over $600k: 33 to 38% |
| Restaurants | $65k to $500k: 32 to 39%$500k to $2m: 32 to 38%Over $2m: 31 to 36% |
| Takeaway food services | $65k to $200k: 34 to 42%$200k to $600k: 36 to 43%Over $600k: 35 to 41% |
| Pubs, taverns and bars | $100k to $750k: 34 to 46%$750k to $2.5m: 33 to 41%Over $2.5m: 31 to 42% |
| Bakeries and hot bread shops | $65k to $400k: 31 to 38%$400k to $750k: 34 to 39%Over $750k: 29 to 36% |
| Pizza shops, takeaway | $65k to $150k: 33 to 44%$150k to $600k: 38 to 44%Over $600k: 34 to 41% |
| Catering services | $50k to $200k: 31 to 43%$200k to $600k: 32 to 41%Over $600k: 31 to 41% |
What’s normal: shops
| Industry | Cost of sales, by annual turnover |
|---|---|
| Clothing retailing | $65k to $250k: 39 to 55%$250k to $500k: 46 to 58%Over $500k: 48 to 57% |
| Florists | $65k to $300k: 40 to 51%$300k to $600k: 43 to 50%Over $600k: 45 to 53% |
| Grocery retailing and convenience stores | $65k to $300k: 59 to 71%$300k to $950k: 64 to 73%Over $950k: 71 to 77% |
| Bottle shops and liquor retailing | $65k to $500k: 63 to 74%$500k to $2m: 69 to 77%Over $2m: 74 to 79% |
| Hardware and building supplies retailing | $65k to $400k: 47 to 63%$400k to $1m: 56 to 66%Over $1m: 61 to 69% |
| Pharmacy | $400k to $1.5m: 61 to 67%$1.5m to $3.5m: 63 to 67%Over $3.5m: 66 to 70% |
Trades: cost of sales is there, but not the key number
For most trades the ATO’s key benchmark is total expenses to turnover, because labour is such a large share of the cost. Cost of sales still tells you whether your materials are priced in.
| Industry | Cost of sales, by annual turnover |
|---|---|
| Electrical services | $50k to $200k: 22 to 34%$200k to $500k: 26 to 36%Over $500k: 30 to 41% |
| Plumbing services | $50k to $150k: 20 to 33%$150k to $600k: 26 to 35%Over $600k: 29 to 38% |
| Painting services | $50k to $150k: 13 to 19%$150k to $600k: 14 to 21%Over $600k: 14 to 21% |
| Landscape construction | $50k to $200k: 15 to 30%$200k to $500k: 24 to 36%Over $500k: 27 to 38% |
Your industry isn’t here? All 100 of the ATO’s industries are on the benchmarks page.
If yours is creeping up
A rising cost of sales percentage usually has one of a few causes: suppliers put their prices up and yours didn’t follow, more stock is being wasted or going missing, the mix shifted towards lower-margin lines, or the stock count at the end of the period is off. The ATO also says that a business outside its range should check it has reported all its income.