If you don’t know the actual bottom-line of each and every one of your sites, you are playing a dangerous game. Your company could decline in profitability, or even worse, experience losses before you even know what’s happening.
If you have multiple locations and track headquarters expense in a separate profit center from your sites, but are not allocating those expenses to individual sites, you do not have critical information — the actual earnings of each site. Now is a good time to correct that situation. You can allocate overhead by a variety of successful methods that may be appropriately applied to your company.
Sales Dollars Method
For companies with heavy inside store sales, a sales dollar method may provide an accurate allocation. Look at the revenue generated by the total company, the revenue per site, then use the percentage method for allocation purposes. For instance, if your company does $10 million in annual sales and one store accounts for $2,500,000 of those sales, that store would pick up 25% of the overhead.
Personnel Expense Method
If you have a business that is a combination of wholesale and retail operations, using personnel expense for allocation may work well. For instance, if personnel expense at your company runs $1,500,000 and one site is $500,000, you would allocate one-third of the headquarters administration costs to that site.
Always be sure to check the allocation amount for believability. You may have to “tweak” the math to get reasonably accurate allocations. However, don’t manipulate allocations because of profitability. If a site you thought was making money before the allocation is showing a loss after the allocation, it may be that your allocation is accurate but that site needs more management guidance or should be considered for closure.
Once you’ve settled in on what you feel are reasonably accurate allocations, review them no less than annually. In addition, don’t lose sight of possible escalation in total administrative expenses. These expenses should still be totaled before allocation each month and studied on a percentage-of-sales basis. If escalating, management should take active cost-reduction actions.
