To optimize profit in your business, each and every part of your company should be profitable on a stand-alone basis. Too often, successful businesses lose track of “losing” sectors or sites, particularly when the consolidated company as a whole is profitable. But, how much more profitable could a company become if every sector and site made money on its own?
Although most family businesses have evolved to profit-center accounting, many miss the final and most vital step — that of allocating general overhead costs to each center. Without this final step in your site-specific accounting, you can not truly know your bottom-line profit.
Most family businesses use proportionate sales dollar revenue to allocate overhead costs out to their individual centers. At times, however, these simple methods of allocation may overburden high volume locations or underburden low volume sites. If you’ve tried either of these methods and were not satisfied with the outcome, consider doing a little fine-tuning. Here’s how:
Interest Costs – In these days where it is common to grow through acquisition, it’s typical to see one single loan for the purchase of multiple sites. If your company owns other sites without related debt, you overstate the profit of the new locations by allocating the interest to all your sites based on sales or volume.
For increased accuracy, allocate the interest cost of any new loan proportionately to only those locations purchased with the loan proceeds. (To make the accounting easy, consider setting a flat amount of interest per month to each site.) Interest in excess of this total amount each month is assumed to be general working capital and can be equally allocated to all sites.
Support Personnel Costs – Take a hard look at your payroll costs. It is likely that some staff are completely devoted to certain segments of your business. For instance, if you have wholesale and store operations together in one company, and you employ a person whose job function is daily store shift report reconciliation, no portion of that person’s payroll cost should be allocated to the wholesale division. Similarly, a credit manager’s salary should be allocated entirely to the wholesale division. Once fully devoted personnel costs are allocated correctly, your remaining staff costs can be allocated using normal revenue or gallon methods.
Insurance Costs – Liability and employee insurance costs can vary greatly by location and may be completely independent of sales or volume trends. Have your insurance company(s) provide you with detailed reporting of premiums by location or profit center. Pay special attention to those premiums associated with your fleet and allocate them solely to your transportation division.
Once you have more carefully allocated these three costs — loan interest, dedicated personnel and insurance — a sales revenue percentage method of allocation for the remaining overhead should be reasonably accurate. Remember, all overhead needs to be allocated. Do not sabotage your effort by leaving any expenses unallocated.
In summary, it is only through accurate and consistent overhead allocation to individual sites and profit centers that you will truly know how much each and every sector and location is contributing to your bottom-line.
