The answer to this question lies in setting up logical profit centers or divisions within your company, and then good accounting procedures including overhead allocation. Let’s start with profit centers.
For each type of business you have, set up a profit center. An easy way to think about profit centers is by the amount and type of gross margin. For instance, for wholesalers, you may have several types of fuel customers with very different types of margins. A profit center list for you might be:
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Cardlocks
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Dealers/resellers
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Commercial full load fuels
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Commercial bobtail fuels
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Bulk lubes
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Package lubes and chemicals
If you are in the retail sector, your list could be:
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Large freeway stores
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Medium stores with fast food
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Medium stores no fast food
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Small stores
Once you have set up your divisions, have each site be a subcategory of that division. You want to be able to see a profit and loss statement by site after all overhead allocation.
This brings you to your next chore, which is managing overhead. First, try to direct cost as much as possible. This means that you may need to revamp your purchase order system or work with vendors to have them identify the specific site or sites an invoice pertains to. For instance, have your insurance carrier give you a detailed billing by site rather than just one bill.
Even with good vendor cooperation, however, there will still be expenses that cannot be identified to a specific site. To handle these expenses, do the following:
Step One—Set up an overhead area in each of your divisions or profit centers. That way, expenses are incurred that pertain to a division and not the whole company. They can be more easily allocated within that division to the specific sites.
Step Two—Set up an overall company overhead account. Essentially, this account will pick up any expenses that cannot be allocated to a specific division. Items such as officer compensation, home office personnel, etc. will go into this area to be allocated to the divisions which will then in turn be allocated to the specific sites.
Step Three—Select appropriate allocation methods. Note that the method you use for each division may be different. That is fine as long as the allocation method is well documented, simple to administrate, and makes sense to all staff affected by the allocation decision, especially if bonuses or compensation is involved. Listed below are allocation methods you will want to consider, with their benefits and drawbacks for certain profit centers:
- Volume Driven – Allocation based upon gallons sold. This can work well within divisions such as cardlocks, commercial fuels, etc., but is usually not effective for corporate overhead out to the divisions.
- Sales Dollar Driven – Again, this may work effectively in individual divisions, but is usually ineffective when it comes to corporate overhead.
- Number of Customer Invoices – Invoice processing can be a major expense for commercial marketers and can be very effective for corporate allocation in a pure wholesale environment.
- Customer Counts/Register Rings – With this data, it is a pretty accurate method for allocating within a store division.
- Time-Based – A very good way of allocating corporate overhead, this measure is derived from your home office staff’s estimate of the amount of time they spend in a typical month doing each division’s work. This is also an excellent way to allocate owner salary. (Note: If you use this method, be alert for an employee who spends 99% of their time on one division. This person’s pay and benefits should have been directly expensed to that particular division’s overhead area.)
- Mileage – This is a typical allocation method for transportation divisions. The problem with this method occurs when some of the transportation division vehicles are making numerous stops over small miles, while other vehicles are making single stop long hauls. If this is the case, number of deliveries may be a better allocation method.
Step Four—Get buy-in from those managers and staff affected by the allocation process. Make sure they understand and agree with the methods selected. Be open to new ideas in case, with their intimate knowledge of the division, they may have a better way.
Step Five—After everyone is in agreement, document the allocation methods.
Finally, make it a practice to insist on after overhead financials. The whole reason you put yourself through this process is to find out where your company is making the most profit, and to shore up or dispose of marginally profitable divisions or sites. Each month, first allocate the corporate overhead to the divisions (into their overhead account) and then allocate the respective division overhead accounts to the individual sites. Any time reports are published, make sure the overhead is clearly visible on the report.
One of the reasons some companies are reluctant to funnel overhead down to the sites and publish those results is the backlash that may occur at the site level. Actually, site managers concerned about corporate overhead can be a very good thing! We learned of one client that began outsourcing many of its home office functions after site managers looked at the allocations, thought the costs were high, then did their homework and presented less costly outsourcing alternatives to the headquarters’ staff! It ended up being a win-win.
And finally, review your allocation method(s) at least annually. Particularly if your company is in a high growth cycle and you are using any time or activity-based methods. You may even need a quarterly review. Good luck!