|
|
 |
 |
Overhead Allocation FAQs (1004) |
|
|
Summary: Frequently-asked questions about
allocating overhead to clients, the Overhead Allocation
Worksheet, and how overhead affects the Client P&L
Analysis report. The ability to easily allocate overhead
expenses to clients is a key new feature. The overhead
allocation function lets you calculate your shop's
overhead with no rekeying of data, it uses the overhead
expense totals from your General Ledger and client hours
from Time Sheets to distribute each client's share of the
agency's expenses based on different formulas.
Q. Why is overhead allocation important? According to the AAAA, overhead represents almost 50%
of a typical agency's total operating expenses. It is the
rent, utilities, office supplies, and other expenses used
to run the shop and service the agency's client accounts.
By allocating these overhead expenses to each client, the
shop has the ability to see what the true service cost of
the account is -- and if the account actually makes money
for the agency. Once you know each client's true
profitability, you can more profitability allocated
people, facilities, and other resources to your most
valuable clients. You'll also know as well which clients
may not be worth keeping. Q. Why doesn't Clients & Profits allocate overhead automatically? Not all shops allocate overhead the same way. The way agencies and design studios determine client profitability depends on their client mix, their business model, and their billing practices. Some will allocate overhead based on billings, the gross income of the agency, or one of a couple of formula's based on hours. Since there are multiple allocation methods, Clients & Profits provides you with the opportunity to choose the allocation method that best reflects the way your agency uses overhead for the servicing of it's clients. The AAAA guide dealing with overhead allocation is:
The AAAA's Guide to Individual Client Profitability.
Q. What is the Overhead Allocation Worksheet? The Overhead Allocation Worksheet is a G/L tool that calculates each client's share of the shop's overhead expenses. It works by taking the period's salary expense (which you'll enter for each staff member) and the month's overhead hours from time cards and time sheets. The worksheet can distribute overhead expenses based on one of four formulas (see below), depending on how you want to allocate overhead to clients. When using the worksheet, you'll first choose an
overhead allocation method (they're described in detail
below). Each of these four methods is listed by the AAAA
in their "Guide to Individual Client Profitability."
After choosing the allocation method, the worksheet will
a all staffers that have billable hours for the selected
period. You'll then be prompted to enter the individuals
monthly labor costs (i.e., salary, bonuses, benefits,
etc.). After you've added in everyone, Clients &
Profits calculates the amount of salary which should be
allocated to each client and the remaining overhead to be
allocated. Q. What are the methods of overhead allocation? There are four key methods for allocating overhead:
Q. What are included in labor costs? These are costs which you determine are part of an
employee's total cost to the shop. They will always
include salary, bonuses, and employer payroll expenses.
They may also include any one of a number of fringe
benefits listed in various expense accounts. You have the
flexibility to determine what is most reasonable for you
and your shop. Q. Will other users be able to view the monthly direct service cost information after I've enter it into the Overhead Allocation worksheet? No. After you save the monthly service cost
information, these amounts are used to make the
calculation to allocate salary and overhead, and only the
calculated results are saved. The actual labor inputs is
not saved, so it can't be seen by other Clients &
Profits users. Q. Our salary information is the same from period to period, must I reenter the salary information to run the report for a different period? Yes, while your employee's salary may not change from
month to month, the amount of hours charged to a specific
client probably did. Since the overhead allocation
worksheet uses both labor costs and client hours, you
would need to run the report for each period. Q. Where does the Client P&L Analysis report derives its information? First, it calculates the revenues and job costs for
each client (like the Client P&L report). Second, it
applies the salary amounts for each staffer entered in
the Overhead Allocation worksheet to each client. It does
this by dividing the total salary for a staffer for a
month by their billable hours for that month to derive an
hourly cost. Then it applies this hourly cost based on
the number of billable hours a staffer logged against
each client. Third, it subtracts the total of the salary
amounts in the Overhead Allocation Worksheet from the
total of your Expenses, Other Expenses, & Other
Income on the Income Statement to establish the overhead
dollar amount. This overhead dollar amount is then
applied to each client based on one of the four
allocation methods you chose. Q. What is the Client P&L Analysis? The Client P&L Analysis is a report that will
directly reconcile with the Income Statement for any
period and separate revenue, job costs, salary &
overhead on a client basis. This report will sort by most
to least profitable client so you can quickly see who is
making you the most money. With this report you may
discover a number of things that affect your financial
business decisions. The client you thought was profitable
is actually unprofitable because it takes too expensive
individuals to manage the client. The client who has a
low margin is actually profitable since it can be
effectively serviced with more cost effective staff. From
an agency management standpoint, several industry studies
have concluded the reason most unprofitable accounts
occur is due to the lack of income instead of the agency
having excessive overhead. Since one of the most
important pieces of information you can know as the is
how profitable are your clients, you'll want to use the
Client P&L Analysis every month. Q. How do I print the Client P&L Analysis? First, you need to complete the Overhead Allocation
worksheet located in the G/L Tools window. Choose
Accounting > General
Ledger, then Edit > G/L
Tools. After the Overhead Allocation worksheet is
saved, then you can print the Client P&L Analysis.
Choose Snapshot >
Financials and click on the Income Statement
reports. Q. Can I print the Client P&L Analysis before allocating overhead? Yes, but the overhead allocation column on the report
will be blank. Q. What is the difference between the Client P&L and the Client P&L Analysis reports? The Client P&L report shows revenues less job
costs by client (i.e., AGI by client). The Client P&L
Analysis goes a step further by applying salary and
overhead costs to each client, in addition to job costs.
Q. What is the "direct expenses" column for? This column is used to separate agency overhead
expenses (such as agency travel) which can be identified
to a specific client. The amount is deducted from agency
overhead before allocation. Q. How is salary allocated to each client when printing the Client P&L Analysis? First, an hourly cost is established for each staffer
by dividing the salary for a staffer in the Overhead
Allocation worksheet by their total hours for that month.
Hours marked as unbillable and hours logged against
clients marked as "in-house" are excluded when
determining an hourly cost. Then it applies this hourly
cost based on the number of hours this staffer logged
against each client that month. Q. How is the "overhead" dollar amount determined when printing the Client P&L Analysis? The total of all salaries for each staffer in the
Overhead Allocation worksheet is subtracted from the
total of the Expenses, Other Expenses & Other Income
on the Income Statement. This dollar amount is then
applied to each client by one of the four methods of
overhead allocation. Q. I make month end WIP entries to match my revenues and expenses. Should I continue doing this as normal? Yes you should with one important change. You will
need to prepare your WIP journal entry by client. Enter
the amounts for each client, then double click on each
line and enter the appropriate client code. If you don't
do this, then the total AGI for each client in the
Clients P&L Analysis will not agree with the AGI on
your Income Statement. This journal entry will show up in
the Client P&L Analysis as unallocated
income/costs/expenses. Keep in mind that Clients &
Profits Pro 3.0 can automatically accrue media costs when
creating a media prebilling. This automatic accrual entry
includes the client number, which is needed for the
Client P&L Analysis. Q. Does the Overhead Allocation Worksheet save for each period I save it so I can go back and print the Client P&L Analysis again? Yes. The most recent overhead allocation worksheet is
saved and will be used for the Client P&L Analysis.
Make sure you are using labor costs from the correct
period in preparing the overhead allocation. Q. Can I print the Client P&L Analysis for a period using different overhead allocation methods? Yes, but you'll need to reenter the period's salary
amounts. As a practical matter, once you determine which
allocation method makes the most sense for your shop,
that's the only method you run on an ongoing basis. To
run multiple allocation methods for the same period would
be confusing (as marginal accounts could switch from
profitable to unprofitable) and would diminish the
effectiveness of the analysis. The four allocation
methods are there so you can make the determination which
one best represents the way overhead is used in your
agency. Q. I need to edit a staff member's salary information and reprint the Client P&L Analysis. How can I do this? For security reasons, you are unable to edit an
Overhead Allocation worksheet after it has been saved.
This is to prevent others from opening it and viewing
staffer's salaries. You will need to reenter the entire
Overhead Allocation worksheet.
|
|||
