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 effectively allocate 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
Not all shops allocate overhead the same way because there are multiple accepted methods. 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
formulas based on hours spent on their clients. Clients & Profits provides the opportunity to choose the
allocation method that best reflects the way an agency uses overhead for
the servicing their 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 and direct labor costs. The amounts on the worksheet are then reflected in the Client P&L Analysis when it's printed for the same period after the worksheet has been completed. It works by determining the total overhead expense amount for the period, then backing out the total direct labor (salary, bonus, etc.) expense per the worksheet, to arrive at a final overhead expense amount. The worksheet can
distribute overhead expenses based on one of four formulas (see below),
depending on how you want to allocate overhead to clients.
The direct labor expense is allocated on a percentage basis per staffer, based on the number of billable hours each staff person spent on each client.
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 display all staffers
that have billable hours for the selected period. You'll then be prompted
to enter the individuals' monthly direct labor costs (i.e., salary, bonuses,
benefits, etc.). Clients & Profits then
calculates the amount of direct labor cost which should be allocated 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. The remaining overhead amount (total overhead expenses, less total salary entered into the worksheet) is then allocated to each client based on the chosen method.
Q. What are the methods of overhead allocation?
There are four key methods for allocating overhead:
Agency Direct Service Costs
This method allocates the overhead dollars based on the actual hourly
rate for each staffer for each month. It determines the total hours worked
for each client from the staffers' time sheets, and then
allocates these hours based on the salary for each staffer. This
method is the most-used method by advertising agencies today. The
method makes the assumption that there is a relationship between the
salary of a person and the amount of overhead used by that person in a
given month. Think of it as "weighting" the hours based on one's salary.
This method allocates the overhead dollar amount based on the
percentage of total billings each client generated that month.
This method allocates the overhead dollar amount based on the
percentage of AGI (revenue less job costs) each client generated that month.
Agency Direct Client Hours
This method allocates the overhead dollar amount based on the number
of total hours each client generated, without regard to the monthly direct
service costs for the employees generating the hours. The hours spent on each client are not "weighted" based on the salary of the staffers spending time on the clients.
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 of a number of direct employee related costs 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 for each staffer, these amounts are
used to make the calculation to allocate salary and overhead, and only the allocated results per client are saved. The actual labor input amounts are not saved, so
they 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 employees' salaries 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 since labor costs are not saved (as mentioned in the question above for security reasons).
Q. Where does the Client P&L Analysis
report derive its information?
This is the report for which you create the overhead allocation worksheet. They do hand in hand. The per client client allocation on the worksheet directly impacts this report. First, it calculates the revenues and job costs for each client (like the
Client P&L report), establishing a gross margin per client. Second, under the Direct Labor column the direct labor costs per client from the Overhead Allocation worksheet is applied to each client. Third, the overhead per client from the worksheet is applied to each client. In conclusion, the gross margin amounts are pulled from the general ledger, but the direct labor and overhead allocation are pulled from the worksheet.
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, separating revenue, job costs, salary &
overhead on a client by client basis. Think of it as an income statement broken out by client. 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 uses too many expensive individuals to
manage the client (why Agency Direct Service Costs method is most used, because it weights the hours by salary when applying overhead). The client who has a low margin is actually profitable
since it can be effectively serviced with more cost-effective staff. Or, it could be there are not enough billings for certain clients, especially since 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 an agency manager
is how profitable are your clients, you'll definitely want to use the
Client P&L Analysis every month.
Q. How do I print the Client P&L
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. Choose the same period as you did when creating the worksheet.
Q. Can I print the Client P&L Analysis
before allocating overhead?
Yes, but the direct labor costs and overhead allocation columns on the report
will be blank. This is essentially the same as printing the Client P&L, which will only show gross margin per client vs. total income per client (which is what you're looking for with the Client P&L Analysis).
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., gross margin 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, to arrive at total income by client.
Q. What is the "direct expenses" column
This column is used to separate agency overhead expenses (such as agency
travel) which can be assigned to a specific client. The amount is deducted
from agency overhead before allocation. To "tag" an overhead expense to a particular client under the Direct Expenses column, make sure you add a client code to the journal entry. Double click the posted journal entry and add a job number, then hit tab, and it will fill in the client code. Direct expenses are optional, so it's fine if this column has no amounts.
Q. How is salary allocated to each client
when printing the Client P&L Analysis?
Technically, this is done on the Overhead Allocation worksheet, then it's simply copied into the Client P&L Anysis report (which is why is essential to save the worksheet before printing this report). How the worksheet does this: First, an hourly cost is established for each staffer
by dividing the salary for a staffer in the Overhead Allocation
worksheet by their total billable 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 billable 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. Because it "backs into" the overhead amount like this, this ensures the total income on the income statement ties to the total income on the Client P&L Analysis.
Q. I make month end WIP entries to match
my revenues and expenses. Should I continue doing this
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 gross margin for each client in the Clients P&L
Analysis will not agree with the total gross margin on your Income Statement. This
journal entry will show up in the Client P&L Analysis as client code "--" and named "unallocated
income/costs/expenses". C&P is expecting all amounts in the revenue and job cost accounts to have client codes, so when they don't, it dumps these amounts into this client to make sure the totals on the report agree to the standard income statement. Keep in mind that Clients & Profits Pro and Enterprise editions 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 for any given period is
saved and will be used for the Client P&L Analysis, copying its amounts into the Direct Labor and Overhead Allocation columns of the Client P&L Analysis for that period.
Q. Can I print the Client P&L Analysis
for a period using different overhead allocation methods?
Yes, but you'll need to re-enter the period's salary amounts in the worksheet and choose this method. As a
practical matter, once you determine which allocation method makes the
most sense for your shop, that's the only method you should 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 to monitor performance over time. The
four allocation methods are there so you can make the determination of
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 staffers' salaries. You will need to re-enter the entire
Overhead Allocation worksheet.