WHEN GROWTH REQUIRES EFFICIENCY, AUTO ACCOUNTING TO THE RESCUE!
When most A & E firms grow and become multi-office and/or divisions they are usually in the process of finding and implementing new accounting which will allow them to
generate separate profit and loss statements for each office. To do this, we need to find the best way to allocate those common corporate overhead (those costs for our central
headquarters activities such as accounting, personnel, the company president’s
cost, etc.) to the offices. Deltek Vision allocates Overhead to Direct Projects if you like as a utility included with the software package. But here we are talking about the allocation of Corporate Overhead to the business units.
DECISIONS, DECISIONS, DECISIONS
Finding the amount to allocate is easy but determining the best method for your firm takes understanding and discussion with the firm’s management. How it is done, will almost always vary from firm to firm.
I have found a few methods are most common, but by no means your only
options. Just some of the Allocation methods I’ve seen to distribute those costs are: Net Revenue, Total Payroll, Headcount, FTE Count and Gross Margin. So, if my particular office has 23% of the Net Revenue, Payroll, Headcount, FTE count or Gross Margin from the total in all offices, then my office would receive 23% of the corporate overhead allocated.
Rather than one single allocation method, some firms will use multiple allocation methods to spread corporate costs depending on the nature of each. For example, the cost of the HR Costs may be allocated based on the number of employees in each office, while insurance and maintenance cost might be allocated on the square footage occupied by each office, etc. I’d recommend keeping overhead allocation as simple as possible and sticking to a single method unless you have a very unique situation.
Regardless of which allocation method you choose, some will claim it is just unfair. Just try and be happy with the fact that they are paying enough attention to the numbers.
The conversations that will follow are a healthy process that will benefit the financial health of your firm.
NOW WHAT? EXCEL SPREADSHEET?
Once the decision have been made, then it is up to accounting to come up with the calculations monthly and post the journal entries to account for the allocation. The bigger the firm, the more departments/profit centers you have the more time consuming this process can be. Many will revert to a spreadsheet, always prone to errors followed by recoriding a time consuming manual journal entry.
SO THEN WHAT IS THE ALTERNATIVE?
The alternative is to create an AUTOMATED TRANSACTION ENTRY where the calculation method(s) decided are part of a SQL Stored Procedure. A Stored Procedure is a SQL Query that not only calculates the allocation amounts per department but creates the journal entry ready to post. This formula would then transfer those Corporate costs across a group of profit centers, departments, divisions or companies. Whatever you call them, in Deltek Vision these are your Organizations (Orgs). The formula creates a Transaction Entry file ready for posting into your General Ledger.
There are no limits for the uses for SQL Stored Procedures. Allocations of Corporate Overhead, Professional Liability Insurance, Fringe Benefit Costs, Rent, Other Expenses, WIP Adjustments and even Overtime Premium Costs not posted in timesheets just to name a few. Another common need is automated units that coincide with timesheet entry for Computer Time, Add-On’s tied to billed hours and many others.
More information can be found in another blog Automated Transaction Entry: