How do I account for my overhead?
November 24th, 2008 by Michael Giuffrida
As an SMB, we don’t generally have the time to run a myriad of reports and twist and turn data to figure out where we are making money and where we are not. Sure, direct expenses are east to calculate, but which lines of business are taking up the rest of the company resources such as sales, marketing, accounting, administrative support etc.? One way to get to the bottom of it without spending a lot of time is using a method called time driven activity based costing (TDABC). Using this method, you simply figure out the cost of the support department, estimate how long each support activity takes, and then count how many of thise activities you do for each line of business. For example, you could figure out what the cost of an hour of your sales department’s time costs, track how long you spend generating a half dozen proposals and calculate an average time to generate one. Then count how many proposals you do for each line of business. A little simple math and you have allocated the appropriate expense to each line of business.
While TDABC can be much more complex than this, once you start tracking information at this level, the possibilities are endless. You can start tracking the cost of a specific customer or specific job this way if you want to get that granular. The real trick is figuring out the balance of the time spent tracking and the potential gains. Don’t try to make the model perfect from the beginning. Simply get something going and fine tune it over time. Once you start doing this, you will be able to identify areas for improvment in the organization and start seeing where your excess capacity is which is where you can really start to see this pay off.
