How Are Your Business Lines Really Doing?

Neighborworks CFO ConveningDetroit, MichiganMay 16 – 17, 2011

Are they as safe as they seem?

This session is for groups with multiple business

lines.

It is not intended to:

Solve all of your cash flow problems Make all of you business lines

profitable Cause your managers to

understand their reports

This session will be a No-GAAP Zone!

GAAP

Internal management reporting does not have to conform to GAAP.We do a lot of internal billings and

cost allocations between departments, as well as indirect

cost allocations.

Show of Hands!

How many of you have multiple lines of business?

2 to 5 lines of business? 5 to 10 lines? More than 10 lines?

Community Housing Partners has the following lines of business: Weatherization

services Energy Training

Center Regional Energy

Alliance Single-Family

Development Homeownership

Center

Realty Company Multi-Family

Development Property

Management Contractor Architectural Firm Asset Management Resident Services Accounting Services

How many of you allocate out the following costs:

Office space? Shared Vehicles? HR costs? IT costs? Accounting Costs? Executive Salaries? How many of you allocate out 100% of

your “indirect” costs?

Haw many of you have a federally approved Indirect Cost Rate Agreement?

You can get one the hard (and expensive way) – Like I did - $11K…

Or you can go the easy way. If HUD is your cognizant agency, you can go to:

http://rates.psc.gov› Submission Requirements

Non-Profit Organization Fill out the 4 documents

Can you answer the following questions?

Which of your business lines are profitable?

Are you sure? Can you tell which of your business

lines are bleeding? Are you sure? Do you allocate all of your overhead

costs?

What is cost allocation?

A process of attributing costs to a particular cost center› The assigning of a common cost to several cost

objects

Definitions

Direct Cost Costs that can be

traced directly to a cost object such as a product, department or profit center.

Indirect Cost Costs that is not

directly traceable to a cost object such as a product, department or profit center.

Do you know your alligators?

Pembroke Management Inc.

Pembroke Mgmt was an entity CHP set up to run the administration for Sec 8 vouchers in the New River Valley and to administer a local IPR program.

It had one P&L and in 2000, lost $28K. The first month I was onboard, I had to analyze

this entity and problem solve. Without cost allocation, or separate departments

set up for the two activities, we had no way of knowing who was bleeding. Mgmt. felt like we needed to drop both programs.

After departmentalizing, Sec 8 lost $30K and IPR had net income of $2K

Tekoa Incorporated Tekoa provided group home care for “at

risk” youth. We had:

a girls home in Floyd, Vaa boys home in Radford, Va A girls honors house in Christiansburg, VaAnd, an accredited school.

Tekoa Incorporated (cont.)

Usually flowed $200K in cash per year 4 months after coming to CHP, I saw we

were on track to flow $100K for the year Program director said there was “a

problem somewhere” After departmentalizing, the school and

Christiansburg were performing “as expected”, Radford was doing better than expected but Floyd was on track to lose $150K

How can you allocate out accounting costs? By timesheet We used to do

short- term time studies and estimate % of time spent per person, per department

By revenue By expenses

A/P costs can be allocated by number of checks cut› We found it more

accurate to allocate by number of invoices processed

HR and Payroll costs can be allocated by number of employees per department

Dept # 110 111 112 113 114 117 118 119 121 122 123 124 125 132 136 138 139 140 150 170 601 620 710 750

Exec Gen Corp Cburg VAB Comm Rich Prop SF Tide Lease Ameri- HUD SHP Energy NRC

Salaries Adm Devp Devp Office Office Arch .EHR Serv Office Mgmt DEV HO Bldgs Const Corps Grant Grant Vehicle Serv Grant CLDC GBWC VICC Tekoa Totals

Time Percentages .

employee a 75,000 10.0% 15.0%   75.0%   0.0% 0.0%   100.0%

employee b       0.0%

employee c 30,000 0.1% 3.0% 2.0% 0.1% 0.1% 0.5% 40.0% 0.5% 0.1% 0.5% 48.0% 0.1%   5.0% 100.0%

employee d 5,000 50.0%   25.0%   20.0%   5.0% 100.0%

employee e 12,000 0.5% 20.0% 0.5% 2.0% 0.5% 0.5% 0.5% 0.5% 0.5% 50.0% 1.0% 0.5% 5.0% 1.0%   2.0% 85.0%

employee f 40,000 5.0% 10.0%   85.0%     100.0%

employee g 70,000 5.0% 35.0% 1.0% 2.0% 1.0% 2.0% 1.0% 2.0% 2.0% 3.0% 5.0% 2.0% 3.0% 25.0% 1.0% 0.5% 1.0% 2.5% 2.0% 2.0% 2.0% 100.0%

employee h 40,000 1.0% 3.0% 1.2% 0.4% 1.6% 0.8% 67.5% 0.4% 1.6%  5.8% 7.0% 0.8%   8.9% 100.0%

employee i 30,000 0.1% 3.0% 2.0% 0.1% 0.1% 0.5% 78.0% 0.5% 0.1% 0.5% 10.0% 0.1%   5.0% 100.0%

employee j 30,000 10.0%   90.0%     100.0%

employee k 40,000 1.0% 11.0%   85.0%   1.0%   2.0% 100.0%

employee l 40,000 2.0% 6.5% 1.0% 2.0% 2.0% 1.0% 2.0% 2.0% 2.0% 66.0% 2.0% 2.0% 1.0% 2.0% 1.0% 0.5% 0.0% 1.0% 2.0% 1.0% 0.5% 0.5% 100.0%

employee m 95,000 5.0% 20.0% 2.0% 5.0% 1.0% 0.0% 1.0% 0.0% 43.0% 2.0% 0.0% 3.0% 10.0% 0.0% 3.0% 4.0% 1.0% 0.0% 0.0% 100.0%

employee n 25,000 10.0% 8.0% 3.0% 17.5% 3.0% 1.0% 1.0% 2.5% 8.0% 8.0% 10.0% 2.0% 3.0% 3.0% 2.0% 15.0% 3.0% 100.0%

employee o 25,000 2.0% 4.0% 1.0% 5.0% 1.0% 4.0% 5.0% 2.0% 2.0% 0.0% 3.0% 1.0% 2.0% 33.0% 3.0% 1.0% 1.0% 30.0% 100.0%

557,000      

Dollars      

employee a $7,500 $11,250 $0 $0 $0 $0 $0 $0 $0 $56,250 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $75,000

employee b $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 -

employee c $30 $900 $0 $600 $0 $30 $0 $30 $150 $12,000 $150 $30 $150 $14,400 $30 $0 $0 $0 $1,500 $0 $0 $0 $0 $0 30,000

employee d $0 $2,500 $0 $0 $0 $0 $0 $0 $0 $1,250 $0 $0 $0 $1,000 $0 $0 $0 $0 $250 $0 $0 $0 $0 $0 5,000

employee e $60 $2,400 $60 $240 $60 $60 $60 $60 $60 $6,000 $120 $60 $600 $120 $0 $0 $0 $0 $240 $0 $0 $0 $0 $0 10,200

employee f $2,000 $4,000 $0 $0 $0 $0 $0 $0 $0 $34,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 40,000

employee g $3,500 $24,500 $700 $1,400 $700 $1,400 $700 $1,400 $1,400 $2,100 $3,500 $1,400 $2,100 $17,500 $700 $350 $0 $700 $1,750 $1,400 $1,400 $1,400 $0 $0 70,000

employee h $400 $1,200 $480 $160 $0 $640 $0 $320 $0 $27,000 $160 $640 $0 $2,320 $2,800 $320 $0 $0 $3,560 $0 $0 $0 $0 $0 40,000

employee i $30 $900 $0 $600 $0 $30 $0 $30 $150 $23,400 $150 $30 $150 $3,000 $30 $0 $0 $0 $1,500 $0 $0 $0 $0 $0 30,000

employee j $3,000 $0 $0 $0 $0 $0 $0 $0 $0 $27,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 30,000

employee k $400 $4,400 $0 $0 $0 $0 $0 $0 $0 $34,000 $0 $0 $0 $400 $0 $0 $0 $0 $800 $0 $0 $0 $0 $0 40,000

employee l $800 $2,600 $400 $800 $800 $400 $800 $800 $800 $26,400 $800 $800 $400 $800 $400 $200 $0 $400 $800 $400 $200 $200 $0 $0 40,000

employee m $4,750 $19,000 $1,900 $4,750 $950 $0 $0 $950 $0 $40,850 $1,900 $0 $2,850 $9,500 $0 $0 $0 $2,850 $3,800 $950 $0 $0 $0 $0 95,000

employee n $2,500 $2,000 $750 $4,375 $750 $250 $250 $625 $2,000 $2,000 $2,500 $500 $750 $750 $500 $0 $0 $3,750 $750 $0 $0 $0 $0 $0 25,000

employee o $500 $1,000 $250 $1,250 $250 $1,000 $1,250 $500 $500 $0 $750 $250 $500 $8,250 $750 $250 $0 $250 $7,500 $0 $0 $0 $0 $0 25,000

Total Dollars $25,470 $76,650 $4,540 $14,175 $3,510 $3,810 $3,060 $4,715 $5,060 $292,250 $10,030 $3,710 $7,500 $58,040 $5,210 $1,120 $0 $7,950 $22,450 $2,750 $1,600 $1,600 $0 $0 $555,200

Percent of Acct Salaries   4.57% 13.76% 0.82% 2.54% 0.63% 0.68% 0.55% 0.85% 0.91% 52.47% 1.80% 0.67% 1.35% 10.42% 0.94% 0.20% 0.00% 1.43% 4.03% 0.49% 0.29% 0.29% 0.00% 0.00% 99.68%

     

Total Cost to Allocate 639,000 (1)      

Annual 29,220 87,934 5,208 16,262 4,027 4,371 3,510 5,409 5,805 335,274 11,507 4,256 8,604 66,584 5,977 1,285 - 9,120 25,755 3,155 1,836 1,836 - - 636,935

Monthly 2,435 7,328 434 1,355 336 364 293 451 484 27,940 959 355 717 5,549 498 107 - 760 2,146 263 153 153 - - 53,078

Monthly Charge   2,440 7,330 440 1,360 340 370 300 460 490 27,940 960 360 720 5,550 500 110 - 770 2,150 270 160 160 - - 53,180

      840      

Average Hours per Month       173

employee a 17 26 - - - - - - - 130 - - - - - - - - - - - - - - 173

employee b - - - - - - - - - - - - - - - - - - - - - - - - -

employee c 0 5 - 3 - 0 - 0 1 69 1 0 1 83 0 - - - 9 - - - - - 173

employee d - 87 - - - - - - - 43 - - - 35 - - - - 9 - - - - - 173

employee e 0 17 0 2 0 0 0 0 0 43 1 0 4 1 - - - - 2 - - - - - 73

employee f 9 17 - - - - - - - 147 - - - - - - - - - - - - - - 173

employee g 9 61 2 3 2 3 2 3 3 5 9 3 5 43 2 1 - 2 4 3 3 3 - - 173

employee h 2 5 2 1 - 3 - 1 - 117 1 3 - 10 12 1 - - 15 - - - - - 173

employee i 0 5 - 3 - 0 - 0 1 135 1 0 1 17 0 - - - 9 - - - - - 173

employee j 17 - - - - - - - - 156 - - - - - - - - - - - - - - 173

employee k 2 19 - - - - - - - 147 - - - 2 - - - - 3 - - - - - 173

employee l 3 8 1 3 3 1 3 3 3 86 3 3 1 3 1 1 - 1 3 1 1 1 - - 130

employee m 9 35 3 9 2 - - 2 - 74 3 - 5 17 - - - 5 7 2 - - - -

employee n 17 14 5 30 5 2 2 4 14 14 17 3 5 5 3 - - 26 5 - - - - -

employee o 3 7 2 9 2 7 9 3 3 - 5 2 3 57 5 2 - 2 52 - - - - -

Total Hours Per Month 88 306 16 63 13 17 15 18 26 1,166 40 15 26 273 24 5 - 36 117 6 4 4 - - 1,760

Per hour Billing Rate   $28 $24 $27 $22 $25 $21 $19 $25 $19 $24 $24 $24 $27 $20 $21 $23 #DIV/0! $21 $18 $41 $37 $37 #DIV/0! #DIV/0! $30

Monthly Charge- 2008  2,440 7,330 440 1,360 340 370 300 460 490 27,940 960 360 720 5,550 500 110 - 770 2,150 270 160 160 - - 53,180

2007  4,010 8,050 590 2,000 490 410 360 670 880 29,670 1,350 580 470 6,690 1,020 160 160 1,500 3,560 1,190 470 450 2,000 6,150 72,880

Difference (decrease)   (1,570) (720) (150) (640) (150) (40) (60) (210) (390) (1,730) (390) (220) 250 (1,140) (520) (50) (160) (730) (1,410) (920) (310) (290) (2,000) (6,150) (19,700)

% Difference (decrease) % -39.2% -8.9% -25.4% -32.0% -30.6% -9.8% -16.7% -31.3% -44.3% -5.8% -28.9% -37.9% 53.2% -17.0% -51.0% -31.3% -100.0% -48.7% -39.6% -77.3% -66.0% -64.4% -100.0% -100.0% -27.0%

Annual Difference   (18,840) (8,640) (1,800) (7,680) (1,800) (480) (720) (2,520) (4,680) (20,760) (4,680) (2,640) 3,000 (13,680) (6,240) (600) (1,920) (8,760) (16,920) (11,040) (3,720) (3,480) (24,000) (73,800) (236,400)

How can you allocate out office costs? By office square

footage› If the bulk of your

“office costs” are real estate related (ie Mortgage, Insurance, RE Tax and Utilities – square footage may be the best method

By head count› If server costs,

paper supplies, receptionist costs are the bulk of your costs – allocation by head count may be more accurate

Christiansburg Offices Budget                            

2003 Office Allocation       350 365                   

        2001 2002 2003 2004 2005 2006 2007 2008   2008 2008 2008 2008

    employees Charges Charges Charges Total Total Total   People % Charges Non-Office Pool Car Total

110Executive 2.5  700 700 912.5 1,580 1,486 1,018 1213 2 0.069 751 530 393 1673

112Corporate Dev.           919 927 888 1219 4 0.138 1502  231 1733

115Finance 10  2500 2600 2965 6,633 5,156 5,844 6940 12 0.414 4505 440 393 5338

116IT                 0 1 0.034 375 0 0 375

117Architect 1    350 365 775 793 1,407 1846 4 0.138 1502  755 2257

119Services 2    350 730 270   - 0 0 0.000 0  0 0

122Prop. Mgmt. 1    350 365 496 454 239 131 0 0.000 0  17 17

132Construction 3  700 700 1095 3,040 2,284 2,784 2333 4 0.138 1502 0 664 2165

708VCCI 1.5  350 350 547.5 482 584 890 242 0 0.000 0  0 0

750Tekoa           1,705 997 133 576 0 0.000 0  0 0

150Energy Services     2800 2940 3331 3,767 3,653 3,797 1251 2 0.069 751 0 524 1275

                                 

    Total   7050 8340 10311 19,667 16,334 17,000 15750 29 1.000 10886 970 2978 14833

    Annual   84600 100080 123732 236,000 196,008 204,000 189000    130636 11634 35730 178000

                                14833

                                178000

                          130636     

                                 

Non-Office Sq.Ft. Rate Usage Total                      

Training Area Upstairs-990 1320 6 50% 3960 330Dept 115                  

50% CHPC 50% VCC 1213 0 3% 0 0Dept 110                  

930 Warehouse 897 0 100% 0 0Dept 115                  

990 Warehouse 1412 6 75% 6354 530Dept 110                  

Todd's Tools-990 132 0 100% 0 0Dept 132                  

Tech Area-990 220 6 100% 1320 110 115                 

                                 

    Annual Rate   11634                     

    Monthly Rate   970 970                   

How do you allocate out vehicle costs? Do you charge out

departments that use vehicles?

How do you determine the charge?

How do you cost out vehicles used by indirect staff(pool vehicles)?

Do you purchase vehicles or do you lease?

Do you just cover current years costs? Or, Do you build depreciation cost into your lease rate?

Do you break even on your leases?

Our Method for Vehicles: We purchase all vehicles and currently have a

fleet of 93 We base most of our lease rates on a 5 year

lease at 6% interest with a residual value of $0 Departments with exclusive use of a vehicle are

charged the monthly lease rate For pool vehicles, we charge the full lease rate

to the respective corporate office budget. During the year, we track usage by department and allocate out the pro-rata usage(by checked out day) into each departments office cost.

At the end of the “quality life” of trucks, we pass them down to properties. Cars are sold or traded in.

Questions, questions, questions!

How do you allocate general costs for grant writing?

How do you allocate out costs for HR?

How do you allocate general IT costs?

How do you allocate executive overhead?

Do you fully charge out overhead every month or do you charge out based on a departments level of activity?

Do you allocate out each type of cost separately or do you accumulate all overhead costs into one pot and charge them out one time?

Trash can material – My Opinion As you get larger, it becomes more and more difficult to allocate

out all indirect costs separately – too many moving parts We have an office department for each regional office to

accumulate costs. We then allocate costs out to departments on a square foot basis by usage

We have a vehicle department to accumulate costs including 5 year depreciation, principle and interest. We then determine vehicle lease rates and charge them out monthly to fully absorb costs

We have separate departments for Executive, HR, IT, Accounting and Corporate Development (Public Relations, Grant Mgmt and Grant Writing) › These five departments are grouped as our “Total Indirect

Overhead Costs” › These departments are charged their share of office costs and vehicle

costs› This “Total Indirect Overhead Cost” is the amount we cost out to

departments (profit centers)

Trash Can Material (cont.) Now how do you charge out these

costs? What is your allocation method? For Federal Programs/Grants, you can

only charge the lesser of overhead specified in the award or the amount on your “approved” indirect cost rate plan. Many times that will be a percentage of expenses.

Is this “approved average” always a good way to analyze your lines of business?

Does this make sense?

CHP Construction Sales $20,000,000 COS 17,000,000 GP 3,000,000 OperCosts 2,000,000 NI 1,000,000 10% OH rate on total

costs is $1.9 million 10% of Operating costs

is $200K

Energy Training Center Sales $3,000,000 COS 0 GP 3,000,000 Oper Costs 2,000,000 NI 1,000,000

10% OH rate on costs is $200K

Is there a perfect method? What works for you?

At CHP, we charge our Federal Programs and Grants our approved rate of 10% of operating costs.

10% is also the rate we charge all other departments with no “cost of goods sold”

For our departments with cost of goods sold we charge 40% (instead of 10%) on operating costs.

Overhead Absorption

Fixed Rate Some companies fully

allocate out overhead costs each month, regardless of volume

Problems with this:- A department has a bad month and overhead is just as high as a good month- A program experiences growth, possibly causing additional overhead, but overhead coverage to parent is capped

Variable Rate Charge to department is

a percentage of operating costs and varies month to month.

Problems with this: - More work each month

…can’t do a recurring entry

- Decreases in volume at the department level can leave the overhead “under-absorbed”

How do you allocate costs out to Property Management?

Can’t allocate Corporate Indirect Costs to Properties› Overhead costs to Properties have to be

covered in Management FeesHow can you charge your property

management division to cover your overhead costs for all of the properties they represent?

Discussion