Splitting running costs / resources across multiple projects

[Martin Williams]

Hi everybody

Here goes with my first forum post here!

I'm currently trying to make efficiencies within my growing business. I'm set up as a sole trader. I run a single business with 4 or 5 "projects" within that Company.

The core revenues for the Company are straight forward, as they are fees based, and a number of the costs are also straight forward such as venue hire for each of these projects and other project related expenditure which is easy to separate.

What I'm struggling with are the costs that are spread across each of the projects; for example; mine and my partners salaries, accountants fees, legal fees, website fees, administration, stationary and printing etc. It's very difficult for me to be able to drill down into these and say what proportion of time or money should be allocated to each project.

I was wondering if there was a good benchmark to measure this against?

For example; in the case of salaries - I might spend 4hrs on site each week for project A, 8hrs on site each week for Projects B, 9hrs for Project C but then the remainder of the week on general office work which is necessary and to the benefit of all projects, this is where the work merges.

I don't think simply splitting it down the middle is really a fair way to do it; as the amount of resource that goes into project A is much much more than project B for example, although in some cases (i.e - Website costs) a split would be fair.:|

This being the case - how could I calculate how profitable and worthwhile each of the projects truly is.

Ultimately; what I'm trying to do here is to look at each of my projects and find out just how profitable they are with a view to a) shelving them b) modifying them etc

Hope that all makes sense. Difficult without going into more depth about the business, but I'm sure it's a common problem that is found by most self-employed business people with multiple projects on the go.

Hope you can help and thanks in advance

Martin

 

[kontracta_com]

Sorry to bring probably the most wishy washy of answers but it really is one that depends - there really is no particularly right or wrong answer and even the best fit can often be anything but.

Whilst some firms will allocate administrative overheads by floor space or employee numbers, I'm assuming that none of these would be the most suitable for you.

As an idea would allocating the admin costs along the lines of proportion of time spent on your projects work? (so 4/21 of admin costs get allocated to Project A, 8/21 Project B etc). You can then adjust the allocations every couple of months or so and get an idea of costs but without spending more time than necessary allocating them.

I really can't think of anything else I'm afraid due to a) still waking up and b) shuddering at the thought of activity based costing(!) Hope you find something suitable anyway.

 

[Philip Hoyle]

A simple apportionment of overheads just by spreading the costs across products or departments etc is a very blunt tool and probably one of the worst forms of getting data for decision making purposes. An overhead that will remain, regardless of which projects are axed and which are taken on, should never be part of the decision making process. It will almost certainly lead to bad decision making. A typical example is saying that a purchase order costs £50 to produce (because the department costs £x million and they process y million orders per year) - this is madness because it encourages people to produce fewer purchase orders, thinking that they're saving £50 every time - in actual fact, by not doing the extra order, they're only saving pennies, being the cost of the paper and the postage - it doesn't reduce the departmental overheads - you'd need to stop issuing thousands of purchase orders to save a person's wage! It's that kind of use of the blunt tool which leads to a lot of bad decision making.

From what you say, it seems you want to apportion overheads for decision making purposes, i.e. to decide which projects to shelve. So you need to look no further than to the marginal costs of each project - i.e. how much more overheads you have to pay to do each project. It's wrong to take into account any overheads that would continue to be paid if a project stopped - all that would happen is that you'd then arbitrarily split the overhead over the remaining projects, so it wouldn't actually save you anything and you'd lose the income stream, meaning you'd be worse off! Make a list of your overheads and then split the cost between fixed costs (that will happen regardless) and variable costs - concentrate only on the variable costs and apportion them to each project exactly in accordance with how much the cost will reduce if the project is scrapped. Do that for everything, including directors wages, premises costs, admin overheads, professional fees, etc. You'll then have a figure for how much the company would save if the project was scrapped based on marginal cost.

That's a very simplistic starting point.

The next thing to consider is the opportunity cost, i.e. for resources like your own time, you need to value how much your time is worth to project A compared with what you could achieve with your time if you didn't have to spend it on project A. It's pointless apportioning your actual directors fees, because, firstly they're probably not realistic - i.e. you're probably paying yourself an artificially low wage for tax reasons and secondly because you's still pay the same wage if project a was scrapped. If you are earning £50 per hour on project A but could be earning £75 per hour on project Z then the opportunity cost is £25 per hour to continue doing project A instead of project Z! - Completely different to your actual directors fees spread over the different projects!

Hope that helps give you some insight into costing for decision making.

 

[Martin Williams]

Thank you for the advice.

So; taking this forward - I've had a look at the fixed costs Vs variable costs; and when you break it down in that way well over 90% of all costs are fixed.

The position I have at the moment is like this:

Project 1 = Gross Profit Margin of 67.43%
Project 2 = Gross Profit Margin of 84.68%
Project 3 = Gross Profit Margin of 89.60%
Project 4 = Gross Profit Margin of 100%
Project 5 = Gross Profit Margin of 100%
Project 6 = Gross Profit Margin of 92.08%

However; this does not take into account anything on my Fixed Costs list, this is purely a position of sales revenue minus variable costs.

The fixed Costs not allocated include:

Staff Wages: As you suggested, these wouldn't be adjusted if we ditched a project.

Website: Another cost that wouldn't alter

Professional Fees: Standard regardless of how many projects

Marketing / Advertising: Our strategy is not project based but brand based

Equipment: Non project specific

Videography: Non project specific

Insurance: Fixed

How could I then go about working these in so I get a more accurate picture?

Perhaps I could calculate hourly rates and then estimate the time spent on each project in any given period, and divide all the other costs by 6 and allocate them evenly?

Just after some reassurance really, want to get the best data I can.

Thanks

Martin