Your Indirect Costs Allocation
The Indirect Cost measure the waist size of your business. Just like people, companies increase their cost base with maturity and then continue to buy things they no longer need because they needed them in the past. The budgets and their percentages can tell you how lean you have managed to stay. We usually spot the ‘fat’ by drawing quick-check percentages, such as percentage of rent out of revenue or percentage of transport, telecom or IT budgets.
Your accounting reports don’t show Indirect Costs in a useful manner again. Because this is where they have a set of pre-established categories that may or may not reflect your strategic needs. We will need to re-assign some of your costs categories by asking ‘what is the ultimate purpose of that expense’?
Spotting hidden Direct Costs
We will ask you: ‘if you did not deliver your service, would you still incur that cost?’ Better still: ‘if you did not buy this, could you still deliver the service?’ Some Indirect Costs are hidden Direct Costs and the above questions will help you spot, isolate and monitor them under your Gross Margin percentage.
Re-grouping Indirect Costs
We are not reporting to an authority, we help you make informed decisions. Even if your accountant put them together, sometimes we need to break your costs down and re-group them to be able to make a decision and monitor your strategy.
Let’s say your IT costs used to be minimal. But now you are launching an e-learning service for your clients and you will invest heavily in a platform to support your service delivery. We would want that cost separated and monitored against revenue for a while.
We will avoid splitting hairs if we can. But if the percentage of that hairy area is fairly big, we will look into details.
Benchmarks for Indirect Costs
Your first benchmark is internal: is the percentage of my marketing expenses much higher than last year? Is that justified? And how does it compare to, let’s say, my rent? How much is the percentage I spend with the interest rate for that loan when compared to how much I spend to develop my people’s skills? Which one is more important for my strategy right now?
We have seen enough businesses, most likely within your specific industry, so we can give you an indication of where your percentages could be. However, all our clients are at different stages in their growth and maturity. What someone spends for marketing after 20 years of stable account management activities is different from what someone should spend in their first three to five years of establishing a brand. We will not cage you in a benchmark and ask you to cut costs at any … cost, but we will not close our eyes if some of your budgets spring out of the spreadsheet.