Appropriation of business running costs in a small business

[Davidjames]

Hi There,

I am looking for some advice on how best to split the cost of running my business across the fee-earning staff.

We are a small business with 13 staff, 9 of which are full-time fee earning staff, the remaining 4 are part-time non-fee earners.

We are a creative agency and charge by the hour for projects.

The company is split (internally) into three departments, each headed up by one of the Directors (3 directors in total).

Currently, we appropriate the fixed costs of running the business (rent, rates, heat, power etc) equally across the three departments.

Each Director takes an equal share of the profits made by the business, so the current thinking is that each Director should shoulder an equal share of the fixed costs.

The amount of profit each Director makes is different.
The number of staff in each Directors department is different.

Should the fixed-costs of running the business be split equally across the Directors or split equally across the number of fee-earning staff?

For example, let's say the fixed costs of running the business were £9,000 per year.

Should each Director take on £3,000 each of these costs or should each of the nine employees be assigned £1,000 each?

Of the three 'departments' one has two staff members, one has three and the other has four.

The reason I am looking to work this out is that the three Directors take an equal amount of PAYE and Dividends, irrespective of how much Profit they deliver into the business.

Should the director that has more staff and makes more profit shoulder more of the fixed costs of running the business?

I hope that makes sense to someone!

 

[Szymon]

Are you saying that each Director currently gets the same amount of take-home pay but that their pay should be proportional to the profits they make? What does your agreement say about it?

If the three directors each own 1/3 of the business and there is no agreement in place to say otherwise, then no matter how you allocate the fixed costs (FC),they will be entitled to 1/3 of net profits of the entire business.

There are usually different methods of approaching the FC apportionment. In your case, you need to ask yourself whether the number of fee-earning staff actually have a tangible impact on the fixed costs e.g. if one or two people extra would affect the amount you pay in rent.

You also need to consider if the number of staff working in the other departments somehow could hinder your department e.g. not enough room to expand your team. If the office space was tight etc then I would consider splitting the FC by fee-earning staff but otherwise I don't think splitting the costs 1/3 is a bad idea. After all, the other directors could employ extra staff to increase their profits without increasing FC?

There are many things to consider and the split would need to factor in everything. Let me know if you have any questions. Thanks

 

[JenniferParr]

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