How Are Your Business Lines Really Doing?

1. How Are Your Business Lines Really Doing? Neighborworks CFO Convening Detroit, Michigan May 16 – 17, 2011 Are they as safe as they seem?

2. 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

3. 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.

4. 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?

5. 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

6. 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?

7. 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

8. 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?

9. What is cost allocation? • A process of attributing costs to a particular cost center • The assigning of a common cost to several cost objects

10. 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.

11. Do you know your alligators?

12. 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

13. Tekoa Incorporated • Tekoa provided group home care for “at risk” youth. • We had: • a girls home in Floyd, Va • a boys home in Radford, Va • A girls honors house in Christiansburg, Va • And, an accredited school.

14. 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

15. 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

17. 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

19. 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?

20. 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.

21. 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?

22. 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)

23. 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?

24. 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

25. 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.

26. 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”

27. 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 Fees How can you charge your property management division to cover your overhead costs for all of the properties they represent? Discussion