We were recently asked what costs clients should reasonably expect to see in their agency’s overhead. The question came up because there was uncertainty as to whether some cost items should be allowable in the overhead calculation.
The general rule of thumb answer on agency overhead is that it comprises any reasonable indirect business costs other than direct labour costs. But as we’ll see, it’s not always that simple. So here’s our take on what’s reasonable and what’s not:
- Executive salaries – if not billed separately
- Admin salaries
- Employee benefits not included in direct labour costs
- Payroll taxes
- Employment insurance
- Communications – landlines, cell phones, internet access
- Postage and courier – if not billed separately
- Office supplies
- Computer hardware
This list may not be exhaustive – but it paints the picture of what’s reasonable.
But it’s not always that simple because there are other costs that sometimes creep into the overhead calculation. So what’s not reasonable?
- Materials costs that may be billed separately
- Expenses for other clients (ie. meals and entertainment)
- New business costs
- Relocation costs
- Bad debt
- IPO or sale of agency costs
- Acquisition costs
- Charity or political donations
- Severance costs
- Profit sharing
- Stock options
While this list may not be exhaustive either, the guiding principle is that those costs aren’t directly associated with the day-to-day running of the agency – and it’s not unheard of to find other things creeping into the calculation which may raise eyebrows.
If you’re not sure about what’s reasonable or unreasonable, give your friendly agency management consultant a call to discuss. Or if you’re not sure about how to factor in agency overhead into your broader profit and overhead multiple, check out our calculators and let them do the work for you.
So. Do you know what’s in your agency’s overhead?
Stephan Argent is Founder and Principal at Listenmore Inc offering confidential advisory to marketers looking for truly independent insight and advice they can’t find anywhere else. Read more like this on our blog Marketing Unscrewed / follow me @StephanArgent