Tuesday, December 15, 2015

Dealing With Corporate Allocations - What Fun

When establishing an overall annual Corporate Budget, the subject of Corporate Allocations always comes up.  And, it can get pretty ugly.  Naturally, the business entities of any corporation want to pay as little of the Corporate Overhead as possible because it impacts their bottom line, bonuses etc.  So there is a selfish motivation in this process.  However, the reality is that a Corporate Holding Company that owns various subsidiaries is not a profit center.  Therefore, for the most part no revenues are booked to the Holding Company.   Somebody has to pay for the CEO and other Senior Management of the company and all other shared services.  This CEO has been involved in these discussions, that are really more like negotiations between the business heads of the Company as they attempt to provide all the reasons why they should not be hit with a particular Corporate expense.  This discussion can get pretty heated; but it is actually very funny to watch.  At the end of the day, the CEO must be the arbiter of last resort when agreement is not automatic. 

The real issue is that if anyone in the company touches a specific subsidiary in any way, there must be a charge back one way or another, whether a desired end result is achieved or not.  So, just because Sales did not achieve a sales target does not make the expense of Sales any less.  So to argue that as the basis for not paying for Sales is counter productive. Direct expenses are simple to deal with.  Obviously, any employee devoted 100% of the time to a particular subsidiary is a Direct expense.  There is never an argument about Direct expenses.  It is all the shared services including the Senior Management of the Holding Company that comes into question that is the subject for debate.   This is much an art as it is a science because sometimes it is impossible to come up with precise Corporate Allocations.  In those cases, the best that can be done is to do a gut check.

In other cases, specific formulas are easy.  For example, it is simple to allocate the cost of Human Resources on a headcount basis as of December 31 of each year if the budget year is January 1 - December 31 and or as of the cut off date when the annual budget is formulated.  Information Technology is harder because it is difficult to establish the precise amount of time that IT staff members spend working on IT, which often includes communications support, for a particular subsidiary.  This also includes all shared services aspects of an IT budget.  The same thing is true about departments like Marketing.  In this case, a gut check is as good as wasting a lot of time coming up with some sort of precise calculation that in any given year is likely to be wrong anyway.

As the CEO of our company, my role is to be fair to all of our subsidiaries in determining Corporate Allocations.  Sometimes this is a lesson in Accounting 101, particularly when a senior manager postures illogical arguments as to why their subsidiary should not share in a particular expense.  This is an age old discussion.   At the end of the day, the subsidiaries of the company, where the revenues reside, must pay all the bills.  The devil is in the details and that is both the art and the science of Corporate Allocations.  It is what it is.    


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