Businesses that have a footprint in diverse sectors are typically structured as ‘group companies’, constituting a holding company with various affiliated subsidiaries.
The group company’s head offices are integral to running the show seamlessly for diverse entities within it. Intrinsically, group companies have an added advantage to access finance and are a guiding force taking the business forward.
While group companies are well poised to cater to the needs of individual entities, sometimes there is a price to pay - especially in the realm of evaluating collective head office expenses.
‘Elephant in the room’
Group companies typically apportion head office expenses like C-suite incentives, travel costs, marketing expenses and ERP programs to their subsidiary companies.
With CEOs and other senior executives of subsidiary companies functioning from the head office, it leads to the latter recovering incurred expenses through the subsidiaries. This broad apportioning of head office expenses results in the operational costs of subsidiary companies increasing, which then reduces margins. And lead the subsidiary to walk a tightrope.
If group companies conscientiously monitor and mitigate their head office expenses, they would be strongly positioned to optimise costs, strategize efficiencies, and increase margins.
Head office expense allocation
In the complex landscape of organizational finance, efficient allocation of head office expenses plays a pivotal role in ensuring accurate financial reporting and fostering decision-making. This is critical for assessing the true performance and profitability of individual branches or divisions within an organization.
It provides a clear picture of the cost structure and aids in making informed decisions. Identifying and understanding the various types of expenses incurred at the head office level is crucial. C-suite salaries, business travel costs, training programs, and ERP are common examples that necessitate careful allocation to reflect the true cost of operations.
Types of allocation
• Direct allocation: This straightforward method assigns specific expenses directly to the responsible branches or divisions.
• Step-down allocation: Hierarchical allocation, where costs are distributed incrementally from head office to various units, ensuring a more accurate reflection of the shared resources.
• Activity-based costing: Allocating expenses based on the actual activities and services consumed by each unit provides a more granular and precise allocation.
Excessive or unnecessary spending: The focus of the C-Suite tends to be on ensuring that the company's budget aligns with its overall strategic objectives, and on regular monitoring of the budget to identify any variances and take corrective actions when necessary. The fact that expenses are within budgets, could distract attention from matters dealing with overspending on certain areas or unnecessary expenses that could be reduced or eliminated.
Poor intra/inter group company communication: Inefficient management of corporate expenses could often be because of lack of communication between different departments - or levels of the organization - regarding expense policies, procedures, and budgets. This is a matter that is often not discussed by the C-Suite.
Lack of cost benefit analysis: When group companies undertake exorbitant marketing initiatives in the hope of making big returns, it would be recommended to conduct cost benefit analysis to quantify and measure the benefits of a decision against costs incurred. This will provide a clear understanding of the cost input against the benefit gained from the initiative.
With businesses looking ahead to starting 2024 on the right note, it is important stakeholders channel their energies towards effective financial planning. While companies must consider the effective allocation of head office expenses, it is necessary the Board of Directors analyse the expenses incurred in the current financial year before allocating higher budgets for 2024.
With board meetings lined up, as the year ends, now is the time to get a grip on the financial outflow of the current year and take informed decisions while allocating spends for the next. Embracing the straight-forward cost benefit analysis approach will help in setting a solid foundation for the financial framework in 2024.
We are building businesses in times that are vividly dynamic – hence, it is imperative to navigate the financial complexities while laying the foundation for sustained success.