Is there a formula, ratio or percentage that is generally used to compare administrative salaries to revenue-producing salaries? We have established the administrative cost per dollar of revenue but would like to know if there is a formula that works to tell us if we are administratively top heavy or if we fall in the normal range. Also, how do most members allocate working owners’ salaries?
– Colleen Wright, Controller, Quality Forklift Sales and Service Inc. (Shakopee, MN)
Loren Swakow: Our salaries are applied functionally. We have three owners. I am charged to administration, one is charged to sales, and the third is charged to service. I do not know if there is an accepted formula for above line salaries in relation to operational costs. In good years, owners tend to make more. In lean years, we will make less. With ratios, a flat organization will have less administration expense and more production cost. An operation that is more sophisticated may require more administration, but its margins will prove to be higher. Both could be highly profitable with completely different ratios.
The answer to all of these issues lies in the DiSC Report. This has become our bible for questions just like this. The DiSC benchmarks our operation, line item by line item, to other operations like ours. We can compare our administration salaries against other companies our size. We can compare operational costs, inventory levels, debt levels and a multitude of other numbers to help us run our business. Our goal is to compare ourselves with the high-profit companies our size.
Each year upon receipt of the DiSC Report, we begin planning for the next period. We see where we need to work and how it will affect our company. The report even gives guidelines with changes and how they would affect the bottom line.
As a controller, you will find the information in the DiSC Report invaluable. Only the outside company reviews your financial information. Your privacy is of utmost concern. We started by merely sending in our financial statement. Now we fill out the report in its entirety. We have even changed our reporting structure after seeing how others report their information. I strongly recommend you participate in this report.
Ron Rechenbach: We do not use any specific formula for establishing our administrative salaries. We determine our upcoming budget and designate our monthly run rate based on our annual budget. Next we determine the individual goals of our revenue-producing people in relation to our annual budget. We then calculate the individual revenue dollars that each person needs to contribute to the overall budget. We are constantly working on providing the best service possible while maintaining a lean staff.
Richard Donnelly: At our dealership, we measure administrative salaries as a percent of sales. Most of our administrative salaries are expensed in other salaries on the income statement. We account for these expenses in our sales, parts and service departments. You can compare these expenses to other dealers of your size to see if your administrative salaries as a percent of sales are high or low. A good source for a comparison is the MHEDA DiSC Report.
The owner’s salary at our dealership is an indirect expense and allocated to the different departments. We do not have it in direct expenses because we want to measure the performance of the department based on the expenses directly related to that department.
Duncan Murphy: MHEDA has an excellent tool for you to use in the DiSC Report. The report compiles statistics from a wide range of distributor members and offers comparisons by company type, size and location. It also offers direct comparisons and suggestions for improvement for your company if you submitted data. Even if you did not submit data, you can get a copy of the report as a member. Bob Currie, an industry consultant, has created a financial model for distributors that also offers guidelines.
That being said, you should have a mindset in today’s world that everyone must generate revenue for at least some of their time. If you are a forklift firm, 50 percent or more of your team should be technicians. Inside sales must sell over the phone as well as process. Even IT and finance can help with team selling or Web site response. Specifically for forklift firms, one measure is that overhead staff expense should not exceed five percent of the total parts, service and rental revenue. Working owner’s salaries should be at market rates for work performed and expensed in overhead or the respective department. Any other payment should be in the form of distributions as cash allows.
Greg Morrison: Got DiSC? MHEDA has many offerings, and one of the most valuable is the information included in the DiSC Report. DiSC stands for Distributor Statistical Comparisons. The information provided is detailed financial results of only material handling equipment distributors, our industry peers.
The DiSC information is designed to provide guidelines for all firms regardless of sales size. Sales per employee is covered in the report. As valuable as this information is, surprisingly, only 34 percent of the membership participates. The information obtained for the report is confidential and the only people who have access to the financial information are at Profit Planning Group, the company that tabulates the report.
As far as allocating the owner’s salary, look at the following example. If your primary job function is sales manager, then you would need to research what the salary would be for a sales manager with your experience. After determining what that amount would be, then you would charge that portion to the sales department. That would be a basic starting point.