Salary allocation in the Parakeeto framework refers to the process of allocating salaries to overhead categories such as Administration and Sales & Marketing.
In the context of agencies, overhead allocation allows leadership to understand the true cost of running Delivery and earning client revenue vs the cost of supporting the overhead functions in the business, and ensure their spending is balanced in both areas.
Importantly, allocating salaries based on this framework ensures that spending in these areas does not fluctuate based on how busy or Utilized the team is, creating a more truthful and accurate lens over time, and the ability to objectively compare the business’s performance across multiple time horizons.
Accurate overhead allocation is critical to calculating Delivery Margins and overhead spending. Without it, agencies risk underpricing services or misunderstanding the real cost of doing business.
Why it matters for agencies
For agencies, separating payroll across Delivery and Overhead is critical to being able to differentiate overhead spending issues from earning efficiency issues. Without this separation, it’s impossible for them to measure their Delivery Margins (sometimes referred to as Gross Margins) and gain clarity on where they need to focus in order to improve profitability.
Here’s why overhead allocation is essential:
- Uncovers true margins: Enables agencies to accurately measure Delivery Margins vs Operating Margins and understand the true cost of delivery vs overhead functions.
- Supports budgeting and forecasting: Provides clearer insight into cost structures, budgets and cash flow.
- Informs operational decisions: Helps identify when and where to reduce costs or increase efficiency.
- Creates accuracy and consistency: Because project margins, delivery margins and overhead spending won’t constantly fluctuate based on changes in team business, these distinct margins will be more accurate and horizontally consistent, allowing for objective comparison between time periods.
How to measure
Accurate overhead allocation can be done by building a simple spreadsheet, often referred to as a “payroll grid”
Agencies can improve their overhead allocation by:
- Identifying all employees: Start by listing all employees included in a given time period, including their total compensation for that time period.
- Allocate time to 4 categories: Imagine your agency has unlimited client work to do. Within that context, define how much of each person’s time would be spent in these 4 categories:
- Client Delivery: Time spent working directly on client projects and deliverables.
- Delivery Overhead: Time spent supporting delivery, but not necessarily working directly on client projects or deliverables (professional development, process improvement, etc.)
- Administration: Time spent working directly on administrative functions such as finance, legal, HR, etc.
- Sales & Marketing: Time spent directly on sales & marketing such as prospecting, taking sales calls, marketing campaign, etc.
These allocations should reflect how much time each person would be expected to spend fulfilling responsibilities across these areas no matter how much client work there was to do.
- Reviewing allocations regularily: Adjust the payroll grid regularily based on changes to team composition, roles and responsibilities.
- Aligning with financial reporting: Ensure overhead allocation feeds into your profit and loss (P&L) statements clearly.
Consistency is key—regardless of the method used, applying it uniformly allows for reliable profitability analysis.