All posts tagged 'Finance & Costs'

Time to Make A Budget

Do you remember the Dunkin Donuts commercial “Time To Make The Donuts” from way back in 1983? The donut maker gets woken up early in the morning so he can make today's donuts. With two months left in the year, grab a box of Joe and some donuts, because its time to make the budget!

 

It is important to state that budgeting is a very important tool for planning an organization’s use of its most limited resource - cash. Managing the cash is critical for any business, or individual. Here are a couple tips.

 

A budget is an estimate of the future showing the peaks and valleys of cash flow.  A budget can also serve as a benchmark for evaluating actual versus planned for expenses.  Every organization must budget whether it goes through a formal or an informal process. Like any tool, used correctly it can be an asset in managing your aviation cash rather than a once and done exercise.

 

The budget should be more than just filling a square for your upper management reporting. It is a very useful tool that can enable you to track the effectiveness of your aviation operation. It can also alert you to the future peaks in expenses, such as scheduled major maintenance or an aircraft upgrade. Planning for your maintenance may take the most time in your budget preparation.

 

As part of your budgeting process, I’d like to offer three tips to help you get started.

 

Tip 1. Ask for Information. This information flows two ways. Ask upper management about their intended aircraft usage for the next year, or ideally, several years. Will there be more or less flying, any new destinations, etc. If you are budgeting any optional maintenance items or upgrades, ask if next year or the year after works better for the financial goals of the company. 

 

If you have a plan in place for the eventual replacement of the aircraft, that part of the budgeting process may well run out several years. Due to your company’s finances, they may wish to accelerate, or delay the aircraft replacement. 

 

Tip 2. Document Your Assumptions. Your budget is a best-estimate of the future costs for your aviation operation. There will be changes as you go through the year.  By documenting your assumptions, it will refresh your memory when the actual costs do not equal what was predicted. If and when conditions change, these recorded assumptions will better guide you on revising the budget better than relying on your memory.

 

Tip 3. Explain the Cyclical Nature of Maintenance Costs. These costs can occur in significant amounts (engine overhaul) and be unpredictable (unscheduled maintenance). These two behaviors of maintenance costs are often difficult for a non-aviation person understand. Financial professionals favor stable, predictable cash flows. 

 

You may not be able to change the behavior of your maintenance costs, but you can explain how the C-Check expense took 2,400 hours over six years to accrue. Remember, most non-aviation people have automobile maintenance as their reference point. Let them in on the issues well before they occur. Budgeting a 175% increase in maintenance for next year may never go over well, but communication is key.

 

As a bonus tip, try to visit with the person that you submit your budget to. Try to understand how your aviation budget fits in with the overall corporate budget. Help them to also understand the process that you went through to come up with the budget. As questions and ask for advice. By letting senior management know that you take the budget seriously, you will let them know that you have the organization’s best interests at heart. 

 

Budgeting is important to the health of your organization. However, to be truly useful, all parties involved need to understand the process. Best of luck to you!


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