The aviation professional must understand and be able to implement an operating budget for his or her flight department through analysis of forecasted needs, assessment of actual expenses and management of possible revenues. The primary steps to budgeting are preparing the annual budget, monitoring expenses against that budget to identify deviations and reporting results to relevant parties within the corporation.Back to Articles
Four Steps to Implement a Budget:
Certification basics for Business Aviation managers...
by Walter Kraujalis
The aviation professional must understand and be able to implement an operating budget for his or her flight department through analysis of forecasted needs, assessment of actual expenses and management of possible revenues. The primary steps to budgeting are preparing the annual budget, monitoring expenses against that budget to identify deviations and reporting results to relevant parties within the corporation.
The purpose of budgeting, monitoring, and reporting is to manage the cash necessary for operations. Money has to be available to pay the bills. It is embarrassing and disruptive to be unable to pay a bill or to scramble for a bridge loan. And no one likes surprises.
Step 1 – Determine Forecasted Needs
The size of the budget will depend primarily upon the expected use of the aircraft for the coming year. The expected use can be determined by examining the current trend of where and how often you fly and collecting information on whether that trend will continue. Combine those data with any possible new travel patterns, which can be broken down into the following steps:
• Take all of your flight logs for the past year and collate a list of the city-pairs flown (i.e. departure city and destination city).
• Document the specific purpose for that trip. Be as detailed as possible. For example, note if the flight was to transport the CEO to New York City to meet with bankers or to fly the National Sales Manager on a store tour.
• Identify flights that were technical in nature, such as repositioning, stopping for fuel or customs, conducting a maintenance check flight, pilot training, or similar functional purposes. Estimate the likelihood of these flights recurring in the coming year.
• List the principal passenger or person responsible for authorizing each city-pair flown.
• Visit with each of those principals and ask their opinion as to whether they are likely to fly to those same destinations during the coming year.
• Ask principals if they anticipate working on any new projects that will require new travel compared to last year.
• Recognize that you may be unable to obtain this level of detail. If the information is considered confidential or sensitive, you may be able to list only the destinations, principal passenger, and top management’s assessment of how often these destinations are likely to be visited in the coming year.
• Revise your list of city-pairs for passengers for the coming budgeting year.
Calculate the flight times to complete all the trips. Anticipate the effects of weather and traffic flow. For example, flying to Chicago in January might have winter weather delays and take more flight time.
• Add your anticipated technical flight needs to support these trips.
• Use these calculations to forecast your department’s level of utilization.
Step 2 – Determine Expenses
The forecasted level of utilization is the keystone of calculating the expenses for the coming budget year. Multiply the number of expected flight hours by the historical cost of operation. This can be broken down into the following steps:
• Gather cost information such as DOCs and flight-related expenses for the past year. Add fixed costs—those that had to be paid whether the aircraft flew or not – such as salaries, hangar rent, training and insurance.
• Calculate the expected cost of all items for the coming year based upon your forecasted level of utilization.
• Adjust for the difference between your historical costs information and your estimate of future costs (which may require additional research). Using trade publications and insight from vendors, consider the uncertainty of fuel costs. No one can accurately predict the future, but make your best calculations and be conservative.
• Handle fixed costs somewhat differently, assuming your current infrastructure can accommodate the forecasted level of utilization. For example, hangar rent for next year is probably set by contract. Another example is salaries. You need to determine the size of raises and add that figure to fixed costs.
• Consider the impact of utilization on fixed cost items such as personnel and equipment.
Step 3 – Determine Revenues (If Any)
It is rare that a corporate flight department budgets for revenues. But there can be two possible sources: a cost recovery plan, commonly referred to as “chargebacks”, and revenue generated from chartering out the aircraft.
Chargebacks are a means by which a company allocates the costs of operation back to the department or division that uses the aircraft. There are various methods for calculating an appropriate chargeback rate. Chargebacks may be listed as revenue on the flight department budget. However, it is not unusual that they are not listed as revenue, but merely used to distribute flight department costs to other departmental budgets.
A company may make their aircraft available for charter, which involves the complicated process of having the flight department obtain their own air carrier certificate. More commonly, flight departments partner with an existing charter company to qualify their aircraft for generating revenue. Charter flights may be revenue generators or, similar to chargebacks, may be considered as items of cost recovery.
Step 4 – Monitor and Report Deviations
You must monitor how actual costs are incurred in relationship to the budget that upper management approves. Track all bills and invoices received by posting costs into the category listed in your budget. Your company will likely provide you with the accounting software tools that handle such processes.
Your company’s accounting department should provide you monthly summaries of actual costs compared to your budget. If for some reason they don’t provide such reports, it is highly recommended that you do this comparison yourself, perhaps by employing simple accounting software such as QuickBooks.
Look for differences in the actual costs you are experiencing compared to your anticipated costs. Determine the reason for any differences. Then ask these questions:
• Was this a one-time difference unlikely to happen again? Why are you certain it will not reoccur?
• Should you adjust the remainder of the budget to include this new cost?
• Is this difference a timing related issue (i.e., the cost was expected later in the year but has occurred now)?
• Does this difference reveal a miscalculation or a missing item in the original budget?
Report your findings on the cost differences and recommendations for the remainder of the budget to your management so that adjustments can be made. Remember, it takes money for an aircraft to fly, and no one likes surprises.
Walter Kraujalis is president of AeronomX LLC, an aviation consulting firm providing advice in business jet and helicopter acquisitions, travel analysis, ownership structure, aircraft management, aircraft appraisals, flight department start-ups, operational safety audits, safety engineering, loss control procedures, and IS-BAO audits. He is also an IBAC Approved IS-BAO Auditor and president, National Jet Sales, a service of National Aero LLC.