Operations Development Presentation

Budget and Capital Management
Cannon, James R., and Franklin D. Richey. Practical Applications in Business Aviation Management, Government Institutes, 2011.
ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/erau/detail.action?docID=1732182.
Created from erau on 2022-02-23 00:59:54. Copyright © 2011. Government Institutes. All rights reserved.
248 Chapter 10
manager, you are responsible for a cost center that does not deliver an
offsetting revenue stream. Your department is a financial burden to the
company. The product that the men and women on your team produce is
often difficult to measure. Time savings is a product that has worth; however, opinions vary greatly on how to quantify this service in dollars and
cents. Due to this inherent conflict of how a company justifies owning and
operating a business aircraft, many executives within the corporation will
be skeptical of how much value your flight department adds to the bottom
line. This is your political sparring match. It never goes away. When company profits are soaring, justification of the company jet is placed on a back
burner. During difficult economic times, the aviation department will be
looked at under a microscope.
It varies from one organization to another, but the annual financial planning process for a company can be broken down into four distinct phases:
(1) planning, (2) budgeting, (3) recording, and (4) controlling or tracking.
As the aviation manager, you will be intimately involved with the first two
of these phases. To assure that company objectives are met, the planning
phase is normally interwoven with and tied to the company strategic plan.
This phase also usually involves company senior executives who set sales
projections or production goals for the next year. These sales and production goals are then used to develop the revenue side of the annual budget.
In order to properly plan for the upcoming year’s activity, the aviation
manager is required to comprehend the amount of expected flying during
the budget period. Setting expectations for the upcoming year requires a full
understanding of the previous year’s flight history. The company may have
been engaged in a developmental process during the past several years that
is now complete. That process would have called out the company aircraft
more often than normal. Working with the senior executive to whom you
report in order to gain insight into the amount of transportation support
the corporation will need during the upcoming budget year is a key element
in your planning process. Meeting with other senior executives that have
the authority to request the company aircraft is also very important. During
these brief meetings, ascertain the amount of business and personal usage
each executive is planning for in the upcoming budget cycle. Combined
with these forecasts and full knowledge of the nature of previous year’s flight
activity, the aviation financial planning phase begins with a solid forecast of
the upcoming year’s flight hours. A critical step in this forecast is to coordinate with the maintenance manager to ascertain any planned maintenance
that will take the aircraft out of service during the upcoming year. The next
step in the process is forecasting the flight hours for each month during the
next year. Understanding the frequency of flight operations is essential in
order to properly distribute the variable cost portion of expected expenses
throughout the budget period; more on variable costs later in the chapter.
Cannon, James R., and Franklin D. Richey. Practical Applications in Business Aviation Management, Government Institutes, 2011.
ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/erau/detail.action?docID=1732182.
Created from erau on 2022-02-23 00:59:54. Copyright © 2011. Government Institutes. All rights reserved.
Budget and Capital Management 249
The second phase in the financial and accounting process is called the
budgeting phase. Before proceeding with an explanation of this phase, it is
important to understand what is meant by the term “budget.” The budget
is a company’s set of formal (written) statements of management’s expectations regarding sales, expenses, production volume, and various financial
transactions for the upcoming fiscal year. The aviation manager is typically
only involved with two types of budgets: (1) annual operational budget
and (2) capital budget. Both of these aviation-related budgets involve expenses based upon forecast need.
Capital budget items consist of major purchases that do not occur on
a predictable basis. Capital goods also have an indentified useful life and
may be amortized (to write off the cost over a period of time). Capital
budget items require more justification before being approved. Justification
for capital items could be shown by using certain financial tools; a detailed
cost/benefit analysis, or a return on investment (ROI) study. Examples
of capital budget items for a business aviation department would be the
purchase of a new hangar, a new aircraft, or development of a fuel farm.
Overhauling an engine, repainting the aircraft, and/or completely renewing
the interior of an aircraft are also good examples of capital expense items.
The operational budget for a corporation is usually subdivided into
smaller budgets for separate divisions that are functioning as individual
business units. The business aviation department is an example of such a
unit. The aviation manager’s duties and responsibilities include preparation and submission of the annual departmental operational budget. The
overall company budget is also the company’s tool for both planning and
control. At the beginning of the period, the budget is a plan or standard;
and at the end of the period, it serves as a control device to help management measure the firm’s performance against the financial plan so that
future performance may be improved