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GRAY STONE ADVISORS' BLOG
Financial & Operational Modeling: The 3rd Essential Key to Bizav SuccessPrint This
Sometime by the end of summer, business aviation leaders
will likely receive what's commonly referred to as "the budget call." This
means that their boss will probably ask, "What's your financial plan for the
coming year? Let's discuss it next Tuesday at 10 a.m. in my office."
For some, the budget call is dreaded; for others, it's an opportunity.
As you well know, developing a comprehensive budget for an aviation operation can be a daunting task. There's a tremendous number of moving parts. Everything seems to have an impact on everything else. Yet, your boss expects you to develop and manage a realistic financial plan for the coming year that, once approved, will be accurate throughout the period of time it covers.
In prior blogs, we have stressed the need for you to carefully research your "cost drivers" and to "know your numbers" each and every month of the year. We have discussed the fact that, in our typical business aviation operations, between 50-70% of our operating expenses (OpEx) is fixed—meaning that the level of expense is not influenced significantly by the number of hours flown.
An area that we haven't touched on, however, is the discussion that you are going to have with your boss. "Discussion" is a polite word for "negotiation."
Senior executives are commonly bottom line focused. Very often, they don't personally know what the bottom line number should be, but they recognize that it's their responsibility to find the most reasonable number. In order to do that, they "push back" during budget discussions to test your resolve that the budget you're presenting is the most intelligent, well-thought-through and fiscally responsible plan possible for the coming year. Very often, they will react to your total budget number before anything else is examined.
Unquestionably, aviation is a "service business." As such, we must anticipate the needs of our corporate organizations or private owners for the coming year. Our challenge is to create alignment between ourselves and our boss regarding what we'll need from a service perspective and, as well, the required investment to deliver that service. Here's one of the first steps that you should take to create that alignment.
When you start developing you budget and operating plan for the coming year, you should begin by defining the assumptions that will drive the operating expenses. Questions such as:
- "Will there be any changes to our fleet this coming year?"
- "How many hours and legs will we fly in each of our aircraft?"
- "What will be our likely mix of domestic and international travel?"
And on and on!
You will be very well served if you dedicate at least half of the time you spend in developing your budget to very carefully defining each of your assumptions and the relationship of each of the assumptions to one another. These assumptions will be used to calculate each of the numbers in your budget. The process is not unlike the time that an architect spends carefully designing a building and its entire infrastructure, long before construction actually gets underway.
Present the Assumptions
Now, here's the key to your budget discussions with your boss. You should take control of the meeting by starting with a detailed presentation of the key assumptions that are most influential to the budget. Don't try to go over every number. If you do, you will lose your audience is less than two minutes. Your objective should be to establish a common understanding between you and your boss regarding the nature of the key assumptions that, if changed, will change the budget.
Move on to the Numbers
After you and your boss are aligned on the key assumptions, it's time to move on to the numbers, which are a product of the assumptions. (Keep in mind that if you discuss the numbers first, you will be at a distinct disadvantage.)
Your first presentation of the numbers, which are the result of the assumptions, might not be met with an accepting smile. If that's the case, DO NOT begin to debate the numbers. Likewise, at no time should you cower with a comment such as, "Okay, let me take another look at the numbers and come back to you with a revision." That type of comment signals that you didn't do your homework to begin with! Rather, take this positive and assertive approach: "Boss, I understand your concerns. Let's now revisit each of the key assumptions and determine which one(s) could be revised."
Continue by letting your boss know that the budget is a product of the assumptions, and try to encourage their agreement with the changes in activity levels necessary to reach the OpEx budget number in mind.
There it is! Always return to a fact-based discussion, and avoid emotionally-based interactions at all cost!
Gray Stone has developed a BudgetBuilder™ tool that might be very useful to you. It helps you to ask all the right questions to develop your key assumptions. It also produces a first cut of your Operating Expense (OpEx) budget. Give us a call and we can discuss it with you.
Here's your bottom line: Focus on the assumptions BEFORE you start discussing the numbers! Managing the discussion in this way is sure to produce the results that you desire. Let us know how it goes!
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