As an aviation leader, you may have just completed the first quarter of your calendar year (that is, unless you run on a fiscal year).
A typical question from the aviation reporting executive now, and at the end of every accounting period, is “How did aviation do?”
If your response is, “We need to wait for the financial report before we will know,” then you are likely out of control from a financial perspective.
Why’s that? Are you expected to be clairvoyant?
But, when it comes to accounting and budgeting, there are certain things in your control. In fact, we’ll show you how to start every month knowing up to 70% (or more) of that answer. Just keep reading!
The Need for an Aviation-Specific Sub Chart of Accounts
In many corporations, the aviation organization is relatively small in comparison to the entire enterprise in terms of headcount and expenses.
Yet the same procurement and budgeting systems are typically applied to the aviation function as they are to other organizational cost centers.
In fact, it’s not uncommon for accounting to lump the entire aviation budget into four or five major accounts (e.g., headcount, training, fuel, maintenance, depreciation).
Unfortunately, only seeing a handful of “rolled-up accounts” isn’t a sufficient level of detail needed for you to truly know what’s going on. But that’s still no excuse.
One way that we at Gray Stone Advisors help our clients achieve a greater level of visibility into accounting detail is to create for them an aviation sub chart of accounts. This allows aviation leaders to view up to 30 expense categories (instead of four or five).
Then, we help work with their corporate accounting partners to create a map back, which feeds the aviation sub chart of accounts into the corporate accounting system.
If you’d like to discuss how we go about this process with our BudgetBuilder™ product, just give us a call.
Know Your Numbers Every Day of the Year
You need to understand the real economic drivers of your aviation organization so we’re sharing some techniques to help you know where you are, financially, every day of the year.
The good news is that these basic accounting principles are the same whether you’re responsible for a one-aircraft operation or a large fleet of aircraft.
The first step is to separate your cash from non-cash expenses. As an example, fuel is classified as a cash expense, because we write a check to pay that bill.
However, depreciation is a non-cash expense, because it doesn’t require us to write a check; instead, we merely make a journal entry in the accounting books.
(Please refer to the Typical Business Aviation OpEx Budget chart for a sample listing of expenses.)
Once you identify all of your expenses, put them in order, from largest to smallest. For instance, Aircraft Leases may be your largest expense item, Fuel may be next, Employee Compensation may be third and so forth.
When communicating with your aviation reporting executive or business partner from Accounting, it’s helpful to portray the expenses in a graphical format (as shown).
Now that you have your list ordered from largest to smallest, think about what a fixed expense is and what’s a variable expense.
Per our OpEx Budget, an example of a fixed expense is an aircraft lease. Fuel, on the other hand, is a variable expense, with the principal driver being hours flown.
Now total up the value of the fixed expenses vs. the variable expenses. It’s very common to find that 70% to 80% of all monthly expenditures are fixed.
In small, lean organizations, the ratio of fixed-to-variable may approach a 50/50 split. In large organizations (with lots of infrastructure), the ratio gets closer to 80/20.
For illustrative purposes, let’s say that your budget ratio is 70% fixed and 30% variable (70/30).
Now let’s revisit the question of whether you should know where you stand, financially, without the benefit of a report from Accounting. The answer is a resounding yes.
Every month, you start with 70% of the answer (all of your fixed expenses). The variable expenses are generally a result of flight activity. You know how many hours you’ve flown throughout the month, right? Now, should you know what you expect to see in the financial reports?
Yes! You know the fixed expenses and have a good idea what the variable expenses should be given the number of flight hours for the month.
Are you going to be precise to the penny? Probably not. But, you will have a very good idea of what the numbers should be!
Aviation Budgeting 101: Knowing What to Expect
Here’s a key point: you must have an understanding of the financial results that you’re expecting. If you don’t know what you expect, how will you determine if the report you receive from Accounting is correct or flawed?
If you don’t have an understanding of expectations, two bad things will happen: First, you won’t know if the report is right or wrong and, second, you are guaranteed to be surprised by whatever the result happens to be.
Both of those outcomes can have a very bad effect on your career as an aviation leader.
What’s an acceptable variance range (i.e., budget vs. actual)? That answer varies with each corporation.
In many mature organizations, the answer is no unapproved spending over budget. And, don’t be more than 10% under budget.
The key word here is unapproved. This means, of course, that you must anticipate deviations from budget and obtain approvals BEFORE that deviation happens.
Can You Really “Do More With Less”?
Well, congratulations, your quarterly budget review went well. You were right on plan. But, unfortunately, not every part of the company performed as well as your department did.
At the end of the budget review, you were asked to “do more with less.” Is that possible? The answer is a definite maybe.
In many industries, innovation in Operations can produce significant savings. Unfortunately, in aviation, that doesn’t generally apply.
Can you burn less fuel while flying the same number of hours at the same Mach number? No. Can you fly the aircraft with 1.8 crewmembers instead of 2? No.
How to Take Out 10%
What do you do when you are asked to take 10% out of your budget? First, start with quantifying the variable vs. fixed expenses.
As an example, if you have a $10M annual OpEx budget, a 10% reduction would be $1M. Assume that the variable portion of your budget is 30% ($3M).
Now, can you realistically reduce your variable expenses by $1M when you only have $3M to start with? The answer is probably not. That is, unless your flight hours are significantly reduced.
If you can’t find the savings in the variable cost area, take a look at your fixed expenses. You have a couple of paths to follow:
Make major structural change(s). You can modify your personnel headcount and/or the number of aircraft that you are operating.
This means making a permanent change to your fixed cost structure. However, these changes are generally very difficult to make and incur costs (severance, lease termination fees, etc.).
Make significant operational changes. You can change the way the department operates. For instance, recurrent training programs can change from six to nine months, or you can curtail the use of Supplemental Lift.
Again, these will be changes to the manner in which your department and the company (as a whole) have become accustomed to operating. These types of change are not easy!
As a business aviation leader, you are running a service business within a larger enterprise or high-net-worth family operation. That means you are responsible for overseeing the aviation organization’s finances with the same level of precision with which the aircraft are flown and maintained.
So you must not only know what your numbers are, but, more importantly, understand the financial drivers that most significantly influence fiscal results.
Remember, if you can’t keep score, you’re at risk. Make the commitment to study up on your Aviation Budgeting 101 know your numbers each and every day!
Need help with your aviation budget? Learn about our service, Budget Builder™.