The objective of a financial model, whether it’s being used in the business aviation industry or any other, is to position clients for long-term predictable success.
As such, the importance of effective aviation financial modeling cannot be overstated.
As a Director of Business Aviation, I recommend that you put in place a good financial model that is:
- Easy to understand: uses a transparent design.
- Reliable:uses control checks so that potential errors are automatically noted.
- Easy to use:so that one can be more productive in using the model for analysis and operations rather than simply struggling just to produce simple results from a badly designed model.
- Focused on the key strategic issues: so that one does not waste too much time in development of, or focus on, less significant items.
Aviation Financial Modeling
A perfect example of this is aviation maintenance expense modeling.
During the budgeting process, effective modeling will help your organization predict precisely what you’re going to spend next year. Without it, the budget could unexpectedly soar.
Another example of good modeling is looking at core fleet versus supplemental lift models that are available in the market today.
More often than not, flight departments don’t have the skills they need to create a truly useful and informative financial model within their organization.
So when it’s time for budgeting or operational planning, they typically struggle. Does your team have the requisite knowledge or ability to ramp up in this area?
Be Prepared: Arm Yourself with the Right Corporate Aviation Financial Modeling Tools
Imagine getting a call one Friday afternoon from your company’s CEO informing you that you must implement a 20% budget reduction beginning next week.
Where would you even begin to start? Would you just park the fleet for 73 days (20% of the year)? How could you impact either variable or fixed costs? And, how long would it take to see lower expenditures?
In many cases, the flight department doesn’t even have an adequate chart of accounts to keep track of all of their ‘spend’ categories—both on the fixed cost side and on the variable cost side.
By incorporating effective financial modeling tools, your flight department will be in a much better position to cope with ‘budget adjustment’ scenarios as described above.
Aviation financial modeling tools will help your flight departments know:
- What happened ‘back then’?
- What is happening right now?
- What will happen in the near future?
So what if you (or another senior department leader) simply do not know your budget as well as you should—both inside and out?
First, immediately request assistance from your organization’s accounting/finance group and be prepared to make any requests directly to the most senior executive; most likely the CFO.
Gain an Accurate Picture with Monthly Budget Reviews
Budgeting and forecasting should not be a once-a-year activity. As an Aviation Director, you should review the flight department’s financial statements monthly in order to determine any significant differences between actual vs. budget expenditures.
A real-time understanding of what’s going on financially should make creating a new budget almost spontaneous.
We also recommend that you ask questions of your assigned accountant until sufficient details are created to get that accurate picture.
Of course, understanding the numbers is only part of your obligation. Linking the operations to the numbers enables effective management and predictive outcomes.
Other effective aviation financial modeling tools include:
Operating budget and results
The use of an effective and appropriate chart of accounts gives the flight department visibility to run their business in every functional area—Flight Operations, Maintenance, Scheduling, Dispatch and Administration.
Model the activity to determine the most cost effective means to meet the travel demand using all of the methods available—internal fleet as well as supplemental lift.
Realistic capital budget
Model based on travel schedules, cycles and needs to determine the requirement for new/additional aircraft, major maintenance and significant upgrades to aircraft systems.
Variable cost modeling
Identify and model the various categories of variable and semi-variable costs, including the relationships between the categories.
Fuel cost management
Model the retail versus negotiated price to determine savings opportunities and predict future spend. A simple matrix will prove helpful here.
It’s important to then identify the metrics to measure these activities, so that you can report back to your Aviation Reporting Executive as well as other senior management.
Sure, there’s a lot of data mining that must be done in advance so that your financial model can ‘sit on top’ of scheduling software, flight tracker software, maintenance software, and accounting software. But the end result is worth it.
Benefits of Corporate Aviation Financial Models
If implemented correctly, these financial modeling tools will help you, as an Aviation Director, and your business aviation organization:
- Know where you’re going and why.
- Be more confident at creating a realistic and measurable budget.
- Communicate more effectively with the senior leadership team (especially the CFO) and flight department staff.
- Define business processes to meet the needs of the organization.
- Establish and maintain business performance metrics to show the progress against the budget and the strategic objectives of the flight department.
And finally, you’ll breathe a sigh of relief knowing that you’ll be able to respond intelligently if and when that unexpected call from the CFO comes requesting that 20% budget reduction by next Tuesday!
Gray Stone has developed a Budget Builder™ 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.