Budgeting for Smaller Operators

Managers of smaller flight departments looking to construct their first budget may feel like they are venturing into unknown territory because every budget is different.

“It’s an internal process unique to each company or individual owner,” said Angel Houck, co-founder of Houck & Christensen CPAs, which specializes in business and general aviation. Some want every bean counted, while others are satisfied with just the bullet points.

“Give yourself enough time to talk to the principals or finance [department] and look at the numbers at the start of the process,” recommends Houck. “Communication is the biggest thing. Don’t be afraid to collaborate. A budget is not fact; it is an educated estimation of what the expenses will be for a given period.”

“Budgeting is often a mystery to aviation directors who have extensive experience with the technical side of aviation – either flying or maintenance – but not as much experience on the business side,” said Brian Koester, CAM, NBAA’s director of flight operations and regulations and staff liaison to the association’s Small Flight Department Subcommittee. “Some aviation directors don’t know where to start when it comes time to develop or manage a budget for an entire flight department. Even a single-aircraft operation involves complicated expenses and long-term planning.”

There are many ways to compile a budget, but budget experts agree that all of them should start with a meeting with someone in the office responsible for budgets.

“On the privately owned side of business aviation, managers will likely work with the principal’s financial planner or family office,” said James E. Lara, principal at Gray Stone Advisors. “Budgeting is not terribly difficult, but connecting with a financial mentor makes you a better budgeteer more quickly by demystifying this high-priority exercise.”

Learn the Lexicon

Like aviation, budgeting and finance has its own lexicon, complete with acronyms. “If you speak aviation, you need to become bilingual and speak business,” said Lara.

Managers new to an established aviation operation have an easier time than managers building a new flight department because they can use previous budgets as a template. By talking about each line item, aviation and finance personnel will be able to communicate with few, if any, misunderstandings about their respective expectations.

“Sometimes accounting doesn’t understand the nuances of flight operations and puts everything in one line item,” said Houck. “This also depends on the principal. Some are more concerned with the nitty gritty, while others just want to fly. Either way, the flight department and finance [department] need to work as a team to categorize and record the numbers to the benefit of both.”

Eric Canup worked with finance professionals to build a budget when he established the Live Oak Bank flight department.

“Ours has morphed over the years, changed as I’ve learned how to present and classify the information,” explained Canup. “The more you do it, the more you learn what accounting is looking for in particular.”

Using fuel accrual as an example, Canup provides the cost of fuel per flight hour based on average fuel burns and costs, and accounting accrues that expense by multiplying it by the hours flown as noted in his monthly report.

“That tells them what to expect when the next fuel bill arrives,” he said, “and we’ve had to adjust our fuel accrual figures quite a bit this year.”

Agreed Upon Assumptions

Contrary to the traditional consequences of making assumptions, itemizing and agreeing on those expenses the flight department will incur is essential when budgeting.

Speaking in round numbers, Lara said, “Managers don’t control about 70% of their budgets because those costs – such as depreciation, salaries, hangar rent, aircraft lease payments and insurance – are fixed.”

Operating expenses account for most of the remaining 30%. The data that supports these assumptions – such as how many hours you expect to fly, how many days of operation you expect, and what major inspections are coming up – come from myriad sources.

“Documenting and discussing each of them with the person who approves the flight department budget – and getting this individual’s agreement on them – makes the budget a simple math exercise, putting the numbers to the assumptions,” Lara said.

But aviation managers should not expect final approval at the initial assumption meeting.

“‘No’ is a tool executives use to see how prepared you are and how committed you are to the answer,” Lara said. “Expect ‘no.’ That’s your first step to ‘yes.’ Refine your assumptions and go back. The key to good assumptions is detailed, accurate record-keeping and involving everyone in the flight department. By including everyone, each member of the flight department owns a piece of the budget.

“The supply chain is broken,” Lara added. “It doesn’t affect budgeting that much because you forecast for the coming year and review the operating statement every month to see how you are doing against the budget. The challenge is availability and delivery delays, especially of rotable supplies, filters, tires, brakes.”

Unless an unusual situation arises, such as rapidly rising fuel costs, Canup said he discusses the budget annually with his boss, who is not in the finance department.

“Every year is different, and we discuss what is going to change,” Canup explained. “I start a new budget about eight weeks before it’s due by gathering data from the chief pilot and director of maintenance. I review the entire budget with them before we submit it for initial review. At our company, it goes through data analysis before it goes into a larger company budget that goes to the senior executives and, ultimately, the board for approval.”

Review and Revise

Budgeting is not a “one and done” exercise, it’s a rolling process. Regularly compare the department’s actual expenses against the budget assumptions, and revise or adjust the budget as necessary.

If acquiring a new company doubles the RONs, or a major inspection reveals a discrepancy that adds $100,000, “make the needed adjustments up front; don’t spend the money and ask for forgiveness,” said Lara.

“Do not sit on bad news,” continued Lara. “It is not fine red wine; it does not improve with age. If it’s clear that you’ll have a budget exceedance, share it immediately so the finance department has time to prepare for it and make adjustments.

“Fuel is having the biggest impact on budgets, but we have an early warning indicator we can watch, the West Texas Intermediate Crude contracts,” suggested Lara. “There’s either a 60- or 90-day window, and there’s a direct correlation between this price and the price of jet fuel.”

Dealing with dynamic fuel prices is an example of how Canup’s budget has morphed over the years.

“At first, I budgeted for the entire year. Now, I do it by the quarter. Fuel prices were starting to climb at the end of Q1, but we came pretty close to hitting the number. But you could see the trend, so I submitted an updated budget that increased the fuel accrual number so we don’t start falling behind.”

Communication remains the critical element of any small flight department budget.

“If the person writing the checks is overly concerned about the cost of things, you have to explain why some budget items, like fuel prices and engine programs, are beyond your control,” suggests Canup. “If they suffer sticker shock and only want to spend so much money, you have to show them how much flying that amount provides.”