Developing An Operating Budget

Basics

A budget is “the amount of money that is available for, required for, or assigned to a particular purpose“.^[1]https://www.merriam-webster.com/dictionary/budget For an airport, the operating budget is a one year period that can be based off of a Calendar Year (CY) or Fiscal Year (FY). A Calendar Year budget cycle runs January through December just like a calendar. A Fiscal Year budget runs twelve months and can vary. For example, some run July through June. Others, such as the Federal government, have a Fiscal Year from October through September.

The purpose of the budget is to identify the available resources (revenue), determine the needs to continue operating (expenses), and figure out the balance of the two to break even (self-sustaining). For example, if the operating revenues total $50,000,000 and the operating expenses total $50,000,000, then the airport will break even. However, if the revenue does not cover the expenses, there will be a deficit in the amount of money available. More will be covered on this in the airline rate setting section.

Operating budgets include aeronautical and non-aeronautical revenues as income generators. The costs of keeping the airport open are included as operating expenses. An example of operating revenue comes from lease and use agreements, landing fees, and concessionaire sales percentages. Operating expenses come from personnel, utilities, and normal maintenance operations.

Capital budgeting is a completely different concept that has different time frames, metrics, and revenue sources.

Cost Accounting

What is cost accounting? Investopedia defines it as “a form of managerial accounting that aims to capture a company’s total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease expense.” ^[2]https://www.investopedia.com/terms/c/cost-accounting.asp The difference in cost accounting and financial accounting is cost accounting is an internal accounting method to make the best business decisions with the information available. Financial accounting is used for external reports and audits to show how an entity is performing.

Common Types of Budgets

Line-Item

Line item budgets break down budgets into accounts that typically align with departments or divisions of the airport structure. ^[3]https://www.accountingtools.com/articles/2017/5/13/line-item-budget#:~:text=A%20line%20item%20budget%20is,bulk%20of%20the%20entity’s%20funds.Within that department or division, each category is further broken down into its own line to track revenues and expenses. An example is a budget may include revenue from landside terminal lease agreements and expenses for contract services. Each income and expense category is specific to the category within that department’s budget.

Performance Based Budget

Results matter more than money in a Performance Based Budget. They are common in government bodies as they look at the desired outcomes instead of focusing simply on a dollar amount. The budget still accounts for the costs of a program and a deeper understanding of the agencies activities. ^[4]https://www.investopedia.com/terms/p/performance-budget.asp

Program Budgeting

Program budgeting effectively programs in money for specific projects or activities. Think snow removal, ARFF, janitorial, maintenance, etc. The flexibility of program budgeting can vary, but it does allow reallocation in the event the money isn’t needed. An example would be a midwest airport that normally spends $50,000 a year on snow removal. In a mild year, they may only get one snow event and spend $10,000. Once the snow season is over, they could reallocate the remaining $40,000 to another program. ^[5]https://efinancemanagement.com/budgeting/program-budget

Zero Based Budgeting

Instead of using historical accounting to your advantage, zero based budgets start from scratch. Each need is individually justified to total the amount of money requested. It effectively is a reverse budget in the traditional budget process. This does require leaders to systemically review each and every area of their operation to look for efficiencies and waste. ^[6]https://www.investopedia.com/terms/z/zbb.asp

Steps in the Budget Process

Operating budgets are typically developed by using a four step process that involves creating the budget, seeking its approval, carrying out the approved budget, and auditing the results.

Budget Preparation

Regardless of the type of budget used, reviewing historical budgets to identify trends and common needs is vital to drafting an accurate budget that addresses the needs and challenges you may face. Looking at the future, you will want to identify additional goals or objectives that may require different resources than previously needed. In large operations, it is best to create a schedule to keep everyone on track to meet the goals and deadlines required to get the budget approved.

Budget Approval Process

As departments begin submitting their budgets, the approval process starts with the Airport Executive agreeing to the requests. At the end of the day, it is the Airport Executive who is taking the budget before the legislative body and/or signatory airlines for their approval as well. Part of the approval process will be gaining approval from airlines who may be considered Majority-In-Interest (MII) holders at the airport and the legislative body. The legislative body will vary by the airport, but is the same as the Board of Directors/Commissioners, City Council, or County Board of Supervisors.

Budget Execution

Once budget approval has been given, it is time to carry out the budget. Departments should be provided copies of their budget so that they can manage the day to day operations, track expenses, review progress through the year, and keep executives aware of any concerns. The execution period lsts the entire budget period.

Auditing

Reviewing the budget to ensure proper controls, effective processes, and efficient operations are in place.

Revenues, Expenses, and Cost Centers, Oh My!

You do not have to have a finance degree or be a CPA to understand the basic concepts of finances. Taking some time to break down what each component does and why it functions makes it easier to do so. Most airports will have specialist within the finance sector to help guide them on the specifics.

Cost Centers

A cost center is a bucket of costs that account for departments or functions within the airport. Some cost centers generate revenues, others expenses. The cost center can be geographic (airfield), departmental (ARFF), or a type of expense (utilities). Breaking down the functions into specific areas helps executives determine airline rates and charges and also to identify rate making methodologies for other tenants. By using cost centers, the airport is able to better account for performance and set more accurate rates and charges.

In aviation, the cost centers should account for all revenue, expenses, and financial obligations. There are two types of cost centers that airports use. Revenue producing cost centers are Direct Cost Centers, while non-revenue generating cost centers are Functional (Indirect) Cost Centers.

Direct Cost Centers

Direct cost centers are revenue generating cost centers. In the airport environment, this is typically airfield, terminal, parking, and cargo operations. Each airport has a different structure and this is a very high level view of the cost center. The exact use of cost centers and what is included is most likely defined in the airline use agreements.

Within the top-level cost center, there will typically be sub areas that further breakdown the revenues and expenses associated with each. Using the airfield cost center for example, within it may be the movement area (taxiways and runways), general aviation, fixed-based operator, terminal apron ramp, and cargo ramp.

Functional Cost Centers

The functional cost centers (sometimes referred to as indirect) are used to allocate the expenses for specific needs. A functional cost center could include broad coverage such as ARFF, law enforcement, maintenance, or operations. Sub areas of a function cost center could be road maintenance, landscaping, or finance.