Why Take a Zero-Based Approach?
Building your budgets on a clean sheet of paper and from the bottom up each year is an investment of time and effort. Why do it? At Polaris Aviation Solutions we have found that we reduce a new client’s spending by an average of 15% in the first year that we apply zero-based budgeting to their program. The approach requires the entire team to question each and every expense. Money does not end up getting spent just because “it was in the budget” left over from last year. Another benefit is that budget variances decrease and any that occur can be thoroughly explained because with this budgeting method, we understand exactly where all the numbers come from.
The Zero-Based Budgeting Approach:
The traditional approach to budgeting starts with whatever was spent last year, then adds to and subtracts from those number based on what we plan to do differently this year. The underlying assumption is that whatever we spent last year is the “baseline” for what will be required this year and all that we have to justify as part of the budgeting process are the things that are going to be different this year. A zero-based approach starts with a blank sheet of paper and builds the budget up based on all the activity projected for the upcoming year, attaching projected expenses to each forecast activity. The zero-based approach requires a bit more effort but results in a budget where every number has been thoroughly examined and understood.
Applying the Zero-Based Approach to Business Aircraft:
As an aircraft management company, Polaris Aviation Solutions, begins the budget process by considering each aircraft in a client’s fleet individually. Each aircraft has its own “personality” with a unique history and its particular schedule of maintenance events and will therefore have a unique set of budget requirements. Unless an aircraft is brand new to the fleet, Polaris uses historical data from each aircraft in the budgeting process rather than “industry standard” numbers for an aircraft type.
Start with a Detailed Usage Projection:
A forecast of flight hours is where all aviation forecasts start, zero-based budgets are no exception. Try to make the forecast as fine-grained as possible, broken down by month at a minimum, but ideally including things like average projected trip length, number of legs, overnights and a forecast of domestic and international destinations. We all know that it is cheaper to overnight at Des Moines International than it is at Heathrow!
Scheduled Maintenance is the Easiest:
Each aircraft’s required maintenance schedule is known in advance and can be spread across the year according to the usage projection. It should be straightforward to estimate the cost of inspections or compliance with required airworthiness directives. A factor based on historical experience can be developed from historical inspection results to estimate the cost of repairs that will be discovered as a result of inspections and applied to develop the budget.
Unscheduled Maintenance is a Bit Old School:
Forecasting an unknown like unscheduled maintenance does require us to rely on the older budgeting technique of taking last year’s actual numbers and adjusting them up or down based on the usage forecast for this year. If we think last year was an outlier, we can even fall back on industry standard maintenance numbers.
Operating Expenses Take Some Work:
For each aircraft we take the historical operating expense data for the past three years and use that to develop rates based on flight hours, flight legs and R.O.N.’s, and also by international or domestic destination. This takes some time working with the historical data but is well worth it. Applying the rates we develop to the usage projections lets us develop a good projection of operating expenses for the upcoming year.
Put It All Together:
Pull this all together and you have a solid budget for each of your client’s aircraft. Sum all the aircraft and you have a budget for your client’s total flight operations that you can be confident in, and better yet, you can answer any question your client might have because you know where all the numbers came from.