University of Minnesota Internal/External Sales “Subsidy, Surplus and Deficit Management” How to Break Even in the Long Run

Internal Sales Policy and Procedure Website

• • • • •

http:www.finsys.umn.edu/sales/iso.html

Policy Procedures Forms Job Aids Internal Sales Training Modules

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Learning Objectives Understand how to subsidize Recharge Center (internal sales) rates for

: •

An individual customer

•

A specific customer group

•

Entire customer base

•

A particular service or product line

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Learning Objectives cont.

Understand how to manage a surplus or deficit in an internal sales activity:

•

Carryforward balances

•

Revising the rate development

•

Transfer-in of subsidy

•

Refunding overcharges to customers

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Recharge Center Basics OMB CircularA-21 requirement

Any rate charged to a federally-sponsored grant cannot be greater than the

lowest rate

charged to any other internal customer

University policy requirement

Recharge Centers must bill

all

internal customers using the

same rate

…for any given service, activity or product 5

Planned Subsidies OMB Circular A-21 and U policy also allow subsidy of rates in several ways:

•

single customer

•

specific group or class of customers

•

entire user group

• (all customers are subsidized) •

specific service or product line

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Why Subsidize?

• Startup faculty/researcher • New lab/equipment/product line • Make expensive equipment or process more “affordable” • Home department vs other units/colleges • Other reasons?

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Subsidy Basics Part 1

• • Include all costs when developing rates • Document any planned subsidy

For subsidy of entire Recharge Center or a particular machine or product line:

– Include the subsidy in the rate calculation – Pay the subsidy into the Recharge Center at year end 8

Subsidy Example # 1

The dean plans to subsidize $25,000 of the cost of a new Recharge Center.

Estimated first-year operating costs: 130,000 40,000 10,000 2,000 182,000 Salaries & fringe Chemicals, materials, supplies Depreciation on equipment Maintenance contract 9

Subsidy Example # 1 cont.

The

unit for billing purposes

is a lab test

Estimated volume

of activity 90,000 tests Rate Calculation $182,000 -25,000 157,000 ÷90,000 $1.75

total estimated cost subsidy planned cost to be recharged to users estimated # of units cost per test 10

Subsidy Example # 1 cont.

Nearing year-end, it appears the activity will end up with 89,300 tests completed and $183,500 in costs $156,275 revenue 89,300 tests @ $1.75 each -183,500 (27,225) + 25,000 ($2,225) new expected total costs estimated deficit dean’s subsidy to transfer in deficit carryforward to next year 11

Subsidy Example # 1 cont.

Suppose the dean reassesses her finances near year end and decides she can subsidize only the amount of the depreciation.

$156,275 -183,500 + 10,000 revenue 89,300 tests @ $1.75 each new expected total costs dean’s subsidy to transfer in ($17,225) deficit carryforward to next year

Would this be allowed?

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Subsidy Example # 1 cont.

+/- 15%

is the allowed range of operating margin for a recharge center

-17,225 ÷ 183,500 = -9.4% Your answer:

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Subsidy Basics Part 2 For subsidy of individual customer/group:

– Do not include subsidy in the rate calculation – Show subsidy amount on each invoice – Pay subsidy in at time of billing, periodically during the year, or at year end 14

Subsidy Example # 2

The dean will subsidize the first year of research, but only for Professor Newguy. The dean will pay half of Prof. Newguy’s lab costs.

Rate Calculation $182,000 ÷90,000 $2.02

total estimated cost estimated # of units cost per test 15

Subsidy Example # 2 cont.

Billing for Professor Newguy’s first month: 150 tests @ $2.02 $303.00

Dean’s subsidy -151.50

Net due $151.50

The dean’s portion can be transferred in each time a billing is done, periodically or even annually.

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Subsidy Example # 2 cont.

Key elements

• Keep meticulous records • The subsidy has to actually be transferred in Questions?

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Surplus and Deficit Management

Rate development is based on many

estimates

: • Level of activity/number of units produced • Labor costs • Materials and supplies • Other cost elements • Depreciation 18

Surplus and Deficit Management

Since estimation is rarely perfect… …a deficit or surplus balance will occur …and needs to be managed

Goal for a recharge center:

Break even over time!

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Surplus and Deficit Management

University Policy

Selling Goods and Services to University Departments

states:

A “3-year average margin of + or - 15% is considered break even”.

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Surplus and Deficit Management A surplus can develop in 4 ways:

1. Sales volume > expected 2. Costs < expected – Estimated amount of inputs needed – Estimated costs – prices can fluctuate 3. Profits from External Sales 4. Putting in excess subsidy 21

Surplus and Deficit Management If a surplus results from overcharging customers, the amount in excess of 15% will need to be refunded

Therefore, it’s important to be able to separately identify the profits from External Sales And not to over-subsidize to the point of causing a large surplus!

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Surplus and Deficit Management A deficit balance may develop from:

– sales < expected – costs > expected

If a deficit goes below the allowed -15% a subsidy will be required

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Surplus and Deficit Management How to manage this surplus/deficit to stay within the + or – 15% range

• Monitor the Recharge Center activity and accounts regularly throughout the year • Be aware of significant changes to the operation, such as gain or loss of customers, large price changes for any of the inputs 24

Surplus and Deficit Management

• If it appears the account will exceed the

+/

-15% margin, recalculate and adjust rates mid-year • Analyze and adjust the rates yearly – Include carryforward balance in new rate calculations 25

Questions?

Resources: Office of Internal Sales website http://finsys.umn.edu/sales/iso.html

This presentation is posted on the site.