Subsidies, surplus, and deficit management

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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
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Policy
Procedures
Forms
Job Aids
Internal Sales Training Modules
2
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
3
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
4
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
6
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?
7
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 total estimated cost
-25,000 subsidy planned
157,000 cost to be recharged to users
÷90,000 estimated # of units
$1.75
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 new expected total costs
(27,225) estimated deficit
+ 25,000 dean’s subsidy to transfer in
($2,225) deficit carryforward to next year
11
Subsidy Example # 1 cont.
Suppose the dean reassesses her finances near yearend and decides she can subsidize only the amount
of the depreciation.
$156,275 revenue 89,300 tests @ $1.75 each
-183,500 new expected total costs
+ 10,000 dean’s subsidy to transfer in
($17,225) deficit carryforward to next year
Would this be allowed?
12
Subsidy Example # 1 cont.
+/- 15% is the allowed range of operating
margin for a recharge center
-17,225 ÷ 183,500 = -9.4%
Your answer:
13
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 total estimated cost
÷90,000 estimated # of units
$2.02
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.
16
Subsidy Example # 2 cont.
Key elements
• Keep meticulous records
• The subsidy has to actually be transferred in
Questions?
17
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!
19
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”.
20
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!
22
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
23
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.
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