University of MinnesotaInternal/External Sales

“Subsidy, Surplus and Deficit Management”

How to Break Even in the Long Run

http:www.finsys.umn.edu/sales/iso.html• Policy• Procedures• Forms• Job Aids• Internal Sales Training Modules

2

Internal Sales Policy and Procedure Website

3

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

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 customers4

Learning Objectives cont.

OMB CircularA-21 requirementAny rate charged to a federally-sponsored grant

cannot be greater than the lowest ratecharged to any other internal customer

University policy requirementRecharge Centers must bill all internal customers

using the same rate…for any given service, activity or product

5

Recharge Center Basics

6

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

7

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?

8

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

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

Estimated first-year operating costs:130,000 Salaries & fringe 40,000 Chemicals, materials, supplies 10,000 Depreciation on equipment 2,000 Maintenance contract182,000

9

Subsidy Example # 1

The unit for billing purposes is a lab testEstimated volume of activity 90,000 testsRate 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 year-end 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 yearWould 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 Example # 1 cont.

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 Basics Part 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

Billing for Professor Newguy’s first month:150 tests @ $2.02 $303.00Dean’s subsidy -151.50Net 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

Subsidy Example # 2 cont.

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 > expected2. Costs < expected

– Estimated amount of inputs needed– Estimated costs – prices can fluctuate

3. Profits from External Sales4. 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

Surplus and Deficit Management

Questions?

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

This presentation is posted on the site.