University of Minnesota Internal/External Sales “Subsidy, Surplus and Deficit Management”

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

2. Internal Sales Policy and Procedure Website 2 http:www.finsys.umn.edu/sales/iso.html • Policy • Procedures • Forms • Job Aids • Internal Sales Training Modules

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 3

4. Learning Objectives cont. 4 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

5. Recharge Center Basics 5 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

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 6

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? 7

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 8

9. 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 Salaries & fringe 40,000 Chemicals, materials, supplies 10,000 Depreciation on equipment 2,000 Maintenance contract 182,000

10. 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

11. 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

12. 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 year Would this be allowed?

13. Subsidy Example # 1 cont. +/- 15% is the allowed range of operating margin for a recharge center -17,225 ÷ 183,500 = -9.4% Your answer:

14. 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

15. 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

16. 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.

17. Subsidy Example # 2 cont. Key elements • Keep meticulous records • The subsidy has to actually be transferred in Questions?

18. 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

19. 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!

20. Surplus and Deficit Management University Policy Selling Goods and Services to University Departmentsstates: A “3-year average margin of + or - 15% is considered break even”.

21. 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

22. 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!

23. 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

24. 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

25. 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

26. Questions? Resources: Office of Internal Sales website http://finsys.umn.edu/sales/iso.html This presentation is posted on the site.