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

2. 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. 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

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 4 Learning Objectives cont.

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 5 Recharge Center Basics

6. 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. 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. 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

9. The dean plans to subsidize $25,000 of the cost of a new Recharge Center. Estimated first-year operating costs: 130,000Salaries & fringe 40,000Chemicals, materials, supplies 10,000Depreciation on equipment 2,000Maintenance contract 182,000 9 Subsidy Example # 1

10. The unit for billing purposes is a lab test Estimated volume of activity 90,000 tests Rate Calculation $182,000total estimated cost -25,000subsidy planned 157,000cost to be recharged to users ÷90,000estimated # of units $1.75cost per test 10 Subsidy Example # 1 cont.

11. Nearing year-end, it appears the activity will end up with 89,300 tests completed and $183,500 in costs $156,275revenue 89,300 tests @ $1.75 each -183,500new expected total costs (27,225)estimated deficit + 25,000dean’s subsidy to transfer in ($2,225)deficit carryforward to next year 11 Subsidy Example # 1 cont.

12. Suppose the dean reassesses her finances near year- end and decides she can subsidize only the amount of the depreciation. $156,275revenue 89,300 tests @ $1.75 each -183,500new expected total costs + 10,000dean’s subsidy to transfer in ($17,225)deficit carryforward to next year Would this be allowed? 12 Subsidy Example # 1 cont.

13. +/- 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.

14. 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

15. 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 $182,000total estimated cost ÷90,000estimated # of units $2.02cost per test 15 Subsidy Example # 2

16. 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.

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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

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