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Mooney Caravan to OSH
Mooney Caravan to OSH
Partnership Financial Issuesby Andrew Czernek, aczernekATcomcast.net
The most-important thing to do is to set up partnership finances to cover most likely expenditures during the year and avoid “special assessments”. They can’t always be avoided: we’ve had two engine failures that required substantial expenditures but the following process has worked for us:
1. set up a working capital reserve at the outset, perhaps $1,000 to $2,000 per pilot
2. divide your fixed costs from your variable costs. Some suggestions:
3. decide how you want to handle accruals towards overhaul or even upgrades. Most of us buy mid-time engines, meaning that we have nothing in accounts for a top overhaul or the major overhaul. When running the Cessna 172 partnership, we were under-accrued at mid-time, so I suggested an increase from $24 to $30 per hour, estimating that it would bring in $6,000 of the $10,000 that we’d need for the engine overhaul (okay, this was back in the 1980s!) Though one of the partners had recently lost a job, her response was “I’d rather have the money in the bank than get a bill for $1,500.”
Here’s an old income statement from a partnership, with comments:
Hourly @$45/hour, 180 hours . . . . . . . . . . . . $8,100
TOTAL INCOME . . . . . . . . . . . . . . . . . . . $13,860
Administrative* . . . . . . . . . . . . . . . . . . . . . . . . . $335
TOTAL EXPENSES . . . . . . . . . . . . . . . . . . .$12,293
NET CASH INFLOW . . . . . . . . . . . . . . . . . . $1,567
* Administrative expenses include state aircraft registration; annual corporation registration; local sectional and terminal charts; annual Customs sticker; bank fees.
We had set up this partnership to cover fixed costs – including admin and the annual inspection -- with the monthly assessment of $160 each because we’d been seeing fairly high maintenance costs with a 20-year-old Mooney 201. At this point the engine had about 1,400 hours on it with a TBO of 2,000 hours on it, so we also knew that we were under-reserved towards an overhaul cost that would likely be $12,000 to $15,000. However, there was a conscious decision to keep excess funds in personal accounts where they could be invested, rather than in the partnership checking account. As it would turn out, we’d be forced to do that engine overhaul in less than a year.
But we wanted to keep the hourly operating costs low to encourage active use of the plane. Each hour’s flight was contributing about $25 - $27 towards maintenance accounts (after deducting fuel) and we’d turned in a surplus with 180 hours of use. And it's important to note too that if usage were to drop to 120 hours, this partnership would be struggling to keep cash flow positive.
Were I teaching finance in college, I’d use this partnership example to show that finance and accounting are affected by your point-of-view. Modern Activity Based Costing (ABC) systems would instruct this partnership to divide the overhead costs by each of the owners, resulting in higher hourly rates that would DISCOURAGE flying.
In 1997, one of the partners flew 100 hours, one flew 50 hours and one flew 30 hours. An ABC-based system would have taken billing from $45/hour wet to $77/hour – making the proverbial “$100 hamburger” into a $200 hamburger and actually discouraging spur-of-the-moment use.