DOCUMENT RESUME

ED 287 097 CE 048 694

AUTHOR Heaselden, Mark; And Others

TITLE Financial Management for Transit: A Handbook.

INSTITUTION Indiana Univ., Bloomington. Inst. for Urban

Transportation.

SPONS AGENCY Urban Mass Transportation Administration (DOT),

Washington, D.C.

REPORT NO DOT-I-86-10

PUB DATE Apr 85

NOTE 222p.

PUB TYPE Guides - Non-Classroom Use (055)

EDRS PRICE MF01/PC09 Plus Postage.

DESCRIPTORS *Accounting; Automation; *Budgeting; *Business

Administration; Computer Oriented Programs; Credit

(Finance); Decision Making; Microcomputers; *Money

Management; Postsecondary Education; *Public

Facilities; Risk; *Transportation

IDENTIFIERS *Mass Transit

ABSTRACT

This handbook is primarily intended to serve as a

primer for transit system managers who have not had any formal

financial education through college classes, professional development

programs, or extensive on-the-job programs. The following topics are

covered: financial planning techniques for transit (beginning the

financial planning process, turning strategy into a financial plan,

budgeting, and coping with problems and pitfalls); accounting

fundamentals (the accounting process, financial statements, working

capital, cost analysis, break-even analysis, the cash and accrual

basis of accounting, depreciation); budgeting (purposes of a budget,

concepts in budgeting, budget preparation, internal preparation,

external review, implementation, analysis techniques); cash control

(the operator, the farebox, the vault, receiving vaults/ancillary

equipment, vault handling and physical facilities, money counting,

money room operators, funds transfer, other loss areas); inventory

management (reasons for and requirements of effective inventories);

risk management (elements of risk management, risk funding and

decision making, property and liability insurance coverages, and

establishment of a risk management policy); cash management (cash

flow time lines, the concept of float, banking services, cash

discounts, cash flow forecasts); debt financing (types of debt,

planning and issuing debt); capital expenses (the time value of

money, life-cycle costing, vehicle rehabilitation, tax benefit

transfer); and automation in financial management. Appendixes explain

various debt mechanisms and microcomputer applications. (MN)

***********************************************************************

* Reproductions supplied by EDRS are the best that can be made *

* from the original document. * ***********************************************************************
U.S.Department %. Transportation

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U1CI April 1985

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912

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Financial Management

for Transit

A Handbook

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U DEPARTMENT Of EDUCATION Office ducatenal Research and Improvement ED TIONAL RESOURCES INFORMATION

CENTER (ERIC) his document has been reproduced as

',tented from the person or organization

originating a

C Minor changes have been made to improve

reproduction quality

PpMsof view or opinions stated in this doctr mint do not necessarily represent official OERI position or policy

a

BEST COPY AVAILABLE

+NW
Financial Management for Transit:

A Handbook

Final Report

April 1985

Prepared by

institute for Urban Transportation

Indiana University

825 East Eighth Street

Bloomington, Indiana 47405

Prepared for

University Research and Training Program

Urban Mass Transportation Administration

Washington, D.C. 20590

Distributed in Cooperation with

Technology Sharing Program

Office of the Secretary of Transportation

DOT-1-86-10
AOCNOLEMEMENTS

This harrlbodc developed over a period of two years and was contri- buted to by nary TUT staff ambers and associates. TUT staff wrote all

of the chapters in this handbodc, but be relied heavily won contrilutars from outside the Institute and we would like to thank than for

their cocperation. appreciate their assistance and give then credit for their comr----kutions; we accept the responsibility for any errors in

interpretation on our part that may have occured.

The principal authors from IUT's staff leach participated in this project include: thric Heaselden, Lennart lienrilcsson, Kent McDaniel, Peter Perrault, George Smenc, and Eve Wyatt Other staff ambers

contributing were Kevin Cordes and Leslie Cleveland. Administrative

assistance and report coordination were prodded bi tfria Lee and Cheryll Fifer -Bran.

In certain chapt...s to relied heavily *iron material developed by

adjunct faculty Romberg, representatives, or existing documents. lbr this assistance a would like to especially admoiledr the

contributions of: Ned Hill for cairse material for Cash Management; in Leffers and George Sae* for Risk Management; Brian O'Neil for cause

material for Inventory Kin/gement; Willian Sartoris for case material

for Capital Expenses; and Ridc Stern for Cash Control. le also

ammo ledge extensive use of two stuiies for their contributions to the

section on Bus Rehabilitation in Capital Expenses: "'Me Role of

Rehabilitation in Transit Fleet Replacement," prepared for the Puget Sound Council of Governments in Mardi 1983; and and Analysis of Bus Rehabilitation in the Mass Transportation Indas (November 1980) by B.B. Balzer, A.E. Savage, and R.C. Stark.

We also want to thark two webers of the Urban Mass Transportation Administration for their assistance in this project. July Z . ade

served as Mager of the Centers for Transit Research and Management Development Program, thich provided folding fur this project. Ed 'Maas

provided giidance and assistance as Technical wbnitor for this project.

4
INTRODIETION

The transit industry has been in a state of financial crisis for several years and there is still no relief in sight Decreasing sources of financial support, increasing costs, shifting goverrmental roles, and changing regulatory requirements are creating pressures on transit mana- gement to reassess existing assumptions and seek internal economics. Above all, this complex environment creates the critical need for sound financial manegement principles. Although financial nunagement is fre- quently confused with accounting, it is far more than a means for tracking money flow. it its heart lies the allocation and management of an or financial, human, and physical resources: it this creates a basic frasewodc for managerial decision mikirg. Ultimately every decision a transit manager makes has financial implications.

In response to this problem, the Institute for Urban Transportation/Center for Transit Research and Management Development at Indiana University (IUT) developed a ten day training course called "Financial tiinagement for Itansit." Since 1982, this course has been offered twice each year to financial naingers from transit systems from all over the United States. Instnsctors for the course have been selected fran experts in the transit industry and from faculty members of the Indiana University School of Business who hare borrowed the proven techniques from private industry and adapted then for use in the ptblic sector.

This handbook developed as a logical outgrowth of the "Financial Management for Transit" training course. IUT staff members used the training course notebooks as a base, along with other available s tulles and documents. Wan this material we developed a handbodc which addresses nary of the fundamental financial management issues that the transit industry faces. Bich of the ten chapters addresses a separate financial topic and can be used by itself for a specific use, or the chapters can be used in conjunction to provide a comprehensive approach towards financial management. Despite the variety of topics, this hand- book is not intended to encaipass all of the financial management issues of the transit in: betty; nor can it completely cover any of the topics that are included. this handbodc is merely intended to be a primer for transit managers that hare not had the opportunity for a fomel finan- cial education, either through college classes, professional development program, or through extensive on-the-job experience. lib hope that some of the ideas presented in this hardbo& will be beneficial even to those financial onagers who have had fousal training and experience.

5
TABLE OF CafTENTS

CHAPTER QE FINAICIAL RAMC maraps KR IRANSTT

Introduction

Begiming of the Financial Planning Process 2

'Diming Strategy into a Financial Plan 5

Budgeting 9

Problems and Pitfalls 11

Summary 13

CHAPTER IUD ACCOINTI/C FUNIUMEALS

Introduction

Accounting Process

The Accounting Equation

The D3uble Entry System

TAccounts

Financial Statements

The Balance Sheet

The Income Statement

Statement of Changes in Financial Position

Working Capital

Cost Analysis

Variable Costs

Fixed 038t8

Mixed Gnats

Step Variable Costs

15

15

15

18

22

22
4 re Stlt4VP4? .94177493y0644004.41Pckfe st:IPPVII;4>tott Auto"- 'eos . oost,s447'471,,,,:: '44ntb eicklbil,s, 4$70044177rtbitisc$4,
Other Loss Areas. 68

Money Received by Operators Electronic Data Processirg

Inca/dig Mail Tidcets, Tokens, and Transfers

Conclusion. 70

CHAPTER FIVE IN/ENICIU MAN/CEMENT 71

Introdict ion. 71

Types of Inventories 71

Inventory Management Objectives 79

Reasons for Ma intainirg Inventories 79

Types of Damand 73

Requireme nts for Effective Inventory System 74

Tradcirg Inventory

Demand Forecasts

Leal Time Variability Cost Estimations

Es tablishirg Inventory Priorities

Economic Order Quantity (ECQ) 76

Quantity Discamt ample 80

CHAPTER SD( RISC MANAGE PENT 83

Elements of Risk Management 83

Risk Identification

Risk Evaluation

Risk Control

Risk Randirg Risk Administration

9
Other Loss Areas. 68

Money Received by Operators Electronic Data Processirg

Inca/dig Mail Tidcets, Tokens, and Transfers

Conclusion. 70

CHAPTER FIVE IN/ENICIU MAN/CEMENT 71

Introdict ion. 71

Types of Inventories 71

Inventory Management Objectives 79

Reasons for Ma intainirg Inventories 79

Types of Damand 73

Requireme nts for Effective Inventory System 74

Tradcirg Inventory

Demand Forecasts

Leal Time Variability Cost Estimations

Es tablishirg Inventory Priorities

Economic Order Quantity (ECQ) 76

Quantity Discamt ample 80

CHAPTER SD( RISC MANAGE PENT 83

Elements of Risk Management 83

Risk Identification

Risk Evaluation

Risk Control

Risk Randirg Risk Administration

9
Risk Binding and Decisionmaking 86

Risk Retention

Risk Transfer Ihro ugh Insurance

Risk Decision:asking

Property Insurance Coverages 91

Fire and Allied Lines

Boiler anciMachinery

Automobile Physical Damage

Ikployee and Nonemployee Crime

Liability Insurance Coverages 95

Automobile Liability

Ubrker's Compensation and Employees' Liability

General Liability

Establishing a Risk Management Policy 98

Policy Statement

Risk Management Goals

Risk Management Functions

Risk Retention

Risk Reduction

CHAPTER SEVEN CASH MANAGEMENT 103

Introduction 103

Sources of Cash

Disbursements

Collections

The Cash Flow Time Line 105

Cash Inflows

Cash Outflows

The Concept of Float 107

Deposit Float

Disbursement Float

10
13aricirg Services. 108

Selection

Ac ccunt Malys is Zero-balance Accaints

One -time Cash Trans far

Short-tens Investments

Cash Discounts. 1 14

Cash Fla/ %recasts 117

CRAFTER FILET LEST FINUCIN3 123

An Introduction to Debt 123

Purposes of Debt Classifying Ibbt

Types of Ibbt

0 I 1 /4

Short -teen Debt

Long -team Debt

Planning and Issuing Debt 130

Is suing Donis Selection of Underwriter

Timing of the Debt Issue

CHAPTER NINE CAPITAL EXPENSES. 35

In trodic t ion. 1.35

Time Value of Money 135

Cagy/mind Interest

Future Value

Present Value

Annuities

Life-cycle Costing 143

Life-cycle Cos tirg Example Calculation Vbiksheet

11
Vehicle Rehabilitation 150

Defining Rehabilitation

Advantages of Rehabilitation

Disadvantages of Rehabilitation

When is Rehabilitation Appropriate?

Buying Versus Rehabilitation

Tax Benefit Transfer( Safe Harbor Leasing)

Background

Description

Benefits

Safe Harbor leasing Example

157

CHAPTER TEN AUD34ATION 165

Introduction 165

Uses of Automation in Financial Management 166

Accounting

Data Storage and Retrieval

Management Support and Analysis

Other Financial Programs

Sources of Information 172

APPENDIX A DEBT iECHANISMS

Anticipation Notes

Revenue

Bond

175

175

Zero Coupon Bonds 176

Certificates of Participation 177

Procedure

Backing of Certificates

UCA involvement

Financial Results

1 2
Lease PurdhastAueemEnt 178

APPENDIX B MICRO:71,7MR APPLICATION EXAMPLES 179

Opsmat!ng Budget 180

Cash Elm Manager 191

Fare Structure Analysis 195

Mbuthly Route Summary 199

13
Figure 1.1

Figure 1.2

Figure 2.1

Figure 2.2

Figure 2.3

Figure 2.4

Figure 2.5

Figure 3.1

Figure 5.1

Figure 6.1

Figure 7.1

Figure 7.2

Figure 7.3

LIST OF FIGURES

lie Strategic Plannirg Proms. 4

Financial Plannirg 6

Relationship Betheen the Balance Sheet and Inc=

St atom nt 19

Balance Sheet 2a

Statement of Revenue, Expense, and Assistance (or Inane Statement) 23

(bat Behaviors 24

Break -even Analysis 27

Cbmparison of Forecasting Techniques 55

Carrying Cost, Ordering Cost, & Total Cost Curves 78

Frequency /severity Matrix: Re ccmste !tied Guidelines

for Handling Risk 89

Gash Flo/ Time Line/Imsediate Payment 105

Cash Flo/ Time Line/Purchase by Crelit. 106

Cash Out ft cw Time Line. 107

Figure 10.1 Database Example: Fixed Asset Inventory 169

Figure 10.2 4:r earls beet Example 171

1 4
A

CHAPTER ONE

FINANCIAL PLANNING TECHNIQLES FOR TRANSIT

Introduction

Financial planning in transit has always been important. Wan the very earliest private enterprise days of the incbstry to the pre- sent days of public amership, there has been an obvious need to gatge carefully the resources needed for carrying out operations and to sake the necessary capital investments to the transit property.

Financial planning is even more important in times when money is scarce. Minagement effort is always directed toward the scarce rescArce, when labor is short, the management of personnel function becomes an important factor. lath mounting concern over fiscal problems

in transit, management attention should be increasingly directed testa rd financial planning. that should be and what actually is are often pm very different things; the financial planning that prudence and good management demand is often missing in transit, replaced by fiddling with budgets and cos t-cuttirg programs that are simple reactions rather than carefully crafted events.

Financial planning is more difficult and more necessary at present became of the nary financial uncertainties facing transit. Wile uncertainty is no stranger to the transit incitstry, it has taken on a new dimension. Fran a financial viewpoint, the federal aid progran, begun in 1961, had contitual* expanded the amber of programs and the federal funds available; for new years the trend was steadily upward. Since 1981 the level of federal support has actually diminished and the missive federal deficit stggests that this decline nay contitue into the future.

Local and state support of transit is another uncertainty. In recent decades, there hare been stbs tantial increases in state and local support for transit operations, capital, planning, and other programs- - usually catching a federal grant--ha this support tends to fluctuate with the condition of the econany. In bed economic tines, when transit ridership and fare receipts usually fall, it is difficult for state and local goverment to provide additional finds for transit. Add local political conflicts between city and suburb, risitg costs of labor and supplies, and citizen tax revolt, and the financial situation in transit

16

4
A

CHAPTER ONE

FINANCIAL PLANNING TECHNIQLES FOR TRANSIT

Introduction

Financial planning in transit has always been important. Wan the very earliest private enterprise days of the incbstry to the pre- sent days of public amership, there has been an obvious need to gatge carefully the resources needed for carrying out operations and to sake the necessary capital investments to the transit property.

Financial planning is even more important in times when money is scarce. Minagement effort is always directed toward the scarce rescArce, when labor is short, the management of personnel function becomes an important factor. lath mounting concern over fiscal problems

in transit, management attention should be increasingly directed testa rd financial planning. that should be and what actually is are often pm very different things; the financial planning that prudence and good management demand is often missing in transit, replaced by fiddling with budgets and cos t-cuttirg programs that are simple reactions rather than carefully crafted events.

Financial planning is more difficult and more necessary at present became of the nary financial uncertainties facing transit. Wile uncertainty is no stranger to the transit incitstry, it has taken on a new dimension. Fran a financial viewpoint, the federal aid progran, begun in 1961, had contitual* expanded the amber of programs and the federal funds available; for new years the trend was steadily upward. Since 1981 the level of federal support has actually diminished and the missive federal deficit stggests that this decline nay contitue into the future.

Local and state support of transit is another uncertainty. In recent decades, there hare been stbs tantial increases in state and local support for transit operations, capital, planning, and other programs- - usually catching a federal grant--ha this support tends to fluctuate with the condition of the econany. In bed economic tines, when transit ridership and fare receipts usually fall, it is difficult for state and local goverment to provide additional finds for transit. Add local political conflicts between city and suburb, risitg costs of labor and supplies, and citizen tax revolt, and the financial situation in transit

16

4