Follow-up to Public Debate from Benny Blog
If you haven’t read the blog entry that I am writing about I suggest you go back and read it (and the associated comments) first, otherwise you will not understand what I am talking about.
Gareth Barker stated on my blog that,
“If you want a rough figure for the commercial contribution (and it is rough) then you are looking at something closer to £3 million, not 300k mate. Infact, 300k is what is reserved for our capital expenditure to make building improvements and purchase new equipment for departments each year. As you should already know."
If it were true that the commercial operations were making a net surplus of something close to £3 million which was then contributed to the non-commercial side, this would mean that the net surplus was something around 70% of sales. I cannot immediately think of any company that makes a profit of anything like 70% of its turnover on a regular basis. It might be thought at a first glance that a contribution of 300k, representing about 7% of sales, might be the more plausible of the two numbers. However as I have a copy of the budget pack available, I can look at the figures to work out which one is more likely to be correct.
The purpose of this entry is to examine in some detail whether it is plausible that the commercial contribution to non-commercial activities is something close to £3 million. I am going to do this by using data from the Union’s Budget Pack, dated 23rd June 2004.
Please note that this is only an attempt to quantify the monetary gains from the Commercial activities. Non-monetary gains are not included, as these are not the purpose of this discussion, although it is obvious that there are substantial non-monetary gains for students from the Union’s commercial operations.
I am using data for the Forecast for the year 2003–04, as estimated at the time of the June 2004 budget. Although the Union will now know actual figures for this year the detail of these have not yet been released to students, and so this is why forecasts are used. I am also using these figures for consistency as the figure of £334,000 that is estimated in the budget is a forecast for the 2003–04 year.
The budgets show Operating Income as being £4,227,737 and Operating Costs as being £1,409,271. The difference between the two is about £2.8 million, this could be said to be something close to £3 million.
But where does this £3 million go? Does it all go towards funding non-commercial activities? The answer is clearly “no”. This is clearly the case, as these operating costs do not include the payroll of £2,294,999. Some of this £2.3 million is spent employing staff who work only on commercial activities, some of it is spent on staff who work only on non-commercial activities, and the rest is spent on staff who work on both commercial and non-commercial activities. It is not all spent on the non-commercial side.
Fortunately, help is at hand, as Section 6 of the budget pack divides the budget up into these three sections.
Commercial is defined of consisting of
b) Food and Beverage
h) Market Research
i) Venue Operations
The only suspect entry on this list is Reception, indeed the Budget Pack states,
The Union Reception provides a huge service to the Union in a whole host of areas, and is our front line for numerous enquires and services. It sits perhaps rather incongruously under Commercial Services because it produces some income from room hire.
Arguably, Reception should be transferred to the list of departments that is both commercial and non-commercial in nature. However as the cost of reception is only £42k, this makes very little difference in the end.
Non-Commercial (or Membership) is defined of consisting of
a) Advice and Democratic Services
b) Sabbatical Officers
c) Student Activities
d) Societies and Sports Federation
e) Committees and Representation
Things which are both Commercial and Non-Commercial (or the so-called “Department Services”) consist of
a) Facilities and Safety
c) Human Resources
e) General Management
f) General Overheads
g) Other Income
It is worth noting that the total payroll budget for all the departments that are purely commercial is £1.35 million. Some departments also have “expenses” that are not included in Cost.
Section 6 rather usefully takes each department in turn and considers the total amount that the department makes. This is done by taking income and subtracting cost to give gross profit, and then subtracting labour and expenses to get the total amount made by the department.
The totals made by each of the purely Commercial departments is as follows:
a) Entertainments £143,034
b) Food and Beverage £1,064134
c) Stewarding (£152,052)
d) Retail £56,977
e) Machines £179,327
f) Rents £116,650
g) Marketing (£134,378)
h) Market Research £750
i) Venue Operations (£74,202)
j) Reception (£42,141)
Negative contributions are in brackets.
The total amount made by these purely commercial departments is £1,157,649. (or about £1.2 million if reception is excluded).
The total amount spent by all the purely Non-Commercial departments is as follows:
a) Advice and Democratic Services £161,402
b) Sabbatical Officers £124,729
c) Student Activities £85,288
d) Societies and Sports Federation £90,541
e) Committees and Representation £78.780
These departments run at a total cost of £540,740, so the cost of these departments is easily covered by the block grant of £1 million.
The total amount spent by the departments that are both Commercial and Non-Commercial is as follows:
a) Facilities and Safety £247,994
b) Finance £221,349
c) Human Resources £104,852
d) IT £153,204
e) General Management £97,889
f) General Overheads £699,305
g) Other Income (£21,423)
Negative costs (i.e. income) is in brackets.
With the exception of the “other income” category, and a misc. income of £600 in the I.T. Department, all of the departments that are both commercial and non-commercial have no income, these consists of costs that are borne on behalf of both the commercial and the non-commercial sides of the organisation.
Even if the commercial and non-commercial departments (like Facilities and Safety, Finance and Human Resources) only did any work for non-commercial side, the total contributed by the Commercial side would only be £1.2 million.
If, on the other hand, the departments that are both commercial and non-commercial only did work for the commercial side, the total contributed by the Commercial side would be minus £886k.
It follows that the true monetary contribution of the Commercial side to the non-commercial side is somewhere in the region of minus £886k and plus £1.2 million.
To work out whether the Commercial side makes and contribution at all, and the level of that contribution, it is necessary to make assumptions about how much of the expenditure from the departments that are both commercial and non-commercial should be attributed to commercial activities and non-Commercial activities.
This is what Ross Davidson did in Section 6 (i) of the Budget Pack entitled “Generation of Union Funds”. We know this is the case because he stated:
“In order to get an accurate picture of how much each area of activity costs us, it is necessary to reallocate the cost of Departmental Services between Commercial and Membership Services. In the past, this has been done based on a rule of thumb. This year, a Cost Driver Reallocation basis has been used, where the costs are allocated based on an analysis of what generates the costs. E.g. IT costs are reallocated based on the number of computers in each department.”
He clearly thought that this is an appropriate way to answer the question I am trying to answer because he went on to say:
“This technique allows us to make it abundantly clear that the Union’s Commercial Services produce a substantial surplus to the organisation. This is added to the Annual Allocation from the University, and is used to fund the cost of Membership Services.”
So this technique allows the question of whether the contribution from the commercial side is positive or negative to be solved, and infact shows that the contribution from the commercial side is substantially positive.
Ross Davidson calculated that commercial operations resulted in a net surplus of £334k, or about 7% of sales. And lets face it, a return of 7% of sales is not bad going for any commercial undertaking.
So, the figure of a commercial contribution of somewhat in the region of £3 million is simply not consistent with the Union’s own figures. All the commercial departments put together only yield a net surplus of £1.2 million, without taking into account the costs incurred by the commercial side in departments such as “facilities and safety” and “human resources”.
There is an argument of economies of scale which can be sensibly made – the idea here is that the whole is worth more than the sum of the component parts. This is slightly superfluous to the discussion of the monetary contribution; however it’s worth investigating to consider what the magnitude of these economies of scale might actually be.
According to Ross Davidson’s estimate the non-commercial side costs about £1.3 million, made up of £1 million from the block grant and £334k from the commercial side.
Now it could be argued that the non-commercial side would incur additional costs if it wasn’t part of the commercial operation, due to cost duplication. For example there would have to be a separate finance department and a separate human resources department. This would mean that the departments that currently provide both commercial services and non-commercial services would have to remain bigger than the amount estimated using the Cost Driver estimation method.
However it doesn’t seem plausible that these departments would have to grow in size if the commercial operations were dispensed with, so the upper limit of the cost of these departments to the non-commercial side would be £1.5 million. Adding this to the costs of the purely non-commercial departments of £540k, means that the total would be about £2 million, and so once the block grant is subtracted it would only be necessary to find £1 million to plug the hole left by removing the commercial services.
Of course, as I pointed out, this is an upper limit of how much the commercial services may be worth using an economies of scale argument, in practice it will be substantially less than this, as it would be possible to reduce the size of many of these departments in practice.
This examination has told me that the claim that the commercial side gives something close to £3 million to the non-commercial side, a profit of some 70% of takings, is just not substantiated by the Union’s own figures.
The Union’s own budget pack suggests that the actual figure is £334k. A scale economies argument could be used to argue that in practice the figure would be somewhat more like £700k, but it is difficult to see how it could be argued that it is substantially more than that.
As I said at the outset, it could well be argued that commercial services are a good thing in their own right and should be retained on principle, but that is a separate argument.
A couple of final points, yes the Union does set £300k aside for capital expenditure, however this is generally spent on the commercial side (Zippy’s, the Graduate, Café Xanana, Cholo), and not on the non-commercial side at all.
It’s also worth noting that whilst losing the commercial services would downsize the Union, it would not be downsized as far as a sixth form college. How many sixth form colleges have a block grant of over £1 million?