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BEYOND `CAP IN HAND' FUNDING OF RENTAL COLLECTIONS: THE ESTABLISHMENT OF HIGH DEMAND COLLECTIONS AT TAURANGA DISTRICT LIBRARIES.

The establishment of rental collections under a quasi commercial self funding mechanism is described. This requires the separation of the rental collections' revenue and expenditure accounting mechanisms from total library revenues and expenditures. Having established rental collection revenues and expenditure (including overheads) the success or failure of the rental collections to meet their own costs can be monitored. The mechanism allows the commercial freedom to expand existing rental collections or establish and grow new media rental collections in order to respond to demands

Many New Zealand libraries operate revenue generating rental collections.

New Zealand metropolitan libraries reported over $2,700,000 of revenue from rental collections in 1998/99.[1] The money earned appears in budgets and reports but is not generally related to costs of providing the rental collection service. This can be disadvantageous in two ways.

* while there may be an assumption that revenue from the rental collections is meeting or exceeding the cost of providing rental services, this cannot be demonstrated

* funding of the rental collection is another budgetary item, usually increased or decreased on an annual basis in an incremental fashion. While one may suspect that increased funding will produce more revenue there is no formal mechanism for relating materials funding to revenue, or measuring that relationship

A high demand based rental collection model was conceived in the Tauranga District Libraries following a review of the fiction collections. The model sought to gain more revenue from the collections through increased turnover, increased charges, and reduced loan periods, while enabling the percentage of the overall fiction collection which would be free to borrow, to be increased.

The high demand collection model is considered a consistent and robust mechanism for meeting revenue goals by balancing demand, price and issue period. Generally, items of greater popularity have a shorter loan period and a higher cost per loan. This mechanism maximises user access to the materials they require, increases turnover of stock and generates significant revenue in a manner that is acceptable to the majority of public library stakeholders.

An essential component of the model is the establishment of a self funding business unit within the library that would be free to reinvest a percentage of revenues in new materials to fund growth and development of the collections. Because the high demand collection is self funding it is able to grow, like any business, to meet consumer demand,

In order to convince Tauranga District Council that the operation of the high demand collections would be cost neutral and that any growth would not cause an increase in net library costs, it was necessary to arrive at a ratio between new materials costs and overheads.

The net present value calculation

Public library rental collections are designed to generate revenue and measurement and reporting of rental revenues is standard for libraries operating such collections. What is more difficult to measure is the cost of providing rental collections and comparing this with the revenues in a meaningful way.

A standard accounting method for assessing business propositions is known as a net present value (NPV) calculation.[2] It is a way of comparing costs and revenues over a number of years. For example, a project with a ten year life cycle will have establishment costs in the first few years and variable revenues over eight or nine years. As most investment projects have an element of risk the investor wants to compare the returns from the project against a low risk investment at the going rate. In other words the investment should offer rates of return that are greater than the opportunity costs of capital.

To arrive at a comparison between costs and revenues it will suffice to compare an investment in one notional high demand item against a risk free investment returning 8% per annum.

Table 1 illustrates an NPV calculation on an item with a revenue earning life of 4.5 years and an average 11 issues per year. An investment of $75.07 (discounted to $71.68) over 4.5 years will yield a return that is marginally better than an 8% investment over the same period of time. The numbers are based on data from Tauranga District Libraries for 1997/98.

Table 1 Possible investment and return over 4.5 years.
Year Zero One Two

Issues 15 13 11

Purchase price $31.50(a)
Technical Services' costs $11.30(b)
Overhead costs $1.56(c) $1.56 $1.56
Circulation costs $7.65(d) $6.63 $5.61
Total costs $52.01 $8.19 $7.17
Rental returns at $1.63 $24.45(e) $21.19 $17.93
per issue ($1.50 + $0.13
extended loan charge)
Returns -- Costs -$27.56 $13.00 $10.76
Discounted @ 8% -$27.56 13.00/1.08 10.76/1.17
 -$27.56 $12.04 $9.20
NPV = $0.97

Year Three Four Totals

Issues 7 3.5 49.5
 (half
 year)
Purchase price
Technical Services' costs
Overhead costs $1.56 $0.78
Circulation costs $3.57 $1.79
Total costs $5.13 $2.57 $75.07
Rental returns at $1.63 $11.41 $5.71 $80.69
per issue ($1.50 + $0.13
extended loan charge)
Returns -- Costs $6.28 $3.14 $5.62
Discounted @ 8% 6.28/1.26 3.14/1.36
 $4.98 $2.31 $0.97
NPV = $0.97


(a) Average cost of purchase of one item

(b) Annual technical services costs / Number of items purchased annually

(c) Proportion of annual overheads allocated to lending collections / Total lending stock numbers

(d) Annual circulation costs / annual issues

(e) 15 issues at $1.63 per issue

Note: While comprehensive financial and turnover rate data is usually available within local government libraries, information is less exact on the average life of rental items. Research on this factor would refine the accuracy of the NPV calculation.

Table 2 illustrates the rationale for the reinvestment rate of 44% of revenue.

Table 2 Discounted costs as percentage of total discounted costs
Life cycle costs discounted %costs
Purchase $31.50 43.90%
Technical Services $11.30 15.80%
Overheads $6.15 8.60%
Circulation (49.5 issues) $22.73 31.70%

 $71.68

Life cycle revenue discounted
49.5 issues $72.65


Having demonstrated that the rental collection is cost neutral to council (costs and revenue are similar) and that the purchase cost of an average item is 44% of the total costs it then becomes clear that 44% of revenues will be required for ongoing investment in rental materials while 56% of revenues will cover rental collection overheads.

Based on this model, Tauranga District Libraries has come to an agreement with Tauranga District Council to have 44% of annual revenues transferred to the rental materials budget at the beginning of the following financial year.

The benefits derived from establishing such a relationship with a council funder are numerous.

* as material costs are directly related to revenue then rental collections are able to grow to meet public demand. When this point has been reached growth will stop and library users will have a good choice of recently published materials

* while it can be difficult to convince a council to fund the establishment of a new media collection such as dvds, the high demand mechanism only requires one to demonstrate a new collection's financial viability. The success or failure of a new collection to meet revenue targets will be demonstrated through standard monthly reports

Results to date

The high demand collections established in the Tauranga Libraries in 1998 included high demand fiction, high demand nonfiction, high demand large print, high demand music, high demand magazines, and hot favourites (bestsellers). Most collections exceeded their issue targets within the first year, and overall, the GST inclusive revenue received met revenue predictions. As a result, in its 1999/2000 budget the Tauranga District Libraries was allocated $102,000 to fund the development of the high demand collections, based on 44% of the revenue received from the collections in the previous year.

A further outcome is that waiting lists for books and time delays for reserves have decreased dramatically. The same formula will be used to allocate budget for 2000/2001.

The high demand collections continue to be closely monitored and marketing of the collections is being given high priority--for example, a high demand loyalty scheme provides one free high demand issue for each ten high demand loans. A new high demand video collection has just been launched and initial response is very promising. A cdrom games collection is to be introduced in the near future.

Usage of the collections and revenue returns are continuing to increase, with 15% growth over the past year. A user survey of attitudes to high demand collections indicated that the majority of respondents considered the collections to be value for money.

References

[1] Metropolitan Public Libraries Group (2000) New Zealand metropolitan libraries comparative dart 1998/1999

[2] Brealey, R and Myers, S Principles of corporate finance New York, McGraw-Hill 1991

The authors wish to acknowledge the contribution of Tony Richardson, M-Power Management Dynamics Ltd (tony@mpower.co.nz) to the development of the concepts described in this article

Andrew Peacocke BA DipNZLS MBA is Readers Services and Projects Coordinator at Whangarei District Libraries. In 1998 he was contracted by Tauranga District Libraries to review its adult lending collections. The proposal developed with Jane Nees was implemented in that year. Andrew's professional interests include public library performance indicators, development of collections and creating new service products. Address: Whangarei District Libraries Private Bag 9023 Whangarei New Zealand tel +64 (09)4307206 andrewp@wde.govt.nz

Jane Nees BSc DipLib DipIS has recently been appointed Group Manager: City Information at Tauranga District Council. Prior to this she was Library and Information Services Manager at Tauranga District Libraries. Jane is focused on the development of proactive and innovative library and information services which meet the challenges the rapidly changing operating environment is providing. Address: Tauranga District Council Private Bag 12022 Tauranga New Zealand tel +64 (07)5777259 janen@tauranga-dc.govt.nz

Andrew Peacocke Readers Services and Projects Coordinator Whangarei District Libraries and Jane Nees Group Manager: City Information Tauranga District Council NZ Received July 2000
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Author:Nees, Jane
Publication:Australasian Public Libraries and Information Services
Geographic Code:8NEWZ
Date:Sep 1, 2000
Words:1696
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