The Importance of Budgeting for Utilities

By Tom Michalak, CPA

Many utilities do not have a formal budgeting program, because utility budgeting is not generally required. But a sound utility budgeting process offers many benefits.

Why take the time to budget? In a big-picture sense, the structure of a budget increases management's accountability for the performance of the utility. Further, establishing a sound budgeting program will help you manage five mission-critical areas:

Daily Operations – A budget provides a context when comparing actual spending for daily operations to expected results, which is essential for evaluating the efficiency and effectiveness of utility processes and management practices.

Debt Service Payments – A budget helps everyone be aware of debt service payments and the structure of outstanding debt. This is particularly important because debt service payments are a material recurring charge for many utilities.

Capital Planning – A budget allows you to address the difficult question of exactly how much money will be available for expansion and rehabilitation. By scheduling projects for a period with available funds, a thoughtful capital plan can limit the need for additional debt or increases in rates and charges. Additionally, capital planning gives you the ability to prioritize appropriately when there simply is not enough money available to fund all the identified projects.

Customer Growth – A budget helps management understand growth trends over time. New customers can result in incremental increases in operating costs and capital requirements, or perhaps extend the useful life of the rates and charges.

Cash and Investment Activities – A sound budget leads to an understanding of minimum cash requirements as stated in bond covenants and ordinances. Also, a budget ensures that sufficient funds are available for needed periodic maintenance. A utility should have the ability to reserve enough cash each year to fund key periodic maintenance when it is due, resulting in longer-lasting capital assets. By identifying required reserves and cash flow requirements, the budgeting process can also enhance your ability to more effectively invest funds. With a need to consider miscellaneous revenue sources, the ability to maximize interest earnings is important.