Managing Your Utility Finances
One of the biggest problems most utility managers face today is increasing costs and decreasing revenues. As a manager in the utility industry, you have likely struggled to find ways to improve your utility finances. In the past, utility managers have relied heavily on bill pricing to manage their finances. However, changes in the way people use their utilities have caused dramatic changes in the billing patterns and revenues coming in. Utility managers are now faced with two choices: reduce costs and increase revenues or keep their budgets the same but try to find more money for expenses.
The first choice to reduce costs
is to reduce costs by increasing service rates, reworking contracts with customers to avoid late fees, adjusting metering, or other efforts to increase costs effectively. Some utility managers can achieve this by streamlining operations, reducing costs through technology investments, or changing workforce composition. These measures may not increase revenues. If revenues do increase a utility’s expenses ratio (ER) can go up resulting in a net loss in its utility finances.
Managing your utilities so that your costs stay low
but your revenues growth is a challenge facing many utility managers. One of the tools utility management professionals have used to reduce their expenses and increase their revenues is financial statements and analysis. When you prepare your financial statements, you need to include a revenue ratio, which is the comparison of sales revenue to expenses. To understand the relationship between these ratios and your utility finances you need to understand how a revenue ratio measures the cost rather than the amount of money spent.
All utility finances are equal
or in a sense, they should be, but some costs are recurring and other costs are specific. A well-managed utility will consist of fixed assets that represent the value of the benefits of ownership, operating costs, generating revenues, and the actual value of the property. Variable costs are those associated with the supply of a service, demand, economy, competition, and other external factors.
Utility managers consider the efficiency
with which they service their customers before making any changes in their utility finances. They also consider what the economic conditions are doing and if it is likely to change. Usually, it’s more difficult to predict changes in economic conditions, but management professionals may use real estate or personal financial information to make better decisions in their utility budgets. Utility managers also consider the relationships between the actual consumption of electricity and the growth in the income and assets of their system.
Utility managers often face challenges
when there are many aging customers, inadequate infrastructure, and shrinking profit margins. Many utility companies have implemented strategies to reduce their risk exposure. For example, utility companies are bundling services and billing customers at the same time for services rendered. These services are usually made by the largest companies in the industry and so they have the ability to pass on some of the cost savings to consumers.