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Utility Financial Management

Utility Financial Management. AWWA Intermountain Section Leadership Forum Session Two November 12, 2013. BUDGET PROCESS. Outline . Who is Involved in Budget Preparation Main Components to a Budget Strategic Plan (Master Plan) Annual Operating Budget Annual Capital Budget

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Utility Financial Management

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  1. Utility Financial Management AWWAIntermountain SectionLeadership Forum Session Two November 12, 2013

  2. BUDGET PROCESS

  3. Outline • Who is Involved in Budget Preparation • Main Components to a Budget • Strategic Plan (Master Plan) • Annual Operating Budget • Annual Capital Budget • Approaches to Budget Preparation • Example of Budget Steps / Budget Process

  4. Who Are the Players • City Council/Board of Trustees • Managers • Accounting • Department Heads • Employee input as appropriate

  5. Strategic Plan • Strategic Plan Video

  6. Strategic Plan • Strategic plan is critical to budget process • Defines long-range goals and objectives • Starts and evolves around utility mission • Provides parameters for short range goals • Takes into account other partner entities • Top management identifies, implements, and monitors long range goals in plan

  7. Strategic Plan • Importance of Effective Strategic Plan • Dilbert – “Do you prefer that I spend my day planning which doesn’t look like work or should I plunge in to my work with aggressive randomness?”

  8. Strategic Plan

  9. Strategic Plan • A strategic plan provides the framework to prepare: • Annual Operating Budget • Annual Capital Budget

  10. Operating Versus Capital • Operating Budget • Day to Day Revenues & Expenses • Payroll, Supplies, Legal & Professional • Capital Budget • Anticipated Useful Life of More Than 1 Year • Significant Value (Determined by Policy) • Equipment, Vehicles, Land Acquisition, Infrastructure Projects

  11. Annual Operating Budget • Refinement & expansion of the strategic plan in the short term • Internal financial plan for a one-year period • Identifies operating requirements for that one-year period • Serves multiple purposes • Aids in making short range plans • Mechanism to achieve goals • Answers “Spend how much for what?”

  12. Capital Budget Expansion of the strategic plan Implementation of specific and prioritized projects Move organization towards its goals Schedule of large expenditures / projects Planned several years in advance May involve additional public hearings, review meetings

  13. Operating Budget Operating Budget: • Revenue • Expenses

  14. Revenue • First step in budget process • Can be influenced by external factors • Political - Considerable impact through rates • Physical - Weather • Other factors • Business cycles • Economic conditions • New development • Conservation

  15. Revenue • Operating Revenue (Normal Course of Business): • Water Sales • Basic service fees • Engineering review and inspection fees • Misc. fees: • Penalties, reconnection fees, sign-up fees, other income, etc.

  16. Non-Operating Revenue • Non-Operating Revenue: • Property taxes • Interest income • Impact fees (be careful here) • Grant Proceeds

  17. Operating Expenses • Second step in budget process • Expenses Include: • Payroll, Payroll Taxes, EE Benefits • Water purchases, production, treatment • Utilities • Maintenance, materials, supplies • Contract / professional services • Training, travel • Legal & accounting fees • Vehicle repair and maintenance, etc.

  18. Non-Operating Expenses • Debt service • Other

  19. Capital Budget • Break down into departments • Usually larger items requested by department heads • Items over a specified amount include: • Projects identified in strategic (master) plan • Line replacement • New reservoir • Meter replacement, reading hardware • Equipment, vehicle purchases • Computer hardware, software

  20. Approach to Budget Preparation Two processes: Top down or bottom up • Top Down: • Top Management decides the level of expenses • Divides them among department as needed • Budget developers follow management directives • Can be unrealistic, does not incorporate input of those who implement it

  21. Approach to Budget Preparation • Bottom up: • Department heads submit estimated expenses with justification • Budgets are reviewed to eliminate unnecessary spending and spending that can be delayed (let departments know) • Helps ensure spending is well-managed and not wasteful • Pushes decision making process down through organization freeing senior management resources • Department heads can measure own performance and take corrective action as required • Can lead to over budgeting causing issues in overall budget

  22. Approach to Budget Preparation • Can use a combination of both • Department heads submit expenses • Top management decides level of expenses based on department estimations and historical information, such as past actuals and YTD projections • Budget is developed based on the above steps • Department budgets are managed by department heads

  23. Budget Steps / Process • Provide Historical Information & Budget Sheets to Managers (Early August) • Manager’s Budget Requests Due (Early September) • Preliminary (September) • Tentative (October) • Proposed (November) • Public Input • Rate Hearing • Final (December)

  24. Preliminary Budget • Incorporate department estimates into operating budget and capital budget • Review 2-3 years actuals, YTD actuals, and projected • Estimate revenue, expenses and capital • Prepare preliminary budget for council/board review (not required by law but is a good tool) • If recommending rate increase, inform council/board

  25. Tentative Budget • Make adjustments to preliminary budget based on council/board input (show adjustments) • Update YTD numbers • Update revenues, expenses, and capital budget • Prepare tentative budget, present for adoption • After adoption • Set a public hearing date for approval of budget • Set a public hearing date for rate & tax increase (if applicable) • Advertise budget hearing & increases in newspaper • Post hearing information on public notice website • Display tentative budget for seven days before budget hearing date

  26. Proposed Budget • Make adjustments to tentative budget based on council/board input • Update revenues and expenses (same as tentative process) • Prepare proposed budget • Present at budget hearing

  27. Proposed Budget Presentation • Summarize operating, non-operating revenue and expenses • Include capital expenses • Determine budget surplus or deficit • If deficit, present how will it be covered • Rates (advertise and hold public hearing) • Property Taxes (Truth in taxation process) • Reserves

  28. Proposed Budget Presentation • From rate increase and/or property taxes: • Present proposed increases • Present amount of revenue derived from increases • From reserves: • Acts as a storage reservoir • Part of an overall long-term financial plan (strategic plan) • Specific goals should be established • Emergency fund • Debt service fund • Anticipated capital project funds • Operating reserves based on xxx days (determined by management in strategic plan) • Replace what is taken • Cities have different reserves requirements and constraints

  29. Final Approval • Board meeting following proposed budget • Can have hearing before final approval if needed • Take public comments into consideration • Board/council approve budget • Send adopted budget to state auditor • Video - Objective

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