The Seven Steps to Utility Money Management (part 2)
Is $30,000 cheap?
The system we built over the last one hundred years has dropped the cost of energy to virtually nothing. Yet the ease of consumption has only increased our total consumption. Not all of that consumption produces economic value. The EPA estimates that 30% of the energy consumed by the commercial sector is wasted. In the Pacific Northwest, the average electricity rate is half the national average. So if a business spends $100,000 per year in electricity, they are wasting approximately $30,000 per year.
Every business owner can think of many ways to invest an additional $30,000. But saving energy is actually the wrong approach. It is energy one doesn’t need to consume in the first place. It’s impossible to ‘save’ what one doesn’t need. It’s like buying more flour than one needs to make bread. A baker doesn’t save money by the simple act of buying the right amount of flour.
When we apply this framework to energy, we need to ask the question “can I function normally and consume less energy?” For instance, does one’s company function normally after replacing all incandescent bulbs with LEDs? Does an automated HVAC control system, affect productivity? Would weatherizing windows affect your business practices? In each case, the company will function as normal. Yet each energy savings measure could substantially reduce the electric bill. From an energy perspective, one saved energy. From a financial perspective, one reduced waste.
The common approach: Energy management to save money
The common approach to energy management is to purchase more energy efficient equipment. This takes up-front capital. Solution providers quantify the return-on-investment (ROI) of upgrades to make the project attractive. Some projects can have ROIs and paybacks of a few months to a few years. These are great income statement arguments.
A frequent challenge is overcoming this first-cost barrier of financing a retrofit. Many new financial innovations have focused on lowering that first-cost barrier. Solutions such as energy performance service contracts, on-bill financing, and property assessed clean energy (PACE) financing can eliminate the installation costs in lieu of payments out of future savings. These are great on-balance sheet and/or off-balance sheet approaches.
A needed tool: Money management to reduce energy
Given that money and energy are tied, it is possible to reduce energy through disciplined management of money. Consuming electricity is equivalent to the utility cash flow; it can be used as a tangible proxy for energy consumed. Through utility money management, a company can use a full suite of accounting tools to manage energy. The operational utility costs are monitored via the profit & loss statements. Capital costs affect the balance sheet. Month-to-month consumption can be monitored via the cash flow statement.
A company can then apply well-understood and accepted financial practices to utility cash flow in order to manage energy. A holistically managed cash flow can lower overall operating costs. It includes both operational and capital expenses that support the bottom line.
A cash-flow based energy management solution fills a needed gap that connects waste with investments. Waste negatively affects a company’s cash flow all the time. Retrofits and improvements have a long term positive effect but may need an upfront expenditure. In the ideal world, a company would shift their wasted expenditures into investments. However, business-as-usual does not accomplish this task. Through disciplined control of cash flow, one can apply financial tools to identify and reduce waste.
Seven principles for fiscal discipline in utility money management
The goal is to use money management to help control for energy consumption. A strategically managed budget is able to help you manage the cost as well as grow your business. Below are the seven principles when designing a utility money management program.
1) It must be have a plan that focuses on your business goals.
Companies purchase equipment to generate revenue. Equipment also consumes energy, an ongoing fixed cost. These expenses need to reinforce business goals. A plan gives companies a clear roadmap of how continuous improvement in the business can lead to reduced utility costs.
2) The plan must be multi-year long
Some energy needs are short-term, such as higher heating bills in the winter and higher air conditioning bills in the summer. Other energy needs are long term, such as retrofitting LEDs or HVAC systems. Multi-year plans are more effective because they are able to mitigate both short-term risks while achieving long-term goals.
3) It must be responsive and flexible to change
As the saying goes, no plan survives contact with reality. We know that business plans will change over time. As needs evolve, the money management system also needs to be flexible to change. Although the goal usually stays the same, the pathway to get there needs to be continuously updated.
4) It must be interdepartmental and organization-wide
Energy and utilities are consumed by every department in an organization. The plan must incorporate all stakeholders, from finance to operations to marketing and communications. The plan and strategies must be comprehensive and capture all costs associated with utilities.
5) It must be a separate line item in your budget
The most important metrics for success are financial. Having a separate line item in your budget and cash flow statements makes it transparent to manage these metrics. Regular financial reporting helps departments have a common language to communicate their progress towards goals.
6) It must incorporate all costs – both operational and capital.
Utility costs are more than just one’s bills. Maintenance costs, capital set-aside funds and planning/engineering costs should be included as well. Managing all costs in a holistic manner helps minimize the total budget while giving flexibility to respond to emergencies.
7) It must have a single-point of responsibility within the organization
Execution is most effective when there is a single-point of responsibility. The plan needs to identify the individual or team that will be responsible for setting goals and monitoring the metrics. The team needs to made energy investment decisions, communicate with the organization, and report to a company’s financial directors.
The Utility Money Management Solution
Here at Distributed Energy Management, we have taken these seven principles to heart. We have created an automated solution that helps commercial clients maintain a disciplined and robust money management program for their utilities. At its core is a financial platform housed at Kitsap Bank that manages the cash flow related to utilities. This consolidates bills, energy services, etc. that a building already consumes. It adds to that a capital set-aside that helps anticipate future needs and cushion unexpected emergencies. All transactions are automated in order to reduce error and improve accuracy. In essence you are become proactive managers instead of retroactive consumers – we put you in control.
Through our program, we help clients reduce waste. The difference: saving money is opportunistic and reactive. Reducing waste is proactive and strategic. We help businesses determine what they should expect to spend on their normal business activities. We work with clients to tailor their energy expenses to their strategic goals. We implement a fiscally responsible program that reduces waste. We increase transparency between CFOs, accounting, operations and other departments to make decisions that benefit the entire organization. In essence, we are a partner that makes a client’s team more productive.
Benefiting from utility money management
A company should see some immediate benefits after implementing a utility money management program. Responsibilities that are traditionally diffused throughout an organization are now centralized with clear metrics and transparent activity. This consolidation of activity enables control over future decisions. Companies are now able to take advantage of several additional benefits.
Leveraging outside funds – One immediate advantage is being able to leverage utility incentives to maximize one’s own money. Many utilities will pay up to 70% of qualified energy efficiency projects. Financial entities have special interest rates for qualified ‘green’ loans. Companies that already have a capital set-aside fund find it easier to attract lenders and incentive programs.
Reducing errors through automation – Many tasks surrounding utility management is transactional in nature – whether it is paying of bills or filling out efficiency loan forms. Automation of these tasks saves time and the reporting easier. More importantly, automation reduces human errors. In one case, a company estimated that it took over 8-hours to gather a year’s worth of utility bills. Because of this barrier, the client never had visibility into their actual costs. A manager can be focused on setting strategy and goals instead of spending their time on data gathering and entry.
Improved relationships and communication – Clear financial metrics gives visibility and coordination for entire organizations to make decisions. For some that own their own buildings, these metrics allows different departments to set priorities. For organizations that have tenant / manager / owner leasing relationships, this improves relationships and gives clarity to expectations amongst the stakeholders. In all situations, information transparency helps to improve relationships.
Focus staff time on core business needs – Well-run companies want their staff focused on their core businesses. Support roles, such as interfacing with utilities, equipment vendors and a myriad of players in the energy field, becomes an added cost and distraction. By centralizing all non-core activities, one reduces overhead costs. One company found that consolidating non-core activities freed up scarce hours of their busy managerial staff.
Enable future growth – A robust utility money management program helps companies plan for future growth. Companies find it easy to incorporate additional energy expenditures of expansions and increased revenue. In one case, a company was preparing for a major retrofit in two years. They had no plan for how to do the retrofit – just that they needed one. After implementing a utility money management program, they began to systematically plan for all of their needed improvements and found a way to tie in both incremental changes and major renovations into a cohesive strategy.
Achieving fiscal discipline
At the end of the day, there are only two metrics of importance – top line revenue growth or bottom line profitability. A robust utility management system helps companies manage both. It helps achieve top line revenue growth by freeing up staff to perform core business tasks instead of utility support functions. It helps achieve bottom line profitability by reducing costs and freeing up valuable resources. Some companies have been able to achieve both.
One client, a restaurant owner, created a utility money management program to help manage his cash flow. With the transparency Total Utility Budgeting provides, the owner is now motivated to manage energy as a valued resource and has information to better run his business. The result: within twelve months the client achieved a 31% reduction in electricity bills while growing revenues near 30% at the same time. As the owner said, “Good business decisions are ones that reduce costs and increase sales in the long run. As long as I am trying to improve my business, there will always be opportunities to reduce energy costs.”
In conclusion, a fiscally disciplined approach to utility money management can achieve cost savings and energy savings. Energy can be made tangible by centralizing all utility costs and functions under a budgetary line item. It can be achieved organization-wide and must be focused on a company’s business goals. It can increase productivity of staff by removing unnecessary work. A well designed program can both achieve cost savings and productivity improvements.