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Ensuring the financial viability of your water system is no laughing matter. However, with a little advance preparation you can easily put a smile on your customer's face (and we're not talking about fluoride).

In this article we’ll show you the finer points of establishing your budget, managing your assets, and preparing for the future—all in just three simple steps:
1. Budget Preparation.
2. Revenue and Expense Estimation.
3. Future Guesstimation (a.k.a. Financial Planning).

Before we begin crunching the numbers, take a moment to think about your last visit to the dentist, if you can remember it (and who could forget?).

The experience probably prompted a few grimaces and maybe even a solemn oath to floss every day.

You didn't floss this morning did you? The memory of the dental discomfort faded almost as quickly as your oath. But a few months from now, when your next dental appointment looms, there is little doubt you’re going to start flossing like crazy.

For many rural water systems financial planning receives much the same treatment. While we don't want to come across as sounding like your mother (Did you remember to brush your teeth this morning?) we do care about your system's financial health and hope to be able to help you keep the money flowing smoothly both in and out of your system.

Additional Resources
http://www.epa.gov/safewater/smallsys/pdfs/guide_smallsystems_stratplan.pdf

Meeting Today's Needs While Planning for the Future

A community water system is just like any other business. To be successful it must be managed efficiently. The job of setting the proper course and providing continual direction falls squarely on the shoulders of the water system board.

"While rural water districts and cities are nonprofit entities, they should be operated as a business and as a result they should make a profit," according to the Nonprofit Financial Center's website. "An organization that merely attempts to 'break even' eventually breaks down."

While you wouldn't want your dentist to begin drilling without having consulted your x-rays first, a comprehensive financial plan will serve as a roadmap as you prepare the annual budget.

A solid financial plan should focus on at least a three-year period and identify the following:
1. The current and future needs of the system.
2. The system's staffing needs.
3. The system's strengths and weaknesses and a strategy for correcting the weaknesses (parts of the system that will need repaired or replaced over the next three years).
4. A list of external changes taking place in the community and the state that may affect your water system (growth, new industry, economic down-turns), and a strategy for responding to these changes.
5. A "What if?" emergency plan.
6. Goals, budgeting, timetables, and those responsible for each action.

Additional Resources

www.griffin.peachnet.edu/water/fs98_15.pdf

Paying the Bills

Once you have researched and completed a financial plan, the next step is to assemble your yearly budget. This is the process of estimating income and expenses for a future time period.
While the concept of deficit spending may seem appealing at some levels of government—remember it's always best to plan ahead so that you don't end up drowning in a sea of red ink.

The yearly budget process can be broken into two simple parts (take note: this will be the first and last time we use the term "simple" when describing the budget process, so enjoy it while you can): expenses and revenue.

In order to remain viable, these two parts of the budget need to, at the very least, balance each other out.
The annual expense budget is, in essence, a list of bills that you will have to pay during a given year. It should include adequate funds to pay all:
•Utility Bills
•Necessary Chemicals
•Insurance Premiums
•Debt Service
•Emergencies
•Future Equipment Repairs and Replacements

Remember, it's important to always stick to your budget to avoid spending money that you don't have.

Going, Going, Gone

Once you've determined how much money the system will need to meet its financial obligations, it's time to pick up pen and paper and figure out if your cash flow is enough to meet your expenses.

Most systems have two types of income: operating revenue and nonoperating revenue.
Operating revenue includes:
•The sale of water
•Connection fees
•Late payments, penalties and reconnection fees
•Forfeited meter deposits
Nonoperating revenue includes:
•Interest on checking accounts
•Interest on reserve accounts
•Meter deposits

Since most of the money you need to cover your system's expenses will come from user fees (operating revenue) it is critical to make certain that your rates are reviewed on a regular basis to ensure that a fair and equitable price is being charged for your product.

If not, as a board you will be faced with either increasing rates or finding ways to decrease expenses. Remember, you aren't doing your customers any favors by keeping water rates too low to properly operate the system now and in the future.

Additional Resources

http://msucares.com/pubs/misc/m1027section6.pdf

Benchmarking Your Process

In time, one direction many small water systems will certainly begin to explore is the application of business models to their water systems. In a nutshell, this means that the financial and operational data from your system would be compared to that of other systems and evaluated to ferret out the best business practices.

One successful approach among medium-sized water systems in recent years is QualServe, a voluntary program offered by the American Water Works Association that helps utilities achieve a standard of total quality performance in all areas of their operation.

QualServe, like other available benchmark assessments, involves performance evaluations in multiple areas through self-assessment questionnaires that are completed by employees and an outside peer-review team.

A recent study completed by Southern Illinois University at Carbondale found that while managers of most small water supply systems were not yet familiar with benchmarking techniques, they were enthusiastic about the prospect of receiving the technical and managerial assistance that would accompany the program.

The study also determined that of the 1,000 small systems that were initially contacted, the majority were currently maintaining adequate records to complete an initial benchmark survey.

Additional Resources

www.awwa.org/science/qualserve