Every water system needs a budget, no matter how small your system is. An annual operating budget is a 12-month financial plan. The operating budget coincides with the fiscal year of your system and is simply a one-year forecast of your utility’s expected revenues and expenses.
We normally think of budgets as an everyday tool of bookkeepers and accountants, but it’s also an important tool for your system’s board members or leaders, those who make the bigger decisions about the utility. Most decisions have something to do with money, and the budget helps decision-makers keep adequate control of the finances and provides adequate funding to the highest-priority areas of system. The operating budget may be a stand-alone document, but it should be compatible with your utility’s long-range financial plans (planned-repair and -replacement budgets or a major capital-improvement budget, which aren’t covered here).
Preparing a budget
You should begin the process of preparing the annual operating budget well in advance of the start of each new fiscal year. Ideally, the governing body should adopt the final annual operating budget no later than 30 days prior to the start of the new fiscal year.
Your utility’s financial records are critical for creating a budget. The utility’s management should take into consideration:
- previous expenses from the past 2 to 3 fiscal years
- current debt-service requirements
- any unplanned “emergency” expenses that occurred within the past several years
- revenues from customer billings and other sources of income for the past several years
- required “reserve” levels necessary for the coming year
In addition to previous years’ revenue and expense records for the utility, consideration must be given to anticipated changes to those revenues/expenses during the coming year, including:
- anticipated changes in operating expenses, such as wage/salary increases, new hires, changes in costs of materials, supplies, transportation, electricity, and other utilities, as well as adjustments for inflation
- changes in debt-service expenses, including anticipated new debt
- changes in revenues due to expected rate and fee adjustments, growth or decline in the customer base, etc.
- expected transfers to/from financial reserves
Your annual operating budget should have budget categories that match the revenues and expenses in your utility’s chart of accounts.
When your final budget plan has been completed, a projected cash-flow statement should be prepared to verify that monies will be available when needed.
Finally, your annual budget needs to be balanced. A balanced budget is a budget in which anticipated expenses do not exceed anticipated revenues. If expenses for operations, debt service and transfers to reserves exceed your revenue, it is time to look at a rate adjustment.