Budgeting is hard work
There have been many years in my apartment-industry career where budget season has dragged out for month after month, pushing all other duties to the side to satisfy an all-consuming need to continue to review and refine the budget. There are so many moving pieces that drive utility costs: unusual weather in the past (altering your baselines), unknown weather in the future (will this year bring another polar vortex or a late season hurricane to the Gulf?), pipeline throughput capacity causing potential supply shortages (especially in New England), negotiable rates in deregulated areas (but should they be locked or floating with the market?), tiered rates in regulated markets that now increasingly come with heavy financial impact for failure to conserve in drought stricken areas, other rate increases that are hard to keep up with, leaks, and capital improvement projects—just to name a few.
Stages of the process
Let’s start with first things first. From my experience, I’ve learned there are at least three essential stages of the budgeting process: inputs, creation, and explaining. Lets consider what I believe are some best practices for budget inputs, an overview of budget creation, lament the challenges of budget explaining, and dream together about how to overcome the challenges.
Inputs to your utility budget
When it comes to inputs for utilities, it makes sense to break things down into the categories that drive your cost:
- Baseline Dollars
- Rate Change
- Usage Adjustments
Baseline dollars are often your prior year actuals. One challenge to this is that normally when budget season is upon us, Q4 actuals aren’t available for the current year (because Q4 hasn’t happened yet!) Sometimes this causes a default back to the prior year actuals, but logically this implies a 2-year gap between the baseline and next year’s Q4 budget. Some companies use a recent Q4 forecast, while others stick with the 2-year gap and the prior year actuals. Whatever you choose, best practices include being consistent and providing clear documentation/disclosure to all stakeholders.
Budget creation: some assembly required
Next, you need to gather your carefully curated inputs and mix them together to create a final product: the dollars that you believe each property will need to spend next year. This mash up involves carefully written calculations. Most of the time, this involves several lookup formulas and some multiplication in a spreadsheet. Then checking your projected amounts against a baseline (often current year actuals) and explaining any major differences. Once the numbers have been checked, re-checked, and triple checked, they are loaded into an enterprise financial planning tool. After much scrutiny across several departments in your organization that includes some questions and rework, the budget is eventually set in stone.
Variances: “Lucy, you got some explaining to do!”
Throughout the coming year, anytime there is a major variance between the actual expense and what you budgeted, somebody wants answers. And they want them fast! Depending on your position and size of your organization, it may be your boss or even CFO—asking you to explain the unexplainable. Truth be told, it isn’t really unexplainable, but it is pretty complex. Remember all those moving pieces that can drive utility expenses that I mentioned earlier? You’ll need to figure out which one of ten root causes is driving the variances of multiple properties—sometime in the next 20 minutes.
Challenges looking for a solution
I have been thinking about some of the challenges mentioned above for years. And it occurred to me at some point that most of this is just math. If you include a rate component in your budget, wouldn’t it be nice if you had a report to show you when the actual rate on the bill has significantly changed? Not only would this explain the variance for the current month or quarter, but may also lead you to reforecasting the remaining year based on the new rate. Unusually hot or cold weather? It can be captured via what weather professionals call a “degree day” which is measured locally and can be linked with nearby a zip code (which most properties seem to have) and then correlated with each utility account’s response to weather (for example, turns out cold weather doesn’t significantly drive up lighting demand). Sure, some of it is fairly complicated math that involves multi-variate linear regression and 3-dimensional geo-coding, but it is still math. Well-designed computer software can sift through the data, isolating the signal from all the noise. Variances that appear related to unexpected rates or weather can then be identified automagically, saving loads of research time. But what about a usage spike that doesn’t appear correlated with weather? If your utility management company already has a database of previously researched utility alerts that had triggered based on usage spikes (as we do), then those could be linked and explained easily as well.
The gold standard
Wouldn’t it be nice to have an easy button that tied together all these various components? Each month would go smoother with a suite of integrated tools and research services at your fingertips. My team has built this, and I suspect others providers will follow. But the heart of this suite of services rests on the diligence and detail provided by the utility alert research, what we call Alert Management. It is critical to ensure that your service provider has a disciplined, proactive, and detailed process to research anomalies and document the findings.