Budgeting for an expense that can behave erratically from month to month can be a challenge. Between creating the original energy budget, adjusting to successes and failures of the past year and working within your established budget over the course of the year, there are numerous factors to understand and control. Those responsible for energy budgeting often operate under common misconceptions that can undermine the development and tracking of a thorough and accurate budget. Living with your energy budget is hard work, but it is a manageable process. The energy budgeting best practices described within this white paper will help keep surprises, or variances, to a minimum.
Common Energy Budget Misconceptions
Budgets can be easily set based on the accounts payable costs from prior year.
Adding a single percentage factor to accounts payable costs as you develop next year’s budget won’t get you far when budgeting for energy. To do that is to make assumptions about your General Ledger (GL) that probably aren’t accurate.
- Your GL may not be as clean as you’d expect. There may be transactions you expect to be hitting the GL that haven’t, or you might receive a large credit over the course of the year that will impact your budget.
- Your GL is likely to include accruals. Depending on how those have been calculated, you may or may not want to include them in a different year’s budget going forward.
- A portfolio-wide escalation factor for energy rates will likely result in variances at the state level. If you need to report against state-level budgets, a portfolio-wide factor will not be sufficient.
Energy can be accounted for like any other expense.
Unlike other operating expenses, there are many variables and a lot of fluctuation in the world of energy and energy providers.
- The length of energy billing cycles can vary by month and can be drastically different depending on the utility in question. Some water companies, for instance, bill every three months.
- Bills received in a given month largely reflect usage from the prior month. Do not align your energy budget with the amount billed each month in the preceding year because your data would be about a month off.
- You must consider accruals in your budget. Decide how you will calculate and incorporate them into budget planning for the coming year.
Variances can be reported and analyzed in terms of dollars only.
In truth, cost provides little insight into what’s driving the actual variance from month-to-month and year-to-year.
- As you build your budget, keep track of unit cost and consumption. This will allow you to analyze how you’re doing from these more specific standpoints as you compare your performance against your budget and provide better insight into the source of the variance.
- When reporting variances, break the explanation into primary cost drivers such as unit cost, which is affected by market swings and rate changes, as well as usage at the site level and unusual billing, which leads to unusual accruals and budget variance.
- Reporting variances is about more than dollars. It’s also about looking at it in terms of different levels. How is my entire portfolio doing in terms of cost drivers? How are things unfolding with energy spend compared to what I planned for? How are individual sites and regions performing?
- Reporting variance analysis is made easier when you track unit price and usage in addition to cost. You will be able to better explain how your business is performing against the budget, where any problems lie and how they can best be resolved.
Energy Budgeting Best Practices
We cover recommended approaches for all of the above misconceptions in this complimentary energy budgeting best practices whitepaper. Download your copy today to help you live with your utility budget.