We’re operating in uncertain times that test utility financial operations. The playbook of best practices on which utility finance departments historically rely may not have all the answers. In fact, best practices are invented daily as we wade deeper into the current environment.
Below are some of the questions about utility financial best practices Baker Tilly has received and provided insight on to clients. As additional topics arise that will benefit utility companies, this article will be updated.
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Many small and medium-sized utilities have “significant” customers (i.e., contribute more than 10 percent of utility sales). Staying close to significant customers is important, especially when government-required shutdowns and declining sales are affecting these customers’ operations
While the utility will work with the customer to maintain service if they face a cash flow squeeze, it may be prudent for the utility to consider adjusting its allowance for doubtful accounts to reflect current events. Many utilities only review this calculation annually. However with the rapidly changing and unpredictably situations around COVID-19, a monthly look may be more appropriate. It may be better to adjust this regularly rather than record any large write-downs at year-end.
We all have empathy for customers who are financially struggling. Your utility will work with customers unable to pay by using customer assistance programs or longer-term payment plans. From a utility financial perspective, it may be appropriate to conduct a monthly review on the allowance for doubtful accounts and increase it for potential defaults in customer payments.
For projects placed on indefinite hold, it seems appropriate most overhead charges should stop until the projects restart. An applicable overhead that should still be applied is the “allowance for funds used during construction” (AFUDC), as the utility has capital tied up in each project.
The question then arises, “What do we do with the overheads that are now NOT being allocated?” Here are two potential treatments:
Many metrics can be used to manage your utility. KPIs can be leading or lagging indicators. In this fast-changing environment, leading indicators can be more helpful in managing the utility’s financial direction.
Some leading KPIs that can be useful in determining the direction of revenues or source/uses of cash include:
Update these and other KPIs at least monthly. In the case of forecasted days cash on hand, a weekly update will be more useful in spotting positive or negative trends.