If you’re like millions of Americans, you may have set a New Year’s resolution to get fit and lose that “extra 20 pounds.” But have you set a resolution for your water utility?
How fit is your utility, really? Is it financially healthy—or could it stand to put on a few “extra pounds” of reserves?
Most of us have a rough idea of our personal BMI (Body Mass Index). But do you know your utility’s fiscal equivalents—and how to calculate them? If not, read on. You may discover that your utility needs to add some “fiscal reserve weight” this year. If so, consider making that your utility’s New Year’s resolution.
Early Warning Signs of Poor Fiscal Health
- Significant transfers into and out of the main operating account
- Steadily increasing debt
- Declining cash reserves
- Poor customer collections
- Static rates and fees over long periods
Step 1: Stretching and Warm-Up — Data Collection
To calculate these figures, you’ll first need to collect some data. You’ll need:
- Total unrestricted cash and investments
- Daily operating expenses (excluding depreciation and amortization)
- Operating revenues
- Operating expenses
Step 2: Fiscal BMI Ratio #1 — Days Cash on Hand
Unrestricted Cash and Investments ÷ Daily Operating Expenses
Anything less than three to six months places your utility in the danger zone.
Step 3: Fiscal BMI Ratio #2 — Operating Ratio
Operating Revenues ÷ Operating Expenses
This ratio should be greater than 1.0.
A Resolution Worth Keeping
Good luck with your personal New Year’s resolution—and don’t forget about your utility’s.