As the pandemic slowed the world down in the spring of 2020, the next five years was not at the forefront of most people's attention, particularly those of us working in government. Instead, our priority was on responding to the immediate service needs of our customers or constituents.
For City Utilities of Springfield (Mo.), a municipal utility providing electricity, natural gas, water, transit, and broadband to more than 111,000 customers over 320 square miles, our major focus was on how we could continue to provide these essential services to our customers while protecting our employees and the community. However, as our annual budget process started, local stay-at-home orders began being issued and we had to transition many employees to work-from-home situations, casting a shroud of uncertainty on our plans.
However, in this uncertain time, governments and governmental agencies must continue to look ahead and prepare a budget. For many governments, the planning process may fulfill a legal requirement to produce a fiscal-year budget, but effective planning should be about more than just meeting this obligation. An effective planning process is a key element of sound financial management and can help an organization become more resilient.
Throughout our planning process, KPIs are a major focus as we project our revenue budget and determine how to approach what spending we could responsibly include in the next year.
Developing the right KPIs and a strong planning process during a "normal" season can further prepare your organization or government entity to continue that planning when the assumptions do not align with the environment that your organization suddenly encounters. Viewing the budget development as more than just a requirement but also as a way to forecast the output indicators that are most important for your organization will strengthen your organization's resilience.
APPLYING AN AGILE MINDSET
Unsure of the impact the pandemic would have on our organization, I consulted frequently with our CFO, my boss, and we chose to continue with our normal planning process. We decided that the process might need to be altered, but it would not be prudent, or statutorily allowable, to delay.
There was also concern over what assumptions to use. Like the rest of the world, we did not know what to expect for future revenues or other impacts. Applying an agile mindset helped us adapt to change and modify our processes. Forecasting staff would provide estimates to some managers to help them reduce the time commitment of participating in the budget process, when managing in the pandemic demanded their primary attention.
But we chose to continue with development of our five-year operating plan, which requires developing planned revenues and expenditures for the next five years. During this time, we paused cutoffs for nonpayment of our service. This would lead to an increase in accounts receivable, but there was no historical period to benchmark and there was uncertainty about the future for our customers.
Planning and the conversations it created were going to be critical to ensuring that we had the proper level of resilience and were prepared to provide important services to our customers throughout this period.
We concentrate on two types of KPIs throughout our planning process. The first are input KPIs, which are used to create assumptions that impact our revenue projections. Some examples of these are customer growth and changes in customer usage. We must first determine these types of assumptions due to their significant impact on the next decisions in the planning process. This led to identifying data that needs to be collected and tracked so that we can forecast these metrics. For example, we began reporting accounts receivable based on types of customers. This would have a direct impact on fund balances.
We monitor these KPIs from a historical basis, but that does not necessarily reflect the future impact. During the early days of the pandemic, these were especially difficult to project. How would it change? Not wanting to just guess at the impact, we chose to follow our proven method of using historical data and trends to guide these projections. We would continue to watch these actual results to determine if additional adjustments should be made.
The second type of KPIs that we use are output indicators. These are impacted directly by the input KPIs and are integral to determining our financial results and the future success and well-being of the organization. We drilled down on projected fund balances, accounts receivables, or inventory levels throughout the planning process. We needed to be realistic with the input KPIs, but the output indicators were the focus. It was important for us to know how certain decisions and inputs would affect the plan. We have target ranges for many of our output indicators. For example, we translate our working capital level to days of cash, based on our average daily spend. This allows us to better communicate to our board and management the level of cash available on a comparable basis.
CHECKING THE KPIs
As we entered late spring, it was important to monitor our input KPIs monthly to determine how our projections compared with the actual results we were experiencing. This was critical to affirm or modify our input KPIs. Analyzing these results to a much greater level and frequency allowed us to confirm that our input KPIs were reasonable for the future planning period.
With many of our outputs, we focused on planning for a higher range than normal. This forced us to reduce some of our spending projections but allowed us to build some flexibility into our output projections, based on the uncertain input KPIs. In our five-year plan, we deferred some electric equipment purchases and installations. This was directed toward items that could be delayed a year or two without raising a significant risk to the system. These could be funded if conditions improved and our KPIs showed our results being better than expected, or additional funding was realized.
Reforecasting the KPIs does not require rebudgeting every line, but it is important to identify the key drivers behind these KPIs. As we progressed through the summer, it was important that we reforecast, even if informally, to give our management a greater view of where we expected certain KPIs, such as fund balances or working capital, to end the year.
This helped us to make key decisions through the end of the fiscal year that would better prepare us for the next year. With travel essentially on hold, we could better focus our travel and training budgets. This gave us the ability to use some of those dollars on providing additional training through virtual means and also allowed us to reallocate a portion of the travel budget to an unanticipated increase in costs in another area that had not been fully funded previously.
A successful planning process never really ends. For City Utilities, as in other areas for all government entities, the planning process has specific time frames where project managers are more involved in submitting and justifying their budget requests. We began looking at changes for next year following the completion of the budget process. Instead of requiring managers to make process adjustments, moving forward, forecasting staff can now make efficiency improvements.
Throughout the year, we have check-ins to determine if other needs have arisen that require a shifting of budget priorities. We have also implemented open-book management in operating areas. This has increased fluency with the drivers to the financials and has increased the engagement associated with ensuring that we have a strong planning culture throughout the organization.
About the author
Jeffrey Parkison, CPA, CGMA, is the director of Forecasting and Power Marketing at City Utilities of Springfield (Mo.) and the chair of the AICPA Government Performance and Accountability Committee.
To comment on this article or to suggest an idea for another article, contact Drew Adamek, a JofA senior editor, at Andrew.Adamek@aicpa-cima.com.
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- "Forecasting and Impairment Tips for an Unprecedented Time," JofA, Dec. 21, 2020
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