Mr. Poad

Eco-Friendly Practices

Accounting for Accruals and Variance when Budgeting for Energy

By Jim Poad, Director of Client Solutions, Advantage IQ

It’s the time of the year when hoteliers need to look into budgeting for their new year energy expenses. A well thought-out strategy on the front end will take a few weeks to develop and can save a lot of explaining of operating expenses throughout the year. The cost of electricity, gas, and water can be among the most volatile costs affecting your financial situation. Hoteliers need to ask themselves what percentage of their annual budget is exposed to price fluctuation in energy markets and begin to prepare their budget. The goal is to have a comprehensive, defendable and accountable budget.

Comprehensive

The first step in creating a budget is to be prepared. A good place to start is with your utility bills from the prior year, if not further back. These bills will paint a picture of what your organization looked like last year, what you could expect this year, and how you can affect change. If you don’t have utility bills on file, historical invoices may be available from your utilities. You will be most successful if you have a clearly-defined baseline to build from.

From a portfolio perspective, it is critical to understand what changes may be made to sites that could impact reporting. Ensure that you are familiar with current operating procedures and recent capital or infrastructure investments that could affect energy consumption. Can you account for demand and supply side changes? Additionally, are you aware of any discussions around future changes or investments? If approved, when might they be implemented? Knowing the strategic plans for the business can help determine the final data set that you can begin working from.

Defendable

Be realistic and document all of your assumptions. Your ability to identify and separate key usage and cost drivers will serve you well. Having the assumptions to reference later in the year will be vital in explaining unexpected variances that take place.

One of the main drivers of cost inflation is utility rate increases. Utilities apply for, and execute rates at different times throughout the year. Understanding what the utilities are forecasting can prevent large swings at the site budget level. Using a portfolio-wide escalation factor for energy rates will likely result in variances at the site level, as rates in California fluctuate differently than rates in downtown New York. If you need to report against site-level budgets, a portfolio-wide factor will not be sufficient. Use market intelligence to plan for unit price changes at the utility or regional level for more accurate site-by-site budgeting.

Nothing impacts a hotel’s usage more than changes in occupancy, yet many hoteliers do not factor this information into their budgets. Understanding how occupancy can impact usage for utility expenses not only supports the development of a strong budget, but also allows for better forecasting throughout the next year. Knowing what was projected at the time of budget creation can allow for better explanation of variances when the books close each month.

Today, many energy consultants are using weather impact scenarios to predict costs. Paying attention to how locations respond to changes in seasonality can play an important role in forecasting an appropriate response to weather conditions. Particularly accounting for shoulder months, the Spring and Fall seasons when weather is changing, can be the difference between under or overstating a particular month. Many resources are available to help identify weather trends that can be applied to your portfolio footprint.

Accountable

Now that you’ve set goals, it’s important to sync your budget to your financial calendar. To improve your chances in adhering to your new budget, ensure that you are using financial data that is normalized to your fiscal periods. Utility invoicing can vary month to month, paying for immediate consumption or usage four months ago. Because of the unpredictability, aligning the actual expenses to your fiscal calendar is critical to prevent surprises due to timing of utility invoices. Without selecting a standard method of reporting, problems could arise, as variances will not be attributed to an increase in usage, but the payment of a single account in a given month.

Keep in mind that budgets cannot be easily set based on the Accounts Payable costs from the prior year. Your general ledger is likely to include accruals, additional charges, or facility related expenses that you may not want to include in the coming year’s budget. You should always book a full period of expense using an accrual methodology, or estimating the remainder of the current month’s expenses to allow a clean comparison to the prepared budget.

Keys to Success

Engage Multiple Stakeholders – There are many resources in your organization that can help to make this budgeting process a success. Make sure you are communicating across, up and down to fill in the gaps and share the goal. Finance needs to know about assumptions, Facilities has a pulse on changes and improvements, and Procurement has the details of the deregulated energy contracts. If everyone buys into the assumptions, they will share in the responsibility and success of the process.

Take a Micro Approach – While it may seem a daunting task, budgeting by site and applying utility level price forecasts will provide significant insight into budget assumptions. It will make it easier to account for any capital investment projects and operational changes. What kind of an impact does a linen reuse program have on the budget? What about a switch to compact fluorescent light bulbs in guestrooms, lobbies, and hallways? The ability to understand the financial impact of site-level changes can make a case for future portfolio-wide changes.

Additionally, there are external factors that are better explained from a micro approach. Be prepared to explain changes in rates, the timing of the changes and the volatility of the market. How many of your hotels are sitting in deregulated markets?

Engage Informed Resources – Make sure you have the time and information available to get the job done well. An energy consultant can prove to be an excellent resource when it comes to building a comprehensive energy budget. Consultants have knowledge of deregulated markets, access to wholesale market pricing, and analytic tools that make the whole budgeting process simpler. To have successful results, be certain you provide them with the details and share your expectations. Ensure they keep detailed records that you will be able to refer back to as variances need to be explained. The ability to provide feedback when you’re over or under budget is just as important as building an accurate budget.

While budgeting for energy accruals and variances is a time-intensive project, it will pay off in the long run. Remember, your budget will be wrong somewhere the moment it is locked. Don’t be discouraged. If you have done a good job documenting your assumptions, you will be able to analyze and communicate variance impact. Use your newfound energy knowledge to make positive steps to move forward and make the necessary changes to your comprehensive, defendable and accountable budget.

Jim Poad, a 30-year energy industry veteran, serves as Director of Client Solutions for expense and energy management firm, Advantage IQ. In this capacity, Mr. Poad is responsible for developing and directing the Company’s energy management programs on behalf of clients. He works with clients to develop and implement a customized strategy to better manage energy usage, reduce overall operational costs, and meet overriding corporate objectives. He has helped clients save millions of dollars through the implementation of supply-side and demand-side initiatives. Mr. Poad can be contacted at 608-755-1650 or jpoad@advantageiq.com. Extended Bio...

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