Create a Five-Year Plan

Contributor
Sustainable Infrastructure Society
Introduction

A Five-Year Plan shows what you want to do with your water system in the next five years, and how you expect to do it. It provides context for preparing your annual budget and enables greater focus on specific objectives than does your long-range plan.

Glossary of Terms
NTU

Nephelometric Turbidity Units: a measure of clarity of water.

turbidity

The cloudy appearance of water caused by the presence of suspended and colloidal matter. In the waterworks field, a turbidity measurement is used to indicate the clarity of water. Technically, turbidity is an optical property of the water based on the amount of light reflected by suspended particles.

reservoir

A pond, lake, basin, or other structure (natural or artificial) that stores, regulates, or controls water.

Here are the main steps in preparing five-year plan.  These steps are explained further in following sections:

  Step 1: Review the current year Operating Budget

  Step 2: Set goals and objectives for the next five years

  Step 3: For each “Operating” objective prepare a cost estimate

  Step 4: For each “Capital” objective prepare a cost estimate

  Step 5: Create five-year operating budget forecast

  Step 6: Ensure reserve accounts are in place.

Step 1: Review the Current Year Operating Budget

An early step in preparing a five-year plan is to look though your annual operating budgets for recent years. It should show your operating expenses and operating revenues. An annual operating budget is one of the most important tools you can have; one that every water system should complete with care.

Tolls & Taxes

Some types of water suppliers charge both Tolls and Taxes. Tolls are charges made to cover the direct supply of water and are part of operating revenues. Taxes may be in the form of a parcel tax, which is used for capital construction projects.

You probably have an annual budget already in place. It may give you indications of the items that should be included in a five-year plan. For example, if you are spending a lot of money on your electrical supply it may be a sign that you should replace an aging and inefficient pump in the next few years. You can get an idea of the useful life of various assets by following this link: Useful Life of Assets.

You can find out more about annual budgets in the section: Create an Annual Operating Budget

Step 2: Set Goals and Objectives for the Next Five Years

Consider all aspects of your water system when preparing a five-year plan. You can divide the system into the ten parts shown above. For each of these parts, set goals that outline what you want to achieve in the next five years. It’s a good idea to involve others in your goal setting process; these may include customers, health officials, consultants and financial advisors. Your long-range plan, if you have one, will also help you identify five-year goals.  Complicated goals can be broken down into steps with milestones and indicators to keep you on track. Use the Five-Year Goals worksheet (see the section below: Tools and Resources).

Ten Parts of Your Water System

  1. Water Source Reliability
  2. Water Quality
  3. Customer Satisfaction
  4. People Development
  5. Operational Effectiveness
  6. Financial Viability
  7. Infrastructure Condition
  8. Operational Resiliency
  9. Stakeholder Support
  10. Community Sustainability

Once you have a list of goals, you can identify specific objectives and results to help you reach those goals. Objectives should be “SMART” that is: specific, measurable, achievable, reasonable, and timely (this means they come with timelines). What is the difference between goals and objectives? Think of goals as the things that might result from a meeting of all your customers in which desired results are identified in broad terms, such as “provide safe and reliable drinking water”. Objectives are generally more specific, or quantifiable (For example, “We will install filtration to reduce the turbidity below 1 NTU”) or come with a date by which they should be achieved. An estimate of the costs of achieving the objective is always useful.

As another example, a goal might be to remove a Boil Water Notice and provide a safe water supply to your customers. This goal may require more than one year for you to reach. The objective in Year 1 may be to revise your water rates so that you can begin to pay for treatment. The objective for Year 2 might be to send your operator, volunteer or otherwise, for training about water treatment technology; and the objective for Year 3 would be to install upgraded water treatment equipment.

The answers to the following questions will help you establish specific objectives, a timetable for achieving the objectives and a cost estimate.

  • Where are we now?
  • Where do we want to be?
  • How do we get there?
  • How do we measure our progress?

Note that some of the objectives you identify may be fulfilled if you continue to operate in the way you are currently operating, and therefore will not involve your spending any more money than you are spending now. Where that is the case you do not need to include these objectives in the following steps, which are intended to help you budget for new expenditures only.

Step 3: For Each “Operating” Objective Prepare a Cost Estimate

Now that you have your list of new five-year goals and specific objectives, you’ll need to attach cost estimates to achieve them. You will need to decide if the costs should be paid from your operating budget or your capital budget. If the objective will lead to creation of a physical asset, such as a reservoir, with a value exceeding $2,000 say, then you may regard it as a capital item.

An “Iterative” Process

Using certain worksheets for financial planning is an iterative process. That is, you make an initial forecast of a certain value, see what the effect of that forecast value is on other items, and go back and change the forecast value if it does not have the desired effect.

If the objective leads to a smaller expenditure, then it can be part of the operating budget. Some new objectives, such as providing operator training, will obviously be part of the operating budget. 

Enter specific operating objectives onto the Five-Year Operating Costs worksheet, together with your estimate of total cost over the five years. Show the estimated percentage of the work you plan to do each year towards the objective, and the annual cost for that work. Complete the worksheet and add up all the new costs for each of the five years. This completed worksheet can be referenced in preparing your annual operating budgets and the long-range financial plan.

Step 4: For Each “Capital” Objective Prepare a Cost Estimate

In the previous step you identified certain objectives as part of your five-year operating costs. The costs for achieving the remaining objectives, those associated with capital projects, belong in a separate worksheet showing your Five-year capital costs. You can create a worksheet for capital costs which suits your way of documenting plans and projects.  As is the case with the operating objectives, you can sum the total of your estimated capital costs over the next five years and use this information in other worksheets.

tep 5: Create Five-Year Operating Budget Forecast

In Step 1, you assembled information about your current year budget and your revenues and expenditures for past years. Now use this information to make an initial forecast of the revenues and operating expenses for existing administration and operating expense items that you will incur over the next five years; allow for inflation where appropriate. Enter information in the worksheet Five Year Operating Budget Forecast. Note that you should exclude the new operating expenses you identified in Step 3.

Enter the forecast expenditures over the next five years that you identified in Step 3 on the line “New Operating Expenditures”.  The worksheet will add up all the operating expenses to give you the “Total Operating Expenses” for the next five years.

Last Three Years & Making Forecasts

If you have figures for last 3 years, create additional columns in the worksheet for Year -2 and Year -3. You can then work out averages for the last 3 years. Identify any non-recurring or extraordinary expenses and take account of these in working out averages and creating forecasts of future costs and revenues.

Make sure you keep an explanation of your forecast expenses together with your worksheets.

Under the heading “Contributions to Reserves” on the worksheet, enter the amounts you have worked out for these contributions (see Step 6 below). Now the worksheet will give you the “Total Annual Costs” over the next five years. The line below shows the “Total Revenues less Total Costs”. You may have to adjust your forecast of the revenues or the expenditures to make sure this amount is always positive.

For example, if your initial forecast of revenues over the next five years results in Total Costs exceeding Total Revenues, you may have to increase water rates in the future. The section Sustainable Rates & Charges will help with this.  Whatever the effect on water rates, it is important to continue communications with your customers so that they are aware of the benefits of your activities, including the 5-year plan.

Step 6: Ensure Reserve Accounts are in Place

Create Reserve Accounts

  • Replacement Reserve Fund
  • Operating Reserve Fund
  • Emergency Reserve Fund
  • Construction Reserve Fund

Creation of a five-year plan requires you to think beyond your current annual budget and the events of the coming years. As you think about the longer term, the value of creating reserve accounts will become clear. The reserve accounts that are useful for water systems are shown in the box to the left. 

Replacement Reserve: You operate a water system which includes expensive assets, some of which may last a long time, and which have to be maintained and eventually replaced. You should set aside money each year in your Replacement Reserve fund to provide for eventual renewal or replacement of equipment. Systematic renewal will reduce downtime and avoid extra costs due to breakdowns. Your asset management plan will help with this.

Operating Reserve: During your annual budget process, you may consider preparing projections for three scenarios – best case, worst case, and middle of the road. The difference between the annual expenditures for the worst case and the middle-of-the-road case may give an indication of the money you should set aside in an Operating Reserve fund. This approach encourages you to anticipate potential problems, and to plan for them. And this gives you additional confidence when responding to the unexpected. 

Maintain Flexibility

Sometimes the dividing line between expenditures from the Replacement Reserve and the Construction Reserve may not be clear. For example, if you are replacing an aging asbestos cement pipe with a pvc pipe, this could be considered an improvement, payable from the Construction Reserve. Obtain specialist advice in setting up reserves if necessary and maintain flexibility.

Emergency Reserve: You should operate your water system like a business, and all businesses face unexpected events which affect their finances. An established Emergency Reserve fund with budgeted annual contributions made until you achieve a target balance in the fund, will provide money “for a rainy day,” give you peace of mind, and increase confidence of users in your ability to manage a sustainable water system.

Construction Reserve: Your construction reserve is the fund from which you pay for capital construction projects. Capital projects are those which improve your system (as opposed to renewing existing parts and equipment which is covered in the Replacement Reserve). Examples of capital projects might be installing filtration for the first time or extending your distribution network to serve new customers. Income to the construction reserve fund might include the annual contributions you make from your operating budget, and any proceeds of loans you receive for capital expenditures. Expenditures from the reserve will include direct payments for capital projects, and the principal and interest charges in repayment of loans.

Resources

To help you create an Annual Operating Budget, you can complete Excel worksheets available at the Canadian Water Directory's Financial Best Practices web page.

  1. Click on this link to the web page to access the Excel worksheets: Financial Best Practices
  2. Once on the web page, click on the worksheets listed under BMP C.

 © Sustainable Infrastructure Society 2018 at www.WaterBC.ca