Create a Long-Term Financial Plan

Contributor
Sustainable Infrastructure Society
Introduction

A long-term financial plan helps you estimate what your revenues and expenses will be over a period of at least ten years into the future. It includes planning for the repair or replacement of equipment, system improvements, any proposed financing, and building up reserve funds to pay for operations and projects.

Many parts of your system are expensive to repair or replace. You need lead-time to budget and save funds to be able to continue delivering safe water. A long-term plan shows you how much money to set aside each year and helps to set a realistic price for water today and tomorrow.

Glossary of Terms
reservoir

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

Steps in Preparing a Long-Term Financial Plan

Here are the main steps in preparing a long-term financial plan. These steps are explained further in following sections. For each step, you need to use a tool such as the worksheets referenced in the Resources section below.

Step 1: Prepare a strategic plan

Step 2: Forecast operating expenses and operating reserve

Step 3: Forecast capital expenditures and capital reserve

Step 4: Manage balance of Capital Reserve

Step 5: Forecast Asset Replacement Reserve

Step 6: Forecast annual revenues

Step 7: Review your financial viability

Step 1: Prepare a Strategic Plan

Your strategic plan is a statement of how you want your water system to look in the future and how you intend to get there. It is difficult to create a good long-range financial plan if you do not have a strategic plan. Strategic planning typically:

  • defines the purpose of your water system
  • includes a vision and mission that reflects your values
  • lists achievable goals and objectives.

Even if your water system has only a few connections, developing a common vision for the future of your water system makes sustainable operation easier. If you cannot agree on your vision and mission, you will have a hard time creating agreement around your long-term financial plan.

Step 2: Forecast Operating Expenses & Operating Reserve

Operating expenses are those everyday costs to your system to produce and deliver water. These costs can include such things as chemicals, maintenance, fuel, utilities, payroll, depreciation, rent, repairs, and taxes. You may already have made forecasts of your operating expenses as part of your five-year operating plan, in which case the following sections may help you refine those forecasts. See also the article on creating an annual budget.

Step 3: Forecast Capital Expenditures & Capital Reserve

Your strategic plan from Step 1 will give you a good idea of the capital projects you need to undertake. Examples might include installation of water filtration equipment or construction of a new reservoir. The information needed to create a capital expenditure forecast is partly available from your asset management, five-year, and strategic plans. The asset management plan identifies major items needing replacement or renewal. The strategic and five-year plans include reference to system upgrading and expansion. These plans should reflect any required actions to meet conditions of Operating Permits or Construction Permits, such as to install disinfection within the next two years.

To prepare the Long-Term Capital Plan, gather information on the cost of each item and the year it is expected to be installed. You can ask manufacturers or installers for quotes, other local water systems for information on their experiences, or contact your local drinking water officer or public health engineer for guidance. Then complete the forecast worksheet appropriate for your system

You can find lists of companies that can help you estimate of the costs of replacement and renewal at the Canadian Water Directory website.

Step 4: Manage the Balance of the Capital Reserve

Consider setting up a separate Capital Reserve bank account. Otherwise, do track Capital Reserve (also known as Construction Reserve) funds within your regular account and make sure this money is dedicated to capital purchases. Use a worksheet to show the sources of money that you use to pay for capital projects and show the various expenditures you make in connection with capital projects. This account may include proceeds from loans and the payments of principal and interest on long-term debt.

Your long-range financial plan should include a forecast of the balance of this account over the longest practical period. You should manage this account so that the bottom line is always positive.

Step 5: Forecast Asset Replacement Reserve

The Asset Replacement Reserve (also known as the Renewal Reserve) lists the sources of money and the expenditures related to asset renewal. Your long-range financial plan should incorporate the forecast of this account over the longest term practical. Manage this reserve account so that the bottom line is always positive.

To do this, you may need to occasionally increase the money going into this account, for example, by increasing the contribution from your operating account. Further information about managing asset renewal is found in the section Create an Asset Management Plan.

Step 6: Forecast Annual Revenues

Water system revenues may come from one or more of these charges:

  1. the basic water service charge (fixed charge per billing period)
  2. the consumption charge (rate per cubic metre)
  3. service fees (connection/disconnection charge, line extensions)

There may be earned revenues from other sources, such as charges to developers for extending the water system.

Base your projected revenues on clear assumptions about changes in the water supplied to customers. For example, state the estimated increase in additional customers over the period covered by your plan, and the effects of water conservation measures. You may make projections of your customer base by looking at past growth trends and taking into account what you know about the future of your community. In larger systems where water meters are installed, revenues are influenced by the amount of water the average customer uses.

Step 7: Review Your Financial Viability

Once you have completed the forecasts and estimates outlined above, the next step is to find out if your planned rates and charges will be enough to pay for the estimated operating expenses and contributions to reserves.

Your financial viability is directly linked to the rates and charges you make for water. This topic is covered in the articles about Setting Sustainable Rates and Charges. You can enter your forecasts of revenues in the associated worksheets.

For the best practices in setting sustainable rates and charges follow this link: https://www.canadianwater.directory/financial-best-management-practices and click on BMP E

At this point in your planning, if you have not done so already, continue communications with your customers and other stakeholders and build support for your planning initiatives.

Resources

To help you create an Asset Management Plan, 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 D.

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