A long-term financial plan covers a period of at least ten years into the future. It helps you estimate what your revenues and expenses will be during this time. 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. As many parts of your system are expensive to repair or replace, you will need lead-time to budget and save funds in order to continue to deliver 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 in the future.
It is difficult to create a good long-range financial plan if you do not have a strategic plan yet in place. 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. Strategic planning defines the purpose of your water system, includes a vision and mission that reflects your values, and lists achievable goals and objectives.
Your strategic plan does not need to include specific information on costs (that’s included in the long-term financial plan), but is more of a guiding principle to keep in mind as you move forward. Defining what would make your water system successful, and what that would look like in ten years will help you plan for that goal. 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 aren’t in agreement with other stakeholders on your vision and mission, you will have a hard time creating agreement around your long-term financial plan.
Operating expenses are your water system’s day-to-day costs 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 you may only need to refine those forecasts.
Your capital expenditure is the amount you expect to spend on a new or replacement project for an existing facility. This includes construction, expansion, renovation, or replacement. Your capital reserve is a fund that you keep in reserve to pay for these projects.
To prepare your Long-Term Capital Plan, gather information on the cost of each item and the year it is expected to be installed. You can either make your own worksheet, or download one that’s ready to use. 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.
Your strategic plan will give you a good idea of the capital projects you need to undertake (for example, 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 Plan and Five-Year Plan. Your Asset Management plan identifies major items needing replacement or renewal; while your Strategic and Five-year plans include references 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.
While you can track capital reserve funds within your regular account, you may want to consider setting up a separate Capital Reserve bank account. You want to make sure this money is dedicated to capital purchases. This account may include proceeds from loans and the payments of principal and interest on long-term debt. 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.
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.
Your asset replacement reserve lists both the sources of money for, 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. This will mean that you may need to occasionally increase the money going into this account; for example, you could increase this reserve account by increasing contributions from your operating account. Further information about managing asset renewal is found in the section Create an Asset Management Plan.
Water system revenues may come from one or more of the following charges:
- the basic water service charge (fixed charge per billing period)
- the consumption charge (rate per cubic metre)
- service fees (connection/disconnection charge, line extensions)
There may also be earned revenues from other sources, such as charges to developers for extending the water system. In order to calculate your projected revenues, you will need to make some assumptions about changes in the water supplied to customers for the future. Start by stating your estimated increase in additional customers over the period covered by your plan, and the effects of water conservation measures. You can make some 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.
While it may feel like you are making many guesses about the future; you can (and should) go back to your plan on a regular basis to update and refresh your assumptions, especially if there is a large change in your system or population.
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. You must make sure that you are setting sustainable rates and charges. You can enter your forecasts of revenues in the associated worksheets.
At this point in your planning, if you have already, you should continue communications with your customers and other stakeholders and build support for your planning initiatives.