By obtaining better intelligence on energy consumption spending, CFOs can deliver a multitude of benefits to finance, and the business at large, writes guest poster Sanjoy Malik.
It may be a lot cheaper to fill up your gas tank, but running a business continues to be expensive on the energy front. The average U.S. retail price of electricity has risen every year since at least 2013 and is forecast to continue rising in 2016, according to the Short Term Energy Outlook released in February by the U.S. Energy Information Administration.
CFOs are eager to downsize the corporate energy bill, and are asking their accounting teams to get a handle on rising costs. CFOs also need accurate forecasting on spend for shareholders, especially for core operational expenses such as energy. Last-minute surprises on the balance sheet are not welcome on Wall Street. Additionally, the ability to predict energy costs with accuracy allows a company to spend money now, on important areas such as marketing and product development.
While there are many reasons why companies need better energy intelligence, a large company with hundreds of utility accounts doesn’t have easy access to it based on typical accounting practices. Data on the surface is fairly basic: the periods, locations and providers associated with individual bills. From there, accountants can sort the accounts by the largest spend and look more closely at tariffs and consumption data by kilowatt hour (KwH), but if the process is manual, they can only focus on a few areas.
The fallacy here is that the largest bill isn’t always the most wasteful bill. To get a holistic picture of energy usage and spending, in order to identify areas for efficiency and planning, companies should invest more in the effort – and that means skills, tools and training. Is it worth it?
The benefits of having more energy data
Here are several reasons why taking a deeper dive into energy data can help your business save money and be more competitive:
Tariff discrepancies: Utility tariffs are complicated and diverse; a large enterprise may have 100 different tariffs across less than 200 locations. By looking at these tariffs more closely, a company can see where rates are comparatively high for the region and identify outliers. You might find that in one location there was a 100% spike in costs, while other nearby locations show only a 20% spike. That’s worth investigating further.
Management of credit pursuits: Utility companies make mistakes from time to time. It’s important to check bills closely when warranted, and pursue credits when you think there’s something awry. Let’s say the monthly bill for one location is typically $20,000, with variance of $5000 in peak times. Suddenly, that bill jumps to $40,000, for no apparent reason. It’s smart to investigate the bill before paying it. And in tracking annual late fees, are there patterns? A company may be receiving late bills because they are not receiving those bills in a timely fashion from the provider. That information is easy to miss, without having more data and better analysis.
Accurate closings: In large companies, it’s often necessary to make estimates on accounts payables in order to close the books. How smart is your data so that when you do accruals you’re not withholding too much money from other budgets?
We know one large retailer that spent a lot of time and money managing this process. For this company, estimating with a 2% or less accuracy was as valuable as achieving 2% extra sales. The company wanted energy and all the groups that supported sales to excel at budgeting, avoiding a situation where millions dollars that could have been spent toward marketing and promotions was needlessly set aside for bills.
Better budgeting: Once you’re smart with accruals, you can use that same type of logic to write annual budgets. For instance, a company may have a general budget that is created 12 months in advance. At the six-month mark, there is a budget adjustment opportunity.
Your budget has to be ready well ahead of the year and you have to justify it. Every month you were judged against the budget that you produced a year ago. Therefore, having solid accrual logic puts your organization on the path to sound budgeting.
Planning: With detailed energy data analysis, managers can forecast future spending with a higher degree of confidence. For instance, by knowing that in one region, energy spending has been going up 5% annually, a company can adjust the budget accordingly.
Deeper analysis can help executives make sound decisions on facilities, regarding redesign and capital purchases. A facilities manager that wants to purchase new HVAC units will need to wait for the analysts to predict whether the investment will pay off, by looking at the location’s usage data and cost trends. Energy analysis can also help companies that are growing make intelligent decisions on where to locate new buildings, based on comparing utility profiles.
Sustainability reporting: Twenty or even 10 years ago, you would rarely catch CFOs talking about reporting on sustainability measures, such as the carbon emissions footprint of the company by region and globally. Today there is a competitive angle to conducting this research, since customers are now evaluating a brand’s environmental responsibility as part of the buying decision. As well, improving sustainability metrics also delivers cost savings. Yet many sustainability reports are held together with duct tape: it’s fuzzy math. Big data tools can help achieve a more accurate and auditable picture of sustainability metrics, with less effort.
Savings and cash flow flexibility
Corporate accountants are not energy data experts, in most cases. When the CFO wants second-level intelligence and energy spend, it may not be easy to uncover in a timely or cost-effective manner. Through a more strategic focus on energy data management, CFOs can not only close the books and plan budgets more accurately, but deliver far better savings and cash flow flexibility to the company.
Sanjoy Malik is CEO of Urjanet.