Financial Accounting for Small Systems

This article originally appeared on the SmallWaterSupply.org blog in 2012 as part of the Water We Drink series, developed by the Rural Community Assistance Partnership (RCAP) and the National Environmental Services Center. Written by Certified Public Accountant Hatsy Cutshall, its ideas and tips still hold true today.

A cascade of bad economic news since late 2008 has focused nearly every citizen’s concern on finance, certainly at home and often at the public level. Many who are struggling to pay their own bills are looking to municipal leaders and asking valid questions about how their tax money is being spent.

A water or wastewater system is often the single largest asset owned by a small community. Like a homeowner with his property, all the stakeholders of those systems are best served if that asset is well managed and maintained to get the longest and best use at the lowest cost to all concerned. It is imperative that the board and the system managers understand and appreciate the value of the financial aspect of running the system. With that understanding they are then prepared to address public questions and concerns to help them understand how and why many decisions are made.

Financial management is not just about depositing cash in the bank and paying the bills. When used as part of an effective overall management strategy, it helps managers plan for the future to avoid unpleasant surprises like a compliance order or the sudden and unplanned need for significant infrastructure replacement. It also prepares management to explain to the rate-paying constituents how the decisions are made that go into setting the rates that keep the system going.

Without sound financial information, it is easy for the public to make incorrect assumptions about how much it costs to provide safe, reliable drinking water. Often, the first target for public scrutiny is the staffing expense. In response, many small system managers and governing boards are tempted to short change the accounting and finance function in favor of technical staff. By doing so, they risk problems that could cost them far more in the long run than the salary or accounting fees they have opted to avoid.

Furthermore, when a system does face the need for additional investment or maintenance costs, managers will find that there is less money flowing overall, fewer grants, and more loans. Funders are imposing stricter reporting requirements on systems to prove their capacity to manage the money they're borrowing.

There has never been a better time for small systems to take a look at their financial management and make sure it can stand up to this heightened scrutiny. In doing so, they likely will also discover ways that their financial information can help them decide how to make better use of the income and other resources for which they are responsible.

To help system managers and board members form a strategy for improving their financial management, I've compiled some ideas for how to get started. I've had the good fortune to talk with a number of technical assistance providers and other consultants who work with small systems. They've highlighted some common situations that they find when they begin work with a small system, as well as solutions that can help resolve some difficult situations.

1. Get organized! Before you can begin to create or improve a financial system you have to be able to find your expense bills, your receipts records, your bank statements, and your payroll records. Create a filing system and get your paper records in order so that when you need to refer to a document, you can find it easily. If many of your records are in electronic format, create an electronic filing system for those records, as well.
2. Review and document the system's rules and policies for income, expenses, and setting aside reserves. Read the minutes of board meetings for policies that may need to be formalized into the operating procedures. Board members and management should consider policies for handling late payments, whether to apply for a credit card, and board policy for setting aside a percentage of all fee income for capital needs reserves, to name a few.
3. Find the right person to do the accounting work. If the system has a staff member who can take on the work and is willing to learn, get him or her some training. If the system cannot afford or does not need even a part-time bookkeeper on staff, consider hiring a local bookkeeping or accounting firm to do this work on a contract basis. Ask if the contractor has staff members who are willing to attend board meetings to help managers and board members read and interpret the reports.
4. Talk to some trusted and experienced advisors about the system's accounting needs before you buy software. Often small systems buy accounting packages that are far more expensive and complex than they really need. The accounting software must be able to track the water system's activity separate and apart from that of any other government activity. If the system is small enough (e.g. 50 to 100 connections) a simple Excel spreadsheet may be able to handle all the tracking and reporting you need. For larger systems or those that are ready for a more comprehensive solution, QuickBooks is affordable and can handle most, if not all, of the accounting functions that many small systems need.
5. Build a budget. Start with the actual results of the prior year's operations and consider what is likely to change, as well as what the board and constituents wish to change and put it in writing. Once approved, enter this budget into the reporting system so that reports can compare the actual financial activity to what was expected. Comparing the two will help managers and constituents plan for the future.
6. Find and file any records you can that show how much was paid for pipe, pumps, meters, and other system infrastructure. Identify what the system owns and adopt an asset management plan. This survey of the system's physical components then informs the financial planning and budgeting process to reduce the risk of unplanned expenditures. This summary of what the system owns and how much it cost will also give you the information you'll need to record the value of the system's fixed assets on the balance sheet as required by the Governmental Accounting Standards Board (GASB) 34 rule, which addresses financial reporting requirements for infrastructure assets.
7. In addition to training the financial staff or hiring a bookkeeping firm, consider offering training for the system's board. Members of a utility's oversight board are often volunteers and may need assistance in making informed decisions and communicating the reasons for those decisions to the public. This type of training, as well as more generalized financial management training, is often offered through the state's primacy (drinking water or wastewater agency) as well as through non-profit organizations such as the Rural Community Assistance Partnership (RCAP) and the National Rural Water Association (NRWA).
8. Make sure your accounting system can track and classify income by type such as fees for water service, hookup fees, late fees, and so forth. It should also provide reports on aged receivables: how much the system is owed and how much is overdue by 30, 60, 90 or more days.
9. Classify expenses in such a way that a report reader can easily compare how money is being spent to the board's approved budget. Expense line items such as telephone, rent, electricity, salaries, supplies, and other routine costs should be created; as payments are made and entered into the system, those payments should be categorized according to their purpose. The system should also be able to provide a report on how much is owed to outside vendors and when those payments are due. This report is called an "accounts payable aging" report.
10. Record financial activity in the system regularly and often, at least once per month. If you let bookkeeping work pile up for months at a time, it is very easy to forget information that is important to the financial reports, such as the purpose of an expenditure or to which fund is should be charged. Monthly (or more frequent) reporting also helps managers see problems in time to solve them before they become more expensive to solve.

Make the decision that financial management is as important as maintaining the plant and equipment. Whether you decide to do it to meet regulatory requirements, citizen demand, or management needs, it's a great idea!

For more information or for advice and help getting started, contact your region's RCAP office, the National Rural Water Association, or your state primacy agency that deals with drinking water or wastewater systems.

The author would like to thank the following people for their help and information in preparing this article: H.B Calvert, Karen Yates and Jan Frederick with the Midwest Assistance Program; Mary Fleming and Linda Martinez with the Rural Community Assistance Corporation; Karen Johnson and Cindy Navroli, MPA, CPA.