BusinessCorporate FinanceDon’t let profits drip away

Don't let profits drip away

FDs spend so much of their time focusing on costs - so why don't they do more about rising company utility bills?

Utilities costs are unavoidable and necessary to run any operation. With this
in mind, the focus should be on minimising the impact of overheads. If left
unmonitored, energy users can expect to face escalating utilities prices and
inefficient usage issues.

But the potential for any business to reduce its utilities expenditure should
not be underestimated.

Deregulation of the energy markets has led to a more complex purchasing and
decision-making process for businesses, if they are to optimise price and choice
of supplier and negotiate better terms.

Price volatility in utilities has contributed to the complexity of the market
as the move to a commodity market impacts on electricity, gas and telecoms. At
the same time, the build-up of environmental legislation and taxation policies
has also resulted in additional utility costs.

Saving energy is as core to energy management as price optimisation. But for
FDs to be in control of utilities, they must focus on effective energy
management to control usage, as well as price.

One of the main concerns for FDs is the volatility of energy pricing and how
to manage this to minimise the risks involved. Soaring prices have been hitting
the headlines of late, but what options are there for FDs in dealing with
negotiating better, and sustainable, rates?

There are five utilities that need to be considered: electricity, gas,
water/wastewater, fuel and telecoms. Each one is as important as the next in
devising an energy management strategy. Overcharging occurs in all of them.

Just as the gas market has become extremely volatile, with different drivers
affecting commodity prices to varying degrees, water prices rose on 1 April
2005, and look set to continue rising over the next five years.

Businesses and water-intensive industries can no longer afford to ignore the
fact that this utility is a strong candidate for cost reduction. And yet a lack
of knowledge at how to offset the price rises has led to many FDs overlooking
water as part of their energy management strategy.

In monetary terms, the greatest risk concerning telecommunications costs is
fraud and ‘unauthorised usage’. Records show that some employees in the UK may
be making as many as 15 unauthorised premium-rate calls during the working day.

It is possible to minimise the level of risk your company is exposed to
through system abuse by setting thresholds and alert triggers – where employee
indiscretions can be identified very quickly, and action can be taken.

There is one factor that unites all these areas. Bills have become more
complex and, as a result, it is more difficult for consumers to detect anomalies
or areas of overcharging. The elements of charges that make up bills, and the
rationale behind these elements, are often at fault.

Detailed knowledge is essential in identifying many discrepancies – knowledge
that is sadly lacking in your average accounts department, whose main focus is
bill payment.

Analysis of client bills and processes can help companies save thousands of
pounds, with smaller organisations as susceptible to overpaying as larger

Industry reports show that 80% of telecoms bills are incorrect, with
anomalies ranging from incorrect address details to poorly-applied tariff
structures and incorrect charges.

Businesses are continually bombarded with offers of cheap call rates and
seemingly unbeatable packages, and while these may seem an attractive option,
the market is a minefield and there are various pitfalls FDs should make
themselves aware of.

There is also legislation that businesses should be familiar with, as it will
also impact on their costs, and could result in even more being cut from
revenues if not managed correctly.

The climate change levy (CCL) was introduced in April of 2001 to reduce
energy consumption levels in UK industry and minimise the impact of global
warming. The UK government agreed that, to achieve the necessary reductions
agreed at the Kyoto summit, greenhouse gas emissions must be lowered by 20% by

UK companies have encountered an average increase of between 10% and 20% on
business energy costs since the introduction of the

CCL. The CCL rebate – offering discounts of up to 80% on the levy – was
introduced as an incentive to large energy users committed to reducing energy

British Electricity Trading and Transmission Arrangements (BETTA), the new
set of trading and transmission arrangements for electricity, came into force in
1 April, creating a single transmission system operator.

This market change is likely to mean more effective price competition both
north and south of the border, although the improved access for the Scottish
generators to the UK wholesale market may cause price rises in Scotland relative
to those in England & Wales.

There will be an impact on the use of system charges, although what this is
likely to mean to the end user is still unclear.

David Gray is the financial director of international energy consultancy
McKinnon & Clarke

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