Module 6

Business Planning for Small Water

Systems

Workbook

Financial/Managerial Series
This course includes content developed by the Pennsylvania
Department of Environmental Protection in cooperation with the
following grantees:
RCAP Solutions, Inc.
Penn State Harrisburg Environmental Training Center
 Training Module 6
Business Planning for Small Water Systems

Objectives:

By the end of the course, the learner should be able to:

Explain why a business plan is needed

Identify the necessary elements of a business plan
Describe the contents and function of each element of a
business plan
Determine their role in implementing the different segments of a
business plan and what is needed to carry out that role
Review essential financial components of the business plan
Explain how the rate relates to cash flow

Table of Contents

Introduction p. 2
Business Planning p. 3
Preparing a Plan p. 4
Financial Plan Example p. 12
Summary p. 23
Resources and References p. 24

1
Introduction

#1

This course is based on the Department of Environmental Protection’s

(DEP) Public Drinking Water Supply System Business Plan Manual
(June 1996).

#2

Can anyone explain, in your own words, what a Business Plan is

intended to show?

A Business Plan is a long range plan that demonstrates how a water

system will function from a financial, managerial, and technical
standpoint.

#3

You may be thinking to yourself, “But we’re not a business.”

Why should a public water system develop a business plan?

Any new community water system applying for a construction

permit under the Safe Drinking Water Act (SDWA) must prepare
a Business Plan and submit it to DEP as part of the permit
application.

In addition, the purpose of submitting a business plan is to

demonstrate to the DEP that if they issue your system a permit,
you will still be in business in the future (i.e., you are not caught

2
 up in a lot of customer complaints or in revenues that don’t cover
expenses).

It is recommended that all systems prepare a business plan to

use as a financial management planning tool, whether or not
required by state regulations.

For existing systems, the time when a Business Plan is needed is

when a major change or capital improvement is going to occur,
although a system can benefit from a Business Plan at any time.

Business Planning

#4

A Business Plan is intended to show that a water system can achieve

financial, managerial and technical capability. It will show that the
system:

Is self-sustaining

Has the financial and institutional commitment of the system

owner and operators, customers, and local officials

Has the financial, managerial, and technical capability to

reliably meet performance requirements over time

A key point is the commitment of all stakeholders to making the

process work. The development of a successful business plan will be
a joint effort of all parties.

3
 #5

The drinking water Business Plan will demonstrate:

That the system is strong enough to achieve capability even

under the influence of adverse changes in the operating
environment

That the proposed plan is, within practical limits, the best plan
for providing water service to the community

Adverse changes in the operating environment may require funding

and construction of projects, increased payments for services,
equipment and salaries, etc. The true cost of these adverse changes,
and their impact on user fees, is revealed in the Business Plan.

Preparing a Plan

#6

The Business Plan can be prepared by any individual familiar with the
system and its finances (e.g., owner, operator, engineer, financial
consultant).

Additional assistance may be provided by county or regional planning

agencies, DEP, and non-profit organizations such as the Rural
Community Assistance Program (RCAP), known as RCAP Solutions,
Inc. in Pennsylvania.

RCAP is a nonprofit dedicated to providing technical assistance to

small communities and small water systems. RCAP provides
assistance free of charge.

4
 Business Planning Resources:

DEP Capability Enhancement Facilitators under the direction

of Dennis Lee at (717) 772-4058.
RCAP Staff under the direction of Donald Schwartz at (814)
861-6093.

#7

Regardless of who prepares the plan, the responsibility for its validity
and ultimate implementation remains with the system owners.

#8

The first step is to obtain and review the Business Plan manual. We’ll
help you through this today.

The second step is to discuss the proposed business plan scope with
a DEP regional water supply engineer during a Planning Consultation
meeting. You must request this meeting by completing and submitting
a Planning Consultation Request Form to your regional DEP office.

The Planning Consultation meeting should occur before you authorize

an engineer to begin a feasibility study or perform any design work.
Information from this meeting will be used in the development of the
draft Business Plan.

At the same time, don’t forget to prepare for the Planning Consultation
by using the topics checklist on p. 32 of the Business Planning
Manual.

5
 #9

The third step is to prepare your draft Business Plan. This can be in
conjunction with the preparation of a feasibility study.

After you have prepared draft Business Plan, the fourth step is to
schedule a Preliminary Engineering Conference with your DEP
regional water supply engineer.

The purpose of the Preliminary Engineering Conference is to see that

the proposed solution is reasonable and addresses the area’s water
supply problems over time before significant funds are expended.

Bring two copies of the draft Business Plan with you to the Preliminary
Engineering Conference. Refer to page 2 of the DEP Business Plan
Manual for specifics and page 31 for topics to be addressed.

After this meeting, complete the engineering and/or planning, update

the cost estimates in the Business Plan, and note any other changes
to the Business Plan and finalize it. Two copies of the final plan
should be submitted with your permit application.

Note that any advice given by DEP in either meeting is not to be

construed as official DEP approval.

#10

The Business Plan must:

Identify the water supply needs of the area

Identify alternatives to address those needs

Evaluate the alternatives

6
 Recommend a specific alternative

Identify how the organization which will implement that

alternative will be structured and operate

Demonstrate that the operation of the proposed alternative will

be financially viable for a period of at least five years

#11

The Business Plan format must contain the following three

components:

Facilities Plan - an assessment of the current and future water

supply needs, and a description of alternatives with both
construction and operating costs and a rationale for the
approach.

Management Plan – must include documentation that the

applicant has the legal right and authority to construct, operate,
and maintain the system, a management and administrative
plan, and an operation and maintenance plan.

Financial Plan - projections and assurances that the system’s

revenues and cash flow will be sufficient for meeting the costs of
construction, operation, and maintenance for at least five full
years from initiation of operations.

Each of the above components of the Business Plan has sub-parts.

These subparts are described in more detail in the Business Plan
Manual.

A Business Plan Checklist of the information that must be included in

each component is included on the beginning of page 18 of the
Manual. Descriptions of the items to be addressed in each type of
plan along with reviews of what the checklist items mean are included
in the Manual, beginning on page 5.

7
 #12

The Facilities Plan (Pages 5 – 11 in the Manual) should consist of two

subsections:

Potential System Requirements - covers all facilities that will be

constructed as part of the proposed system. The Facilities Plan
Checklist identifies information not normally covered in the
Engineer’s Report - make sure the checklist items are
addressed.

Alternatives Identification and Evaluation - review these with the

DEP regional water project engineer, and Public Utility
Commission (PUC) staff if appropriate. The Facility Plan
Checklist leads you through a series of questions which provide
a financial rationale.

#13

Additional Items in the Facilities Plan:

Cost estimates of the various alternatives including both

operational and administrative facilities. See Facilities Plan Form
2 in Appendix D.

The evaluation of alternatives also may include technical,

managerial, operational, and local decision making rationale in
evaluation of alternatives. If you do not select the alternative that
would appear appropriate on the basis of financial rationale
alone, you should describe in detail your rationale used to select
the appropriate alternative.

Also, if you do not select a regional solution, such as

consolidating with an existing system, becoming a consecutive
water system, etc., you should explain in detail the rationale for

8
 creating a separate system. If you are selecting a regional
approach that is the most cost effective alternative, you may
provide much less detail on the other rationale(s) used. It should
be clear why an alternative has been abandoned.

Throughout the rest of the Business Plan, you only provide

information on those alternatives that you and the DEP regional
water project engineer agree are worth pursuing. In most cases
no more than 2 or 3 alternatives need to be evaluated in detail.

A summary of expected engineering costs. See Facilities Plan

Form 3 in Appendix D.

Total construction cost estimates for each alternative. See

Facilities Plan Form 4 in Appendix D.

Operating Cost estimates for each alternative. See Facilities

Plan Form 5 in Appendix D.

Identification of the alternative to be pursued and rationale for

this decision. This alternative is then addressed in the
Management and Financial Plan component of the Business
Plan.

#14

The Management Plan (Pages 11-13 in the Manual) should:

Identify ownership and system responsibility

Provide assurances from the prospective system ownership that

the Management Plan will be implemented by capable
individuals and organizations

Include an operating plan which consists of management and

administration plans, as well as an operation and maintenance

9
 plan. You may be able to utilize the Operation and Maintenance
Plan prepared under Part V of the Public Water Supply Manual.

To address these items, provide copies of any documentation that

clearly sets forth the applicant’s control and ownership of the system
and disclose any and all outstanding debts. Also disclose if the
ownership of the system is expected to change once the system is
completed.

Refer to the checklist of items to go through in preparation of this

section on page 20 and the Manual and Sample Management Plan
Forms on page 39 of Appendix E.

PUC Tip

Consider the effect of PUC regulations when selecting the

form of ownership. If documentation has been prepared for
the PUC, a copy should be included in the Business Plan.

#15

The Financial Plan (Pages 14-17 in the Manual) should include the
following:

Demonstration of revenue sufficiency (such that the system will

bring in enough money each year to continue to operate)

Demonstration of adequate capitalization (such that there will be

funding in place to build the system)

Assurances that the Financial Plan will provide sufficient

resources to ensure ongoing financial capability

10
 A summary of intended system rate revenue and pro forma
financial statements for a period of at least five years

Refer to the brief checklist provided on page 26 of the Manual

and the Financial Plan Forms in Appendix F beginning on page
41.

The Financial Plan is the last component of a comprehensive Business

Plan. Since the Facilities Plan provides a preliminary estimate of
capital and operating expenses, the Financial Plan should be built from
this base.

#16

Let’s review what we just went over. You’ll find a short exercise in
your workbooks. Take a few minutes to answer the questions. You
can look back through your workbooks if you need to.

Identify which plan (Management, Facilities or Financial) contains each

of the following components:

1. Identification of system ownership and responsibility ___________

2. Operations and Maintenance Plan ___________
3. Summary of Intended System Rate Revenue and Pro Forma
Financial Statements ___________
4. Alternatives Identification and Evaluation ___________
5. Demonstration of Adequate Capitalization ___________
6. Summary of Expected Engineering Costs ___________
7. Demonstration of Revenue Sufficiency ___________
8. Potential System Requirements ___________

11
Financial Plan Example

#17

Welcome to Smallville! Its water system includes 200 customers

served by two wells and an aging distribution system. In the following
exercise, we will develop a business plan on their behalf.

#18

We will look at:

An example of Financial Plan Form 2: Income, Expense, and

Cash Flow Statement

An example of Form 3: Balance Sheet

The Assumptions and Criteria for this example include:

200 customers (20 delinquencies)
o Annual Income = (180 customers x $20/month x 12
months) = $43,200
$20/month current average bill
Bulk water sold to Bigville
Late fees = $1200/year in current year
System
o Ground water, 2 wells, 1 needs rehab
o Tank needs to be cleaned, painted
o Problems with leakage and low pressure

12
 Proposed project
o Total cost - $600,000 ($200,000 grant, $400,000 loan)
o Construction year 2, payments start in year 3
o Loan terms, 20 yrs at 3%/yr
Inflation at 3%/yr
Cash Account of $20,000, Annual Interest Income of $550 in
current year
Depreciation
o Existing system cost $1M
o 40 yr straight line depreciation, $25,000/yr
o 30 yr depreciated
Pays $2500 into a reserve account every year, interest goes into
general account

This example will familiarize you with some of the complex

components of the Financial Plan.

#19

Take 5-10 minutes to review the spreadsheets in the appendices on

the last two pages of the workbook. You can separate these pages
from the manual if it’s more convenient for you. Try to find where the
financial information regarding Smallville fits into the spreadsheets.

The purpose of this example is to highlight:

How to identify when rate increases are required in order to

produce a net positive cash
The impact of a construction project on rates

13
 How the Income, Expense, and Cash Flow statement can be used
as a planning tool
The importance of annual contributions to an emergency fund
The importance of reevaluating the amount contributed to the
capital replacement fund annually

#20

Look at the Income, Expense, and Cash Flow Statement in Appendix

A in the workbook. Note the major components listed:

Operating Revenues
Operating Expenses
Non-operating Revenues
Non-operating Expenses
Taxes
Extraordinary Revenues
Extraordinary Expenses

#21

Look at the Balance Sheet in Appendix B in the workbook. Note the

major components listed:

Assets
Liabilities
Fluid Equity

14
 #22

The Income, Expense and Cash Flow Statement is an important tool to

be used for short-term and long-term financial planning. It allows a
current “snapshot” of the projected income and expenses of the
system for the next five years. Perhaps most importantly, it provides a
baseline for the planning of future rates and/or rate increases.
Although you may want to start your business planning with the
projected expenses, the following reviews the sections of the
spreadsheet in the order they appear.

#23

Operating Revenues:

Line 2: The water rates assume no increase in the customer base over
the five-year planning period. In order to pay for the proposed project
and have a capital reserve account, average rates will have to
increase from $20 per month to $35.11 per month (increase of 76%).
The system will need to increase rates each year to produce a net
positive cash flow (Line 76). This is critical to ensure the
financial capability of the system.

Line 3: Bulk water rates charged to Bigville will also increase by over
75% to produce a net positive cash flow (Line 76).

Line 5: Fees and services are for late fees.

INCOME, EXPENSE AND CASH FLOW Last Year Year 1 Year 2 Year 3 Year 4 Year 5
STATEMENT 20__ 20__
1 OPERATING REVENUES
2 Water Rates $ 43,200.00 $ 48,800.00 $ 49,825.00 $ 73,632.00 $ 75,277.00 $ 75,837.00
3 Bulk Water Sales $ 6,800.00 $ 7,700.00 $ 7,850.00 $ 11,601.00 $ 11,860.00 $ 12,106.00
4 Fire Protection $ - $ -
5 Fees and Services $ 1,000.00 $ 1,200.00 $ 1,150.00 $ 1,200.00 $ 700.00 $ 1,150.00
6 Other $ - $ -
7 TOTAL (lines 2 through 6) $ 51,000.00 $ 57,700.00 $ 58,825.00 $ 86,433.00 $ 87,837.00 $ 89,093.00
8

15
 #24

Operating Expenses:

(General note: An inflation factor of 3% per year is built into the

Operating Expenses. Each Line under Operating Expenses should be
examined closely to determine if this is an appropriate assumption.
Adjustments should be made accordingly.)

Line 28: Customer billing and collection costs are accounted for under
other administrative categories, including salaries, supplies, etc.

Lines 30 and 31: In this example, the legal and engineering fees
associated with the construction project are accounted for under Line
73, “Extraordinary Expenses – Capital Improvements” (Year 2).

Line 34: Depreciation assumes a straight line of $25,000 per year for
the current system, plus $15,000 per year beginning in Year 2 for the
construction project.

Line 37: The operating income is shown to be negative in each year.

However, this is an artifact of the accounting procedure. The cash flow
(Line 76) is positive in every year except “Last Year.”

16
INCOME, EXPENSE AND CASH FLOW Last Year Year 1 Year 2 Year 3 Year 4 Year 5
STATEMENT 20__ 20__
9 OPERATING EXPENSES
10 Operation and Maintenance
11 Salaries (operators) $ 15,000.00 $ 15,450.00 $ 15,913.50 $ 16,390.91 $ 16,882.63 $ 17,389.11
12 Benefits $ 3,000.00 $ 3,090.00 $ 3,182.70 $ 3,278.18 $ 3,376.53 $ 3,477.82
13 Utilities $ 8,000.00 $ 8,240.00 $ 8,487.20 $ 8,741.82 $ 9,004.07 $ 9,274.19
14 Chemicals & Treatment $ 5,000.00 $ 5,150.00 $ 5,304.50 $ 5,463.64 $ 5,627.54 $ 5,796.37
15 Monitoring $ 2,500.00 $ 2,575.00 $ 2,652.25 $ 2,731.82 $ 2,813.77 $ 2,898.19
16 Materials, Supplies, Parts $ 3,000.00 $ 3,090.00 $ 3,182.70 $ 3,278.18 $ 3,376.53 $ 3,477.82
17 Transportation $ 1,500.00 $ 1,545.00 $ 1,591.35 $ 1,639.09 $ 1,688.26 $ 1,738.91
18 Purchased Water Costs $ - $ - $ - $ - $ - $ -
19 Outside Services $ 1,000.00 $ 1,030.00 $ 1,060.90 $ 1,092.73 $ 1,125.51 $ 1,159.27
20 Other $ - $ - $ - $ - $ - $ -
21 TOTAL (lines 11 through 20) $ 39,000.00 $ 40,170.00 $ 41,375.10 $ 42,616.35 $ 43,894.84 $ 45,211.69
22 Administrative
23 Salaries $ 6,000.00 $ 6,180.00 $ 6,365.40 $ 6,556.36 $ 6,753.05 $ 6,955.64
24 Benefits $ 1,000.00 $ 1,030.00 $ 1,060.90 $ 1,092.73 $ 1,125.51 $ 1,159.27
25 Building Overhead $ 1,000.00 $ 1,030.00 $ 1,060.90 $ 1,092.73 $ 1,125.51 $ 1,159.27
26 Office Supplies & Postage $ 500.00 $ 515.00 $ 530.45 $ 546.36 $ 562.75 $ 579.64
27 Insurance $ 2,000.00 $ 2,060.00 $ 2,121.80 $ 2,185.45 $ 2,251.02 $ 2,318.55
28 Customer Billing & Collection $ - $ - $ - $ - $ - $ -
29 Accounting $ 1,500.00 $ 1,545.00 $ 1,591.35 $ 1,639.09 $ 1,688.26 $ 1,738.91
30 Legal $ 1,000.00 $ 1,030.00 $ 1,060.90 $ 1,092.73 $ 1,125.51 $ 1,159.27
31 A/E & Professional Services $ - $ - $ - $ - $ - $ -
32 Other $ - $ - $ - $ - $ - $ -
33 TOTAL (lines 23 through 32) $ 13,000.00 $ 13,390.00 $ 13,791.70 $ 14,205.45 $ 14,631.61 $ 15,070.56
34 Depreciation Expense $ 25,000.00 $ 25,000.00 $ 40,000.00 $ 40,000.00 $ 40,000.00 $ 40,000.00
35 Other $ -
36 TOTAL (line 21 plus 33 plus 34 plus 35) $ 77,000.00 $ 78,560.00 $ 95,166.80 $ 96,821.80 $ 98,526.46 $ 100,282.25

#25

Non-Operating Revenues:

Line 39: Interest income assumes an initial cash account of $20,000,

with a slightly varying interest rate each year.
INCOME, EXPENSE AND CASH FLOW Last Year Year 1 Year 2 Year 3 Year 4 Year 5
STATEMENT 20__ 20__
38 NON-OPERATING REVENUES
39 Interest Income $ 600.00 $ 550.00 $ 700.00 $ 1,000.00 $ 800.00 $ 750.00

#26

Non-Operating Expenses:

Line 47: The total annual loan repayment of approximately $26,900 is

divided into interest expense on Line 47, and principal repayment on
the debt on Line 72.

17
Lines 48 - 52: This example assumes an annual contribution of $2500
into a capital replacement fund (Line 50). It is strongly
recommended that an annual contribution to an emergency fund
(Line 51) be considered, and that the amount contributed to the
capital replacement fund be evaluated annually, and increased as
necessary.
INCOME, EXPENSE AND CASH FLOW Last Year Year 1 Year 2 Year 3 Year 4 Year 5
STATEMENT 20__ 20__
46 NON-OPERATING EXPENSES
47 Interest Expense $ - $ 25,900.00 $ 24,800.00 $ 23,600.00
48 Interfund Transfers
49 To General Fund $ -
50 To Replacement Fund $ - $ 2,500.00 $ 2,500.00 $ 2,500.00 $ 2,500.00 $ 2,500.00
51 To Emergency Fund $ -
52 To Other $ -
53 TOTAL (lines 49 through 52) $ - $ 2,500.00 $ 2,500.00 $ 2,500.00 $ 2,500.00 $ 2,500.00
54 Other $ -
55 TOTAL (line 47 plus 53 plus 54) $ - $ 2,500.00 $ 2,500.00 $ 28,400.00 $ 27,300.00 $ 26,100.00
56 NET INCOME BEFORE TAXES (line 37 plus 44 less 55) $ (25,400.00) $ (22,810.00) $ (38,141.80) $ (37,788.80) $ (37,189.46) $ (36,539.25)
57

#27

Taxes:

Lines 59 – 61: Taxes should be included as necessary (for profit

systems, etc.).
INCOME, EXPENSE AND CASH FLOW Last Year Year 1 Year 2 Year 3 Year 4 Year 5
STATEMENT 20__ 20__
58 TAXES
59 Income Taxes $ -
60 Other than Income Taxes $ -
61 TOTAL (line 59 plus 60) $ - $ - $ - $ - $ - $ -

#28

Extraordinary Revenues:

Lines 65 – 66: The $200,000 grant and $400,000 loan for the
construction project are reflected on these Lines in Year 2.

18
INCOME, EXPENSE AND CASH FLOW Last Year Year 1 Year 2 Year 3 Year 4 Year 5
STATEMENT 20__ 20__
64 EXTRAORDINARY REVENUES
65 Construction Grants $ - $ 200,000.00
66 Proceeds from Borrowing $ - $ 400,000.00
67 Equity Contribution $ -
68 Other $ -
69 TOTAL (line 65 through 68) $ - $ - $ 600,000.00 $ - $ - $ -

#29

Extraordinary Expenses:

Line 72: As noted earlier, the annual loan repayment is divided into
interest on Line 47, and principal on Line 72.

Line 76: The Smallville water system requires a projected rate

increase of about 75 percent to produce a positive cash flow in Year 5.
It is important that the Income, Expense and Cash Flow statement be
used as a planning tool to ensure the long-term financial capacity of
the system. If a rate increase is necessary, it must be enacted.
INCOME, EXPENSE AND CASH FLOW Last Year Year 1 Year 2 Year 3 Year 4 Year 5
STATEMENT 20__ 20__
71 EXTRAORDINARY EXPENSES
72 Debt Repayment - Principal $ - $ 1,000.00 $ 2,100.00 $ 3,300.00
73 Capital Improvements, Acquisition of Plant & Equipment $ - $ 600,000.00
74 Other $ -
75 TOTAL (line 72 through 74) $ - $ - $ 600,000.00 $ 1,000.00 $ 2,100.00 $ 3,300.00
76 CASH FLOW (line 62 plus 34 plus 69 less 75) $ (400.00) $ 2,190.00 $ 1,858.20 $ 1,211.20 $ 710.54 $ 160.75

#30

Balance Sheet:

The Balance Sheet is an important tool to be used for short-term and

long-term financial planning. It shows a “snapshot” of the assets and
liabilities of the system at the end of the year for the next five years.

19
 #31

Assets:

Line 2: Current Assets – This section includes all of the system’s

current assets. For water systems, the accounts receivables (line 5)
can be considered to be the system delinquencies.

Line 9: Fixed Assets - This section includes all of the system’s fixed
assets, such as plant, lines, buildings, and work in progress, less the
accumulated depreciation. Accumulated depreciation (line 14)
increases every year on a pre-set schedule, in this example a straight
line 40 year schedule, although it may increase or decrease greatly in
one year if assets are bought or sold.

Line 16: Other Long Term Assets – This section includes other long
term assets. In this example, it includes a replacement fund reserve
account.
BALANCE SHEET Last Year Year 1 Year 2 Year 3 Year 4 Year 5
20__ 20__
1 ASSETS
2 Current Assets
3 Cash $ 20,000.00 $ 22,190.00 $ 24,048.20 $ 25,259.40 $ 25,969.94 $ 26,130.69
4 Investments $ - $ - $ - $ - $ - $ -
5 Accounts Receivable $ 2,300.00 $ 1,579.00 $ 1,150.00 $ 1,200.00 $ 700.00 $ 1,150.00
6 Inventories $ - $ - $ - $ - $ - $ -
7 Other $ - $ - $ - $ - $ - $ -
8 TOTAL (lines 3 through 7) $ 22,300.00 $ 23,769.00 $ 25,198.20 $ 26,459.40 $ 26,669.94 $ 27,280.69
9 Fixed Assets
10 Property, Plant & Equip at Cost $ 1,000,000.00 $ 1,000,000.00 $ 1,600,000.00 $ 1,600,000.00 $ 1,600,000.00 $ 1,600,000.00
11 Contributions in Aid of Construction $ - $ - $ - $ - $ - $ -
12 Construction Work in Progress $ - $ - $ - $ - $ - $ -
13 Other $ - $ - $ - $ - $ - $ -
14 Less Accumulated Depreciation $ 750,000.00 $ 775,000.00 $ 800,000.00 $ 840,000.00 $ 880,000.00 $ 920,000.00
15 TOTAL (lines 10 through 13 less 14) $ 250,000.00 $ 225,000.00 $ 800,000.00 $ 760,000.00 $ 720,000.00 $ 680,000.00
16 Other Long Term Assets
17 Restricted Assets/Trust Funds $ - $ - $ - $ - $ - $ -
18 Unrestricted Replacement Funds $ - $ 2,500.00 $ 5,000.00 $ 7,500.00 $ 10,000.00 $ 12,500.00
19 Unrestricted Emergency Fund $ -
20 Other $ - $ -
21 TOTAL (lines 17 through 20) $ - $ 2,500.00 $ 5,000.00 $ 7,500.00 $ 10,000.00 $ 12,500.00

22 TOTAL ASSETS (line 8 plus 15 plus 21) $ 272,300.00 $ 251,269.00 $ 830,198.20 $ 793,959.40 $ 756,669.94 $ 719,780.69

20
 #32

Liabilities:

Line 24: Current Liabilities – This includes any of the system’s current
liabilities such as unpaid bills and the current portion of long term debt,
which is the principal portion of debt paid to a bank or funding agency.
Additionally, the accrued payroll (line 27) and withholdings includes the
system’s unpaid payroll expenses at the end of the year. This occurs
if the end of the fiscal year falls before the end of a pay period. It is
assumed to be $500 for this example. The long-term debt (line 32) is
the remaining principal less the current portion of debt.
BALANCE SHEET Last Year Year 1 Year 2 Year 3 Year 4 Year 5
20__ 20__
24 LIABILITIES
25 Current Liabilities
26 Accounts Payable $ - $ - $ - $ - $ - $ -
27 Accrued Payroll and Withholdings $ 500.00 $ 500.00 $ 500.00 $ 500.00 $ 500.00 $ 500.00
28 Current Portion of Long Term Debt $ - $ - $ - $ 1,000.00 $ 2,100.00 $ 3,300.00
29 Short Term Debt $ - $ - $ - $ - $ - $ -
30 Other $ - $ - $ - $ - $ - $ -
31 TOTAL (lines 26 through 30) $ 500.00 $ 500.00 $ 500.00 $ 1,500.00 $ 2,600.00 $ 3,800.00
32 Long Term Debt (less current portion) $ - $ - $ 400,000.00 $ 399,000.00 $ 396,900.00 $ 393,600.00

33 TOTAL LIABILITIES (line 31 plus 32) $ 500.00 $ 500.00 $ 400,500.00 $ 400,500.00 $ 399,500.00 $ 397,400.00

#33

Fluid Equity:

Line 36: Retained Earnings – This is the value of this system retained
by the owners of the system after Liabilities and Contributed Capital
are subtracted from the Assets. This serves to “balance” the
statement and gives us the name, “Balance Sheet.”

Line 40: Capital Stock – This should be ignored unless the water
system is a corporation.

Line 41: Contributed Capital – This section includes government

grants (line 42), such as the $200,000 grant in year 2, and other

21
contributions. Other Contributions (line 43) can include tap fees for a
new system.
BALANCE SHEET Last Year Year 1 Year 2 Year 3 Year 4 Year 5
20__ 20__
35 FLUID EQUITY
36 Retained Earnings
37 Reserved $ 271,800.00 $ 250,769.00 $ 429,698.20 $ 393,459.40 $ 357,169.94 $ 322,380.69
38 Unreserved $ - $ -
39 TOTAL (lines 37 plus line 38) $ 271,800.00 $ 250,769.00 $ 429,698.20 $ 393,459.40 $ 357,169.94 $ 322,380.69
40 Capital Stock (corporations only) $ - $ - $ - $ - $ - $ -
41 Contributed Capital
42 Government Grants $ - $ - $ 200,000.00 $ - $ -
43 Other Contributions $ - $ -
44 TOTAL (lines 42 plus 43) $ - $ - $ 200,000.00 $ - $ - $ -

45 TOTAL FUND EQUITY (line 39 plus 40 plus 44) $ 271,800.00 $ 250,769.00 $ 629,698.20 $ 393,459.40 $ 357,169.94 $ 322,380.69

#34

Before we summarize what has been covered, you will find one last
very short exercise in your workbooks. There is only one question.
Take a few minutes to answer the questions.

The very short Business Planning Exercise

What are the steps you would go through in developing a Business

Plan for a new system in accordance with the DEP requirements? The
first and last steps are filled in for you. Can you remember what falls
in between?

1. Obtain the DEP Business Plan Manual and review it.

2._______________________________________________________________
3._______________________________________________________________
4._______________________________________________________________
5. After the Preliminary Engineering Conference, finalize the Business
Plan and submit two copies with the permit application.

22
Summary

#35

The key points of this module are:

Any new community water system applying for a construction

permit under the Safe Drinking Water Act (SDWA) must prepare
a Business Plan and submit it to DEP as part of the permit
application.

It is recommended that all systems prepare a business plan to

use as a financial management planning tool, whether or not
required by state regulations because it is a sound long-range
planning tool.

A Business Plan is intended to show that a water system can

achieve financial, managerial and technical capability.

There is a defined procedure and format for the Business Plan

as identified in the Public Drinking Water Supply System
Business Plan Manual.

The Business Plan format contains three components: a

Facilities Plan, a Management Plan and a Financial Plan.

Each component of the Business Plan has specific items that

must be addressed.

23
Resources and References

#36

The following are references and resources you can use when you
have business planning questions, or are ready to study it in more
detail:

DEP’s Public Drinking Water Supply System Business Plan Manual

DEP regional office and regional water supply engineer as listed on

page 28 of the manual

PA Department of Environmental Protection, Technical Assistance and

Outreach, Dennis Lee, (717) 772-4058

RCAP Solutions, Don Schwartz, PA/NJ Program Manager, (814) 861-

6093

The complete list of training modules includes:

Module 1, Water Supply System Basics Operations
Module 2, Responsibilities of Governing Boards
Module 3, The Safe Drinking Water Act
Module 4, Dealing with Consultants, Technical Assistance
Providers, Regulators, and Funding Agencies
Module 5, The Basics of Accounting and Finance for Small
Water Systems
Module 6, Business Planning for Small Water Systems
Module 7, Budgeting and Capital Improvements Planning
Overview for Small Water Systems
Module 8, Rate Design Overview for Small Water Systems
Module 9, Bidding, Purchasing, and Leasing
Module 10, Project Management Overview for Small Water
Systems

24
 Appendix A: Smallville Financial Plan Form 2 -Income, Expense, and Cash Flow Statement
INCOME, EXPENSE AND CASH FLOW Last Year Year 1 Year 2 Year 3 Year 4 Year 5
STATEMENT 20__ 20__
1 OPERATING REVENUES
2 Water Rates $ 43,200.00 $ 48,800.00 $ 49,825.00 $ 73,632.00 $ 75,277.00 $ 75,837.00
3 Bulk Water Sales $ 6,800.00 $ 7,700.00 $ 7,850.00 $ 11,601.00 $ 11,860.00 $ 12,106.00
4 Fire Protection $ - $ -
5 Fees and Services $ 1,000.00 $ 1,200.00 $ 1,150.00 $ 1,200.00 $ 700.00 $ 1,150.00
6 Other $ - $ -
7 TOTAL (lines 2 through 6) $ 51,000.00 $ 57,700.00 $ 58,825.00 $ 86,433.00 $ 87,837.00 $ 89,093.00
8
9 OPERATING EXPENSES
10 Operation and Maintenance
11 Salaries (operators) $ 15,000.00 $ 15,450.00 $ 15,913.50 $ 16,390.91 $ 16,882.63 $ 17,389.11
12 Benefits $ 3,000.00 $ 3,090.00 $ 3,182.70 $ 3,278.18 $ 3,376.53 $ 3,477.82
13 Utilities $ 8,000.00 $ 8,240.00 $ 8,487.20 $ 8,741.82 $ 9,004.07 $ 9,274.19
14 Chemicals & Treatment $ 5,000.00 $ 5,150.00 $ 5,304.50 $ 5,463.64 $ 5,627.54 $ 5,796.37
15 Monitoring $ 2,500.00 $ 2,575.00 $ 2,652.25 $ 2,731.82 $ 2,813.77 $ 2,898.19
16 Materials, Supplies, Parts $ 3,000.00 $ 3,090.00 $ 3,182.70 $ 3,278.18 $ 3,376.53 $ 3,477.82
17 Transportation $ 1,500.00 $ 1,545.00 $ 1,591.35 $ 1,639.09 $ 1,688.26 $ 1,738.91
18 Purchased Water Costs $ - $ - $ - $ - $ - $ -
19 Outside Services $ 1,000.00 $ 1,030.00 $ 1,060.90 $ 1,092.73 $ 1,125.51 $ 1,159.27
20 Other $ - $ - $ - $ - $ - $ -
21 TOTAL (lines 11 through 20) $ 39,000.00 $ 40,170.00 $ 41,375.10 $ 42,616.35 $ 43,894.84 $ 45,211.69
22 Administrative
23 Salaries $ 6,000.00 $ 6,180.00 $ 6,365.40 $ 6,556.36 $ 6,753.05 $ 6,955.64
24 Benefits $ 1,000.00 $ 1,030.00 $ 1,060.90 $ 1,092.73 $ 1,125.51 $ 1,159.27
25 Building Overhead $ 1,000.00 $ 1,030.00 $ 1,060.90 $ 1,092.73 $ 1,125.51 $ 1,159.27
26 Office Supplies & Postage $ 500.00 $ 515.00 $ 530.45 $ 546.36 $ 562.75 $ 579.64
27 Insurance $ 2,000.00 $ 2,060.00 $ 2,121.80 $ 2,185.45 $ 2,251.02 $ 2,318.55
28 Customer Billing & Collection $ - $ - $ - $ - $ - $ -
29 Accounting $ 1,500.00 $ 1,545.00 $ 1,591.35 $ 1,639.09 $ 1,688.26 $ 1,738.91
30 Legal $ 1,000.00 $ 1,030.00 $ 1,060.90 $ 1,092.73 $ 1,125.51 $ 1,159.27
31 A/E & Professional Services $ - $ - $ - $ - $ - $ -
32 Other $ - $ - $ - $ - $ - $ -
33 TOTAL (lines 23 through 32) $ 13,000.00 $ 13,390.00 $ 13,791.70 $ 14,205.45 $ 14,631.61 $ 15,070.56
34 Depreciation Expense $ 25,000.00 $ 25,000.00 $ 40,000.00 $ 40,000.00 $ 40,000.00 $ 40,000.00
35 Other $ -
36 TOTAL (line 21 plus 33 plus 34 plus 35) $ 77,000.00 $ 78,560.00 $ 95,166.80 $ 96,821.80 $ 98,526.46 $ 100,282.25
37 OPERATING INCOME (line 7 less line 36) $ (26,000.00) $ (20,860.00) $ (36,341.80) $ (10,388.80) $ (10,689.46) $ (11,189.25)
INCOME, EXPENSE AND CASH FLOW Last Year Year 1 Year 2 Year 3 Year 4 Year 5
STATEMENT 20__ 20__
38 NON-OPERATING REVENUES
39 Interest Income $ 600.00 $ 550.00 $ 700.00 $ 1,000.00 $ 800.00 $ 750.00
40 Interfund Transfer $ -
41 Proceeds From the Sales of Assets $ -
42 Lease and Extraction Fees $ -
43 Other $ -
44 TOTAL (lines 39 through 43) $ 600.00 $ 550.00 $ 700.00 $ 1,000.00 $ 800.00 $ 750.00
45
46 NON-OPERATING EXPENSES
47 Interest Expense $ - $ 25,900.00 $ 24,800.00 $ 23,600.00
48 Interfund Transfers
49 To General Fund $ -
50 To Replacement Fund $ - $ 2,500.00 $ 2,500.00 $ 2,500.00 $ 2,500.00 $ 2,500.00
51 To Emergency Fund $ -
52 To Other $ -
53 TOTAL (lines 49 through 52) $ - $ 2,500.00 $ 2,500.00 $ 2,500.00 $ 2,500.00 $ 2,500.00
54 Other $ -
55 TOTAL (line 47 plus 53 plus 54) $ - $ 2,500.00 $ 2,500.00 $ 28,400.00 $ 27,300.00 $ 26,100.00
56 NET INCOME BEFORE TAXES (line 37 plus 44 less 55) $ (25,400.00) $ (22,810.00) $ (38,141.80) $ (37,788.80) $ (37,189.46) $ (36,539.25)
57
58 TAXES
59 Income Taxes $ -
60 Other than Income Taxes $ -
61 TOTAL (line 59 plus 60) $ - $ - $ - $ - $ - $ -
62 NET INCOME AFTER TAXES (line 56 less 61) $ (25,400.00) $ (22,810.00) $ (38,141.80) $ (37,788.80) $ (37,189.46) $ (36,539.25)
63
64 EXTRAORDINARY REVENUES
65 Construction Grants $ - $ 200,000.00
66 Proceeds from Borrowing $ - $ 400,000.00
67 Equity Contribution $ -
68 Other $ -
69 TOTAL (line 65 through 68) $ - $ - $ 600,000.00 $ - $ - $ -
70
71 EXTRAORDINARY EXPENSES
72 Debt Repayment - Principal $ - $ 1,000.00 $ 2,100.00 $ 3,300.00
73 Capital Improvements, Acquisition of Plant & Equipment $ - $ 600,000.00
74 Other $ -
75 TOTAL (line 72 through 74) $ - $ - $ 600,000.00 $ 1,000.00 $ 2,100.00 $ 3,300.00
76 CASH FLOW (line 62 plus 34 plus 69 less 75) $ (400.00) $ 2,190.00 $ 1,858.20 $ 1,211.20 $ 710.54 $ 160.75

25
 Appendix B: Smallville Financial Plan Form 3 – Balance Sheet
20__ 20__
1 ASSETS
2 Current Assets
3 Cash $ 20,000.00 $ 22,190.00 $ 24,048.20 $ 25,259.40 $ 25,969.94 $ 26,130.69
4 Investments $ - $ - $ - $ - $ - $ -
5 Accounts Receivable $ 2,300.00 $ 1,579.00 $ 1,150.00 $ 1,200.00 $ 700.00 $ 1,150.00
6 Inventories $ - $ - $ - $ - $ - $ -
7 Other $ - $ - $ - $ - $ - $ -
8 TOTAL (lines 3 through 7) $ 22,300.00 $ 23,769.00 $ 25,198.20 $ 26,459.40 $ 26,669.94 $ 27,280.69
9 Fixed Assets
10 Property, Plant & Equip at Cost $ 1,000,000.00 $ 1,000,000.00 $ 1,600,000.00 $ 1,600,000.00 $ 1,600,000.00 $ 1,600,000.00
11 Contributions in Aid of Construction $ - $ - $ - $ - $ - $ -
12 Construction Work in Progress $ - $ - $ - $ - $ - $ -
13 Other $ - $ - $ - $ - $ - $ -
14 Less Accumulated Depreciation $ 750,000.00 $ 775,000.00 $ 800,000.00 $ 840,000.00 $ 880,000.00 $ 920,000.00
15 TOTAL (lines 10 through 13 less 14) $ 250,000.00 $ 225,000.00 $ 800,000.00 $ 760,000.00 $ 720,000.00 $ 680,000.00
16 Other Long Term Assets
17 Restricted Assets/Trust Funds $ - $ - $ - $ - $ - $ -
18 Unrestricted Replacement Funds $ - $ 2,500.00 $ 5,000.00 $ 7,500.00 $ 10,000.00 $ 12,500.00
19 Unrestricted Emergency Fund $ -
20 Other $ - $ -
21 TOTAL (lines 17 through 20) $ - $ 2,500.00 $ 5,000.00 $ 7,500.00 $ 10,000.00 $ 12,500.00

22 TOTAL ASSETS (line 8 plus 15 plus 21) $ 272,300.00 $ 251,269.00 $ 830,198.20 $ 793,959.40 $ 756,669.94 $ 719,780.69
23
24 LIABILITIES
25 Current Liabilities
26 Accounts Payable $ - $ - $ - $ - $ - $ -
27 Accrued Payroll and Withholdings $ 500.00 $ 500.00 $ 500.00 $ 500.00 $ 500.00 $ 500.00
28 Current Portion of Long Term Debt $ - $ - $ - $ 1,000.00 $ 2,100.00 $ 3,300.00
29 Short Term Debt $ - $ - $ - $ - $ - $ -
30 Other $ - $ - $ - $ - $ - $ -
31 TOTAL (lines 26 through 30) $ 500.00 $ 500.00 $ 500.00 $ 1,500.00 $ 2,600.00 $ 3,800.00
32 Long Term Debt (less current portion) $ - $ - $ 400,000.00 $ 399,000.00 $ 396,900.00 $ 393,600.00

33 TOTAL LIABILITIES (line 31 plus 32) $ 500.00 $ 500.00 $ 400,500.00 $ 400,500.00 $ 399,500.00 $ 397,400.00
34
35 FLUID EQUITY
36 Retained Earnings
37 Reserved $ 271,800.00 $ 250,769.00 $ 429,698.20 $ 393,459.40 $ 357,169.94 $ 322,380.69
38 Unreserved $ - $ -
39 TOTAL (lines 37 plus line 38) $ 271,800.00 $ 250,769.00 $ 429,698.20 $ 393,459.40 $ 357,169.94 $ 322,380.69
40 Capital Stock (corporations only) $ - $ - $ - $ - $ - $ -
41 Contributed Capital
42 Government Grants $ - $ - $ 200,000.00 $ - $ -
43 Other Contributions $ - $ -
44 TOTAL (lines 42 plus 43) $ - $ - $ 200,000.00 $ - $ - $ -

45 TOTAL FUND EQUITY (line 39 plus 40 plus 44) $ 271,800.00 $ 250,769.00 $ 629,698.20 $ 393,459.40 $ 357,169.94 $ 322,380.69
TOTAL LIABILITIES AND FUND EQUITY (line
46 33 plus 45) $ 272,300.00 $ 251,269.00 $ 1,030,198.20 $ 793,959.40 $ 756,669.94 $ 719,780.69

26