6 business insights your energy company needs to grow
Just as experts recommend identifying energy leaks in your home, it's your responsibility as a finance leader to find and stop revenue leaks. At your energy company, you could be losing money due to aging infrastructure, high overhead, or bloated administrative processes, among other things.
Fortunately, there are business intelligence tools like Microsoft Power BI to help make that work easier. Even then, the task can seem overwhelming given the number of business insights you could monitor.
Our downloadable resource, "The business insights every CFO needs to become a chief value officer," discusses the insights that can help drive any business forward.
Some of these business insights are specifically relevant to an energy company's success.
Key business insights for a growing energy company
Total revenue is calculated by multiplying the price of the goods or services your company sells by the number of units sold in a certain period.
That seems straightforward enough, but for an energy company, simply knowing how many kilowatt hours of electricity or thousand cubic feet of natural gas you sell isn't enough. When it comes to total revenue, consider:
Revenue will likely be higher in some months than in others as energy consumption changes with the seasons. Plan with an eye toward keeping capital on hand to bridge the leaner months.
A company with multiple legal entities needs to monitor the total revenue for each at a glance. A healthy overall revenue could mean some entities are propping up others that are floundering.
Who are your most valuable customers?
Knowing your average customer lifetime value and which customers contribute the most to your total revenue can help you decide how best to allocate resources and help you target expansion efforts.
Monitoring operating expenses tells you how much you're spending as part of your energy company's day-to-day operations. Expenditures like wages, administrative costs, marketing costs, and equipment maintenance all fall under operating expenses.
Again, that seems straightforward enough, but one common problem companies make is incorrectly categorizing costs as operating expenses when they aren’t. These include:
One-time purchases, such as new machinery, shouldn’t count as operating expenses. Certain types of leases, including capital leases, also fall under this category. According to GAAP, these assets must be capitalized and depreciated over time.
Cost of goods sold (COGS) refers to the expenses directly tied to the items or services your company sells. It's a separate line item on income statements. For an energy provider, COGS might include power plant employee wages or fossil fuels for burning.
Other non-operating expenses include costs such as interest charges on loans or one-time payments such as legal settlements. They don't pertain to the company's day-to-day operations.
Also important: breaking down expenses into categories such as employees, overhead, office supplies and more. The more granular you get, the more you can identify where changes may be warranted.
As an energy company, your operating income is the revenue you earn to generate or distribute energy, less the cost to run the business (operating expenses), produce the energy and get it to customers (COGS). Again, it's important to know what the term doesn't refer to as well as what it does. Operating income doesn't include one-time income such as dividend payments on investments.
Operating margin brings together all three of the performance indicators discussed so far. It's calculated by dividing operating income by revenue. You'll get a percentage that represents the profit your business earns from every dollar in sales after subtracting operating expenses and COGS.
Why is it so important to monitor operating margin – and the factors that comprise it – as opposed to other indicators such as non-operating expenses? The answer is that operating margin is, to a certain extent, at least, within your company's control and affects it on an ongoing basis.
You can't go back in time and negotiate a more favorable interest rate on the loan you took out five years ago, but you can potentially negotiate better health insurance premiums for your employees. The sale of a piece of land may boost your bottom line temporarily, but investing in new marketing initiatives to increase revenue is more likely to give you an ongoing boost.
Gross profit margin
While operating profit margin takes into account what it costs to generate and distribute the power you sell as well as to run the business, gross profit margin only accounts for the cost of goods sold.
Like operating profit margin, gross profit margin is at least somewhat within your company's control. Monitoring it closely will tell you when the winds of economic circumstance are no longer at your back so you can decide what to do next. As an energy company, if you find your gross profit margin plummeting, you might be able to find new suppliers for your raw materials or pass on price increases in the supply chain to consumers.
When it comes to working capital –calculated by subtracting current liabilities from current assets – the Goldilocks principle applies.
"If a company has too much working capital, cash may not be properly deployed to grow the business. If it has too little, creditors may question whether it can meet its obligations," Deloitte's Kirk Blair and Wanya du Preez stated in a recent report.
Knowing how much working capital is too much or too little is something you can determine with the help of business intelligence tools and expert analysis from your team.
Get more valuable business insights with Gravity
For energy companies with multiple entities, gaining real-time business insights can be challenging, but Gravity’s accounting software makes it much easier.
This makes it easy for your accounting and finance teams to see your total revenue, expenses, inventory and customer data at a glance while also looking at a detailed breakdown for each entity. You can uses these business insights to answer important questions, such as:
- What is our average customer acquisition cost (CAC)?
- What is our average customer lifetime value?
- Which regions have a significantly higher CAC, indicating we need to improve our marketing efforts there?
- Which regions are most in need of new capital equipment?
- Which locations or divisions have optimal levels of working capital?
You can even use Power BI for sales forecasting, giving you a full picture of your financial performance and your future growth.
In addition to providing business intelligence, Gravity also makes it easy to automate multi-currency accounting, simplify approvals, and move toward a more sustainable software solution because it’s cloud-based.
Learn more about how your company can grow faster with Gravity. Schedule a demo today.
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