Even if sales growth is strong, it doesn’t necessarily translate into profitability growth. For many businesses, unexpected and difficult to forecast expenses, like utility costs can cause profits to sink.
In fact, the median net profit across 212 industries in a Yahoo Finance database is only 6.5%, according to an AEI analysis.
Grocery stores, for instance, operate on a tight net margin of only 1.4% on average, so unexpected expenses can easily make the difference between profitability and being upside down, particularly as other costs such as rent and wages rise.
Why Utilities Matter
For many businesses energy is a top three operating expense, but it is often an overlooked cost category as many companies consider it fixed and opaque.
At a full-service hotel, for instance, energy costs equal 4-6% of total revenue, according to National Grid. Suppose a hotel chain had had $10 billion in annual revenue at a 5% profit margin. That would mean that profits equal $500 million for the year, while energy utilities equal $400 million – $600 million. Considering that commercial buildings waste of 30% of energy they consume, if the supposed hotel chain removed that waste they could save an additional $120 million – $180 million per year, equaling an additional 24-36% more profit.
On the flip side, higher costs from utilities would eat into that profit margin, and if charges doubled, the balance sheet could go into the red. While that would be a dramatic scenario, it’s theoretically possible, because energy usage itself wouldn’t have to double; instead, using energy at the wrong times could lead to much higher costs.
How Companies Can Better Manage Utility Bills
To avoid being hit with surprise charges, companies should take advantage of both hardware and software that can prevent price spikes.
Energy analytics software (EAS), for instance, allows businesses to monitor their energy usage in real time, and if a peak period approaches or energy prices per kilowatt hour (kWh) increase, businesses can identify curtailment strategies that would allow them to stay within budget.
In the case of a hotel, demand might be highest at the start of a check-in time as guests enter their rooms and consume energy such as by turning on the lights and TV. To counter this surge, the hotel could reduce its employees’ usage, such as pausing laundry during that period so that the hotel’s energy load is more evenly distributed throughout the day.
And smart devices can help, such as if laundry machines automatically lock during these high demand periods to avoid usage. Plus, they can help increase general efficiency by automatically turning off when not in use so that energy is not wasted.
As a result, businesses can reduce their utility bills and help ensure that they remain profitable.
Your building’s energy costs are one of your largest operating expenses. If you’re still treating energy like a fixed cost, then you need our guide on Energy Analytics Software (EAS).