How does your security deposit compare?
In one of the listservs I subscribe to, a question was recently asked about what other utilities’ deposit policies are, including deposit amounts. While I think inquiring about other utilities’ policies is worthwhile, comparing the amount of their deposit without knowing their rates and business practices can be futile.
How much is an adequate deposit?
A sufficient deposit should protect your utility against bad debt customers who leave and never pay their final bill. How much that is depends on your average utility bill and your business practices.
Worst case scenario
The worst-case scenario for a security deposit is that customer who ends up on the cut-off list and skips out without paying. Your utility is owed the original bill which caused the customer to be on the cut-off list, the next bill (if one has been issued) and any usage since the most recent bill. To illustrate this, let’s look at a hypothetical situation…
Days of exposure
I’ve written before about days of exposure, the total number of days of service you would be owed for by the worst case scenario customer described above. For our hypothetical customer, let’s assume:
- meters are read on the 10th of the month
- bills are mailed the last day of the month
- bills are due on the 25th of the month
- bills are considered delinquent 5 days after the due date
- a final notice is mailed 5 days after the delinquent date
- cut-off occurs 5 days after the final notice is mailed
This adds up to 90 days of exposure.
Assuming you bill each customer monthly, 90 days of exposure equates to three months of bills. You would then have to multiply your average monthly utility bill times three to determine how much an adequate deposit is.
If your deposit is less than this, then you are at risk for write-offs from bad debt customers.