Identify environmental costs
In this guide:
Environmental management accounting and the role of accountants
Environmental management accounting helps to identify and analyse the environmental costs of a business.
Most business activities have environmental impacts. Almost all environmental impacts also have business costs, such as consuming raw materials, using utilities such as water and energy, and generating waste.
Environmental management accounting uses standard accountancy methods to identify, analyse, manage and reduce these costs in a way that can benefit both the business and the environment. In addition to financial costs, you can use environmental management accounting to identify other issues such as non-compliance, negative public relations and health and safety problems.
The process also enables you to identify which activities have the biggest environmental impacts and costs. This enables managers to set goals and priorities for managing these activities and reducing their impact.
Role of accountants and financial staff
There are several ways in which accountants and financial staff can adapt their existing skills and usual job responsibilities to help businesses deal with environmental issues.
Accountants have a direct interest in controlling and reducing business costs and increasing profits. They have the necessary skills and experience to:
- monitor, measure and control costs
- manage information systems so that the outputs are accurate and reliable
- identify and plan financial budgets for improvement projects
- help formulate and implement strategy
- provide highly regarded advice
Environmental management accounting offers an opportunity for accountants to develop the services they offer beyond the traditional core activities. Two accounting skills are particularly relevant:
- costing - it is essential that the environmental costs of products and services are understood and allocated properly so that they can be managed and prices set at an appropriate level
- investment appraisal of projects - accountants have an important role to play in ensuring that all relevant environmental costs are considered in project proposals
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Identify environmental costs
How to use financial data and evidence from managers to identify environmental costs for your business.
You can find much of the information needed to prepare environmental management accounts in your business' general ledger. A review will show you the costs of materials, utilities and waste disposal, and it will help you to identify the best opportunities for immediate cost savings.
However, as environmental costs tend to be treated as a general overhead rather than being allocated to individual products this can distort the full costs of different products. Accountants can help to determine the true value of environmental costs.
How to identify environmental costs
Departmental managers and senior employees should understand the individual processes in detail and be able to help you identify how large costs are broken down across different activities. In addition, these managers can provide guidance and information that will help you identify the best way to make changes, and over what timescales they can be implemented.
Face-to-face meetings with managers are also important in providing an understanding of physical quantities eg raw materials and waste, rather than purely financial costs. This kind of information is important when setting targets because operational managers don't often have cost information, and may find it easier to measure physical quantities.
Departmental managers can also help identify internal costs and where savings can be made. For example, although the general ledger and supplier invoices will show the cost of disposing of a skip full of waste, departmental managers will know how long it takes to fill the skip. These costs need to be included in environmental management accounts.
You can use activity-based costing to develop a detailed understanding of costs and identify cost drivers which reflect the links between causes and effects of environmental impacts. You can then use this information to recalculate the costs of products, processes and services - see how to allocate environmental costs to specific processes.
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Identify opportunities to cut environmental costs
Decide the main opportunities to cut environmental costs as part of environmental management accounting.
Once you identify environmental costs to your business, you should analyse them to see where they can be reduced or eliminated.
Types of environmental costs
The largest environmental costs are likely to include:
- waste and effluent disposal
- water consumption
- energy
- transport
- consumables and raw materials
Waste environmental cost saving
Waste production offers significant opportunities for savings because of its effect on:
- costs of unused raw materials and disposal
- costs of transport, storage and handling
- possible penalties for compliance failures such as pollution
- taxes for landfill
In addition, waste has environmental costs in the loss of land resources and the generation of methane, a potent greenhouse gas.
You can identify how much material is wasted in production of products by comparing the weight of materials bought with the product yield. This is known as a 'mass balance', and is a valuable tool to identify areas for cost saving.
For more information on reducing and managing waste, see our guides on waste reviews, policies and action plans and reduce your business waste to save money.
Water
Businesses pay for water twice - first to buy it and then to dispose of it. As mains supply, sewerage and trade effluent charges rise, controlling water use offers several opportunities to make cost savings. To make the most of these opportunities, you need to identify clearly where water is used, and where you can reduce consumption. Find out how to monitor your water consumption in our guide on how to monitor your water use. Find advice on saving water in our guides on how to save water at commercial premises and save water at industrial premises.
Energy
Energy is a significant expense for most businesses, but usage can often be reduced at little or no cost. In addition, the benefits can be increased by government initiatives and grants which encourage businesses to be more energy efficient such as enhanced capital allowances - see tax breaks and finance for your business.
Environmental management accounts will help you identify inefficiencies and wasteful practices, and thus opportunities for improvements and cost savings - see how to save money by using energy more efficiently.
Transport and travel
Reducing the environmental impact of both business travel and the transport of goods and materials can have significant cost benefits. Using public transport rather than company cars, investing in more fuel-efficient vehicles and better journey planning will reduce fuel, maintenance and other costs - see workplace travel planning and zero emission vehicles and alternative fuels.
Consumables and raw materials
The cost of raw materials and consumables needed to make products or deliver services can be readily identified, and discussions with senior managers will show where savings can be made. For example, the use of recycled or sustainable products can reduce costs as well as having environmental benefits.
You should encourage suppliers to participate and be involved in the process. Consider a 'servicised' contract where your suppliers are paid for their service performance and not for the volume of supply. This should provide suppliers with an incentive to look for ways to minimise rather than maximise the quantities of products consumed. In the long-run, suppliers also have an incentive to look for ways to redevelop or reformulate what they are supplying, even substituting it with a different technology.
For more information, see our guide on how to supply chain efficiency and environmental impact.
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Allocate environmental costs to specific processes
Setting environmental costs against products and processes to enable you to target potential cost savings.
Allocating costs to processes or products is an important element in preparing management accounts. It enables you to identify the key areas that you should focus on to cut costs.
You should produce a flow chart showing the main activities of the business, breaking down the processes into enough detail to allow you to allocate an estimate of the environmental costs to each activity. The flow chart should not be overly detailed, but should have enough information to show clearly where you can make savings.
Reviewing the general ledger and face-to-face interviews with managers and senior employees will allow you to list material, labour, utility inputs and waste outputs and give accurate environmental and financial costs.
To help analyse the data, you may find it useful to prepare a spreadsheet showing the materials, utilities and wastes for each of the main processes.
Once this has been achieved, you can start to reduce environmental costs significantly, often at little or no additional cost. Further improvements can be made by investing in:
- eco-designing products
- optimising product processes
- using new technology
- recovering and reusing materials
The most effective way to cut costs is to set objectives and targets so that you have clear goals to work to - see how to set environmental targets to increase profits.
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Set environmental targets to increase profits
Create an action plan and targets to achieve cost cuts identified by environmental management accounting.
Environmental management accounts should provide an analysis of environmental impacts, with detailed analysis of financial costs and physical quantities allocated across the business' processes, products and services.
You can use this information to produce an action plan including:
- targets for reducing waste, improving energy efficiency, cutting water use and improving the reuse or recycling of materials and equipment
- an estimate of potential cost savings and payback period, with data to enable managers to measure progress against the targets, tracking success and identifying where further attention is needed
- assessments of the actual cost savings and payment periods of capital investment projects when they have been completed
- periodic progress reports for senior management by including additional data in monthly management accounts
In addition to financial targets, environmental targets should also be included expressed in terms of improved efficiency.
It will not always be possible to make immediate improvements. However, it should be possible to define specific projects for which environmental and cost reductions can be achieved.
Communication plays an important role in maximising the benefits of environmental improvements, eg through the use of emails or newsletters for staff, suppliers and customers. In addition, all employees should be encouraged to participate fully, so that the business benefits from their enthusiasm and knowledge - see making the case for environmental improvements.
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