Today’s facility managers must create strong ties with the business managers of the company. To do this successfully, facility managers should know the business they support, learn the language of business, and demonstrate in dollars and cents their support of the company’s strategic plan. For example, one effective way to form a good working relationship with the vice president of marketing is to show how effective facility management can improve the performance ratio of sales to cost through cost reduction and avoidance.
Three Key Financial Statements
Most business decisions are made based on money. Speaking the language of finance can be scary to people who have not been trained in finance. But if you can master just a few basics of finance, you’ll be able to talk to almost anybody about getting your projects approved and funded. Finance is how the dollars in and the dollars out are counted in order to measure if a given project is the appropriate way to spend the money. There are always competing projects that are looking for capital. A good facility manager must be able to talk in a way that makes it easy for the decision makers to understand exactly what he or she is proposing.
There are three key financial statements a facility manager needs to understand:
Sometimes called a profit and loss statement, an income statement covers all the flows for a business in a given period (typically 12 months). It lists revenues (the money coming in) and expenses (money going out to all the vendors and service providers in the company). Finally, it shows the difference between revenues and expenses—profits. Revenues minus expenses equal profit. As a facility manager, you need to understand the expenses that your part of the facilities management process contributes. This will give you a clearer idea of what effect you can have on the overall profits of the business.
The balance sheet shows assets and liabilities at a single point in time, usually the end of a fiscal year. Assets are all the things that the business owns, such as a checking account, any properties held, and the receivables that are due to be collected from clients. Those are all positive contributions to the balance sheet.
On the other side of the balance sheet are liabilities and equity. Liabilities and equity, added together, total up to assets. They can never be out of step: If you have $1,000 in assets, you must have $1,000 of combined liabilities plus equity.
The liability component is comprised of anything owed to someone. If you have 30 days of bills on the books that you owe to your vendors, that would be a liability. Any money that you owe your clients in deposits that are held on the balance sheet would also be liabilities.
Equity is the component of the business that the shareholders or property owners contributed to fund the assets.
Cash Flow Statement
The third key financial statement is less used, but nonetheless quite critical. A cash flow statement takes the cash balance at the beginning of the year, goes through all the revenues and adds them in, removes all cash expenses, adds in any changes in capital expenditures or new capital expenditures, subtracts that from the cash, then adds in money that might have been borrowed from the bank. It finally arrives at the cash balance at the end of the year. This statement enables you to follow how cash has gone through the business every step of the way.
The income statement alone is only part of the information that you need, as is the balance sheet. If a company is making $100 this year, that doesn’t tell you a lot. You’ll want to know if they have $1,000 in assets to generate that $100 of income, or whether they had $10,000 in assets to generate that $100 of income.
Income statements and balance sheets report on either a 12-month period or a single date in time. As a facility manager, you should be able to look at any single year and understand what the expense ratio of, for example, maintenance costs is to total revenues of the business.
But knowing a single year is not enough. Calculating that ratio for prior years is also important. Knowing the level of maintenance expense to total revenue of your business is helpful, but you also want to know whether or not you’ve improved in that area over time.
Understanding Common Ratios
Three categories of ratios are important to understand in order to be an effective financial communicator—and to be able to talk the common language of finance.
The first category is the revenue ratio, also called a turnover ratio. Some examples include revenues per unit, revenues per employee, and revenues to total fixed assets.
The second category is the margin ratios, or profitability ratios. One example of a margin ratio is an expense ratio, where an income item, such as maintenance and repairs, is divided into total revenues.
Return ratios are the third type of ratio. These are the ultimate way that people judge businesses. Three universally accepted formulas are used to measure overall financial performance:
- ROA (Return on Assets) is the net profit after taxes divided by the total value of assets employed to generate income. This calculation does not consider interest paid to creditors and therefore works best for owned assets with no financing.
- ROI (Return on Investment) is the total profit divided by the total amount originally invested to gain a profit. This method gauges performance of an investment based on total money invested, including both direct capital contributions and borrowed funds.
- ROE (Return on Equity) is the net profit after taxes divided by the net worth, yielding the total percentage of equity gained through an investment. This method shows the earning power of the shareholder’s book investment and is frequently used to compare overall corporate performance when an investor is considering which stock to buy.
Although these methods evaluate overall performance, in practice, investors are concerned about different aspects of performance, depending on their needs and circumstances. Several more detailed tools are used to evaluate actual financial performance. Even from these simple formulas, it is apparent that there are many ways to measure return (investment performance). Facility managers striving to obtain funding for major initiatives will have greater chances of success if they know and understand which methods are most accepted and meaningful to those evaluating proposals.
Ratios do not have to be complicated. The key is to make the number on the top as big as possible and the number on the bottom as small as possible to get the best results. You can create all kinds of ratios to figure out what’s important in your business and drive it that way.
Be creative. Figure out different ways to clearly quantify your facilities operations. From an operational perspective, janitorial cost per square foot may not be as relevant as janitorial cost to the number of people in the building. Applying the right ratio can give you an entirely different way to manage a particular line item. You may then be able to come back and show that even though the janitorial expense is going up per square foot, the fact that you’ve been able to fit twice as many people in that building actually means the janitorial costs per employee in that building has gone down.
As a facility manager, you can be a business hero by showing that you are driving up the profits that you already have or reducing the amount of assets that it takes to generate those profits.
This article is adapted from BOMI International’s Facilities Professional Leadership Series, a comprehensive leadership course where facility managers learn how to successfully navigate the road to leadership and career enhancement. More information regarding this is available by calling 1-800-235-2664, or by visiting www.bomi.org. Visit BOMI International’s Web site.