Ifma Fmpv3-0 F-B Ch2

Chapter 2: Financial Management
of the Facility Organization

► Topic 1: Budgets and Budgeting Basics
► Topic 2: Financial Statements
► Topic 3: Business Cases, Supporting Documentation and

Financial Reports
► Topic 4: Fundamental Cost Concepts
► Topic 5: Analyzing and Interpreting Financial Documents
► Topic 6: Cost-Containment Strategies
► Topic 7: Chargebacks
© 2014 IFMA
All rights reserved Chapter 2 Introduction Edition 2014
www.ifma.org/fmp Slide 2-1 v3.0
Budgets
A budget is a formal, numerical expression of

how an organization expects to operate for a
defined period of time. It identifies the
resources and commitments needed to satisfy
the identified goals over a period as well as
the sources of the funding to provide those
resources.
© 2014 IFMA
All rights reserved Chapter 2, Topic 1 Edition 2014
Discussion Question
Identify the following statements as true or false.
Answers:
True 1. Budgets are actionable plans that help to ensure
fiscal responsibility.
False 2. Strategic plans are characterized by short-term goals
and objectives.
3. Forecasts may be for months, quarters, one year,
True
multiple years or accounting periods.
4. Budgeting serves dual roles of planning and control.
True
5. Compared to strategic plans, budgets have
False a broader focus.
6. Forecasting implies more management control than
False budgeting.
© 2014 IFMA
Budgeting Benefits
► Improves communication and
coordination
► Forces management to plan
► Provides a basis for performance
evaluation
► Allows for fine-tuning of the
strategic plan
© 2014 IFMA
Budgeting Approaches
Authoritative Participative Combined
• Senior management • Managers at all • Combines the
sets everything from levels and certain features of
strategic goals down key employees authoritative and
to the individual cooperate to set participative
items. budgets. methods.
• Lower managers • Top management • Known as an
and employees fulfill usually retains final iterative budget.
these goals. approval. • Characterized by
• Known as a top- • Known as a bottom- two-way
down budget. up or self-imposed communication.
budget.
© 2014 IFMA
Budget Assumptions
FM budgeting requires making reasonable assumptions
about the future.
Examples:
► Revenue expectations
► Projected operating expenses
► Number and compensation of full-time equivalent FM employees
► Projected costs for health-care benefits
► Number of contract personnel and outsourcing costs
► Supplier price projections
► Rent, insurance and taxes
© 2014 IFMA
Developing Budget Assumptions
Intuition and experience
Historical data Research
Laws
Dynamic Trade journals
Factors
Supply and demand Industry best practices

for FM services
Colleagues’ input
© 2014 IFMA
Types of Budgets: Operating Budget
An operating budget is a short-term budget projecting all
estimated income and expenses during a given period
(usually one year). It excludes capital expenditures because
they are long-term costs. It:
► Consists of funds that are used to support daily operations.
► Estimates revenue (income) and expense items on a
monthly basis.
► Includes projections for a one-year period.
► Is also called an operational budget or operational
expenditures.
© 2014 IFMA
Discussion Question
Why is good due diligence important
when preparing an FM operating
budget?
Answer:
Due diligence helps FM to be proactive
regarding assets. Ultimately, it enhances
asset management and helps to mitigate
perpetual reactive maintenance.
© 2014 IFMA
Types of Budgets: Capital Budget
A capital budget shows financial impacts resulting from
major, long-term, non-routine expenditures for items like
property, plant and equipment. It:
► Provides a direct, high-dollar response to the
organization’s business objectives.
► Requires an organization to reserve substantial funds
and resources for use on large investments, oftentimes
to realize benefits far into the future.
► Includes projections for a multiyear presentation.
© 2014 IFMA
Due Diligence Considerations for
Capital Projects
► Organizational business objectives and their priority
► Project boundaries
► Funding needed to complete an ongoing project
► Maintenance or replacement of worn-out equipment
► High expected return on investment
► Average return on investment
► Modernization of work processes and resulting cost savings
► Assurance of the organization’s financial integrity
► Compliance with legal/regulatory requirements
► Financial risks
© 2014 IFMA
Revenue Projections
► Typically associated with leasing,
subleasing or the monies from the
sale of a facility.
► Some revenues may result from
Revenue internal chargebacks.
projections
► Key is to make adjustments as
soon as there is sufficient
information to anticipate future
plans or changes.
© 2014 IFMA
Expense Projections
► Should consider all the costs
required to achieve the
organization’s objectives (e.g.,
capital expenses and general
Expense administrative expenses).
projections ► Based on experience and
anticipation of changes and
unknowns (e.g., personnel costs and
associated expenses, administrative
costs, seasonal variations).
© 2014 IFMA
Discussion Question
Identify the following statements as related to fixed costs or
variable costs.
Answers: Fixed 1. Remain unchanged in total for a given time period,

despite wide changes in the related level of total activity.
Variable 2. Change in total in proportion to changes in the related
level of total activity.
Variable
3. Can be changed in the short term with few constraints.
4. Annual liability insurance premiums and depreciation
Fixed are examples.
5. Mail services or printing costs based on usage are
Variable examples.
6. Tend to be recurring.
Fixed
© 2014 IFMA
Budget Periods
Budgets are prepared for a set time period.
► Typically established for ► Increasingly popular

the one-year period that method is continuous
corresponds to the budgeting (a rolling
organization’s fiscal year. budget); rolls forward (e.g.,
► May not be the same as month, quarter, or year) as
the government’s tax year. each period ends.
► Often broken down into
quarterly and monthly time
periods.
© 2014 IFMA
Budgeting Methods
Incremental Zero-Based Activity-Based
• Extrapolates from • Requires justifying • Focuses on
historical data. the continued activities.
• Starts with last existence of items • Includes the use of
year’s budget and financially and activity-based costs
adds to it (or operationally. to connect resource
subtracts from it) • Helps to avoid consumption and
according to including ineffective output.
anticipated needs. activities just • Emphasizes value-
because they were added activities.
in the prior budget.
© 2014 IFMA
Discussion Question
A criticism of incremental budgeting is that
it focuses on departments or products and
services and obscures the relationship
between costs and outputs. True or false?
Answer:
True. Because incremental budgets rely on
past (historical) budgets, there is more
potential to continue funding items that
would be cut if their cost-effectiveness (or
lack of) were known.
© 2014 IFMA
General Budgeting Guidance
Support the organization’s

Control costs.
core business.
The budget process can

highlight FM contributions to . . .
Quantify the impact of any Outline anticipated cost

capital requirements on the increases and/or decreases
operating budget. for the budget period.
© 2014 IFMA
Discussion Question
Which of the following practices are likely to
contribute to effective FM budgeting? (Select two.)
I. Alignment to the organization’s strategic plan and core
business and operational objectives
II. Regular monitoring of expenses against budget levels to
track progress toward budget goals
III. Overly optimistic revenue projections
IV. Creative accounting practices to offset negative budget
variances
Answers:
I and II. The overall goal of the budget process is to
produce accurate and detailed financial projections and
provide for fiscal accountability.
© 2014 IFMA
Budget Monitoring
Weekly analysis Annual analysis
► Frequency may be weekly, monthly, quarterly, midyear

or annual.
► Helps to determine if allocated funds have been spent
as specified.
► Allows variations between the approved budget and
actual spending to be analyzed and, if warranted,
appropriate adjustments to be made.
© 2014 IFMA
Budget Closeout
Coincides with the end of the fiscal year
► Can be simple or complex. Examples

► Typically requires ► Government sectors:
coordination between the • Rigorous closeout of
facility manager and the purchase orders
finance department. • Books closed out at end
of every fiscal year
► Reveals how well a facility
• Financial audit
manager has managed
► Private sectors:
the budget.
• Accounting for accruals
© 2014 IFMA
Multinational Budget Considerations
► Legal and regulatory requirements
► Currency
► Collective bargaining, employee
representation and government mandates
► Culture
► Risk management
© 2014 IFMA
State or Cross-Border
Benchmarking and Budgeting
CEN’s benchmarking standard identifies many factors
that can impact finance or business in state or cross-
border benchmarking.
Examples:
• National rules and regulations • Level of outsourcing
• Currency exchange rates • Subletting
• Taxation and value-added tax • Spare capacity (temporarily/
• Accounting rules short-term vacant space)
• Rental basis and service charges • Effect of internal recharging
• Labor costs
© 2014 IFMA
Financial Statements
Financial statements portray the current financial health
and recent financial history of an organization. They are
prepared from accounting records once the organization is
confident that all accounting data is accurate.
They answer basic questions about an organization, such as:

► What does it own?
► What does it owe?
► What are its sources of revenue?
► How is money spent?
► How much profit is made or loss incurred?
► What is the state of the organization’s
financial health?
© 2014 IFMA
Financial Statement Principles
Data presented
should be:
 Clear.
 Accurate.
 Complete.
 Consistent.
 Timely.
© 2014 IFMA
Financial Statement Categories
 Produced on a regular basis (usually monthly).
Internal
 Made available to senior management, staff management
and others with operating or oversight responsibilities.
 Serve as essential reporting mechanisms and management
tools.
 Required by law for publically traded companies.

External
 Prepared in accordance with accounting standards—IFRS
or GAAP and FASB
 Prepared and certified by an auditor (e.g., certified public

Audited
accountant or chartered accountant).
 Include a rigorous review of the organization’s financials as
well as additional documents.
 Include an opinion document.
© 2014 IFMA
Discussion Question
True or false? A qualified opinion of an
audited financial statement is a good thing.
Answer:
False. Contrary to its connotation, a qualified
opinion is not a good thing. Auditors who issue
qualified opinions are suggesting that there is a
material problem with one or more aspects of the
financial statement and/or the company being
audited may not have upheld IFRS, GAAP or
Sarbanes-Oxley Act accounting principles.
© 2014 IFMA
Exhibit External Financial Statements
2-9
Income Statement
· Record of revenues and expenses for

current period
· Revenues – Expenses = Net income (or
net loss)
Statement of Cash Flows

Shareholders’ Equity
· Shows sources and uses of cash
· Net change in shareholders’ equity from · Three sections: operating, investing,
operations over specified period of time financing
· Shown as a footnote to income statement · Cash flow from profit = Other
· Assets – Liabilities = Shareholders’ equity sources of cash – Uses of cash =
Change in cash
Balance Sheet
· Snapshot of performance at one point in

time
· Assets = Liabilities + Shareholders’ equity
© 2014 IFMA
Income Statement
An income statement is an accounting document that
represents the company’s revenue and expense
transactions for the reporting period. It:
► Is also called the profit and loss (P&L) statement or
earnings statement.
► Shows profitability for a specific period; indicates
cumulative business results within a defined time frame.
► Does not reflect financial solvency.
► Is comparable to the statement of activity (SOA)
prepared by not-for-profit businesses.
© 2014 IFMA
Exhibit Sample Adapted Income Statement
2-10 (For-profit organization; USD in millions)
Current Prior
Year
Year
Revenues $8,380 $7,757

Expenses:
Cost of operating expenses 4,982 4,594
Cost of goods sold 2,300 2,109
Interest expense 173 172
Depreciation and amortization 39 24
Income before income taxes 886 858
Income tax expenses 269 275
Net income $617 $583
© 2014 IFMA
Exhibit Sample Adapted Income Statement
2-11
Comparative Horizontal Analysis
(For-profit organization; USD in millions)
Increase (Decrease)
Current Prior
Year Year Amount Percentage
Revenues $8,380 $7,757 $623 8.0%

Expenses:
Cost of operating expenses 4,982 4,594 388 8.5
Cost of goods sold 2,300 2,109 191 9.1
Interest expense 173 172 1 0.6
Depreciation and amortization 39 24 15 62.5
Income before income taxes 886 858 28 3.3
Income tax expenses 269 275 (6) (2.2)
Net income $617 $583 $34 5.8
© 2014 IFMA
Balance Sheet
A balance sheet is a “snap shot” of a firm’s financial
position at a specific point in time. It:
► Reports on an organization’s assets, liabilities and net
assets at a specified date.
► Illustrates an organization’s solvency and cash position.
► Does not reflect profitability.
► Is comparable to the statement of financial position
(SOFP) prepared by not-for-profit businesses.
► Indicates how efficiently an organization is utilizing its
assets and managing its liabilities.
© 2014 IFMA
Discussion Question
Identify the balance sheet sections (assets,
liabilities or equity) described below.
Answers:
Assets 1. Resources obtained, owned or controlled by
an organization
Equity 2. An organization’s net worth
Liabilities 3. What the organization owes to others
4. Listed in order of the time frame in which they
Liabilities
are due
5. Generally divided into categories and shown
Assets
in the order of their liquidity
© 2014 IFMA
Exhibit Sample Adapted Balance Sheet:
2-12
Assets
Current Year Prior Year

Assets
Current assets:
Cash and cash equivalents $192 $130
Short-term investments 15 27
Accounts receivable, net 169 168
Inventory 67 63
Pre-paid expenses and other 363 342
Total current assets 806 730
Plant, property and equipment, net 3,280 3,037
Intangible assets 878 849
Other assets 656 784
Total assets $5,620 $5,400
© 2014 IFMA
2-12
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and other current $1,213 $1,166
Income tax payable 238 208
Short-term debt 10 146
Total current liabilities 1,461 1,520
Long-term liabilities 2,056 2,299
Other liabilities 983 987
Total liabilities 4,500 4,806
Shareholders’ equity:
Common stock 916 1,046
Retained earnings (accumulated deficit) 414 (203)
Accumulated other comprehensive (loss) (210) (249)
Total shareholders’ equity 1,120 594
Total liabilities and shareholders’ equity $5,620 $5,400
© 2014 IFMA
2-13
Assets
Current Prior
Year Year Increase (Decrease)
Amount Percentage
Assets
Current assets:
Cash and cash equivalents $130 $62 47.7%
$192
Short-term investments 27 (12) (44.4)
15
Accounts receivable, net 168 1 0.6
169
Inventory 63 4 6.3
67
Pre-paid expenses and other 342 21 6.1
363
Total current assets 730 76 10.4
806
© 2014 IFMA Plant, property, and equipment, net 3,037 243 8.0
All rights reserved Chapter
3,280 2, Topic 2 Edition 2014
Intangible assets 849 29 3.4
2-13
Liabilities and Shareholders’ Equity
Current Prior Year
Year Increase (Decrease)
Amount Percentage
Current liabilities: Liabilities and Shareholder’s Equity
Accounts payable and other current $1,213 $1,166 $47 4.0%
Income tax payable 238 208 30 14.4
Short-term debt 10 146 (136) (93.2)
Total current liabilities 1,461 1,520 (59) (3.9)
Long-term liabilities 2,056 2,299 (243) (10.6)
Other liabilities 983 987 (4) (0.4)
Total liabilities 4,500 4,806 (306) (6.4)
Shareholders’ equity:
Common stock 916 1,046 (130) (12.4)
Retained earnings (accumulated deficit) 414 (203) 617 303.9
Accumulated other comprehensive (loss) (210) (249) 39 15.7
Total shareholders’ equity 1,120 594 526 88.6
Total liabilities and shareholders’ equity $5,620 $5,400 $220 4.1
© 2014 IFMA
Statement of Cash Flows
The statement of cash flows shows cash levels across
the operating period so as to ensure that predicted liabilities
due to be paid at any given time do not exceed the ability to
pay. It:
► Provides relevant information about cash receipts and
cash disbursements.
► Indicates where the organization’s cash came from and
how it was used during the time interval specified in its
heading.
► Is prepared by rearranging items on the balance sheet
and income statement.
© 2014 IFMA
Exhibit Sample Statement of Cash Flows
2-14 (For-profit organization; USD in millions)
Operating activities
Net income $35,000
Adjustments for noncash items
Depreciation $14,000
Net increase in current assets other than cash (24,000)
Net increase in current liabilities 8,000 (2,000)
Net cash flow from operating activities 33,000
Investing activities
Sale of plant, property and equipment $91,000
Net cash flow from investing activities 91,000
Financing activities
Borrowing $22,000
Payment of long-term debt (90,000)
Purchase of treasury stock (9,000)
Payment of dividends to stockholders (23,000)
Net cash used for financing activities (100,000)
Net increase (decrease) in cash $24,000
© 2014 IFMA
Discussion Question
All of the following information may be included in
notes to financial statements EXCEPT
A. highlights of significant accounting policies.
B. major acquisitions.
C. any special contracts or major agreements.
D. payment of dividends to stockholders.
Answer: D. Payment of dividends to

stockholders is included in a statement of cash
flows. Notes help to portray an organization’s
finances beyond the actual numbers.
© 2014 IFMA
Depreciation
Depreciation is a noncash charge against assets, such
as cost of property, plant and equipment over the
asset’s useful life. It is an expense associated with
spreading (allocating) the cost of a physical asset over
its useful life. It:
► Shows (for most assets) that they have reduced
value as a result of wear and tear, age or
obsolescence.
► Is customarily associated with tangible assets (e.g.,
buildings and equipment) but is also applicable to
natural resources and intangible assets.
© 2014 IFMA
Depreciation Example
FM must know organizational depreciation rules and
adhere to those rules in every way.
Example in USD: Depreciable cost for maintenance equipment

Purchase price for equipment $200,000
Freight delivery charges $2,500
Installation $6,500
Employee training $1,000
Total cost $210,000
Less salvage value * $60,000
Depreciable cost $150,000
* The estimated value of an asset if it is sold at the end of its depreciation period or service life.
© 2014 IFMA
Why Depreciate Assets?
Accounting Purposes Tax Purposes
Expenses incurred in producing Tax rules vary.

revenue should match the revenue ► May tax the depreciated value of an
they helped to earn for that period. asset using a flat rate.
► Organizations may be allowed to
► Revenue recognition
• For simple cash transactions, the revenue depreciate assets according to
is recorded when the sale is completed accelerated schedules.
and the cash received.
• For capital expenditures, the revenue is
accounted for on a periodic basis.
► The matching principle implies that each
expense item related to revenue earned
must be recorded in the same
accounting period as the revenue it
helped to earn.
© 2014 IFMA
Depreciation Methods
Modified
Straight-Line
Accelerated Accelerated Cost
Depreciation Activity Method
Depreciation Recovery System
Method
(MACRS)
Assumes the asset Based on a measure Steadily decreasing U.S. asset

has the same of productivity relative charge so assets are classification system
usefulness and repair to the total expected depreciated quickly in that groups similar
expense in each year. productivity for the early years. types of assets
asset. Examples together and shows
• Sum-of-the-years’- the number of years
digits of depreciation for
• Declining balance each type.
© 2014 IFMA
Capitalization Versus Expense
► Defined by tax law and organizational policy.
► Typical considerations are:
• The useful life of the asset (e.g., less than or longer than one
year).
• The cost of the item (e.g., whether it exceeds the organizational
capitalization cutoff point).
Example:
A building may have a 50-year life for financial purposes. That building
may have a roof with a 20-year life. Replacement of that roof may be
very costly. Some organizations may characterize that major repair as a
capital activity; others may expense the activity.
© 2014 IFMA
Lease or Purchase Considerations
for Capital Assets
► Decisions are driven by specific financial considerations
and recommendations for acquiring capital assets.
► Often vary depending on the asset.
► Should involve life-cycle cost analysis.
► Influencing factors include:
– Tax implications.
– The organization’s cash position.
– The cost of alternative decisions.
© 2014 IFMA
Discussion Question
Identify the pro forma statements described
below.
Answers:
Pro forma 1. Component projections of revenues and expenses for
income the budget period; indicates the expected net income
statement for the period.
Pro forma 2. Classifies cash receipts and disbursements depending

cash flow on whether they are from operating, investing or
statement financing activities.
3. Projects how assets will be managed in the future;
Pro forma
adjusts figures for expected events during the coming
balance
fiscal year.
sheet
© 2014 IFMA
Estimating Cash Flow Effects
► When accounts receivable decrease, that means that MORE
of them have been converted into CASH that is available for
use.
► When accounts payable increase, that means that LESS of
them have been paid and MORE cash is available for use.
► When accounts receivable increase, that means that LESS
of them have been converted into CASH that is available for
use.
► When accounts payable decrease, that means that MORE of
them have been paid and LESS cash is available for use.
© 2014 IFMA
Guidelines for FM Financial Operations
 Understand the organization’s mission  Keep accurate financial records.
and how the FM budget and financial
decisions move the organization toward  Compile accurate historical data for
that mission. evaluating trends and forecasting.
 Establish rapport with organizational

finance personnel and external  Prepare accurate and timely
customers. operational and capital budgets.
 Monitor budgets and take appropriate
 Clearly define roles in the FM budgeting actions/adjustments required to
process (top-down versus bottom-up and
correct/offset negative budget
the approval process).
variances.
 Understand fundamental accounting
practices and organization-specific  Know how to discern the managerial
practices. implications of external and internal
financial statements.
 Maintain clear, well-understood and
documented financial handling
processes.
© 2014 IFMA
A Business Case
A business case explains how a specific project or initiative will add
value to an organization. It captures the reasoning for a project or
initiative and how fulfilling specified needs is aligned with organization’s
strategic plan and/or can support specific organizational strategies and
objectives.
It should also:
► Define how much money will be involved.
► Define how much the organization will make (or save) through the
change.
► Demonstrate an understanding of the organization’s concerns for
profits, reduced costs and similar financial concerns.
► Position how the project or initiative may improve the lives and
welfare of people or fulfill compliance.
© 2014 IFMA
Common Business Case Components
► Executive summary
► Current status
► Assumptions
Business
► Business analysis
Case
► Risk analysis
► Recommendation
► Goals and timeline
All relevant narrative and financial data should be linked together into a
cohesive presentation to justify resources and capital expenditures.
© 2014 IFMA
Concept of Best Value
Extends the conventional wisdom pairing value and
money and instead implies a need to continually strive
for something superior at the lowest practicable cost.
► Value is about the relationship of cost or price and quality or

performance.
► Ideally, cost and quality should both be considerations in FM
decisions.
► Cost should take sole priority only when financial constraints are
severe and dictate so.
► Value for money encompasses the quality of a service and the
economy, efficiency and effectiveness with which it is delivered.
© 2014 IFMA
Life-Cycle Costing (LCC)
Life-cycle costing is the process of determining (in present-value
terms) all costs incident to the planning, design, construction, operation
and maintenance, and disposition of a structure over time. It involves
the analysis of the costs of a system or a component over its entire life
span.
Basic considerations:
► Identifying alternatives
► Estimating costs
► Computing life-cycle costs for each alternative
– Making cash flows time-equivalent by converting them to present values
– Totaling all costs
► Conducting appropriate risk and uncertainty assessments
© 2014 IFMA
Discussion Question
Which of the following are appropriate applications
of FM benchmarking? (Select two.)
I. To identify and evaluate problems that when solved
restore the status quo
II. To help ensure that planning and decisions are based on
best practices
III. To establish a baseline for self-improvement
IV. To help empower employees to make decisions and take
action in their work areas without prior approval
Answers: II and III. Benchmarking is a continuous,

systematic process of measuring products, services,
costs, quality and practices against the best levels of
performance.
© 2014 IFMA
Capital and Operational Expenditures
Operational Expenditures Capital Expenditures
► Short-term in nature. ► Long-term investments.

► Considered current ► Result in a current cash outlay
investments that can be with the expectation of future
written off in the same year benefits.
that the expenses occur. ► Value of the initial cash outlay is
► Also known as operating gradually reduced (amortized)
expenses or current over a period of years according
expenditures. to tax regulations.
► Also known as capital
investments.
© 2014 IFMA
Time Value of Money
The time value of money principle states that a dollar in hand is worth
more than a dollar to be received in the future because it can either be
consumed immediately or put to work to earn a return.
► A dollar (or any other monetary unit) is worth more today than a
dollar received tomorrow because that dollar can be invested today
to earn a return.
► A dollar tomorrow is worth less than a dollar today because of the
interest foregone.
EXAMPLE
Period Beginning Value Interest Earned Ending Value

1 $3,000,000 + $300,000 $3,300,000
2 $3,300,000 + $330,000 $3,630,000
© 2014 IFMA
Present Value and Future Value
Present Value Future Value
Present value (PV) is the Future value (FV) is the amount

amount that a given future that a given amount, invested
amount is worth today at a today at a given rate of return or
specific rate of interest. interest rate, will be worth at
some designated future time.
IN THE PREVIOUS EXAMPLE
Period Beginning Value Interest Earned Ending Value

1 $3,000,000 + $300,000 $3,300,000
2 $3,300,000 + $330,000 $3,630,000
© 2014 IFMA
All rights reserved
Present value Chapter 2, Topic 3 Future value Edition 2014
Future Value and Present Value Formulas
Present value x Future value interest factor = Future value
$3,000,000 x 1.2100 = $3,630,000
Future value interest factor for 10 percent over two years
Capitalization is the operation of evaluating a present value into the
future value (how much $3,000,000 today will be worth in two years).
Future value x Present value interest factor = Present value

$3,630,000 x 0.826 = $2,998,380
Present value interest factor for 10 percent over two years
Discounting is the operation of evaluating the present value of a future

amount of money (how much $3,000,000 received in two years—at some
interest rate—is worth today).
© 2014 IFMA
Capital Investment Analysis
Key questions in evaluating potential capital
investments:
 Are the projects independent or mutually exclusive?
 Do the projects have the same or different size, cash flow
pattern and life?
 Are the projects subject to capital rationing?
 Do the projects have the same risk?
Various capital budgeting techniques are used to evaluate and select
independent and mutually exclusive projects and make decisions under
capital rationing (e.g., net present value, internal rate of return, and the
payback method).
© 2014 IFMA
Discussion Question
Which of the following characteristics distinguishes
discounting methods from nondiscounting
methods?
A. Bases decisions primarily on experience and judgment
B. Promotes projects promising later returns (rather than
early returns)
C. Ignores the time value of money
D. Recognizes the time value of money
Answer: D. Net present value and internal rate of return

are considered discounting methods and make capital
budgeting decisions using discounted cash flows.
© 2014 IFMA
Comparisons of Capital Investment
Analysis Techniques
Net Present Value (NPV) Internal Rate of Return (IRR) Payback
(Discounting Method) (Discounting Method) (Nondiscounting Method)
• Determines monetary value • Determines rate of return • Determines time required for
today that investment project promised by investment organization to recover
earns after yielding desired project over its useful life; original investment—speed
rate of return for each period sometimes simply called of recovering initial
during life of investment. yield on project. investment.
• Compares PV of investment • Estimates discount rate that • Based on target payback
project’s cash inflows makes PV of net cash inflows period (PP)—maximum cutoff
(benefits) to PV of equal to initial investment— considered to be acceptable
investment’s cash outflows discount rate that will make length of time for project.
(costs). NPV of investment zero. • Ignores time value of money
• Yields monetary value. • Yields percentage showing (deficiency).
return on each dollar • Useful as screening measure
invested. only.
© 2014 IFMA
Discussion Question
Answers:
False 1. If the NPV and IRR methods disagree about the
worthiness of a project, it might be wiser to use the data
from the IRR method.
2. NPV values of individual projects can be added to
True
estimate the effect of accepting some possible
combination of projects.
3. An unrealistic NPV discount rate can result in an
True
erroneous decision to accept/reject a project.
4. The payback method ignores the time value of money.
True 5. Use of discounting methods mitigates the need to use
False multiple criteria for evaluating investment projects.
© 2014 IFMA
Minimizing Risk in Capital Investments
Sensitivity Analysis Scenario Analysis
► Measures the change in one ► Examines what happens to

variable as a result of a change in profitability estimates such as NPV
another variable. if a certain set of events (a
► Employs a “what-if” technique to scenario) arises.
help determine which variables have ► Examines probability estimates
the greatest impact on a capital against different sets of
project’s outcome. assumptions or conditions.
Example: Example:
Evaluates how NPV, IRR and other project Measures the impact of simultaneous changes
profitability indicators change if the discount rate, and reflects a range of outcomes as reflected by
labor or materials costs, sales or some other a probability distribution (e.g., optimistic,
factor varies. pessimistic, most likely).
© 2014 IFMA
FM Costs
FM costs are the price paid for acquisition,
maintenance, production, or use of materials or
services. They are the most highly scrutinized
aspect of FM performance.
Facility managers:
► Manage a huge cost center within an
organization.
► Must understand their costs of doing business.
© 2014 IFMA
Cost Terms and Classifications
Costs may stay the same or may change proportionately (rise or fall) in
response to a change in activity.
Variable • Change in total in proportion to changes in the related level of total activity.
• Routinely increase and decrease proportionately with changes in activity level.
Fixed • Remain unchanged in total for a given time period, despite wide changes in the related
level of total activity.
• Fixed within some relevant range—specific cost drivers for a specific duration of time.
• Change in a cost driver (activities that have a direct and causal relationship to the
incurring of overhead costs) will result in a change in the total cost of a related cost
object.
• A cost object (anything for which cost data is accumulated) is used to determine how
much a particular thing or activity costs (for example, items or activities such as
customers, projects and services).
Mixed • Vary with changes in volume or activity, but not by a direct proportion.
• Also called semivariable; many are a combination of fixed and variable costs.
Total All the fixed and variable costs for a cost object.
© 2014 IFMA
Assigning Costs to Cost Objects
Direct Costs Indirect Costs
► Costs that can be specifically ► Costs that are spread over a period
traced to an item or activity. of time, regardless of specific
► Costs that can be easily and activities.
accurately traced to a cost ► Costs that are related to a cost
object (an item or activity). object but not directly and solely
associated with that item or activity.
Examples Examples
• Direct labor • Annual insurance premiums
• Direct materials • Some maintenance costs
• Utility costs for a building
• Salaries
© 2014 IFMA
Cost Measurement Systems
Facilitate tracking and quantifying costs and providing customers with
high-quality products or services, at reasonable costs, in a timely fashion;
often categorized as traditional and contemporary (activity-based).
Cost accumulation  Collects and organizes cost information in some organized way
through an accounting system.
Cost assignment  Precedes an activity or takes place without measurement of the
activity; makes assumptions about the proportion of costs that are
assumed to relate to an activity.
Cost allocation  Determines the proportional share of a total cost that belongs to a
particular cost object based on data about the proportions of the
total resource cost consumed by the cost object.
Cost tracing  Assigns direct costs to a particular cost object.
Unit costs  Relate resources consumed to outputs or outcomes provided by
those resources in the form of a ratio.
© 2014 IFMA
Discussion Question
Identify the cost measurement system (traditional,
activity-based, or both) described below.
Answers:
Both 1. Basic cost elements include salaries and wages,
utilities, depreciation, materials and supplies, and
Activity-based
taxes.
2. Assigns costs to final cost objects based on cost
drivers.
Traditional
3. Uses responsibility centers as the key cost object in
tracking flows.
Traditional 4. Uses a single base for allocating indirect (common)
costs.
Activity-based 5. Focuses attention on the process of the work.
© 2014 IFMA
Traditional Cost Measurement Systems
Job Order Costing Process Costing
► Assigns costs (e.g., the direct ► Accumulates product or service

materials, direct labor and costs by process or department.
overhead) that go into the ► Assigns those costs to a large
product or service to a specific
number of nearly identical
job (a distinct unit, batch, or lot
products by dividing the total
of a product or service).
costs by the total number of units
► Typically applies overhead costs
produced.
at a predetermined percentage
rate.
► Records and accumulates job
order costs per job.
© 2014 IFMA
Key Differences Between Job
Exhibit
2-21
Order Costing and Process Costing
Job Order Costing Process Costing
 Used with a wide variety of distinct  Used with similar or identical products
products or services. and a steady stream of units.
 Total job costs consist of actual direct  Costs are assigned uniformly to all units
materials, actual direct labor and passing through a department during a
overhead applied using a predetermined specific period.
rate or rates.  Costs accumulate by process or
 Costs accumulate by the individual job or department.
order and are tracked separately.  The flow of costs is simplified because
 Unit cost is computed by dividing total job costs are traced to fewer processing
costs by units produced or served at the departments.
end of the job.  Unit cost is computed by dividing total
process costs of the period by the units
produced or served at end of the period.
© 2014 IFMA
Activity-Based Costing
Assigns costs to customers, services and products
based on an activity’s consumption of resources.
► Emphasizes the management of activities and operations
rather than the department or functional area that performs
the work.
► Uses many separate cost drivers (called activity bases) to
derive actual overhead costs that are then applied to
products or services.
► Calculates the resource cost using a cost driver; the amount
of an activity consumed in a period is multiplied by the cost
of the activity and the calculated costs are assigned.
© 2014 IFMA
Exhibit Implementing ABC in FM
2-22
Extract from a selection of cost driver activities all costs that represent the gross overhead
1 component of each of those activities; set them aside.
Identify separate and unique overhead activities associated with each full cost driver’s
2 gross overhead component, and create a cost pool for each of those overhead activities.
Determine how overhead costs can best be measured by determining an activity base unit
3 for each overhead activity base (square feet, per person, per hour, etc.).
Determine the exact amount or proportion of activity base units consumed by each cost
4 driver activity.
Consolidate identical activity base units under their appropriate cost pools.
5
For each associated cost pool, sum the activity base units to arrive at a gross activity base
for that cost pool.
6
Calculate an overall cost per unit for each overhead activity by dividing the total cost pool
for that overhead activity by its gross activity base.
7
Allocate future overhead activity costs to non-overhead activities based on usage using
proration of the cost pool or, better still, by applying the unit costs derived in step 7.
8
Periodically repeat the process (especially steps 4 through 7) to ensure the validity of the
applied overhead activity costs.
9
© 2014 IFMA
ABC Allocation and Apportionment
Allocation
If … Then …
• The cost center caused the overhead to be A facility manager can allocate costs.
incurred.
• The exact amount of overhead is known.
Examples
Power consumption in a stand-alone data center; staff canteen subsidy when FM has usage figures by
department
Apportionment
If … Then …
Overheads cannot be specifically identifiable to There is a need to find a suitable basis to charge
the specific cost unit center. the various cost units with a fair share of the
overhead through apportionment.
Examples
Power consumption in a shared office (and rent, property taxes, water) apportioned by floor area
occupied or by head count; staff canteen subsidy, apportioned by departmental head count when there
is no data on departmental usage
© 2014 IFMA
Exhibit Advantages and Disadvantages
2-23
of ABC
Advantages Disadvantages
 More accurate costing of  Not all overhead costs can be related
products/services; reduces distortions to a particular cost driver; some may
caused by traditional cost allocation need to be arbitrarily allocated.
methods.  Cost of buying, implementing and
 Utilizes unit cost rather than just total maintaining activity based system;
cost. requires numerous development and
 Better understanding of overhead; maintenance hours, even with software
measures activity-driving costs. and databases.
 Makes waste/non-value-added visible;  Generates vast amounts of information;
allows management to better the volume of information can mislead
understand how overall cost/value are managers into concentrating on the
affected if changes are made. wrong data.
 Facilitates benchmarking.
© 2014 IFMA
Using Costs in Decision Making
Differential Costs Opportunity Costs Sunk Costs
• Costs that differ between • Costs that are “lost” • Money that has already
two or more possible uses opportunities (measured in been spent on decisions
of funds. monetary units) that could that cannot be changed.
• Also known as incremental have accrued by pursuing • Costs that should be
costs and relevant costs. an alternate course of ignored because they were
• Those that are the same for action. incurred in the past; the
all of the alternatives should • Represent the potential money is history and
be ignored; only changing benefits sacrificed when therefore irrelevant to
costs are considered choosing one alternative decisions made about any
relevant to the decision- over one or more other future business activities.
making process. possibilities.
© 2014 IFMA
Discussion Question
Answers:
True 1. Differential costs and revenues always relate to
future outcomes and are critical to accepting or
rejecting alternative capital budget projects.
True 2. Sunk costs are ignored because they are historical
costs that are not relevant to the investment
decision.
3. Opportunity costs are typically treated as a cash
True
outlay at the onset of the project.
© 2014 IFMA
Liquidity/Short-Term Debt Ratios
Ratio Description Calculation

Current Indicates the general
ratio availability of cash to Current assets
pay off liabilities Current liabilities
(debts) as they come
due
Quick Provides a quick

(acid-test) measure of an Cash + Cash equivalents + Receivables
ratio organization’s Current liabilities
immediate liquidity
© 2014 IFMA
Asset Management Ratios

Average Shows how many
inventory times an organization’s Sales
turnover inventory is sold and
replaced over a period
Average inventory
© 2014 IFMA
Profitability Ratios

Gross Relates sales to
profit production costs
Gross profit
margin Net sales
Operating Provides a measure of

profit operating efficiency Operating profit
margin Net sales
Net profit Provides an indication

margin of how effective an Net income
organization is at cost Net sales
control
© 2014 IFMA
Return-on-Investment Ratios
Return on Gives an idea as to how efficient
assets (ROA) management is at using its assets to Net income
generate earnings Total assets
Return on Reveals how much profit an

equity (ROE) organization earned in comparison to Net profit
the total amount of shareholder Equity
equity found on the balance sheet
Return on Measures the efficiency and
capital profitability of capital investments;
employed also indicates whether there are EBIT
(ROCE) sufficient revenues and profits to Current assets - Current liabilities
indicate the best use of capital assets
© 2014 IFMA
Benefits and Cautions of Ratio Analysis
► Highlight organizational strengths and weaknesses.
Benefits
► Either provide assurance of financial health or detect early
warning of any significant financial difficulties.
► Can be extremely useful as benchmarks and enable facility
managers to identify areas of conformity and variance from
the norm with similar or competing organizations.
Cautions ► Should not be relied upon as sole indicators for decision

making.
► When using ratios for benchmarking, any mitigating
circumstances that might explain variance or conformity
with a norm should be considered.
► Ratios themselves have many variations; organizations
may use different numerators or denominators.
© 2014 IFMA
Facility Management Metrics
General FM metrics Leasing FM metrics
Metrics should be appropriate to the

organization and whatever senior management
considers important to financial well-being.
Operating and
Relocation FM metrics
maintenance FM metrics
© 2014 IFMA
Cost Containment
Cost containment requires:
► Maintaining organizational costs within a
specified budget.
► Controlling expenditures so that they meet
financial targets.
Many possibilities for FM cost-containment

initiatives exist. Cost-containment strategies often
involve reducing expenditures or the rate of growth
of expenditures.
© 2014 IFMA
Exhibit Guidelines for Cost-Containment
2-27
Implementation
► Institutionalize cost reduction, ► Provide a format to gather cost-
especially in decision-making containment suggestions that
processes. promote employee involvement and
► Identify areas with high cost- buy-in.
containment potential and act on those ► Establish a procedure to ensure that
first. accepted suggestions are
► Minimize waste. implemented.
► Mitigate fraudulent practices. ► Provide incentives for meaningful and
► Generate specific savings ideas. accepted cost-containment
suggestions.
► Develop a methodology to track actual
savings. ► Celebrate successes.
► Integrate cost containment as part of ► Lead by example.
the FM departmental objectives, job
descriptions, performance reviews.
© 2014 IFMA
Discussion Question
When implementing cost-containment initiatives,
which of the following are appropriate practices?
(Select two.)
I. Use only proven industry best practices.
II. Ensure that strategies fit the organization.
III. Secure organizational commitment before
taking action.
IV. Make sure actions are quantifiable and
measureable.
Answers: II and IV
© 2014 IFMA
Chargebacks
Chargebacks, also known as cross-charging or
recharging, describe the ability of FM to charge its services
to another group that is requesting those services.
A chargeback system is a system where companies
require service departments to charge other departments
for services rendered.
Chargebacks are not done in every organization. If they are,

the practices must be tailored to the organization and minimize
any perceptions about unfair or unrealistic allocations or
charges.
© 2014 IFMA
End of Chapter 2
© 2014 IFMA
All rights reserved Chapter 2 Edition 2014

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Chapter 2: Financial Management

of the Facility Organization

► Topic 2: Financial Statements

► Topic 3: Business Cases, Supporting Documentation and

► Topic 5: Analyzing and Interpreting Financial Documents

► Topic 6: Cost-Containment Strategies

A budget is a formal, numerical expression of

Intuition and experience

Historical data Research

Supply and demand Industry best practices

Answers: Fixed 1. Remain unchanged in total for a given time period,

► Typically established for ► Increasingly popular

Support the organization’s

The budget process can

Quantify the impact of any Outline anticipated cost

Weekly analysis Annual analysis

► Frequency may be weekly, monthly, quarterly, midyear

► Can be simple or complex. Examples

They answer basic questions about an organization, such as:

 Required by law for publically traded companies.

 Prepared and certified by an auditor (e.g., certified public

· Record of revenues and expenses for

Statement of Cash Flows

· Snapshot of performance at one point in

Revenues $8,380 $7,757

Revenues $8,380 $7,757 $623 8.0%

Current Year Prior Year

Answer: D. Payment of dividends to

Example in USD: Depreciable cost for maintenance equipment

Expenses incurred in producing Tax rules vary.

Assumes the asset Based on a measure Steadily decreasing U.S. asset

Pro forma 2. Classifies cash receipts and disbursements depending

 Establish rapport with organizational

► Value is about the relationship of cost or price and quality or

Answers: II and III. Benchmarking is a continuous,

► Short-term in nature. ► Long-term investments.

Period Beginning Value Interest Earned Ending Value

Present value (PV) is the Future value (FV) is the amount

Period Beginning Value Interest Earned Ending Value

Future value x Present value interest factor = Present value

Discounting is the operation of evaluating the present value of a future

Answer: D. Net present value and internal rate of return

► Measures the change in one ► Examines what happens to

► Assigns costs (e.g., the direct ► Accumulates product or service

Differential Costs Opportunity Costs Sunk Costs

Ratio Description Calculation

Quick Provides a quick

Ratio Description Calculation

Ratio Description Calculation

Operating Provides a measure of

Net profit Provides an indication

Return on Reveals how much profit an

Cautions ► Should not be relied upon as sole indicators for decision

General FM metrics Leasing FM metrics

Metrics should be appropriate to the

Many possibilities for FM cost-containment

Chargebacks are not done in every organization. If they are,

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