Developing Financial Skills Can Pay Dividends for Managers
No set of skills is more critical for maintenance and engineering managers to master these days than the basic concepts of financial management — the language of money.
By understanding how to budget, spend and manage money within their organizations, managers can both deliver direct bottom-line benefits and talk effectively with their organizations' C-suite, especially the chief financial officer.
I routinely see three primary areas in which managers struggle: budgeting, evaluating return on investment (ROI), and life-cycle costing.
Back To Basics
Before tackling those three concepts, managers first need to understand several basic financial terms. One concept managers need to familiarize themselves with is net present value (NPV).
NPV is a standard way to determine the present value of money over time. It allows managers to decide whether or not to invest in a project by looking at future inflow and outflow of cash. Basically, it's a calculation that, if proven to be worthwhile, will generate a positive cash flow. In NPV terms, this means anything greater than zero is worthwhile, and anything less than zero is not.
Some other terms to become familiar with are fixed costs, variable costs, and direct and indirect costs. These terms come into play when developing and evaluating budgets, ROI, and life-cycle costs. Managers should keep in mind that their friends in finance can help in calculating these numbers, so be sure to consult with them.
Fixed costs are costs you have to pay regardless of the workload or the level of activity. They include rent, utilities, and salaries. They tend not to change or fluctuate greatly.
Variable costs are those costs that change in relation to variations in an activity. Examples include materials, transportation, and hourly wages. Note that this is hourly wages, not salaries.
Direct costs are anything that can be directly attributed to the operation, such as labor and materials. Indirect costs are common costs that cannot be directly charged to a department, such as depreciation, energy, and janitorial supplies.