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Financial Management: Buildings Blocks for Success
OTHER PARTS OF THIS ARTICLEPt. 1: This Page
Overseeing a maintenance and engineering department brings managers a new set of challenges every day — staffing issues, meetings, daily emergencies, constant complaints from occupants about areas being too hot or too cold. Did I mention meetings every minute?
I used to cross out my job title on my business card and write in vice president of child care services because some days, I thought that best described by job duties.
On top of all of those challenges, I had to make decisions that often had critical financial implications. I had to put on my financial thinking cap and consider the uncertainty of the decision, its complexities and consequences, and whether I had alternatives.
But here's the added level of difficulty many maintenance and engineering managers face in such situations: I run a maintenance department, not a financial services firm. Given the challenge, what financial management skills do managers need to make the right business decisions?
Learning The Language
Over the years I've learned basic terms all managers must understand.
Most leaders of any organization are willing to spend $1 today because their return on that $1 will be greater in the future. Conversely, if $1 spent today eliminates the need to spend in the future, there is a return, as well. Two terms and calculations you need to know are net present value (NPV) and return on investment (ROI).
NPV is a standard way to determine the present value of money over time. It allows you to decide whether to invest in a project by looking at future inflow and outflow of cash. It's a simple calculation that, if proven worthwhile, generates a positive cash flow. In NPV terms, this would be reflected as anything greater than zero.
ROI is a financial calculation that evaluates the consequences of a project in terms of the magnitude of the cash outflow versus the time it takes to break even, as well as the expected returns. The calculation involves dividing the initial investment by the initial investment plus the expected return. Managers can estimate the break-even point as some time before a return is realized.
Other important terms to become familiar with — which come into play when planning capital projects or any other major investment — are fixed, variable, direct, and indirect costs.
Fixed costs are anything the organization has to pay, regardless of workload or the level of output. These costs include rent, utilities, and salaries, and they tend not to fluctuate greatly.
Variable costs depend on output. The lower the output, the lower the costs, and vice versa when production is greater. Examples include the cost of goods sold, transportation, and hourly wages.
Direct costs include anything that can be attributed directly to the project or product, such materials and labor. Indirect costs are the common costs that cannot be charged directly to a project, such as depreciation and energy.
Rules Of The Game
Managers need to understand the financial side their jobs, whether the challenge at hand is the department or a project. If you have ever been tasked with leading a project but had very little experience doing so, you understand how daunting and overwhelming it can be. You might not clearly understand the project's complexity or scope, and there certainly will be consequences if you don't make the right decisions. Financial projects are no different.
Your role as project lead is not only to manage the project but to motivate, enable, and encourage the rest of the team — not much different than managing a department.
Everyone has individual rules for project management, and these are mine.
You need to define the scope of the project, as well as the specifications and deliverables. Make sure you're on track throughout the project. Clearly understand the project and the expectations once it is completed.
One of my bosses had what he called the 25-50-99 rule. First, he wanted me to come to him when I felt I was 25 percent complete with a project to make I was going down the right road and that I was not wasting time and energy. Then we would meet again at the 50 percent and at the 99 percent completion mark, just to wrap up all the details. As a newbie, I really appreciated this guidance.
Plan the project. Compile a timeline with dates, milestones, resources, etc. This is a critical step, but people with little experience in project management often do not understand its importance. One tool to consider is a SWOT: It identifies the project's strengths, weaknesses, opportunities and threats.
Gather your A team. Supporting resources will determine whether you succeed. Strong managers understand their strengths and weaknesses, so identify yours, and find a team member who complements those traits.
Use project-management tools. Gantt charts, critical paths, and project-management software are good tools to help you build a timeline and document the activities, resources, and milestones that will ensure you remain on track.
Adopt a plan-do-check-adjust strategy. Plan the work, do the work, check to make sure it's correct, and adjust appropriately, if required, to get back on track.
Perform an after-action-review. One important step in project management is the one that gets missed the most — review. Determine steps that went well and those that didn't go well, and decide how to improve next time.
Putting It All Together
Think of managing your department's budget in terms of replacing items in your house. Is it time to replace that old furnace with a newer, high-efficiency model? Should you add insulation? What should you do about new windows, a new roof, or an addition? Within your department, you need to look at the return or value you see in pursuing one option over the other.
If you're interested in learning more about financial management, you can buy one of many good reference books on the topic, such as Cost Planning & Estimating for Facilities Maintenance from R.S. Means, Business Ratios & Formulas by Steven R. Bragg, and The Principles of Project Management by Merri Williams.
Andrew Gager, CPIM, CMRP, is director of consulting for Marshall Institute Inc., an asset management company providing maintenance and reliability consulting and training services to facilities.