IFMA CFM TRAINING COURSE

SESSION NO. 04
FINANCE & BUSINESS

CHAPTER 1 | FINANCE & BUSINESS IN THE FACILITY ORGANIZATION

The facility manager should showcase to the top management that investment in FM is
not a liability; it’s a cost-saving strategy.
FINANCIAL TERMS FOR FACILITY MANAGERS
ACCRUAL BASED ACCOUNTING, is a method of recording accounting transactions for
revenue when earned and expenses when incurred. A key advantage of the accrual basis is
that it matches revenues with related expenses, so that the complete impact of a business
transaction can be seen within a single reporting period.

DOUBLE-ENTRY BOOKKEEPING, in accounting, is a system of bookkeeping so named

because every entry to an account requires a corresponding and opposite entry to a different
account. The double-entry has two equal and corresponding sides known as debit and credit.

FINANCIAL ACCOUNTING refers to the aggregation of accounting information into financial

statements, mainly for external use; while MANAGERIAL ACCOUNTING refers to the internal
processes used to account for business transactions. Majority of day-to-day uses for FM is
grounded in managerial accounting.

CYCLE OF MANAGEMENT DECISIONS

ACCRUAL
ACCOUNTING STANDARDS
An accounting standard is a common set of principles, standards and procedures that define
the basis of financial accounting policies and practices. Accounting standards improve the
transparency of financial reporting in all countries. In the United States, the GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (GAAP) form the set of accounting standards
widely accepted for preparing financial statements.

International companies follow the INTERNATIONAL FINANCIAL REPORTING

STANDARDS (IFRS), which are set by the INTERNATIONAL ACCOUNTING STANDARDS
BOARD (IASB) and serve as the guideline for non-U.S. GAAP companies reporting financial
statements.

ACCOUNTING RECORDS
The CHART OF ACCOUNTS is a listing of all
accounts used in the general ledger of an
organization. The chart is used by the
accounting software to aggregate information
into an entity's financial statements. The chart
is usually sorted in order by account number,
to ease the task of locating specific accounts.
ACCOUNTING RECORDS
LEDGERS – Contains all the company’s
accounts with account balances.

ACCOUNTING RECORDS
TRIAL BALANCE
Compares the total debit and credit balances
of all accounts to ensure that they equal.
ACCOUNTING CYCLE
E

CHAPTER 2 | FINANCIAL MANAGEMENT OF THE FACILITY ORG.

BUDGETS AND BUDGETING BASICS
IMPORTANCE OF BUDGETING
• Gives you control over money
• Keeps focus on money goals
• Raises awareness on what is going on with money
• Helps organize spending and savings
• Decides in advance how money should be spent
• Enables to save for expected and unexpected costs
• Provides an early warning for potential problems
• Enables to produce extra money
BUDGETING APPROACH
• Authoritative Approach – or top-down budgeting, is a
budgeting method in which senior management develops
a high-level budget for the company.
• Combination Approach – or negotiated budgeting, is a
combination of both top-down and bottom-up budgeting
methods.
• Participative Approach – A budgeting process under
which those people impacted by a budget are actively
involved in the budget creation process.

BUDGET TYPES
• OPERATING BUDGET - shows the company's projected revenue and associated
expenses for an upcoming period - usually the next year - and is often presented in
an income statement format.
• CAPITAL BUDGET - is the process in which a business determines and evaluates
potential capital expenses or investments.
Capital Expenditures – Are the funds used to acquire or upgrade a
company's fixed assets, such as expenditures towards property, plant, or
equipment (PP&E).
Capital Asset – An asset that has a useful life longer than one year and is not
intended for sale during the normal course of business.
FIXED VS VARIABLE BUDGETING
• FIXED BUDGET is a budget that doesn't change
due to any change in activity level or output level.
• VARIABLE BUDGET is a budget that changes as
per the activity level or production of units.
• FIXED COSTS do not vary with output, and often
include rent, buildings, machinery, etc. VARIABLE
COSTS are costs that vary with output. Generally
variable costs increase at a constant rate relative to
labor and capital. Variable costs may include wages,
utilities, materials used in production, etc.

BUDGET PERIOD
Budget Period is the specified future period of time over which revenue and expenses
are estimated.

Budgeting is usually done for short, mid-range, longer term time periods. A month, a
quarter and a month are usually observed budget periods. However, budget period
can vary with each entity.

A rolling budget is continually updated to add a new budget

period as the most recent budget period is completed.
Thus, the rolling budget involves the incremental extension
of the existing budget model. By doing so, a business
always has a budget that extends one year into the future.
BUDGET METHODS

GENERAL BUDGETING GUIDANCE

Being knowledgeable about the importance of budgeting accomplishes the following:
• e given budget period.
Ability to manage the probable cost increase/decrease for the
• get.
Determine the impact of capital needs on the operating budget.
• Manage and control cost.
• Support the company core business.

BUDGET MONITORING
nts to:
Effective planning and financial control will help departments
• Demonstrate accountability
• Ensure the efficient and effective use of resources
• Make sound business decisions
• Take remedial action where needed
BUDGET CLOSEOUT
Typically, budget closeout held at the end of fiscal year which can be simple or complex
process that varies on each organization. This process normally requires manager to
coordinate with finance department.

TOPIC 2 | FINANCIAL STATEMENTS

CATEGORIES OF FINANCIAL STATEMENTS
• Internal income statement – a financial document used
to gauge a company's ability to generate revenue and profit.
• External financial statement – Prepared by the organization
according to IFRS or GAAP and FASB.
• Audited financial statements – Audited Financial result
means financial statements certified by an auditor as
showing true and fair view.
TOPIC 2 | FINANCIAL STATEMENTS
Audited financial statements will have the following outcomes:
• Qualified opinion – is a statement issued after an audit is completed by a professional
auditor, suggesting that the information provided is limited in scope and/or the company
being edited has not maintained relevant accounting principles (e.g. GAAP).
• Unqualified opinion – the auditor's opinion unqualified is a definite "Thumbs Up." It means
audited statements conform to relevant accounting principles (e.g. GAAP) and represent
the company's accounts fairly.
• No opinion/disclaimer of Opinion – auditors may issue a disclaimer of opinion. Note
especially that this is not an opinion.

TOPIC 2 | FINANCIAL STATEMENTS

TYPES OF FINANCIAL STATEMENTS
Income statement – Also termed as
statement of operations, statement earnings,
profit and loss (P&L) statement), is a report
reveals the financial performance of an
organization for the entire reporting period.
TOPIC 2 | FINANCIAL STATEMENTS
TYPES OF FINANCIAL STATEMENTS
Balance Sheets – a statement of the
assets, liabilities, and capital of a business
or other organization at a particular point in
time, detailing the balance of income and
expenditure over the preceding period.

TOPIC 2 | FINANCIAL STATEMENTS

TYPES OF FINANCIAL STATEMENTS
Cash Flow Statements – This report reveals the
cash inflows and outflows experienced by an
organization during the reporting period.
TOPIC 2 | FINANCIAL STATEMENTS
DEPRECIATION
Depreciation is an accounting method of allocating the cost of a tangible asset
over its useful life and is used to account for declines in value.

Importance and benefits of depreciation:

• Companies use depreciation to report asset use to stakeholders.
• For big companies and people that want to sell their business, the depreciation
in the books helps to see which time is best to reinvest in assets.
• Helps companies correctly report assets at their net book value.
• Helps companies generate tax savings.

TOPIC 2 | FINANCIAL STATEMENTS

DEPRECIATION METHODS
TOPIC 2 | FINANCIAL STATEMENTS
CAPITALIZATION VERSUS EXPENSE
Expenses can be expensed as they are incurred, or they can be capitalized.

LEASE OR PURCHASE CONSIDERATIONS FOR CAPITAL ASSETS

TS
To help facility manager make the best decision in any given situation,,
the facility manager should ask the following questions:
• Consider life-cycle cost analysis.
• How frequently does technology change with this asset?
• How long do FM plan to keep the asset?
• What are the financing options for purchasing vs. leasing?
• What are the tax benefits of buying vs. leasing?

TOPIC 2 | FINANCIAL STATEMENTS

PROFORMA STATEMENTS
A pro forma financial statement is one based on
certain assumptions and projections (as opposed
to the typical financial statement based on actual past
transactions).

• Pro forma income statement

• Pro forma balance sheets
• Pro forma cash flow
TOPIC 3 | BUSINESS CASES, SUPPORTING DOCUMENTATION & FINANCIAL REPORTS
BUSINESS CASE
A business case is a justification for a proposed
project or undertaking based on its expected commercial
ercial
benefit. A business case is intended to convince key
y
decision-makers of the merits of a particular
course of action.
Business cases are created to help decision-makers
ensure that:
• the proposed initiative will have value and relative
priority compared to alternative initiatives based on the
objectives and expected benefits laid out in the
business case.
• the performance indicators found in the business case
are identified to be used for proactive realization of the
business and behavioral change.

TOPIC 3 | BUSINESS CASES, SUPPORTING DOCUMENTATION & FINANCIAL REPORTS

QUANTIFYING COST AND BENEFITS
A business Cost-benefit analysis (CBA) is a technique used to compare the total costs of a
program/project with its benefits, using a common metric (most commonly monetary units).

The following analysis are part of

business case ‘cost and benefit’
analysis:
• Best value
• Life-cycle costing
• Benchmarking
TOPIC 3 | BUSINESS CASES, SUPPORTING DOCUMENTATION & FINANCIAL REPORTS
CAPITAL INVESTMENTS AND TIME VALUE OF MONEY
Capital investment refers to funds invested in a firm or enterprise for the purpose of furthering
its business objectives.

THE TIME VALUE OF MONEY (TVM) is the concept that money available at the present time
is worth more than the identical sum in the future due to its potential earning capacity.

CAPITAL INVESTMENT ANALYSIS is a budgeting procedure that companies and

government agencies use to assess the potential profitability of a long-term investment.
• NET PRESENT VALUE
• INTERNAL RATE OF RETURN (IRR)
• PAYBACK PERIOD
• BENEFIT TO COST RATIO (BCR)

TOPIC 3 | BUSINESS CASES, SUPPORTING DOCUMENTATION & FINANCIAL REPORTS

MINIMIZING RISK IN CAPITAL INVESTMENTS
There are different ways to minimize the risk in capital
investments as follows:
• Sensitivity analysis
• Scenario analysis
Managers typically start with 3 basic scenarios:
• Base case scenario (most likely)
• Worst case scenario (pessimistic)
• Best case scenario (optimistic)
Risk handling (also called Risk Mitigation) – is the process that identifies, evaluates, selects,
and implements options in order to set risk at acceptable levels given program constraints and
objectives.
TOPIC 4 | FUNDAMENTAL COST CONCEPTS
Variable cost – is a corporate expense that changes in proportion
with production output.
Fixed cost – A fixed cost is an expense or cost that does not change
with an increase or decrease in the number of goods or services
produced or sold
Mixed cost – A mixed cost is a cost that contains both a fixed cost
component and a variable cost component.
Total cost – all the fixed and variable costs for a cost object.
Direct cost – cost that can be specifically traced to an item or
activity.
Indirect cost – costs spread over a period of time, regardless of
specific activities.

TOPIC 4 | FUNDAMENTAL COST CONCEPTS

COST MEASUREMENT SYSTEMS

Types of cost measurement

systems are as follows:
• Cost accumulation
• Cost assignment
• Cost allocation
• Cost tracing
• Unit costs
TOPIC 4 | FUNDAMENTAL COST CONCEPTS
COST MEASUREMENT SYSTEMS

DIFFERENTIAL COST is the difference between the cost of two alternative

decisions, or of a change in output levels. The concept is used when there
are multiple possible options to pursue, and a choice must be made to select
one option and drop the others.
OPPORTUNITY COSTS represent the benefits an individual, investor or
business misses out on when choosing one alternative over another.
A SUNK COST (also known as retrospective cost) is a cost that has already
been incurred and cannot be recovered. Sunk costs are contrasted with
prospective costs, which are future costs that may be avoided if action is
taken. Sunk costs should be ignored in decision making process!

TOPIC 5 | ANALYZE AND INTERPRET FINANCIAL STATEMENT

FINANCIAL STATEMENT RATIO ANALYSIS
LIQUIDITY/SHORT-TERM DEBT RATIOS

CURRENT RATIO – The current ratio is a liquidity ratio

that measures whether or not a firm has enough resources
to meet its short-term obligations. The current ratio
measures a company's ability to pay off its current
liabilities (payable within one year) with its current assets
such as cash, accounts receivable and inventories.

The QUICK RATIO or ACID TEST RATIO is a liquidity

ratio that measures the ability of a company to pay its
current liabilities when they come due with only quick
assets.
TOPIC 5 | ANALYZE AND INTERPRET FINANCIAL STATEMENT
FINANCIAL STATEMENT RATIO ANALYSIS
ASSET MANAGEMENT RATIOS

Asset management ratios – Which had a ‘stock turnover

ratio,’ attempt to measure the firm's success in managing
its assets to generate sales.

TOPIC 5 | ANALYZE AND INTERPRET FINANCIAL STATEMENT

FINANCIAL STATEMENT RATIO ANALYSIS
PROFITABILITY RATIOS Used to assess a business's
ability to generate earnings relative to its associated
expenses.

GROSS PROFIT MARGIN – Gross margin is the

difference between revenue and cost of goods sold
divided by revenue expressed as a percentage.

OPERATING PROFIT MARGIN - Operating Profit

Margin is a profitability, or performance, ratio used to
calculate the percentage of profit a company produces
from its operations, prior to subtracting taxes and interest
charges.
TOPIC 5 | ANALYZE AND INTERPRET FINANCIAL STATEMENT
FINANCIAL STATEMENT RATIO ANALYSIS
PROFITABILITY RATIOS Used to assess a business's
ability to generate earnings relative to its associated
expenses.

NET PROFIT MARGIN –Net profit margin is the

percentage of revenue left after all expenses have been
deducted from sales.

RETURN ON ASSETS (ROA) - Return on assets (ROA)

is an indicator of how profitable a company is relative to
its total assets.

RETURN ON EQUITY (ROE) – is a measure of the

profitability of a business in relation to the equity, also
known as net assets or assets minus liabilities.

TOPIC 6 | COST CONTAINMENT STRATEGIES

STRATEGIES FOR COST-CONTAINMENT
Cost-containment strategies is the business practice of maintaining expense levels to prevent
unnecessary spending or thoughtfully reducing expenses to improve profitability without long-term
damage to the company.

EFFECTIVE IMPLEMENTATION OF COST-CONTAINMENT STRATEGIES

A successful implementation of program must be able to face potential challenges such resistance from
the employees, contractors, and customers. Therefore, proper change management must be in place to
overcome the obstacles.
.
TOPIC 7 | CHARGEBACK

A system of cost control that requires

the requesting unit or organization to
pay for work done to its area.

Chargeback can also be a financial

penalty for non-compliance with the
customer’s requirements.

CHAPTER 3 | PROCUREMENT IN THE FACILITY ORGANIZATION

PROCUREMENT PROCEDURES
Procurement is the process of finding,
agreeing terms, and acquiring goods,
services, or works from an external source,
often via a tendering or competitive bidding
process.
Purchasing is the process of how goods and
services are ordered
CHAPTER 3 | PROCUREMENT IN THE FACILITY ORGANIZATION
PROCUREMENT PROCEDURES
Procurement is Procurement process is not the same on each organization.
Some considerations for bidding are as follows:
• Request for proposal (RFP)
• Invitation to tender (ITT)
• Request for quotation (RFQ)
Contract may be awarded for the following factors:
• Lowest bidder
• Evaluated based on the money best value
• Risk assessment

CHAPTER 3 | PROCUREMENT IN THE FACILITY ORGANIZATION

PROCUREMENT AND FACILITY MANAGEMENT OUTSOURCING
Outsourcing is a version of the make-or-buy decision, commonly used for services, in which a
firm elect to purchase an item/service that previously was made/performed in-house.
The following are possible reasons why FM needs to outsource:
• Cost-containment opportunity.
• Expert not available in-house can be obtained.
• Flexible cost.
• Flexible resources.
• Increase the capacity of services not available in-house.
• Opportunities for FM staff.
• Outsource eliminates capital investments.
• Outsource non-core function of the organization to allow to
concentrate on expertise and resources available in-house.
CHAPTER 4 | CONTRACTS IN THE FACILITY ORGANIZATION
TOPIC 1 | CONTRACT DEVELOPMENT, MANAGEMENT AND OVERSIGHT
A contract is a promise or set of promises that are legally enforceable and, if violated, allow the
injured party access to legal remedies.

CLASSIFICATION OF CONTRACTS
• Bilateral & Unilateral contracts
• Express & Implied contracts
• Illegal/Void contracts

CHAPTER 4 | CONTRACTS IN THE FACILITY ORGANIZATION

TOPIC 1 | CONTRACT DEVELOPMENT, MANAGEMENT AND OVERSIGHT

PURCHASE ORDERS (PO)

It is a document, signed by a contracting officer and addressed to a contractor, requesting
the future delivery of supplies, equipment, or material, or the future performance of
nonpersonal services in accordance with certain terms in exchange for a promise by the
government to pay the stated price.

FIXED PRICE CONTRACTS

It is a form of pricing that includes a ceiling beyond which the buyer bears no responsibility
for payment.
CHAPTER 4 | CONTRACTS IN THE FACILITY ORGANIZATION
TOPIC 1 | CONTRACT DEVELOPMENT, MANAGEMENT AND OVERSIGHT

COST REIMBURSEMENT CONTRACTS

(also called a reimbursable or variable price contract) Cost- reimbursement contracts
contrast with a fixed-price contract, in which the contractor is paid a negotiated amount
regardless of incurred expenses.

• Cost plus fixed-fee (CPFF) contracts pay a pre-determined fee that was agreed
upon at the time of contract formation.
• Cost plus percentage of cost pay a fee that rises as the contractor's cost rise.
• Cost-plus-award fee (CPAF) contracts pay a fee based upon the contractor's work
performance.
• Cost-plus-incentive fee (CPIF) contracts have a larger fee awarded for contracts
which meet or exceed performance targets, including any cost savings.

OTHER CONTRACT TYPES

• Indefinite delivery quantity, line item contracting
• National buy contracts
• Open book contract
• Labor hour/time and materials (Time & Material)

TYPES OF CONTRACT FRAUD

Contract fraud may take place in many forms
• Cartels (maintain high price and restricting competition).
• Collusion between personnel or agents.
• Irregularities during execution of contracts.
• Noncompetitive pricing of contracts.
• Payments for work not carried out.
• Price fixing.
CONTRACT FRAUD PREVENTION
Some of the possible solutions that FM may
consider preventing fraud are as follows:
• Budgetary controls
• Change order controls
• Competitive bidding/ tendering
• Documentation and record keeping
• Proper authorization
• Segregation of duties
• Shifting staff around

SERVICE CONTRACT
A service contract is an agreement for the
performance of various labor-oriented services,
funded on a periodic basis.

SERVICE SPECIFICATION
Service specifications are included in a separate
document developed and agreed upon in order to
clarify and give further detail on expected service
levels and quality.