Budgeting

Budget preparation and management is the beating heart of a facility and money is its life-blood, sustaining the ability to maintain and continually improve operations. Appropriate budgets are essential in delivering a workspace that satisfies personnel and leads to comfort and productivity. Inadequate funding will result in sub-par facilities. It is up to an FM to plan and justify a budget that will support their roles and responsibilities.

Understanding how to budget starts with acknowledging and anticipating the various costs of running a workplace. Everything from maintenance costs to expenses for repairs, refurbishment and the replacement of key components affect how much an FM needs to budget: and that’s just the bare-bones of the process. There’s much more to facility management than just ensuring equipment runs well. Challenges arise when dealing with environmental health and safety, sustainability, corporate social responsibility and other such factors.

Creative thinking

There’s a fine line between complying with a company’s financial goals and making sure there is enough money to cover facility expenses. Not only does an FM have to plan for budget cuts, there will always be unexpected costs and situations. Even the best budget is one unforeseen incident away from being overrun. Thus, in a budget preparation it’s important to be as realistic as possible, but with a little sugar on top. Adding buffers throughout the budget help alleviate those external influences that may unduly affect the funds available for operations. One option would entail adding extra funds in each line item; this would allow for some latitude at a subtle level, where the ability to make up for shortcomings in one area could be covered from somewhere else. Another, more visible tactic would be to pad the budget with one lump sum for general, unexpected expenses.

An FM may not be able to see the future, but if they are up on workplace trends, it could be the next best thing. One of the best budgeting tips for facilities managers is looking closely at workplace and facility management trends and budgeting for them. Taking advantage of information resources such as IFMA has available is a sound strategic and tactical decision.

Short term vs. Long term

From an accounting standpoint, there are two types of budgets: operating and capital. Operating budgets deal with day-to-day expenses which an FM must manage to effectively run their facility. General ledger lines will encompass money needed for expenses like maintenance, utilities, supplies, furniture & fixtures, environmental quality, and security. Capital budgets are more strategic in nature, looking at larger expenses that will serve the facility over time.

When informal conversation in a company turns to the budget, the term usually refers to the operating budget. Facility managers are responsible for control of the operating budget more than the capital budget. The operating budget is also far more likely to be the subject of intense scrutiny and cost-cutting efforts. An FM can expect a closer examination of line items, disproportionate to dollar value, than they would experience with capital budgets. Operating budgets deal with more immediate expenses and impact the bottom line in real time, so they demand more attention.

Planning the operating budget can take two different routes. One way to set the budget is through historical analysis, or incremental budgeting. The second is zero-based budgeting. Historical budgeting takes last year’s actual figures and (ideally) adds a percentage to derive this year’s numbers. It is the most common method of budgeting as it deals with real costs and reflects any anticipated increase in commodities, utilities, labor costs and the like. It also works to an FM’s advantage as the opportunity to grow the budget allows for continual improvement in the facility.

Zero-based budgeting is a technique that allocates funding based on efficiency and necessity rather than budget history. An FM must start from scratch and develop a budget that only includes operations and expenses essential to running the business. No expenses are automatically added to the budget. This process works on the assumption that all department budgets are zero and must be rebuilt from scratch. FMs must justify every expense, with no expenditures automatically approved. Zero-based budgeting is very tight, aiming to avoid any and all expenditures that are not considered absolutely essential to the department’s successful (cost-efficient) operation. This kind of bottom-up budgeting can be a highly effective way to evaluate all expenses and is not the friendliest approach for FMs. Zero-based budgeting is best suited for addressing discretionary costs rather than essential operating costs. The challenge for FMs is that the majority of their expenses are non-discretionary, or fixed costs.

Budget preparation

What is difficult to plan for are unforeseen costs. However, there are a few ways to make the unexpected more predictable. Using historical data for things like routine maintenance costs, an FM can look at budgets from years past and extrapolate costs based on those expenditures. Also, when planning an operating budget, some things to take into consideration would be how changes in the weather affect costs, either on a monthly or quarterly basis. This will help highlight overlooked costs, such as seasonal facility fees. Utility costs differ as the seasons change. Usually, there is a need for more landscaping in the warmer months and snow removal when the cold hits. Similarly, if there are renovations planned during the more temperate months, they can be forecast and reflected during those periods.

It is important to plan for future events or circumstances which are possible but cannot be predicted with certainty, as well as any exigencies, the more urgent needs or demands that may arise. Anything outside of the normal scope of operations will come at a cost. The key to creating an inclusive budget is to continually look ahead.

An FM should make the most of every opportunity where funds must be spent. Performing a lighting retro-fit may seem like a good idea, but is that a better idea than researching a more comprehensive lighting solution? An FM should always be cognizant of the impact of activities on the cumulative elements of the workplace.

Capital budgets

Capital budgeting in facility management is the process in which an FM determines and evaluates potential large expenses or investments. A capital expenditure or investment could include projects such as building a new plant, computer equipment, office equipment, furniture & fixtures, machinery or vehicles. Capital planning or purchases are based on need and are primarily different than OPEX due to their cost and utilization. Compared to operating budgets, capital budgets are more static: they involve fewer cost types, less scrutiny, and longer terms and do not necessarily fall into the category of day-to-day expenses.

Determine capital needs by establishing a priority system for facility projects. Mandatory projects to satisfy government requirements and replacement of certain equipment usually take priority, followed by discretionary investments. The distinction between mandatory and discretionary is not always clear and may depend on the nature of the business strategy, can be simplified as a need vs a want. For instance, expenditures to meet legal compliance or personal safety or to complete ongoing projects would take top priority over the replacement of equipment or modernization of work processes. Initiatives that involved upgrading or creating new capacity in the workplace would have to have, at the least, a high expected ROI.

Although capital operating budgets are classified separately, they are interrelated. Proper and preventive maintenance will have a long-term beneficial impact on capital projects by extending the useful life of those assets.

Capital projects and investments will require ongoing maintenance, care, and operation after they are purchased or built, adding cost to the OPEX budget. It is important to understand how capital expenditures will have ongoing costs on the operating budget and that these effects are reflected in the expense budget. A life cycle cost (LCC) analysis, will account for the costs associated with an item over its expected life. This would include the purchase, operation, maintenance, and disposal of an item. Valid and convincing arguments for large capital investments are based on an LCC analysis and report that can prove operating costs can be reduced.

Managing a budget

Creating realistic budgets are part of the FM function needed to run a facility, not only well, but better. This means the budgets must be managed and controlled to stay within the defined parameters. Not only is this important for being held accountable in the current year, it also sets expectations and precedence moving forward. This entails measuring and monitoring to evaluate progress and creating a baseline of trends. Variances must be monitored and reported to track expenses. Differences between discretionary and non-discretionary costs must be highlighted. Supply costs getting out of hand is controllable: utility rates going up is out of an FMs control. There are many variables and an FM must able to justify spending at any point in time.

Maintenance expenses are a normal and an expected facet of facility management. These costs can be minimized through a comprehensive preventive maintenance (PM) program aided by applicable diagnostic tools. Lack of an effective PM program results in reactive management as repair becomes the normal business activity. This creates unnecessary costs that take ever-increasing amounts of the maintenance and operating budgets. Consequently, maintenance can be deferred, leading to accelerated deterioration and failure. This, in turn, means more money spent on replacement…usually unbudgeted expenses. Managing a budget means managing equipment and systems. The more an FM can do to circumvent spending on fixes, the more good can be done in other areas of the facility.

Closing

Perhaps the most challenging part of FM budgeting is receiving approval. Facility department budgets are generally viewed as pure expense - FM is typically not a revenue producing department. Therefore, cost avoidance and operational savings must be highlighted, not only when the budget is presented, but on an ongoing basis. Value should be illustrated wherever possible and expenses balanced by the benefits derived. If an FM has taken the time to budget well and responsibly account for contingencies, they won’t have to defend their budget so much as explain it.

Budgeting is never easy, no matter the profession. For FMs, there’s a lot to consider including the unknown. A budget may be complex, but that doesn’t mean it should be convoluted. The more an FM can account for their variables, recognize trends, and build in a buffer, the more comfortable they can feel in presenting and maintaining their final budget.

The FM profession is of extreme significance to organizations of all kinds. Through its evolution over the years, it has become the focus for the important issues of best value and customer satisfaction within the management of support services. The most effective FMs are visionaries. In order to realize their plans, FMs must consider everything related to the built environment and budget accordingly. After all, a vision without financial back-up is just a pipe dream.