Understanding business finance is key to making a big impact as a facility manager. I know FMs that have mastered this skill and I know those that haven’t. Those that know – capture more dollars, are more effective at utilizing their budgets, and can argue for projects and funding from a position of strength. Those that don’t know – accept their budgets as they are given and tend to just “get by”. Foundational to understanding business finance is knowing financial accounting vs. managerial accounting. This will set you apart from other department heads because you will be able to speak the language of the controllers and know what is important to manage within your department.
Knowing What is Important
As a kid growing up in Tennessee, we were not a wealthy family at all. My idea of finance was counting up the number of weeks it would take me to purchase a Nintendo Entertainment System® while making the staggering income of $1 per week allowance. Here’s a hint….it took a while.
I remember the day I got my first raise. I went from $1 to $2 per week. It was a glorious moment because, while it doesn’t sound like much now, I doubled my income! Any day you get a 100% raise is a good day in my book. Both dollars from then on out went straight into savings (which was an empty crayon box) and stayed there until I found something worth blowing my entire life savings on. Since the money was usually burning a hole in my pocket, I could make it two or three weeks before finding a comic or baseball card to buy. Life was so simple.
Then, I turned 16 and got my first job at the local movie theater. I was less than pleased with that first paycheck when I found out who FICA was. Alas, I had a nine-year-old Honda that I had to keep insured and put gas in, so I kept shoveling the popcorn, wearing my pink plastic bowtie (I am not exaggerating). I kept a written record in my checkbook of everything I spent and saved. I felt like I had a pretty good handle on things.
Then I graduated college. Ugh. I got my first real job, an apartment, a fiancé, and a CPA in tax season to keep track of everything. As it turns out, I was able to figure the financial management aspects of life just fine and even learned to do my own taxes for a while. I enjoyed learning more and more about economics and money management from articles, websites, and talk radio. I enjoyed it so much that I went back to school and earned my MBA in finance.
After all of that, it didn’t take me long to figure out I didn’t know enough. I had to reapply the principles of finance in the varying contexts my different employers used them. If you don’t think a privately owned smaller company manages their money differently than a larger publicly traded company, you would be mistaken. And don’t even get me started on the federal government…
To begin, we need to have a common understanding of accounting basics, terminology, and application. These tools will then lead us into more advanced principles. Accounting is record keeping that gives management financial control and enables them to report on the financial condition and operational results of the organization.
Financial Accounting Vs. Managerial Accounting
If you’ve ever heard your CFO refer to the balance sheet or income statement, this is the type of accounting he is referring to. Accountants use financial accounting records to generate the financial statements for the company that will be viewed by external organizations (auditors, investors, etc.). To see examples of these, go to an investment or market research website. Look up a publicly traded firm and download their historical financial statements. The information contained within these statements must adhere to standards prescribed by governing bodies, which is highly regulated.
For facility managers, it is helpful to understand three primary financial accounting reports. They are:
- Income Statement – Commonly referred to as the P&L (profit and loss report) or earnings statement, the income statement reports an organization’s income, expenses, and profits during the reporting period.
- Balance Sheet – Referred to as a statement of financial position (SOFP) in not-for-profits, the balance sheet is a snapshot of a company’s financial position at one moment in time.
- Statement of Cash Flows – The statement of cash flows shows the levels of cash across a reporting time period. This information is used to determine if the organization can pay their liabilities when they are due.
In contrast, managers within the organization primarily use managerial accounting, which is not required to adhere to standards or be regulated. Managerial accounting is specific to only the part of the organization for which the manager is responsible (unlike financial accounting that reports on the organization as a whole). This type of accounting will contain financial information, but can also contain other information that will help managers make informed decisions about the future of their department.
The key thing to remember about managerial accounting is that it is primarily used by managers to make decisions specific to the departments under their control. This is in contrast to financial accounting, which aims primarily to provide financial information about the entire organization to external entities.
Knowing the difference between financial accounting vs. managerial accounting will benefit you greatly as a facility manager. I know too many department heads that are focused solely on accomplishing objectives with their team. While that is great and can’t be understated, you have to understand the financial health of your organization through financial accounting in order to get a complete picture of its strategic direction. In addition, you need to be able to use managerial accounting to make informed decisions on daily operations and report to your management how and why you make those decisions.
In future posts, we will get into these concepts in greater depth. Thanks so much for reading and I would love to hear your thoughts. If you have any questions, please feel free to email me at email@example.com.