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Financial Analysis and Control



Since the 17th century, organizations have used financial and nonfinancial information to direct managerial decisions. Until the 1950s, financial accounting information was primarily used to control the work of individuals and production units. However, in the 1950s, businesses started using this information not only to control work but also to plan the extent of financing of the enterprises as a whole. Therefore, when financial accounting information is used for controlling people and financial planning, it is referred to as management accounting.

Management accounting reports are built around the information needs of managers, who must define specific objectives of the enterprise. Different institutions have different objectives, and management accounting focuses on the financial dimensions of how and why institutional objectives are achieved. Unlike audited financial reports, managerial financial reports are more subjective and less rigid in form. The form or content may vary and can include graphs or charts to supplement the statements. Moreover, these reports can encompass nonfinancial elements such as the size and quality of enrollment, faculty size, the condition of physical facilities, and the scope of administrative staff.

Nearly all facilities management problems involve alternatives, and resolution of these problems requires consideration and comparison of the costs of alternatives. What levels of electric power should be purchased and produced? Should a heating or power plant be converted to a different type of fuel? Should building cooling systems be converted to a central chiller plant with a chilled water distribution system? There are alternatives when replacing building components and equipment such as absorption chillers, compressors, components of a steam distribution system, roofs, and roof drainage systems. The choice among alternatives is often not simple; machines and structures generally are part of a complex plant, and this complexity creates difficulties when determining the effects of alternatives. Many alternatives embody subsidiary alternatives. Satisfaction of the engineer's sense of technical perfection is not normally the most economical alternative; imperfect alternatives are sometimes the most economical.

In most cases, the costs to be compared are not immediate costs but long-term costs. Initial costs, operating and maintenance costs, life expectancy, and replacement costs all must be considered. The time value of money is a factor and should always be considered. A business manager who is not technically trained must rely on the facilities manager for advice as to the differences among technical alternatives. Facilities management must translate the differences among alternatives into money terms, both for internal decision making and to justify requests to higher authorities for funds.

This chapter addresses the basic financial principles and methods with which facilities professionals must be familiar in order to participate competently and effectively in college and university financial management. As mentioned earlier, managerial accounting involves planning analysis and control for financial decision making. These topics will be discussed briefly.

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