Managing Costs and Business Continuity Planning

9.1 Managing your costs

Cost management is an important part of any management role, facilities management included. Whether you are responsible for managing your own budget or not, identifying areas where cost savings can be introduced is without doubt an area in which you will need to develop skills to succeed in a facilities management role, no matter what industry you are working in. Undertaking an all-encompassing review of all activities across your business is a good way to identify potential areas in which you can save costs effectively.

Here are some thoughts around the best ways to carry out this exercise:

Involve as many representatives from around the organisation as possible. This will give you more varied responses to your questions and will ensure that cost saving opportunities across the business are picked up uniformly. Think outside of the box. We can all name the well known cost cutting measures, such as reducing staff overtime or cutting back on non-essential materials, but there are likely to be a multitude of less obvious factors that you could implement which, added together, could make a considerable difference to your bottom line. Many of these are likely to be either industry or business specific, so you will need to be creative in order to find them, as you won't necessary find them in a book.

Review, review, review. The story does not end once cost cutting measures have been put into place. As variables constantly shift and change, you should put into place robust measures to assess the viability of the cost controls at set points, to ensure that you are still getting the value for money that you expect. Improve your bargaining skills. We talked in detail about negotiation skills in Module 5 - Leases, Purchasing and Vendor Management from a procurement perspective and these principles hold in this area too. Often, getting the best price for something involves some element of bargaining and this is generally a skill that can be learned and honed, to enable you to get the best possible deal from your suppliers.

9.2 Examples of cost cutting measures

Similarly, one measure may have a much smaller impact on the bottom line in one industry or business than in another and may therefore mean that it is not worth doing, or it may have too big an impact in either area to cut it.

Weighing up these variables is an important part of your role as a Facilities Manager and solid and thorough analysis can help you to make the right decisions during these exercises.

Here are some common examples of cost cutting measures:-

Headcount freezes or reductions

A headcount freeze is implemented when the business decides not to recruit any further personnel for a set period of time, in order to reduce costs. Usually, like for like roles or replacements for leavers in business-critical roles are permitted, but managers must go through an authorisation process prior to embarking on recruitment for their team.A headcount reduction refers to the process of actively reducing the number of employees in an organisation - this can happen through natural wastage (not replacing leavers), but a quickermethod is to put a voluntary or compulsory redundancy programme in place.

However, redundancies should not be made as a knee jerk reaction - you should undertake a detailed business case exercise to ensure that it is the right decision for your business. Sometimes,although reducing your salary bill in the medium term, you can spend more in statutory redundancy payments to employees and it can also adversely impact the morale of the organisation or leave you with skills shortages, both of which can have an adverse effect on business.

Reduction in overtime

Management may decide to limit paid overtime, or even stop it altogether for a set period of time, to reduce staff costs. A thorough analysis of the business needs should be carried out, before taking this route as, if done without proper consideration, it could have an adverse impact on the ability of the business to meet customer demand effectively.

Changes to salaries or staff benefits

This area is predominantly handled by the HR team, as it involves consulting with staff and potential changes to their terms and conditions of employment, although it can have the effect of reducing the organisation's salary bill.

Re-negotiate your fixed prices

This is a big area to look at and, if handed well, has the potential to result in considerable cost savings. All areas of fixed costs should be on the table, including leases of premises, equipment, materials, etc. You may be tied into long term contracts for utilities or the purchase of materials for example, which do not offer you good value for money and doing some research comparing other suppliers and negotiation can often pay dividends in cost saving terms.

Cut wastage

Many businesses buy in bulk and, whilst this can achieve good cost savings in some cases through economies of scale, care should be taken not to over-purchase or tie yourself into high volume agreements with suppliers on the premise of achieving economies of scale, as it can lead to wastage, particularly if the product or material is perishable. Keeping excess stock can also increase storage costs.

Reduce discretionary or non-essential areas and consolidate where possible

This may involve reducing the number of training days per employee that your organisation offers or, if this is not possible, combining training events with other departments, for example.

Activity 1

Estimated time: 15 minutes

Imagine that the company you work for, or one with which you are familiar, needs to cut its costs by 10% over the forthcoming 12 months, with little or no impact on revenue, quality, or customer care. Review the list of suggested cost cutting measures in this module, along with your own ideas and detail the two most appropriate methods that you suggest, giving reasons.

9.3 Get to grips with unknown or miscellaneous spending

Many budgets have a miscellaneous line, to which costs are assigned which have no other natural place, but they can be great places to start to cut non-core, non-essential costs, quickly. Consider your maintenance strategiesWe discussed preventative and risk-based maintenance approaches in Module 7 - Co-ordinating Maintenance and Repairs. These methods could provide good opportunities for cost cutting.

As an example, do the air conditioning filters always need to be changed exactly on time? Would it have a business critical impact if they weren't?Figuring out which assets to invest in from a maintenance perspective and which not to prioritise can be a tricky business, but is worth the hard work, as you can sometimes reap rewards in short term cost reductions. However, make sure that you balance this approach with a longer view too, as simply stopping preventive maintenance on a system without understanding the consequences can be a risky and short-termist strategy.

Finding energy savingsBasic interventions such as setting heating and lighting to a lower consumption setting or ensuring that they are switched off overnight, for example, can help. You can even find motion-detecting devices that turn off some appliances such as vending machines at night and thermostats to efficiently control the temperature of a building. Reviewing your utility contracts is another effective way of making sure that you are paying the right price. It is also a really good idea to consult employees on what they feel could constitute effective and fair energy reductions, in order to engage them in the process.

Fact

The biggest challenge that may hold back business continuity developments is a lack of budget, funds and resources, with 35.6% of respondents citing this reason.

Source: Community Central Survey into Business Continuity Trends and Challenges, 2015

9.4 Compiling a Budget

A budget is a set of information relating to the finances of an organisation, usually covering a set period of time and constitutes the financial plan of the business during that period. A budget may include elements such as anticipated sales volumes and revenues, expenses and costs, assets, liabilities and cash flows.

A budget has a number of uses, as follows:

It serves as the financial plan of a business, setting out in quantifiable terms the financial targets that it seeks to achieve during its duration.

It serves as a method for measuring the performance of a business, financially and also as a general health check for its ongoing success. Many internal and external stakeholders look to the achievement of the budget to assess the performance of the business and it is an important consideration for shareholders, if your business has any.

It can serve as a method for coping with adverse scenarios which are foreseen.

Basic components of a budget

Budgets can be as simple or complex as you make them, although it is naturally common that larger organisations have more complicated budgets, using many different variables. However, most budgets run to a simple formula, as detailed below:-

Revenue forecasting

This is surely one of the most essential elements of the budget process and refers to the prediction of how much money the business is going to bring in, in the form of revenues. Most businesses have a core revenue stream constituting sales from its core products and/or services, as well as irregular or one-off revenues, such as asset sales for example. There are lots of tools at your disposal, to help you to forecast your revenue as accurately as you can. Historical sales data, trends in the market, external governmental or monetary policies, changes in competition and customer surveys are just a few methods that you can use and you should choose those that fit your business more closely.

Costs and expenses

There are different financial approaches to defining your business costs, but a simple and effective way is to split your costs into production costs and overhead costs. Overheads (also known as fixed costs) are the costs that you incur at all times, even when not producing your product or service to sell, such as the lease on your premises, whereas production costs are those expenses that are directly related to creating what you sell, such as materials.Servicing of debt It is important to remember to include the interest charges of any debt that the business has, such as business loans, in your budget, as it is a direct cost to the business and, if not accounted for properly, could adversely impact how much you have available to borrow at a later date.

Cash flow projections

Whilst the calculation of income (revenues) and outgoings (costs and expenses) is key, care should be taken to consider the overall cash flow situation of the business - that is, when the payments either arrive or become due for payment. Failure to factor this is can lead to cash flow problems and has caused many a small business to fail.

For example

You cannot assume that because you take an order in February, you will receive the revenue from itin that month. Equally, you may have to pay out for both production costs and overhead costs before you receive that revenue. Clever cash flow forecasting is imperative to any budget.

General projections

An important part of a budget is the creation of more medium and long term income and expense predictions, rather than just by month or by budget period. This will help you to see the growth or decline in your business, analyse like for like results and take reparatory action quickly, where necessary.

Balance Sheets

A balance sheet is a financial statement which breaks down the assets, liabilities and capital of an organisation at a specific point in time. Your finance team and other finance professionals will use the balance sheet to evaluate the financial health of the company. A standard balance sheet is formatted with two vertical columns, with one detailing the assets of a company and the other detailing the financing of the company, further split into liabilities and ownership equity.

If the balance sheet is prepared accurately with all areas correctly listed, the total of the assets on the left hand side will equal the total of liabilities and owners' equity on the right hand side. The balance sheet is used to give investors or potential investors information about what a company owns, as well as the amount invested by shareholders. It can be prepared at any time, but is usually prepared at the end of the accounting period.

9.5 Asset Registers

Another document which you will likely be involved with the preparation and/or monitoring of is an asset register, which is a record of all of the fixed assets of your organisation. The term fixed assets is used to refer to the assets (such as equipment, systems, etc) that your business utilises on a regular basis, in order to produce the products or services that generate its income. Fixed assets differ from other assets such as stock/inventory, as they are permeant features of the organisation, not temporary items with the purpose of being sold. A good rule of thumb is that you can expect to own a fixed asset for more than one year.

Here are some examples of the fixed assets of a business:

Buildings

Land

Furniture

Fittings and fixtures

Vehicles

Manufacturing equipment

Office equipment

Technological equipment

Steps to creating an asset register

Facilities Managers are often responsible for the asset register of their business and there are some easy steps below for drawing this register up:-

You can identify what the fixed assets of your business are, by checking the balance sheet. Any assets listed on here are current assets of the organisation, as reflected on their books.

Double check your findings from the balance sheet, by carrying out a physical audit and walking around your premises to compare what you physically see with what is on the books. If you come across an asset that is not listed on the balance sheet, you should still include it on the asset register. The main reason for this situation occurring is if the asset has depreciated and now has a zero value and hence, has been removed from the balance sheet. However, as it is still a fixed, usable asset, it should be included in the asset register.

After compiling your findings from the balance sheet and your physical audit, you are ready to prepare the register itself. You can either use a physical, paper based register or a digital one, most commonly a spreadsheet.

Create an account record for each fixed asset.

You will need to compile information about each asset, as follows:-

Name and description of the asset

Identification or serial number of the asset

Purchase price

Date the asset was purchased

Any insurance details for the asset

Any warranty information for the asset

Service history summary, including the date of the last service or inspection

Predicted life span of the asset (depreciation) and which method is used to calculate

depreciation

Predicted salvage value

Carry out regular audits to cross check the fixed asset register, by doing an annual physical check of assets.

9.6 Business Continuity Planning

Business continuity planning is a management process which is often jointly owned by the Facilities Manager, along with the senior management of a company. It aims to create systems to prevent, mitigate and deal with potential threats or emergency scenarios which could face an organisation. These threats can be wide ranging and can include anything which has the potential to severely and/or negatively impact the business operations, safety or reputation of the business.

Some examples of these events include:-

Natural disasters, such as earthquakes, fires or floods

War, terrorism or civil disorder

Sabotage

Power, IT or telecoms outages

Cyber-attacks or fraud

Theft of business critical information, material, or assets

Epidemic or other medical emergencies

An event which causes a severe impact to the reputation of the organisation

It is important to develop robust plans in the case of disruptive events such as those mentioned above, to ensure that the organisation can not only ensure the safety and security of its staff and customers, but can also retain its competitive advantage and reputation in the market. In times of crises or emergency, a number of things outside of your control can happen to the business. These include employees not being able to get to work or not being safe doing so, suppliers being unable to provide you with the materials that you require to make your product or service, or your business may face a dramatic decline in demand. What's more, in unknown,challenging or potentially dangerous situations, it is much more difficult for the business to create new plans or strategies from scratch to deal with the crisis, as it will be caught up with fighting the various issues that arise from it.

This is one of the main reasons why implementing solid business continuity plans in advance, which have been tried and tested and which your management team and employees can pick up and have ready to go, gives a sense of organisation, safety and security, as well as a potential competitive advantage against other businesses who have not done so.

A business continuity plan can be drawn up using the following steps:-

Business impact analysis

Consult with a range of both internal and external stakeholders, in order to determine the most likely and most damaging scenarios to your specific business and, specifically, how these threats could manifest themselves in the given departments or areas. Ask your participants to be as realistic and as detailed as possible, encouraging them to think of all possible scenarios. You may also consider taking advice from external sources, such as the government or local council, as they sometimes have information or intelligence regarding potential threats on a larger scale.

Recovery strategies

Review your business impact analyses and identify the resource requirements arising from them, focusing on the gaps between what successful recovery would look like in each scenario and what the current situation or capability is. Ultimately, decide upon the most suitable recovery strategies for each potential situation.

Plan development

Decide how to make each recovery strategy happen, including the organisation of recovery teams, developing relocation plans, writing of business continuity procedures and policies.

Testing and evaluation

Develop methods for testing your plans and evaluating them impartially. As part of this, carry out training for the business continuity team and for general staff. Retain a framework for continuous review, as external circumstances change.

Activity 2

Estimated time: 20 minutes

If your business already has a business continuity plan, ask to review it and make suggestions for improvements.

If such a plan does not exist, draw up the summarised areas of focus from scratch, using the guidelines in this module.

9.7 Contingency planning for IT

As we have already mentioned, often the IT and Facilities teams work closely together, as some areas of their roles overlap. Business continuity is one area where you will need to work in tandem with your IT team to ensure that the necessary contingency plans are in place when required. IT includes both the software and the hardware of the organisation and is usually a business critical area when disaster strikes, due to the fact that

a) many companies rely on their IT network to carry out their business,

b) IT assets constitute a high proportion of the total assets of an organisation and

c) recent threats to cyber security mean that a business risks its intellectual property and security if an infiltration to IT systems occurs.

It is for this reason that recovery strategies for IT should be prioritised, in order to restore technology services to the business as quickly as possible.What's more, manual workarounds should be included as part of these plans, so that the organisation can continue running efficiently whilst computer systems are being restored.

The SARS crises - an example of the importance of business continuity planning

A well known example of the importance of business continuity planning was during the course and the aftermath of the SARS outbreak in China and Hong Kong between November 2002 and July 2003. At its peak, it had spread to 29 countries and three regions, with a cumulative total of 8,422 cases and 916 deaths. Needless to say, the commercial and economic impact of this crisis was significant, with the biggest impact being felt in demand, particularly local consumption, tourism and air travel.However, thanks to the contingency plans that had been put in place both at a governmental and business level, once the outbreak was brought under control, the economy was able to rebound quickly, with few long term effects.

The main areas that were prioritised from a business continuity perspective prior to the outbreak were data protection and recovery and the outbreak served to alert companies around the world of the impact of potential operational disruption caused by such occurrences and the importance of business continuity planning. A greater focus on the part of businesses on the protection of human resources, backup teams and alternative locations for business operations was one of the positive outcomes of the crisis and has led to an increased focus on business continuity planning in today's modern businesses.

Module Summary

Our focus in this penultimate module of our Facilities Management course has been on your role in controlling and reducing costs in the business that you work in.We began the module by explaining the universal importance of cost control and gave you some good starting points regarding how to look for opportunities to save costs in your business. We then went on to list, in some detail, some of the more usual and tried and tested approaches that businesses use to reduce their overheads, recognising that the type and needs of your own business will determine your decisions regarding what sort of cost control activity to take, as one size does not fit all.

We then continued to take a closer look at some of the financial documents that you may be exposed to in your role as a Facilities Manager, these being budgets, balance sheets and asset registers - and how to draw them up. Finally, we undertook a review of business continuity planning and the advantages that this can offer your organisation. We covered the basic steps of drawing up contingency plans and also considered a brief case study of how the SARS epidemic affected businesses in China and Hong Kong.