Facilities professionals understand the importance of maintaining the quality and efficiency of health care infrastructure. They also understand how high-quality infrastructure relates to safe and effective patient care. However, obtaining the capital funds required to replace aging equipment or improve the efficiency of systems is a challenging task for which they must be prepared.
|Critical finance formulas for facility managers|
Facilities professionals should meet with senior management to determine the criteria they use to prioritize capital investments and whether capital financial decisions are based on simple return on investment or more complex methods.
Life-cycle costing is an example of a more complex method. Life-cycle cost analysis incorporates not only the initial capital cost for a piece of equipment, but also factors in maintenance cost, energy cost, replacement cost and salvage value. If a facilities professional is considering replacing a chiller, boiler or other equipment that will be in service for many years, life-cycle costing can determine the best choice.
A piece of equipment that consumes less energy or requires less maintenance over its projected life may save significant expenditures, which would more than offset a higher initial cost. The life-cycle cost analysis will help to demonstrate which equipment would be the best investment for the organization over the life of the equipment.
It is also important for facilities professionals to be prepared to compare cost savings with equivalent revenue. Because the facilities department typically does not generate revenue for the hospital, it is often viewed only as an expense. However, by knowing the operating margin for the organization, a facilities professional can quickly equate cost savings to equivalent revenue. For example, if an organization had an operating margin of 4 percent, this would indicate that for every $100 received in revenue, $4 would be left after all operating expenses were paid.
Stated another way, a savings of $4 in operating expense would be equal to $100 in revenue. In this example, equivalent revenue is savings multiplied by 25 (100/4). As an example, a project that would reduce energy cost by $10,000 per year in an organization with a 4 percent operating margin would be equivalent to bringing in $250,000 additional revenue per year ($10,000 x 25 = $250,000).
By being proactive and developing a professional relationship with senior management, facilities professionals will be able to determine which financial indicators and tools will be most useful when making financial decisions.
To obtain the funds needed to maintain the facility and its infrastructure, it’s important to use the appropriate financial terms and tools to “speak the language” of senior management.