The Slow & Silent Cash Flow Killer
What’s the Cost of Poor Maintenance?
Buildings wear out over time - it’s a fact. We never seem to notice until we visit a competitor’s Branch or our roof leaks, stains the drywall and the patched area can’t be matched because the old paint has faded. It seems that these expenditures come out of the blue, there’s never enough money in the maintenance budget to cover them and we can never accurately predict when they will occur. So what’s the solution?
The first step towards a solution is understanding the situation, which should be easy for financial people:
Facility Renewal (Deferred Maintenance) is the physical manifestation of Depreciation.
If a building’s Expected Useful Life is 40 years, then theoretically 2.5% of the building is “used up” each year and shows up in the Operating Budget as depreciation. However, Labarre Associates has found that only about 55% of a typical Branch’s components actually wear out over the course of the Branch’s Expected Useful Life. The foundation, site work, sidewalks and other items that are often included in the Replacement Value (check your insurance policy for this value) will not wear out within 40 years, so the equation for estimating your liability each year is:
Current Replacement Value x 55% x 2.5%
You should remember that Deferred Maintenance (Facility Renewal) refers to Capital Expenditures for replacing building components like Roofs, HVAC Units and other similar expenditures that exceed your capitalization threshold. When you calculate your cumulative liability for the current year and subtract any previous replacement project costs, you arrive at the approximate magnitude of your liability.
Then what? Labarre Associates’ Facilities Division can perform an assessment for each Branch and will prepare a detailed 10-year Capital plan for Facility Renewal. This plan will allow you to control facility issues before they control you and will help you keep your good lookin’ Branches lookin’ good! We’ll call to see if you would like to discuss ways we can make your life easier when it comes to maintaining your facilities and controlling both your Capital and Operating Budgets.
Posted: May 04, 2017