Real Estate Financial Perspective

Businesses that can effectively manage utilization and costs associated with the assets get substantial benefits and boast effective company performance.

Efficiency is the primary quality measured in the Financial Perspective, and with the Balanced Scorecard used as a measurement system, it particularly means that the strategy execution should lead to improved results. Planning real estate processes should be focused on the strategic importance of occupancy costs to define, manage and measure them. It will provide information of business's true profitability and lead to more accurate valuation of real estate assets. 

Occupancy cost escalation has a significant impact on how firms use their office space. If the business occupies too much space, it leads to overpaying that does not match the budget, and the company carefully reconsiders the utilization of the office space in an effort to reduce occupancy costs and achieve planned income goals. This primarily concerns law firms ? large consumers of office space. Among cost-saving measures there are strategies including moving support functions to less expensive space within a building or a combination of less expensive space and lower improvement costs which can also reduce location expenses. However cost-sensitive firms seek to measure and compare occupancy costs before considering facility relocation. 

Sometimes it is problematic to assess true occupancy costs because of complex leases, billing procedures which often result in billing errors, and unexplained charges assessed by landlords and property owners. Besides, business costs can be disguised as occupancy costs and distort the productivity of a particular real estate asset. Without a good benchmarking system occupancy cost accounts are often used inappropriately and can hide the real expense of the use of an asset.  

To solve these problems the National Association of Accountants (NAA) has established benchmarks for defining occupancy costs related to the use of real estate assets by business. The number of items which are assigned to occupancy costs can be broken into two types: those that fall under costs of operation and those that are associated with costs of providing the fixed asset.

Day-to-day operational expenses like maintenance, utilities, and management provide examples of costs of operation. Capital costs, property taxes, insurance, and depreciation charges refer to costs of providing assets.

Following the principle of charging costs to occupancy expense accounts as they would be charged in the open market, the NAA suggests four tests. The first focuses on the question if the expense reflects a cost of providing, maintaining or using real estate, while the others center on the cost as it compares to current market conditions. Accounting occupancy cost separately provides a basis for comparison, measure business performance exclusive of occupancy costs, and measure underlying real estate values separate from business performance.

On the whole companies consider Financial Perspective as a factor determining long-term profitability. One of the prerequisites for building up a profitable real estate business is assessing the corporate strategy shown in the balanced scorecard with regard to the perspective in question, assuming it is of key importance to business performance as it tells whether the strategy execution is leading to improved results.