It is that time of the year again Budget Season. Why is this such a dreadful time of year? The year is making the turn to the finish line. It comes at the end of summer, the start of hurricane season and with 2020 COVID-19. Yet, we are held accountable to meet or beat the numbers, and often managers or first-line budget preparers are just not educated in the whole budgeting and forecasting process. Sometimes we can be our own worst enemies, which is what makes budgeting so painful. But many pain points can be avoided. Identifying and correcting processes that can help make budgeting feel more comfortable is the first step.
Here are seven ways to make the season less like pulling teeth:
1. Make preparation time count
Make sure you are prepared. Don’t expect to just sit down and knock out a budget without being aware of market conditions, including economic forecasts for your sub-market. Marketing, demographic and economic changes impact leasing and retention and, in the end, profitability. Research prior to committing to revenue is critical. Corporations moving in and out of your market can have a substantial impact on the bottom line.
2. Set clear goals and targets
Ever try playing darts blindfolded? Just try to hit that bulls eye (and watch people take cover).
It’s important to provide clear objectives and targets for your budget preparers so they have direction. Ask questions like “What are the expectations for income growth and expense control?” Also, “Is the property under review for renovation and how will that impact income and expenses?” For novice budgeters, this is critical information. Written guidance, checklists with what is expected, and guidance on how to use your budgeting model are critical to success.
3. Forecasting is a detailed process, not goof
Projecting losses and gains and year-over-year growth without knowing your starting point is dangerous. Failing to forecast prior to budgeting eliminates all real hope of getting a true idea of YOY performance. Being able to compare end-of-year revenue at the beginning of the budget cycle is important. If starting numbers aren’t correct, you will be writing variance explanations each month to your owners. While expenses are usually easier to project, forecasting end-of-year market and effective rents, Loss to Lease, concessions, vacancy and bad debt can be a challenge. For example, forecasting economic occupancy at 90 percent to finish December and starting the January budget at 95 percent or boosting Gross Potential rent more than the minimal amount could cause the remaining budgeted revenue to be off substantially for the entire year.
4. Avoid averaging or annualizing especially this year
Taking an average or annualized amount and budgeting it equally for each month makes expense-line items messy. Seasonality, move-ins/move-outs and resident retention impact various line items. Utilities, turn costs and other income are line items that should never be averaged. This is a common mistake made by novice budgeters that asset managers often complain about.
Also, remind budget preparers that just because an expense or income event happened one year does not mean it will repeat. Timing issues, staffing changes or shortages, one time supplier refunds or major repairs such a boiler system may be a one-time occurrence and shouldn’t be factored into the budget.
5. Take the blinders off before budgeting Capital
Property managers who have spent any length of time on a property may be so accustomed to seeing an issue that needs fixing that it becomes invisible to them. Property walks, therefore, are critical to identify Capital issues that need to be addressed and budgeted. Walk interiors and all the way around buildings, common areas, signage, flags, models, and office areas.
While it is very unlikely that everything will be addressed, it may bring things to light that were otherwise ignored. Also have someone perform a light check at night and look for potential safety risks resulting from poorly lit areas. Be aware of any city or state regulations that might impact common areas.
6. Consider historical values when budgeting
While reviewing a preliminary budget for the first time with a property manager, I asked why an expense line that did not appear to have any historical value was budgeted. For example, a $500-a-month expense would surface out of the blue on an expense line that had previously been zero. “We always budget that just in case,” was the reply. Just because you have always done something, does not make it the right choice. Unless, the budget item can be justified, don’t just plug a number in to be on the safe side.
7. Use the facts & data
Quality commentary and explanations throughout the budget process are important to selling the game plan to owners. Budget preparers should avoid statements such as “based on historical trends” when explaining a line item. Cite specific trends so the numbers hold water. For example, explain that payroll increased 15 percent because of staff shortages in the previous year. Solid comments will reduce review time substantially and speed along the budget process.
Budgeting and forecasting are skill sets, and managers should invest time in their teams to ensure time spent is meaningful. Pre-budget season preparation will make it much simpler to forecast or see into the future. A solid budget is one that takes into consideration past and present trends, as well as market conditions and property knowledge.
If you need any help with your budget for next year, please contact us for free estimates