By Christine Bright
Source: Property Management Industry
A budget is your vision of an asset and a forecast of potential earnings. While creating a portfolio or property budget, our deniable need to put everything under the microscope to review and analyze blurs the view. As we try to ensure that values tick and tie, we can miss the big picture.
So where do we go wrong in the process? The answer can often be found in the budget review process. A successful budget is more than just plugging in numbers that look right.
In the battle of the budget review process, there are three main culprits for bad analysis:
- Failing to define and set goals for the asset. How can you review a target that is not clearly defined?
- Not accurately projecting end-of-year numbers. Inaccurate forecasting for the end of the year will hinder growth measurement for the next year. An explorer must always know where he is before deciding on the right path
- Ignoring the details. Reading between the lines is essential when reviewing budgets
First: Define the property or portfolio goal
Not properly defining an asset’s goals can impact the review process. Simply stating a desire to grow income by 5 percent and hold expenses is not goal-setting. Sure, they are measurable numbers, but how are you going to get there? If you drive from New York to California without accurately mapping a plan, you can bet your travel expenses will be more and the trip will take longer. Let’s face it, an internet map doesn’t always take the most direct routes. Do a little homework and make the right plan.
By not knowing the what, how, how much it’s going to take to get that 5 percent income growth and having a direct plan for maintaining expenses, you are just looking at numbers in the review process. Dig deeper. You may want to keep your budgeted expense the same, but the likelihood that your vendors feel the same way is doubtful. They just might be planning to raise rates because of increased materials cost, labor, etc.
Knowing the goals for an asset and the details in the review process allows you to evaluate if the budget makes sense and if changes need to be made to reach these goals.
Second: Year-end forecast should be on the money
If your revenue numbers are off at the beginning of the new year, chances are they won’t be accurate for the rest of the year.
Accurately forecasting for the end of the year is critical in determining where your budget begins, in addition to any increases and decreases in revenue and expenses. This is especially true for rental revenue. Before reviewing next year’s budget, evaluate forecasted values for the current year. Determine if there are any current expenses that will or will not be required next year.
By paying attention to present performance and trends, you can better determine if growth is accurate or inflated in the review process.
Third: Analyze details and compare values
It is said that the devil is in the details, and this expression cannot be more true or the budget review process.
If your review process only looks at the summary details and variances year over year, you are most likely going to miss something. Even with a quick review, you must look across and down. In other words, you need to compare monthly values and then summary values. Assuming someone else has done this for you is a big mistake.
Analyzing details and comparing values will help identify timing issues, budgeted values that have seasonal impact and are averaged, or line items that are budgeted just because they have always been done that way. If you were to only look at summary values, you will find yourself explaining variances to your owners month after month.
Remember what Benjamin Franklin said: “Beware of little expenses, a small leak can sink a big ship.” The same is true for budgets; ignoring the details will likely cause huge variances down the road.
The budget review process can be tedious and full of hazards, but avoiding the three most common mistakes will help you ensure budgets are as accurate as possible and that you do not have to spend next year writing detailed variance explanations to your owners.