4 Ways to Change the Multifamily Budget Narrative
The confluence of the end of budget season in December and the new year got me thinking about the whole budget process. Almost everyone I know in the industry hates the budget season. At best, it’s a “necessary evil” and at worst, “budget is a ‘four letter word’’! But just because it’s always been that way doesn’t mean it should stay that way.
Our team is on a mission to change this budget narrative, and we think you should be, too!
Budgets Are Painful
But before discussing how to do that, let’s understand why it’s so important by examining the reasons the current approach is so painful:
- Time-consuming. Before our approach, the shortest budget cycles I’ve seen lasted at least three months with some taking as long as six or more. Anything taking this long that doesn’t directly generate revenue feels like a tax on everyone’s time.
- Easy to make mistakes. With more than 70% of operators using Excel for their budgeting tool, the opportunity to make mistakes is huge. From small ones like overwriting a formula with a number thus freezing that number for all future versions to large ones like overwriting a whole file and having to start from scratch again, it’s just too easy to make mistakes in Excel. I know one SVP of a large management company who dreads the weekend before budgets are due since she inevitably gets calls from operators in tears who have somehow lost or messed up their budgets. She can sympathize with their pain but still can only tell them they’re going to have to work extra hours over that weekend to get the file rebuilt and submitted in time.
- Often feels like an arbitrary process. When budget models require inputs that should be outputs, many involved feel the arbitrariness of the approach. For example, occupancy is the result of several drivers (expiration profile, renewal rate, days vacant to release, …), not an input. Similarly, if you’ve ever had to enter a “plug” to get to a certain result decreed from above, you feel exactly this pain.
- Seems like it’s done more for leadership than for those who create it. This reminds me of everyone’s “favorite radio station,” WII-FM— “what’s in it for me.” This amusing quip aside, it’s a reminder for everyone involved in leadership that it’s virtually impossible to get full-throated commitment when subordinates don’t see the value of their activity. You’ll get compliance—the budget must get done—but part of why it feels so painful for most associates is that the work is largely divorced from any day-to-day use for them.
Change the Budget Narrative
So how can we change this narrative? Here are four important and (not so simple) ways to do so:
- Centralize to reduce man-hours. Why do so many budget processes require so many man-hours from the field? It’s much more efficient to have subject matter experts in more centralized locations who can create the assumptions and load them into budgets for properties in bulk. This saves many hours, and equally important, reduces mistakes. Another challenge with budgeting is that it typically happens coming out of the high season—a time when it’s particularly bad to “put your head to the CEO and rear end to the customer.” This approach frees the field to spend more time with their head to the customer.
- Structured data should sit on top of a database, not in a spreadsheet. If all the budget data is sitting in a database, and calculations are exactly that—calculations in code, not in Excel cells—then data entries cannot mistakenly replace equations; and if proper versioning and data backups are employed, users cannot accidentally completely wipe out their work!
- Use only driver-based rent and expense algorithms. As mentioned earlier, results like occupancy are an output, not an input. Expenses are sometimes driven by meta-data, e.g. software whose cost is based on the number of units, make-ready expenses based on the number of move-outs, and gift baskets based on the number of move-ins. Use or create a driver-based model, and you can create much more useful variance analyses that help operators run their business better—that’s a WII-FM!
- Make budgeting/forecasting an ongoing activity. With models that are easier to operate, allow for centralized updating, and store multiple versions, it becomes possible to do quarterly (or even monthly) re-forecasts. The line between “budgets” and “forecasts” blurs with the former simply being the quarter (or month) that is declared to be the budget, typically 3Q for quarterly reforecast or September or October for monthly reforecasting. “Budgeting” is no longer an annual Herculean task; instead, it’s just one milestone in a series of smaller reforecasting tasks.
Of course, all of this requires a purpose-built application. That’s why all operators should either build such a custom application for themselves or buy one available in the market. If enough operators choose either approach, we can finally change the narrative on budget season!