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Budget Season: Tips to Make This Challenging Time Less Painful

Budget season is among everyone’s favorite. It’s right up there with tax day, cleaning out the garage and having toenails pulled. 

Much thought goes into creating a budget – not to mention a lot of back-and-forth from everyone who is a part of the process – but the information is often obsolete the moment it’s finalized. The spreadsheet might look tidy, an accurate spending forecast for the year to come, but things change quickly.

Budget-breakers, such as unforeseen repairs, unexpected increases in vendor costs or the need to upgrade to a more sophisticated software platform can throw the original budget into disarray.

Seeing that the process of constructing and modifying a budget can be painful, here are a few concepts that can help alleviate the process:

Be timelier: Many companies want the first draft of the budget to go to the asset management team in September, which doesn’t take into account four more months of revenue when attempting to predict up to 16 months out. Seeing that many are not approved until December or early into the next year, constructing a budget too early can paint an inaccurate picture.

Delegate some of the hours elsewhere: This is not advising companies to skimp altogether on constructing a budget. But seeing that the information can become outdated the moment it is printed, perhaps it’s best to shift some of those hours to other tasks. When I was at AIMCO, our COO estimated that 100,000 hours were expended per year on budget preparation on the 385,000 units we managed (which might have been an under-exaggeration as it projected to about 65 hours per property). It begged the question of whether those hours justified the end result or if they could have been used elsewhere to help increase performance.

Train and communicate: Left without proper guidance and templates that calculate accurate year-over-year costs, most property managers will put less revenue in the bank for the upcoming year but spend more on the asset. This reduces NOI, which is the antithesis of what property management is geared to do. Proper training and communication, such as a pre-budget expectation meeting that discusses philosophies on revenues, growth and capital expenditures, can help prevent this tendency.

Make it a work in progress: I’ve always advised property managers to project the budget spend for the remaining portion of the year and add it to the year-to-date actuals. Evaluating this with a keen eye can provide the base for the beginning month’s revenue performance, as well as the calculation for year-over-year performance on the asset. Likewise, reviewing the monthly trends of actual year-to-date performance alongside the projected budget allows you to diagnose any movement before it’s too late. 

Budgets are tricky. You have to evaluate everything from renovation costs to employee bonus calculations, and you’ll never be able to accurately prepare for any unforeseen expenditures. Simply put, the perfectly accurate budget plan doesn’t exist. But if you take these steps, you can alleviate at least part of the headache.

 

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