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Strategies for Creating the Right Budget Now and in the Future

It’s budget season!  For many companies, this is a several month-long process of fact finding, planning, and negotiations.  Your budget and budget process can have an enormous impact on your operations, so we’ve outline several different methods of creating budgets, their pros and cons, and how to prepare for implement such methods in the future.   Method 1: Increasing last year’s budget by X% – Problematic if the prior budget is off The easiest way to setup a budget is to look at last year’s budget and actuals and then increase a combination of those numbers by a certain percentage based upon expected market conditions.  However, what it makes up for in simplicity, may cause problems down the road.  Did last year’s budget create the optimal operational incentives to achieve your goals?  Does it provide the right incentives for your star performers? Pros: Simple to implement if you have a prior year budget Cons: May not be accurate May create disincentives for strong performers and reward weak performers What if your best property manager has managed to optimize the performance of their property.  Occupancy is high, rents are strong, and expenses are kept at a minimum, and their next year’s budget is based upon their stellar performance.  You are essentially rewarding them with a more challenging budget due to their great prior year performance, which could cause them to not make the effort to meet the less achievable numbers, or worse, they could decide such unfair treatment is a reason to quit. ......
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