Budgeting season is here, and with it, the opportunity to tweak plans and re-think priorities.
While budgeting is always important, 2021 will be a different beast. With a post-pandemic backlog adding to the numerous challenges ahead, it’s essential that property management leaders nail this core financial process.
Without question, the next twelve months will be more unpredictable than usual. That said, two priorities will be protecting the bottom line and investing in resources and projects that will drive growth. It's a tricky balance to strike during the best of times, let alone in the middle of a global health crisis.
An important first step is to ensure that differences between budgeting and forecasting are clear, as the terms are often conflated. Here's a simple way to look at it: a budget is a plan for where a business wants to go, while a forecast indicates where it is actually going. A budget isn’t just numbers; it lays out expectations for what your business wants to achieve. It creates an annual statement of what your company values by detailing future results, financial positions, and cash flow. Forecasting, on the other hand, estimates potential achievements by projecting major revenue and expense line items.
Budgeting 101
Many accountants focus solely on cutting costs – and that’s fair, because that’s an important part of their job description. However, what often gets lost in all the slashing is that an effective budget is a roadmap for growth. Cost-cutting is important, but so is investment in areas that will help your company reach long-term goals.
One reason budgeting is so challenging is that it has to make so many different parties happy. You’re dealing with promises to ownership and management, while setting benchmarks for bonus payouts. There's value in having in-depth conversations at the start of the budgeting process so the final document has a stronger chance of setting every stakeholder's expectations. Let each department bring its expertise to the table, then think purposefully about what you’re trying to accomplish through budgeting and discuss the best way to get there.
Here are five ways to strengthen your business by balancing cost-cutting with investments:
1. Be realistic: Record-breaking growth and occupancy may not be in the cards for 2021. Before you shoot for the sky (or plan for dark days ahead), be sure to read the market and do your homework. Perhaps in other years, you’d shoot for growth, but in 2021, simply maintaining your current level of business and retaining your employees could be a worthy goal. Prioritize needs over wants and ensure you’re equipped with the tools and technology to get it done.
2. Clarify your income: It can be hard to allocate resources if you aren't clear what funds are coming in. Assess the health and sustainability of your income sources to ensure you'll have the money you're expecting to spend when you need it. This means taking stock of any concessions you're making to drive occupancy rates, re-evaluating lease rates, and factoring in other financial practices that might get in the way of creating an informed and reliable income strategy.
3. Benchmark, benchmark, benchmark: Leverage your own data – as well as outside statistics -- to get a sense of your property's trends when it comes to operating expenses, income fluctuations, and market shifts. Benchmarks give you a sense of what you should be aiming for.
For example, you can use outside data like the Institute of Real Estate Management (IREM)’s stats on per-unit-date for most major markets to see if your property costs are in line with similar properties. You should also be using your own data to create internal benchmarks. If you’re expecting a maintenance backlog when residents are once again comfortable with maintenance techs in their homes, investing the time to benchmark how long each step should take, as well as the costs, will help you create more accurate budgets.
4. Expand your budget categories: Increased competition and tight markets are opportunities to stand out among the competition. Instead of focusing on ways to increase income from the get-go, take time to see if investing in upgrades, retrofits, or new amenities and resident services will make an even bigger impact on your bottom line.
5. Invest in your team: The road to economic recovery will require collaborative and productive teams. When creating your budget, be sure to consider the tools, systems, and back-office resources your teams will need to stay responsive to residents. (As we outlined in this blog, Covid-19 has heightened resident expectations, so it’s more important than ever to be prepared.)
Great budgeting requires balancing an accounting perspective with an investment perspective. Your business is constantly evolving – now more than ever – and your budgets should have some flexibility as well. After all, if you’re not getting stronger, chances are you’re getting weaker.