Responding Quickly to Financial, Operational Trends Key to Healthy Budget Performance
Financial trends above or below the expected budget can be tricky to diagnose. Fluctuations within a budgeted expense or revenue category that happen because of abnormalities or for other reasons make managing the bottom line more challenging.
Responding quickly with a solution to offset the peaks or valleys in actuals versus the plan is important to maintaining a healthy budget.
In multifamily property management, many things can trend expenses or revenues above or below expectations. When a trend is identified, it’s good business to ask yourself these questions:
- Is this trend due to a one time or limited time impact?
- Is the trend a result of expense or operational changes?
- If trending up, how can I maximize and take advantage of the trend?
- Is hitting my budgeted numbers good enough?
Forecasting can help identify opportunities to improve budget performance
Forecasting helps analyze and predict trends that affect budget performance. Many multifamily companies do not forecast because it is so time-consuming. But, disregarding this necessary accounting practice can mean missing opportunities to accelerate income or avoid cash flow issues because of slow reaction.
The reality is that by the time monthly financial variances reports arrive, the next month is probably halfway through. Using a web-based forecasting tool will help you look forward and solve this gap in the process with minimal effort.
Because one-time fluctuations are commonplace, making an adjustment as soon as you’re aware of something that will impact your bottom line is important. For example, if a property receives a high number of move-out notices for upcoming months, it’s time to adjust your marketing and leasing strategy to reduce the financial impact. While turn units will still cost you, reducing vacancy time by pre-leasing as early as possible will help soften the impact.
Also, unexpected major expenses like replacing a boiler system are going to happen. Prudent property management means looking to options like delaying projects or reducing maintenance purchases to minimize any impact on the budget.
Property staff influence financial and operational trends
Operational and expense changes are the biggest influencers of your financial trending. Normal churn of residents and the associated costs all affect your ability to quickly address changes to the bottom line.
A property team’s performance is the main influencer of financial and operational trends. Watching operational trends such as lease expirations, seasonal leasing, preventative maintenance, and customer service all have one element in common − staff. Ultimately, operational and expense changes are controlled by your staff, and poor performers can, in turn, chase away your good performers.
James C. Collins sums it up well in “Good to Great: Why Some Companies Make the Leap and Others Don’t”:
“Letting the wrong people hang around is unfair to all the right people, as they inevitably find themselves compensating for the inadequacies of the wrong people. Worse, it can drive away the best people. Strong performers are intrinsically motivated by performance, and when they see their efforts impeded by carrying extra weight, they eventually become frustrated.”
Capitalize on an upward trend instead of missing a sometimes golden opportunity
Taking advantage of an upward trend is frequently a missed opportunity. Property managers naturally get excited about being 98 percent occupied, but don’t consider the opportunity to raise rents on new and renewal leases.
One of the biggest financial misses is not taking the brave step to push rents in an upward trending market or waiting until the property is already leased up before starting. As the old saying goes, strike when the iron is hot.
By forecasting, it is easier to identify trends and take action sooner. Forecasting at least a quarter in advance allows for increasing rents, identifying financial misses that could be addressed through careful expense management and better lease management, and ensuring the asset is maintained in good condition to avoid costly long-term repairs.
Keep in mind, the national average required notice to vacate is 60 days, so if you are looking at you’re trending for only the next 30 days, you are already in trouble.
Exceeding budget is the goal, not just managing what’s already established
Budgets are a baseline, not the ultimate goal. Meeting rental and other income budgeted numbers means the property has met the minimum, but the goal should be to actually exceed budgeted income values. If a property is budgeted for a rent increase in April but has the potential in March to raise the rents, then by all means don’t wait.
Ask yourself, are there opportunities to increase ancillary income? If I had a dollar for every time someone told me “Well, this is what we always collect.” I would be rich. Push your comfort zone, step out of the box and try something new.
Finally, buying something because it was budgeted is a bad way of doing business. Buy based on need, not because it is in the budget. The maintenance team should be buying supplies based on maintenance trends and anticipated turns, not because it’s budgeted. Painting a unit that doesn’t need it just because it’s in the budget is a waste of money. The opposite could be true if parts are being taken from nearby vacant units to fix occupied apartments. This is doubling your maintenance labor costs.
Responding quickly to financial and operational trends impacts the bottom line. It is the difference between healthy cash flow and just managing. By forecasting, reviewing operations and trending − and taking action quickly − the financial health of your properties will improve and show strong growth.