What Went Wrong with Your Budget and How Can You Improve it?
2. Reinforce through financial reviews and documenting anomalies
Ensuring historical data through reinforcing financial reviews and documentation of anomalies and variances – unanticipated expenses or changes in income that affect the budget – is critical. Review financial variances, and track and identify anomalies of historical numbers, she says. Once anomalies and reasons for them are identified, avoid repeating the peaks and dips they had on the general ledger. For example, if the historical value for July vacant electric was half of what it normally should be because the invoices came after the normal billing period, you should not repeat the same trend for the following budget year. Perhaps the reason for the later postings was because someone was on vacation, the bill was lost or human error.
“Timing issues occur and without tracking these issues, it’s natural to look at historical trends and just assume, ‘The financial trend was this last year, so we might as well budget the same this year because it’s probably going to happen again.’” Bright said. “If it’s a timing issue, it may not happen again. Also, don’t take the annualized number, divide by 12 and call that the monthly budget. It sounds like common sense but that’s the worst thing you can possibly do because in our industry there’s seasonality. Factoring in that seasonality is critical.”
Some things are hard to budget, like when a boiler system unexpectedly blows. But Bright says budgeters need to be aware of unpredictable expenses and factor them in as much as possible. Capital walks, inventories to identify potential replacements or major repairs in advance of the budget season, reduce surprises in the coming year.
3. Plan for the budget process
Planning meetings help develop a strategy to ensure a better budget. Budget meetings, workshops – even a short retreat involving a fun activity – helps staff get in the habit of reading and understanding financial elements.
Distributing templates or the budgeting program ahead of time and requiring a strategic approach, rather than just filling in the blanks, helps achieve true numbers. Also, automate data entry as much as possible to reduce manual typing and typos.
“Spending time in budget workshops or prep sessions ultimately will reduce your time spent budgeting and get you a better base budget,” Bright says
4. Audit your budget by looking at the detail
It’s easy to review budget reports and look at variances at a high level, but you may miss the details, Bright says. For example, plugging in rental income from the previous year without looking at what drove that number, like vacancy losses and concessions, can be risky.
“You can miss quite a few of the numbers because you haven’t reviewed them at a deeper level,” she said. “The devil is in the details. It’s not just looking at the highest level, but actually looking at the details once you get past that. That’s how you catch budgeting mistakes. The detail level review is critical.”
Budgets are game plans that drive success, Bright says. A strategic approach to budgeting is just as important as the best marketing plan aimed at maintaining high occupancy and competitive rents in the rental housing industry. A thoroughly planned and audited budget based on historical performances, seasonality and those anomalies and good forecasting will help ensure a winning bottom line.
“Budget planning. It’s a learned process.”