By Christine Bright Oct. 3, 2016
“Budgets were originally designed as control mechanisms. As such, they are traps …”
― Stephen Bungay, “The Art of Action: How Leaders Close the Gaps between Plans, Actions and Results”
Budgets are effective tools if implemented correctly. Understandably, they are large undertakings and require a lot of time and planning.
The challenge is that good companies often create bad budgets, then compound a budget’s ineffectiveness by rigid standards and resistance to make good business decisions based on what’s been created. Bad budgets lead to operational deficiency, which causes investors to get edgy. Shooting from the hip is no way to approach multifamily budgeting.
Wondering what makes a bad budget, or how it leads to operational deficiency? Here are a few attitudes that can make the difference between a bad and good budget:
Increasing income 5 percent and reducing expenses 1 percent may look like a winning combination on paper. But blanket increases/decreases established across the board from an old budget or based purely on historical financial trends makes two statements: 1) I am not planning on improving my business through practice or process, and 2) I don’t understand that just because something happened this year it may not repeat.
As managers and leaders for our portfolios look for opportunities to increase revenue or reduce expenses, the solutions may be specific to a specific area. Generalization does not really address the need for change, proactive reaction to possible changes in the market, or promote opportunities for improvement.
Henry Ford said, “If you always do what you’ve always done, you’ll always get what you’ve always got.” In the multifamily budgeting process, because everyone works so diligently to make all the numbers “work”, the concept of pushing the envelope or looking for a better way to do it falls to the way side. Managers should understand that each year brings different challenges and market conditions, and the same-old, same-old approach is outdated and unhealthy.
The use-it-or-lose-it mentality is rarely spoken outload, but is the hidden attitude of most of our culture. It is important to make sure that your teams understand that spending for the sake of keeping the pot of gold is bad for business. Each year will bring new challenges to an asset, which will drive the need for calculated spending (and saving). Make sure managers are not penalized for leaving money in the kitty. If brochures were budgeted but not needed just now, don’t buy them.
While it is important to use the budget as a tool and guideline, holding back on making a purchase because it’s not budgeted could actually cost the company more in the long run. For example, a leaky roof left unrepaired because the expense is not budgeted could cause additional expense. Within a few months, the expenses could mount for drywall damage and mold rotten wood, not to mention an angry resident. Help your teams identify necessary expenses that may not be in the budget, and the impact they could have to bottom line over the long term.
It is all about timing when it comes to rents. Every year, we budget market and effective rents, concessions, and rental losses. It’s important to ensure everyone knows that if the rent is not budgeted to be increased until April, but there is opportunity in March, that action is required.
Another common issue is raising rents a standard amount when there is opportunity to push that number or ancillary income higher. Just because you budgeted to raise the rents $5 … be brave, your cash flow will thank you.
Budget season starts every year with good intentions, but good companies can easily get off track. If you have had the same old process every year, it is a time to look at that method.
Post-budgeting season is equally important. Are you using your budgets for good or evil? Budgets are benchmarks and a goal line. Decisions based on them need to be balanced and ensure for performance success.
Check out the on-demand webinar RealPage offers on multifamily property budgeting software.
You can also view our Property Management Insider budgeting archive for more insights.