Annual Operating Budget Critical to Successful Property Management
Submitted by S. Leonhard
Sometimes referred to as an Asset Management Plan, a well prepared annual operating budget should include a narrative executive summary, a summary operating statement and a detailed operating statement supported by clearly documented assumption notes and explanations.
The executive summary should briefly describe the current status of the property, outline the goals and objectives for the budget period, describe the strategy contemplated to achieve the stated goals and objectives and conclude with a description of the expected status of the property at the end of the budget period.
The summary operating statement should be a one document page that mirrors the format of the financial statement. This will allow you as the owner to see at a glance the main categories of income and expense used to arrive at the projected net operating income. In addition, and following the net operating income, the total projected for capital items and debt service should be reflected to arrive at the projected cash flow for the budget period. A good format to use includes 3 columns showing the prior year budget, prior year actual and current year budget.
The detailed operating statement should include each individual general account included in the property trial balance with sub-totals that support each category included in the summary operating statement discussed above. The schedule should have a column for each month and a total column for the budget year. Each and every line should have a reference to a note which explains the assumption used to arrive at the budgeted amount.
Finally, and most importantly, a written explanation of the assumptions used to arrive at the amount budgeted for each item of income and expense projected in the detailed operating statement should be included and properly reference to detailed schedule. A qualified property manager will analyze each income and expense line item for your property and carefully project what the expected result should be for the coming period. Simply using a fixed percentage of increase over the prior year actual will often lead to unpleasant surprises and unfavorable variances.
There are many benefits that result from spending the time to prepare and properly document an annual operating budget. Included among those benefits are:
· You and your property manager develop an intimate understanding of each category of income and expense affecting your property.
· You will have realistic and measurable expectations for the performance of the property for the budget period and confidence in the property management plan.
· The budget document provides permanent reference materials to guide current site staff, new site staff and to introduce the property to lenders, investors and accountants.
· Budgets approved by the owner will provide necessary spending authority to your property manager to conduct normal operations for the year. Exceptions outside the approved budget would require approval.
· Well documented assumption notes and explanations allow the property manager to quickly identify and report to you as the owner reasons why actual results vary from the budget expectations.
· Detailed budget preparation with monthly detail will allow for the proper timing of major expenditures to avoid cash shortfalls and maximize distributable cash flow to you as the property owner.
Make sure your property management firm is taking the time to properly prepare your property’s annual operating budget. A well thought out plan will avoid lost revenue or unnecessary expenditures and allow you to quickly indentify and react to items that vary from the expected results.