A Budget For Your Business

Posted by msmessenger on Feb 1, 2017 12:00:00 AM

Why You Need One

Budget is a word many people find irksome. But when viewed in the context of running a business, a sound, comprehensive management budget occupies an essential role in efficiently and profitably operating any venture.

The self-storage industry is no exception. A competently planned, well-executed budget will accurately track cash flow, assist in predicting future trends, and provide historical data essential for tax preparation and dealing with creditors.

What precisely is a management budget? The name may be a bit misleading, since a budget has much in common with a business plan. A budget is a tool that can assess a facility’s current financial situation, make projections based on data drawn from different sources, and offer steps on how to improve the facility’s future profitability. This information is in addition to the estimation of revenue and the allocations for expenses—the nuts and bolts of any budget.

Charlie Fritts, COO of Storage Investment Inc. in Buffalo, N.Y., describes a budget as “a comprehensive review of your business in the last quarter of the year before the new year starts”.

The need to prepare and ongoingly maintain a budget is a necessity, explains Fritts. Owners with only one or two facilities often fall into the habit of “checkbook accounting” or simply using rent proceeds to pay bills as they come due without a sound overall strategy. Engaging in a practice like this is like driving with fogged up windows, making a long-distance perspective impossible.

Collect Data
Gathering essential information is the first step. This will include recent profit and loss statements, sales journals from the past year, and a record of all payroll expenses. You’ll also need a list of all upcoming scheduled loan payments and any other contractual obligations. A good spreadsheet program, such as Microsoft Excel, which adds new features with every update, can be a helpful tool to record and later process the data.

The next step is to take a good long walk around your facility and assess its general condition. Fritts gives examples of what to look for. “Is there peeling paint, potholes in the driveway, or shrubbery that’s worn out? These details are important. Look at this from a customer’s perspective, and ask what she or he might think.”

“If customers are visiting their unit, stop and ask how satisfied they are with your facility and its level of service; their perspective may be insightful.” Fritts explains.

Armed with this information, make an anonymous visit to nearby competitors and make an honest comparison. Does your facility equal or exceed their level of value and service? Methodically determine what improvements your facility needs to remain competitive; obtain cost estimates for each. To gain a broad perspective, consider involving managers and/or employees in making these decisions before obtaining cost estimates.

Study The Numbers
Once the step of amassing data is completed, it’s time to crunch the numbers. As mentioned earlier, programs such as Microsoft Excel can be very useful at this stage. If you’re not familiar with Excel, look online to find a basic tutorial. Perhaps the best one is on the Microsoft Office support website, https://support.office.com.

There are several templates available online on how organize a budget spreadsheet, but what follows is a basic example. Begin by inputting all income, giving separate lines to each category of unit, as determined by size and climate-control status, less discounts. Use additional lines to list miscellaneous income such as merchandise sales or revenue from having a cell phone tower on your premises.

On another Excel sheet (it’s best to make these all separate “sheets” within one Excel document), list all normal operating expense: salaries, utilities, taxes, insurance, and all marketing expenses. Also include an allowance for maintenance and repairs (based on inspection) other than those financed outside the day-to-day cash flow.

Lastly, include a page devoted to tracking payments on amortized loans. Typically, this includes debt from land acquisition, construction, and capital improvements. The page should include the total amount financed, the outstanding balance(s), and the accumulated equity, but, for budgetary purposes, the amount of the monthly payment is the key figure.

Finally, set up a “master page” where you’ll list your total income for a given month (form the first page). Subtract all regular month expenses on the next line, calculate a sub total, then deduct the sum of your monthly loan payments.

The result will be your monthly gross profit, or loss, should it be a negative figure.

Budget Benefits
After you complete this simple process, you’ll instantly be able to benefit from the information. If your gross bottom line isn’t where you want it, do some analysis. Look closely at each expense line item. What costs can be reduced without impacting your level of service? Think creatively; is your local tax assessment too high? Try initiating an appeal with your board of review. Has the insurance coverage you’ve had for several years become too expensive? Brokers and agents will sometimes offer discounts to longtime clients.

On the income side, what proactive steps can be taken to boost revenue? Is it time for an across-the-board rent increase? Does your office area have an unused room or two you can rent to a local start-up?   

Once you master these basic techniques, you can enhance your spreadsheet to calculate things like projecting the move-in vs. move-out rate over the next several months, which you can in turn use to predict future trends of revenue and expenses.

Beyond these nuts and bolts examples, industry experts point out how a well-prepared management budget can be useful and sophisticated tool in managing the business, especially in the case of large concerns. So, while the mom-and-pop owner/operators of one or two properties are most likely to prepare their own budgets, the process does change somewhat as companies get bigger.

Diane Gibson runs Cox’s Armored Mini Storage in Phoenix, a third-party manager of 18 properties of various sizes. She uses a collaborative approach when preparing each location’s budget. The process begins each September with a walk through of the facility with the manager, where capital the building’s needs are discussed. Bids are obtained and presented to owners for approval.

“I put together the rest of the budget at the home office, considering each property’s occupancy level and location to determine a realistic goal for revenue growth.”

And while the basic template used is universal, “Each facility is in its own community with its own unique pros and cons that need to be considered,” she explains.

But Gibson emphasizes that the process is not rocket science. “I don’t use any high-tech tools; Quick Books and Excel are all that’s necessary for the job.”     

Operating on a still larger scale is Westport Properties in Orange County, Calif. Westport is a third-party management company that operates over 100 facilities, mostly located in the western half of the U.S. Mike Brady, COO, explains the importance of budgeting for his company. 

“We use the revenue forecasting provided by a budget for performance benchmark for our managers. It allows is to set goals that a manager must meet to be eligible for a bonus,” Brady says. “We have a dedicated team at our home office that annually studies and prepares detailed budgets for each property. We look at the current occupancy level, the historic average occupancy, and the potential for growth. That way we don’t plan projected revenue growth based only on rent increases.”

With all the information a well-developed budget provides, it may be tempting to conflate it with a business plan. Brady clears this up by drawing a distinction.

“Several initial questions have to be addressed when an owner first acquires a property: Do I add more units right away? Or even expand to include another floor? These foundational issues involve metrics that are outside the normal budgeting process and therefore necessitate a professionally prepared business plan,” he says. “Once a property is fully developed and stabilized, the owner can execute the plan by transitioning to a management budget.”        

The advantage for a company with many locations is that the common budget template, once designed, can generally be applied universally to each property under management.

“The numbers will vary, but the widget doesn’t,” explains Brady.

Paul Vachon is a freelance writer, editor, and public speaker based in Detroit. He is a member of the American Society of Journalists and Authors.