Getting Your Budgets Over the Finish Line
As we now approach the Fall, everyone is back from summer holidays and the “silly season” is upon us which means Budgets and making the final Q4 push on any deals or financing activities.
If you are in a crunch for time to get your budgets over the line then this guide is for you.
Step 1 – Determine the Asset Strategy – Hold, Refinance, or Sell
Before going deeper into the details of the budget process it is important to take each asset and ask yourself the following:
- What are the returns to date for this asset?
- Is the asset meeting our investors’ return expectations?
- Are there opportunities to refinance the debt or add additional debt to lever returns? This is a good time to re-look at the loan agreement or your loan database if you have one.
- Is the asset meeting its loan covenant requirements including debt service coverage ratio (DSCR)?
- What are the upcoming capital expenditure needs for the asset?
- If we were to sell the asset today on an “as is” basis what would returns look like for our investors? It is worth doing a cap rate sensitivity here to help see at what cap rate the sale of this asset could be accretive to investors.
- Is the asset attractive to bring in outside investors and get some of the existing investor’s capital out?
- How are the operating results for the asset?
- If using 3rd party property management are they performing well to your investment mandate?
- Are there investment or fund structure considerations that require you to keep the asset at status quo?
- Are there opportunities to add further square footage through densification? What are the costs and benefits of undergoing this change?
After evaluating the above questions you will be able to evaluate whether you intend to hold, refinance, or sell the asset. It is highly recommended here to run some preliminary financial scenario analysis work to help you determine which Asset Strategy you fall in.
Step 2 – Tickin’ Timelines
If you haven’t already re-visit your budget calendar and ensure everyone involved – your property manager(s), finance, asset management, and operations teams are all aware of what it left to be done. A best practice here is to get these in people’s calendars. Your chosen Asset Strategy will help drive the amount of effort you will want to spend on each asset.
A suggested timeline with the last few months remaining in 2023 would be:
- September 15th – First draft of budgets by assets completed
- September 22nd – First draft of budget consolidation with quality control review completed
- September 29th – Review of first draft of the budget with the key budget owner (CEO, CFO, COO, or others) for initial feedback.
- October 31st – Review of Q3 results and Budget with CEO, Board, or Management team as applicable.
- November 15th – Upload final 2024 budgets in the financial system
Step 3 – Budget Templates
The best practice is to build templates that are common across each property with key assumptions in a separate tab, revenue, operating expenses by category, net operating income (NOI), general & administrative costs, capital expenditures, debt service costs, and ending with net cash flow.
You will want to prepare your template on a per month basis and if you have an asset that may be refinanced or sold during 2024 your template should factor this in to provide a realistic financial view of the asset.
We try to ensure template assumptions are able to be toggled based on important key performance indicators (KPI’s) such as occupancy, vacancy, contractual rent increases, and new rent amounts in the case of rental revenue. Operating Expenses should be split between recurring items such as pest control or snow removal and one-time items such as major or minor repairs. Capital expenditures are split between maintenance capital expenditures and revenue enhancing capital expenditures.
Before jumping into tools to automate your budget process it is very critical to decide on your key assumptions, template format, and process owners so that the technology enables the process not the other way around.
Step 4 – Consolidate for Quality
Whether you are using industry leading technology tools or good old-fashioned Excel nothing helps you get a true state of the nation then doing a roll-up of the budgets to date. We suggest comparing your 2024 budget roll-up to your 2023 forecast to the end of the year. The best practice is to implement a “roll-up” structure to your budget templates which shows revenue, operating expenses by category, net operating income (NOI), general & administrative costs, capital expenditures, debt service costs, and ending with net cash flow.
Step 5 – Review Assumptions & Drivers
Once the consolidation has been completed and the appropriate quality control has been applied to ensure accuracy it is time for the review of results. Best practice is a peer review of the work that was done to ensure there is accuracy in the inputs. It is critical to find any major errors or inconsistencies upfront and resolve these before involving more senior folks in your organization.
The consolidation should include a “bridge” that shows how the current year’s expected results translate into 2024’s proposed budget. The best practice here is to bridge your results between rate and volume drivers which will allow you at a macro level to explain the change in results year over year.
Each asset should also be reviewed in the context of its loan agreement to ensure the 2024 proposed budget doesn’t cause a breech in loan covenants or potential heartache for a lender. The other major check is to compare the projected returns by asset to what was underwritten in the original deal or in the most recent investor reporting package for investor context.
Step 6 – Finalize, Lock & Load
Most organizations have a final review of the budget for approval by the CEO, an external board, or senior leadership team depending upon your corporate or investment fund structure.
Once you have the approval of these budgets it is time to prepare the templates into your chart of accounts structure and have them loaded on a monthly basis well before the end of 2023.
Finalyze has extensive experience in budgeting, financial management, and technology implementations. If you or your team need assistance to get your budgets over the finish line please reach out to us at info@FinalyzeCFO.com