Staying on Budget and Avoiding Hidden Expenses in Property Management

Budgeting can be a tricky endeavor in property management. Not only do you need to monitor your overall financial performance, but you also have to track specific line items to ensure you’re truly staying on target. Below, we’ll look at different ways “on budget” can be interpreted, why it’s important to monitor multiple timeframes, and how to watch out for hidden expenses. We’ll also discuss the benefits of having a standard chart of accounts and using realistic, risk-adjusted calculations to manage seasonality and cyclicality.

Understanding “On Budget” in Multiple Ways

Your property could be on budget overall—meaning your total expenses and revenue align with your financial plan—or you could be on budget for a specific line item, such as maintenance costs or utilities. Additionally, you can evaluate your budget on a monthly, quarterly, or annual basis. Keeping an eye on these three timeframes is essential to determine whether a budget trend is stable or accelerating.

1. Monthly: Offers quick insights into short-term variances.

2. Quarterly: Allows you to identify medium-term trends and seasonal patterns.

3. Annual: Provides a big-picture view of overall financial performance.

   
   

Warning: Hidden Expenses Within Budget

It’s possible to appear on track financially while still missing key red flags. For example, your property manager might reduce salaries and show that you’re beating budget but hide labor inside of a contractual 1099 line item. If you only look at the total line for salaries or labor, you may think things are going well when in reality, these costs might have been shifted somewhere else.

Key Takeaway: Always scrutinize major categories like labor. Ask for clarity on any 1099 contractual expenses and verify whether they are truly separate from regular payroll costs. If you notice unusual fluctuations or reduced salaries, dig deeper to ensure labor expenses aren’t merely being hidden or reclassified.

The Value of a Standard Chart of Accounts

One crucial way to maintain clarity is by using a standard chart of accounts that can account for 99.99% of your operations. By staying consistent with how you code expenses or balance sheet items:

• You reduce confusion when reviewing financial statements.

• You keep your budgeting process transparent.

• You streamline decision-making because every stakeholder can read the accounts in the same way.

When expenses are always coded to the same account, it’s easier to spot irregularities or misclassifications. This consistency also helps you look across multiple properties or projects and do apples-to-apples comparisons of financial performance.

Logical, Practical, and Risk-Adjusted Calculations

After setting up a solid chart of accounts, the next step is to create logical and practical risk-adjusted calculations for each line item. This means developing reasonable assumptions for each month to account for seasonality and cyclicality. For instance, if you know that winter months drive up heating costs or that certain tourism seasons increase revenue, you need to factor those patterns into your budget.

Steps for Better Budget Calculations

1. Identify Seasonal Factors: Heating costs in winter, landscaping in spring, or increased occupancy during holiday periods.

2. Incorporate Risk Adjustments: Consider economic shifts, unexpected repairs, or market fluctuations.

3. Monitor Monthly and Compare to Prior Years: This helps confirm whether your assumptions hold true or need revising.

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