This was originally and posted for Inside Self Storage September’s articles by Alyssa Quill.
Have you created a good budget for your self-storage business yet? If not, there’s no time like the present. Why is budgeting important? For starters, many investors and bankers require it. Even if it’s not required, a budget helps predict cash flow, set goals for revenue growth, and create a framework from which to manage expenses. Without a budget, it can be easy to spend more money than you’re bringing in.
Here’s a step-by-step guide to creating the ideal budget for your self-storage business.
Step 1: Gather the Tools and Data
Before you begin assembling your budget, spend some time gathering important data. If you have a bookkeeper or accountant, ask for copies of your property’s profit-and-loss statements for the last two calendar years and year-to-date for the current year. Find out when paychecks will be cut next year, if payday is every two weeks. Which two months will have three payroll periods instead of two?
Also, review any existing contracts that will extend into 2015. For instance, do you have contracts for preventive maintenance, landscaping or online marketing? If you provide any health or life insurance benefits for your staff, reach out to your broker to find out what they expect to happen to premiums next year.
Also pull a couple of critical reports from your management software, including the most recent monthly management-summary report. It’ll give you starting points for gross potential, occupancy and total actual rent. It would also be helpful to have a historical report that shows move-ins and move-outs, occupied units, total rent collected, and discounts given over the last 36 months.
Step 2: Review Current Competition
How long has it been since you visited your competitors? How does your facility compare in terms of quality, service and value to the customer? Are there any changes you could make in 2015 that would significantly improve your occupancy or revenue? These might include adding climate-controlled units, seal-coating your parking lot, buying a box truck to help tenants move in, adding banners to improve signage, offering a new move-in special, or changing your staff.
Step 3: Audit for Maintenance and Capital-Project Needs
After you’ve visited the competitors, go back to your property and walk through it, trying to see it from a customer’s perspective. Make sure all of the lights are working, and review the shape of your signage, gutters and roof. Are keypads, gates and cameras all working well? Are there any signs of asphalt damage or wear and tear? Are there any doors that need spring adjustments or replacement? Create a list of capital improvements and maintenance projects you’d like to complete next year, and then gather estimated costs.
Step 4: Ask Experts for Help
Who knows your property better than you? Your property managers! So include them in the budgeting process. Ask what they would do differently if they owned the property and it was their money. Managers often have great ideas for improving a facility and bottom line but are hesitant to say something because they’re afraid to overstep boundaries. Your managers should also be able to provide you with their expectations for growth in occupancy and rates next year.
If you know other storage owners in your region, give them a call. Operators are generally friendly and eager to help each other. Brokers and appraisers who specialize in self-storage usually have a great sense of the overall market as well. Share your thoughts on the market and expectations and ask for their opinions. Maybe they’ve heard rumors of a potential new competitor you don’t know about. Other storage investors can be a great source for information on the industry and your market.
Step 5: Analyze Trends
Analyzing the trends in key numbers at your property over the last couple of years can help you make a more accurate prediction for the next 15 months. If you have some experience with Microsoft Excel, creating quick-line charts will be a piece of cake. If you haven’t done it before, visit the Microsoft Office website for a quick tutorial.
I suggest plotting these six line items on individual charts by month for the last two to three years:
- Total revenue
- Total discounts given
- Total expense
- Square-foot occupancy
Look for seasonal as well as long- and short-term trends. Does occupancy usually peak in August? Do move-ins spike in May as local college students leaving school? Do you give more discounts in the summer months or winter?
Step 6: Make Projections
Now the fun really starts! To predict rental income, start with last month’s rent, add in the expected rent from move-ins next month at your average street rate per unit, and subtract the expected move-outs at your average rate per occupied unit. If you’re raising existing tenant rates on a regular schedule, add an appropriate amount on a monthly basis for those increases. Lastly, subtract the amount you expect to give in discounts and bad-debt write-offs.
Remember to add to your “other revenue” line items. For things like administration fees and merchandise sales, it’s easy to predict using an average amount per move-in. On a monthly basis, for example, the admin fees should be $20 multiplied by the number of move-ins you’ve predicted. Looking back at the last six months, on average, what were your merchandise sales divided by the number of move-ins? Use that number to predict next year’s merchandise income. Insurance premiums, truck-rental income and rent from any other sources such as cell towers, office spaces, etc., should be factored into your budget as well.
For expenses, really review the amount you’ve spent for each line item over the past couple of years. For many categories, you can assume an annual growth rate, maybe 3 percent.
For marketing, decide if you want to spend more or less. How did the advertising investments you made work last year? For items like credit-card processing and management fees, calculate the percentage of revenue you paid last year, and apply the same percentage to your projected revenue for 2015. Use the contracts you gathered and maintenance list you created earlier to predict your repairs and maintenance budget.
Step 7: Final Review
A good exercise to check the “sanity” of your new budget is to add a line for your 2015 projections to each of the six charts you created in step 5. The result should look similar to the charts you see here for move-ins and gross profit.
Do the 2015 lines form the same general shape and slope as the 2013 and 2014 year-to-date lines? If they vary dramatically, you may not be predicting realistic numbers. However, there could be a good reason for it. Maybe your occupancy is so high now that you don’t have many empty units, which can affect your move-in rate.
After spending hours or days working on your budget, the numbers can start to blend. This is a good time to ask someone else to take a look. Your bookkeeper or accountant has a keen sense of expectations, especially for expenses. Ask him to review your proposed budget and provide feedback.
Hopefully, this article will help you organize your thoughts, streamline the process and help create an accurate prediction of net operating income and cash flow for next year.