Real Estate Budgeting and Forecasting: Getting Organized
September 27, 2022
OHI
While real estate budgeting and forecasting decide the success or failure of your business, the steps that lead to the preparation of the budget are equally important.
What are these steps to preparing a real estate budget? What information do you need to gather before you can create a budget? Find out all the answers to all these questions in this article.
Steps to Real Estate Budgeting and Forecasting
A realistic budget is only possible if all the information that goes into the budget-preparation process is accurate.
Here are the steps to follow to get ready for your annual budget:
1. Analyse Expenses
To begin with, you need to understand the operating costs of your business. Controlling your expenditure is as important as trying to increase your revenues. Having a rough idea of your expenses is not enough; you need details.
Your costs can be classified into the following categories:
Fixed expenses like electricity, insurance, internet charges, rent, municipal taxes, and salaries. These expenses remain the same regardless of the level of your operations
Variable expenses include wages paid to labour, raw material costs, and expenses directly related to production. The higher the volume of your operations, the higher your variable expenses
One-time expenses such as plant and machinery and other heavy investments
2. Review Supplier Contracts
Are you getting the best raw materials at competitive prices? Review the market price of equivalent products and compare it with prices offered by your suppliers. Negotiate with your suppliers to get the maximum discounts and flexible payment plans.
Your payment may fluctuate, so you should try to time your cash outflows (payment to suppliers) with your inflows (your revenues). During peak seasons, you have higher revenues, and during lean seasons, revenues are low.
By matching your peak inflows with high outflows, your cash flows become better; your business becomes more efficient.
3. Estimate Your Income
Following the thumb rule, overestimate your expenses and underestimate your income, and your business will be healthy financially.
Look at your previous year’s revenues, calculate the current year’s budget numbers, and use a conservative growth rate to stay safe.
The frequency of monitoring revenues should be per month, year, and quarter. Tracking your revenues also helps you arrive at a projected growth rate. When calculating growth, factor in any regulatory changes and fluctuations in the economic environment.
4. Understand the Gross Profit
You get gross profit when you deduct all business expenses from your revenues. Estimate your gross profit and determine if there is a surplus or deficit after deducting expenses.
If you face a deficit, you need to examine all your expenses in detail and eliminate ones that don’t add to your profit.
When calculating the expenses, remove the cost of materials to get the expenses that need to be divided into essential and non-essential categories. The cost of materials and other essential expenses should be included in the budget.
5. Manage Cash Flows
Your cash flows are based on payments received from customers and payments made to vendors.
You need to classify your customers into ‘good’, ‘doubtful’, and ‘bad’ since not all customers pay on time, even if you offer a grace period and discounts on bills.
Offer multiple payment channels to customers. Create a bad debt fund in your budget for non-paying customers or those who pay late. Your cash inflow figures will be more reliable, and planning your fixed overheads like employee salaries will be easier.
6. Factor in Peak and Lean Seasons
When estimating your revenues for real estate forecasting, keep in mind that cash inflows will be high during peak seasons and low during the lean seasons. For calculating the monthly revenue figure, you can’t divide the annual revenues by 12.
Your goal should be to increase your earnings in the peak seasons to see your business through the lean periods. Some of the surplus during peak seasons can go into more aggressive marketing to your target audience and new demographics to boost sales.
7. Involve Value-Added Spending
Spending that adds to your revenues is an investment, while the rest is wastage. Look at your online and offline marketing campaign to see the ROI or return on investment of each minor and major expenditure.
When calculating essential ‘investments’, even something as minor as unused stationery counts. When channelled towards effective marketing campaign investments, this small expense will generate more revenues.
The effective expenses should be included in your budget and must be part of your long-term strategic decisions.
8. Compile All the Information
After all the information you need to create a budget is ready, it’s important to list them according to a specific format.
Your budget flow should be as follows:
Total Revenues – List your estimated sales for the year
Cost of Goods Sold – The direct expenses that relate to the sale of products should be included here
Overheads – This includes all the indirect expenditures like advertising and marketing, fixed expenses, variable expenses, and any one-time expenses. When you deduct the overheads from the Cost of Goods Sold, you get the Net Profit or Loss
The actual expenditure should be placed next to your budgeted figures to check for deviations and take corrective action. With accounting software, creating a budget is a quick and hassle-free process.
Conclusion
The success of your real estate budgeting and forecasting depends on following the steps mentioned above.
Professional accounting firms can help you in getting organize your Real Estate Budgeting and Forecasting. Outsourcing the information collection for your budget to such firms enables you to focus on your core business, real estate.
Select an accounting firm that specialized in real estate budgeting and forecasting and boost your performance.
About Us
OHI is a sixteen-year-old real estate services company working with 75+ commercial and residential real estate developers, funds and property management companies across USA. Our deep expertise in real estate accounting, financial analysis, lease administration and asset management has helped clients cut associated costs by 40-50%. We currently provide these services to a portfolio of 100,000 units across clients.
