Knowing where you stand and forecasting the future: These are both simple ideas in business, but trickier than ever these days for property management companies. In order to do both, sound accounting practices and a simple forecasting framework are essential.
To help you wrap your head around it all, we spoke with Daniel Craig, CEO of Profit Coach and lead author of the NARPM Accounting Standards about how property managers can be gathering their business results for 2020, starting to forecast from an accounting standpoint, and really looking forward to 2021 strategically.
The below transcript has been edited for clarity and brevity.
What kinds of adjustments are you seeing property managers make to their accounting strategies?
Daniel Craig: To me, it’s perhaps more about financial management as a whole than even just narrow accounting strategies. We are really seeing some good things in this area where companies are realizing that what’s been an easy-to-manage cashflow business needs a little bit more monitoring now. So property managers get very used to the fact that on the 5th of the month, they get a big influx of cash every month from management fees. Well, there’s been a lot of concern around that, with delinquencies and what’s potentially going to happen. So I think, in some ways, the change that we’ve seen in this environment has caused property managers to be more attentive to owning the financial outcome of their business.
Too often, as entrepreneurs (and I think as property managers), we get really obsessed with day-to-day operations. But at the end of the day, if you’re the CEO of a property management business, your number one job is to own the financial outcome of the business. So I think we’re seeing more of that happening, to answer your question, in a couple of specific areas. Number one, we’re seeing entrepreneurs tracking year-over-year variances more closely.
So in the past, “What happens this year is what happened this year,” but now people are looking at, “What happened this year and how does that compare to what happened last year?” People are paying more attention. Secondly, people are starting to get more clear on their cash position. Again, it’s been a fairly easy to manage cash position business and COVID’s brought some uncertainty around that. For example, “What would happen to my business if we ran a 15 to 25% delinquency rate?” I think those are some of the things, at a high level, they’re enacting to deal with the uncertainty.
What are all the major pieces that go into end-of-year planning from your perspective?
Daniel Craig: Like so many things, a lot of this comes back to your mindset around planning and how you evaluate the past. It’s really easy for us as entrepreneurs to sometimes when we’re in a good mood at least, to just kind of ignore the data points that don’t really fit into our vision of what happened in the past and ignore the data points that might speak to a vision of what we don’t want it to happen in the future.
So we can have a mindset that says, “Hey, I didn’t really have control over what was in the past and I’m really hoping that these outcomes are going to occur in the future.” The problem with that is that it misses the fact that to a large extent, what happened in the past was really a result of our commitments. Now to be fair, there are unexpected things that absolutely happened, like COVID. Who could have forecasted COVID?
But to a large extent, the way that the past plays out is, in large measure, an extension of what our commitments were. So if we said we wanted to grow by 100 doors in 2020, but we didn’t—we have to ask the question, “Were we really committed to that?” So to answer your question, as people think about planning for the future, the first thing that we really encourage folks to do, and we have a whole exercise around this with our clients and profit coaches to look back and say, “Okay, what were your goals? What did you say you wanted to have happen? And what did you say your commitments were? But based on what actually happened, what turned out to be your commitment?
So the question is, why is this helpful in terms of forecasting for the future? Because it brings clarity to what you think about adding 100 doors in 2021. How do my commitments need to shift in terms of what’s really important to me in terms of the outcomes that I’m going to manage in terms of the plans that I’m going to make in order to actually add those doors in 2021? So that’s step one. Look back, evaluate your commitments and really try to get a sense of how your commitments need to shift to actually achieve the outcomes that you want in the future. Secondly, it’s just putting the numbers in this spreadsheet.
It’s forecasting essentials that I would define as the following: Number one, you need to go through an exercise of forecasting that’s accurate. You need to have a basic framework for being able to take what happened in 2020 and project that into 2021. You need a forecasting framework that’s simple. If it isn’t simple, then chances are, you’re not going to do it and you’re not going to do it well. If you’re spending a week to two weeks trying to crank out a budget, it’s just too painful.
Tony: Right, it has to be flexible and agile enough.
Daniel Craig: Exactly, and that brings me actually to the third point, which is it needs to be flexible and agile—or we’ll call it recurring. You have to be able to go through an easy recurring, reforecasting exercise to make changes on the fly so that it continues to stay useful. Then finally, it needs to be realistic. It’s fine to have BHAGS, big, hairy, audacious goals. Thank you Jim Collin—but your forecast really needs to be realistic.
It needs to be based off of past performance and if you’re going to make a deviation from past performance, you should have a detailed, realistic plan that articulates a justification for deviating from past performance. So those were the four things in terms of forecasting essentials, really needs to be accurate, simple, recurring or agile.
Tony: That’s a great point and I know, obviously, we’ve been going through the COVID pandemic for over 6 months now and some of the, I guess, the good news around that is that people do have the experience to see what has happened to their business in their markets. So since we’re getting more and more information and data on how this has impacted property managers, then they can take that information, look at their own business plans and then adjust for next year.
What do you find your clients get out of that financial planning mindset in general?
Daniel Craig: I alluded to this a moment ago, but again, well, I think what this really comes back to is a mechanism by which entrepreneurs and property management entrepreneurs can own the financial outcome of their business.
I would articulate that as having three aspects: number one, setting realistic targets for the future, based on past performance. We talked about that a moment ago. Secondly, creating a monthly game plan or forecast for how you’re going to hit those targets. So it’s one thing to say, “We’re going to have 30 new units this month and we’re going to generate such and such management fees.” Maybe you have a goal like, “We’re going to hit 2 million this year,” but if you say that, but you haven’t done the math to know how many doors that means you need to add on a monthly basis, then you really haven’t owned the financial outcome of the business.
I think that’s one of the big benefits that we’ll get to in a moment of forecasting, is it helps bridge the gap between aspiration and reality. But back to owning the outcome. Number three, you need a framework to hold yourself accountable to the monthly game plan throughout the year. So you have to know in February when you’re getting off target. So many of us as entrepreneurs, we maybe lay some plans. We run through the year. We get to the end of the year, we ask our accountant or CPA to send us a P&L and we look at it at the end of the year and we’re like, “Shoot. We hit the target,” or, “Shoot, we didn’t hit the target.” But what if you could know that you were on track or off track within a month or two into the year instead of getting to the end of the year?
So to me, owning the outcome is about setting realistic targets, creating a monthly game plan and then holding yourself accountable to that monthly game plan. So I think that what our clients get out of this planning is the ability to do those three things. So at the end of the day, I see forecasting as the best way to do those three things. Forecasting does a few things in addition. The exercise of forecasting helps entrepreneurs clarify their “why.” This is really big, because if you swim in the entrepreneurial stream, you’re around a lot of people who are encouraging you to do big, crazy things and that’s good. But bigger is not always better and bigger is not for everybody, right?
Tony: Right. It’s a lifestyle decision.
Daniel Craig: Exactly. So forecasting really helps you say, “Okay, why am I in business after all?” I think this is really a good time for all of us to be thinking through these kinds of questions as it relates to the kind of change that we’re facing. “Why am I in entrepreneurship? Am I getting out of entrepreneurship what I went into it for?” For example, what do you want in terms of, I like to think of it, freedom in terms of four areas: freedom of time. Are you getting that freedom of time? If not, what’s going to need to change? Do you need to slow your growth pace down in order to get that freedom of time? What about freedom of money? Are you getting that paycheck in terms of profits and your salary that you went into that business for, or maybe you think that you need to grow way more than you need to actually grow in order to get what you want in terms of that owner compensation, paycheck.
What is your desired freedom in terms of relationships, the people you want to be working with or your freedom to pursue relationships outside of business? Lastly, your freedom of purpose. Is your heart’s purpose really in alignment with this business that you’ve got going right now? So forecasting can help clarify some of those things, particularly on the financial side. What does my business need to be a need to look like in order to achieve my why for why I’m in business in the first place? [crosstalk 00:12:59] Secondly, forecasting can help you bridge the gap between aspiration and reality. I touched on this a moment ago, but the truth is often we’re very tempted to just throw numbers at the board. It gives us a little bit of a thrill in the moment to say, “Yeah, we’re going to add 300 doors this year. Yeah! Get the team to do the rah-rah thing,” but somebody in the room has to ask the question, “Okay. So how many doors does that mean we need to add on a monthly basis?”
“Okay. Well, roughly 30.” “Well, how many are we losing a month right now?” “Well, roughly 10.” “Okay. So that actually means we need to add roughly 40 doors a month to hit that additional goal.” “Yeah. Okay.” “Have you ever done that before?” “No. The most we’ve ever added is 10 a month.” “Okay.” “So then how is this actually going to occur?” So forecasting forces those kinds of clarifying conversations. Thirdly, forecasting helps simplify business decision making. This is critical. At the end of the day, if you want to be a successful entrepreneur, you need to move from gut-based decision making to data-driven decision making and forecasting can help you do that.
If you want to run a, say a 20% profitable property management business, you have to be able to answer the question, “Can we afford to hire this new person on our team that we think we need to hire and remain profitable?” A forecast will help you answer that question very definitively. Number four, forecasting helps you move from reactive to proactive. It helps you stay ahead of the change curve. One of the things that we did with our clients this year was early on, in April, so this is very early on in the COVID experience, we helped them create a financial downside forecast so that they could get to a place where they were able to say, “Hey, if things go really South here in terms of delinquency and vacancy rates, what are the potential downsides and what kind of expenses are we going to need to cut to survive this?” So very early on, they’re getting poised for a proactive response instead of realizing that they need to make a change when your credit card bill bounces, et cetera. So those are some forecasting basics and some things that I think you can tangibly get out of the forecasting and planning exercise.
Tony: Of course, forecasting is important for any business, and then tracking those results over time on a monthly, weekly basis, even for some. If you’re not doing that regularly and you’re not communicating where you’re at, especially if you’re a midsize company, how can you expect other people to know where you are and then hit those metrics and hit those KPIs? So of course, really important and you’re big on that.
How do you forecast for your clients?
Daniel Craig: Sure. So obviously I wish it was as simple as step one, two, three and you can just put these three numbers in a spreadsheet and you’ll get an accurate forecast. It’s a little more complicated than that, but frankly, it’s less complicated than probably a lot of people may get. I’m just going to, Tony, if it’s all right just show a little bit of how we do this here at Profit Coach. I won’t get into all the nuances of this spreadsheet, but at least I’ll be able to help folks kind of get a little bit of a bird’s eye view of a basic methodology.
The basic way that we’ve done that is to start with the non-financial position of your company. So what is the growth that you anticipate? You start with, let’s say 345 units. You put in how many units you think you’re going to add on a monthly basis. You put in your churn rate. So you understand how many units you’re approximately losing. This gives you your ending unit’s number. Then you’re forecasting, “Okay. What’s our occupancy? All right. It’s about 90%. So our occupied management fee-generating units is about these numbers here.” Then we’re getting into forecasting other things like new leases, applications or renewals using data that’s readily available out of a property management software.
Then we’re taking that data and we’re translating that into a financial forecast. Very simply, “Hey, our average management fee right now is 130 bucks. We’re going to multiply that times the number of occupied units and we get our management fee forecast.” Things like leasing, renewal and application fees are a little bit more seasonal. So that’s a little bit more complex, but all of this boils down to a monthly forecast, it counts for its seasonality, the leasing season in particular. Then from there, we are able to start putting in some expenses. One of the major categories that we focus on in terms of expenses is direct labor.
So people just need to plug in their anticipated salaries, whether it’s employees or contractors or third party services or VAs. We take a pretty detailed approach to forecasting labor, both on the direct labor side of things and on the management labor side of things. Then when it comes to facilities, other operating expenses, payroll taxes and benefits and advertising, we’re using a very rolled up summary approach. We’re basically just looking at the last 12 months’ average of how much was spent in each of those categories in terms of a percent of revenue. Plug those percentages in and literally, with this model that we have built for our clients and within about 30 minutes, we can come up with a very accurate, bottom line that says, “Hey, we’re actually going to make 96 grand in profit this year, 11% profitability.
So the basic method that we’re using here is we’re starting with a non-financial picture moving to the financial picture. Then finally, we’re moving toward the forecast versus actuals. This is, honestly, where the magic is. You have the forecast and then as the actuals come in, you’re tracking your variances. We have some dummy data in this particular example, but this person’s 42% office revenue forecast, et cetera. So we went through this exercise with our clients at the beginning of COVID when we started to see late fees falling off or NSF fees falling off. We were able to account for these things, or leasing, we saw some drop off in leasing because there was delays in people being able to fill those vacancies, et cetera. So that’s the basic flow.
While I’ve got this up, I’ll just show one last thing and that is related to one of your later questions, but I’ll go ahead and kind of just touch on it briefly here. That is the ability to forecast the downside. So we built a model, as I mentioned earlier, to help our clients forecast the downside. Things like, “All right, what kind of delinquency are you anticipating?” What kind of change in average rent or other categories?” That way, you can have basically, your plan A forecast and then a plan B that helps you understand and have you some concrete awareness around what kind of expenses you might have to cut to survive a negative plan B scenario.
Tony: Since we’re doing plugs now, another thing that people should be aware of on the Buildium side of the equation is we recently launched something called Analytics and Insights. So it plugs into all of the accounting data that property managers store in Buildium and it actually pulls it into different data dashboards, one focusing specifically on leasing. The next question for you, and you brought this up a little bit before, but I think it’s great for us to dive in again, is really cash balances and how they’re important to any business.
How do you typically advise your clients to think about their cash reserves?
Daniel Craig: Well, I wish I was a prophet, but I don’t know that anybody knows what the ultimate outcome of COVID is and I certainly don’t think we’ve seen the end of it. Personally, I’m not actually inclined to think that we’ve seen the worst of it because the reality is, is some of the impact of … well, a lot of the impact of COVID has been largely mitigated by trillions of dollars being pumped into the system, so here’s what I would tell you. Normally our advice to clients is to have two months of expenses free and clear in the bank. So that advice is something that I learned from a mentor of mine who’s the author of Simple Numbers, Straight Talk, Big Profits! Excellent book on small business finance. Simple Numbers is the title of it.
Greg Crabtree is the author and it really recommends two months of expenses free and clear. That’s what he considers to be a fully capitalized business, but hey, we don’t know what’s going to happen and I would recommend saving four to six months if possible, in the bank. So I guess it’s a little bit TBD, Tony in terms of what’s actually needed. I would say this, think judiciously about your PPP funds or whatever kind of aids you got. Before you think that this is your time to just take your business to the next level with a brand new advertising campaign that you’ve never done before, but you’ve always wanted to sink $100,000 into Think again, you might need that PPP in just a few months.
Tony: That’s a great point. Of course, we don’t know how COVID is going to pan out. We’re still very much in the middle of it. I think a lot of people are holding their breaths for October and November, just seeing how things start to pan out then. So fingers crossed, hopefully, things get better for everyone. It takes us by surprise in a good way. Now as far as the next question I had for you is it kind of doesn’t change even during a pandemic. So that doesn’t change, but business strategy certainly has.
Where would you recommend PMs look to adapt their businesses?
Daniel Craig: Well, as a whole, PM businesses have actually fared quite well. I would say probably some of the best. I know that there are some industries, like if you were in the mask industry, you’re probably doing really well right now, right? As a general rule PM’s have done quite well and I think a lot of PMs have actually surprised themselves. So I don’t think that you need to switch verticals. Here’s what I would recommend, though. Number one, if your fees are not where they need to be to your owners or tenants, make that change now. It isn’t going to get easier. I would suggest that you think of this as an opportunity for you to leverage the value created over the last four months with your owners.
“Hey, Mr. Owner. We’ve gone through some crazy times, but guess what? You’ve gotten a written check every single month. That’s because we’re an awesome property management business,” because truth be told, most single family, residential property managers or smaller boutique residential property managers experience pretty low vacancy, at least compared to large multi-family. So probably most Buildium users actually did very well for their clients in terms of delinquency rates. Leverage that and make sure that everybody’s on your plan A contract, that anybody that is hanging out there on five or six or seven-year-old contracts, get those people up to date. Consider this to be also a good time to take a look at other ancillary revenue opportunities because you’re losing some revenue in late fees.
So I would, again, say this is a good time to think about other opportunities for increasing your revenue per unit to again, allow you to provide a reliable, ongoing property management service into the future. So number one now is the time to reevaluate your fees. Number two, consider charging a management fee, no matter if the property is vacant. This would represent a very significant contract shift for many users, but to be honest, I think we saw a really good use case for why charging a management fee no matter what, is a really good idea. If you can make that switch now, I would really encourage you to do that.
Number three, stay agile with your labor and that’s because labor is your biggest cost center. It’s a tough conversation because we’re talking about people here, but I think you need to make sure you have the flexibility to dial your labor back as needed to account for changes in your business. So those would be the three big ones and here’s a bonus one, Tony.
Consider getting out of your lease because if COVID has proved anything to us, it’s proved that we can actually work quite well remotely. So I would work on negotiating that lease because that’s probably for most people around 3% of revenue. Get out of that lease. You’re talking about a 3% drop is the bottom line.
What are the biggest unknowns for property managers going into 2021?
Daniel Craig: Obviously, the question here is just how long is COVID going to last and the effects of it on owners and tenants? So I think there’s just continuing to be questions around, have we seen the bottom of the barrel in terms of delinquency yet? I kind of don’t think so with unemployment and stimulus checks continuing to flow. At some point, those are probably going to stop, presumably. I don’t know, right? Who knows how long they’re going to be able to keep finding new money? But at the end of the day, I would just say that, to me, that still is the biggest unknown is considering what would a pretty negative plan B look like for your company and what kind of shifts in a short term hurry would you have to make to be able to account for those kinds of changes?
So I would probably just stick with COVID. In terms of other unknowns for property managers going into 2021, it would probably continue to be around the aid that the government is going to provide for small business. So that’s probably another unknown in terms of planning your staffing needs. Those are the two big ones that come to mind, Tony.
Those are great points. Of course, selection here and so it’s just there’s so much that can happen over the next three or some odd months. So it’s definitely not short of the entertainment for everyone out there.
Which is a great reason to be aware of your numbers and know how different scenarios are going to impact your numbers.
Tony: For sure. Now as far as success stories or lessons learned, I’m curious what success stories or lessons learned that you’ve heard from property managers in your conversations throughout the pandemic.
What success stories have you heard during the pandemic?
Daniel Craig: So just pulling from different conversations at a high level, I don’t know that anybody has quadrupled their business this year, but for a lot of people, there has been significant growth in profit and even in revenue. I think that there’s a few things that I’ve heard as themes in terms of success stories from property management businesses, Overall, like I said, a lot of PMs are doing well and I think some specific contributors to that are number one, we’re seeing property managers having ability to pivot pretty quickly and at the end of the day, that’s small business America. It’s we can pivot and we can do it quickly. We’re pretty agile as small businesses and so kudos to you, property managers, who are running these small businesses again. So much of the economy is dependent on what you’re doing.
So just hats off for pivoting, for making the changes. Secondly, I think the success stories that we’re seeing are tied to the fact that business owners have had some margin to change, meaning if they weren’t running things super tight to begin with, they had some margin for error. I think that’s worth pointing out because as you look into the future, try to maintain that margin for error. I made a comment to a coworker the other day, “Success in business is literally trying to hit the target within 20%.” Typically, profit is somewhere in the range of zero to 20%. If you’re more than 20% off, you’re probably losing money.
So we generally have a pretty small margin for error. Try to keep that as big as you can. In other words, be conservative, I would encourage, in terms of maintaining cash balances, maintaining profit margins that give you some cushion and some flexibility. I think we’ve seen business owners be successful as a result of that. Another one is that a lot of business owners have taken this year to prove to themselves that they can significantly cut expenses. This is huge because COVID has basically starved out our travel budgets.
We were able to cut those and our businesses are still surviving. In fact, maybe we have more focus as a result of less travel to implement good ideas, but other acts aspects of expense cutting, too, I’ve just seen business owners tighten up the belt in a good way that’s, again, dropping more to the bottom line and providing them more of that margin I was just talking about a moment ago.
Then others have taken the opportunity to restructure the way they do business with their owners. That’s probably one of the big takeaways from COVID is it’s an excuse for just about anything, right? You can blame pretty much anything on COVID. So I think some business owners have taken the opportunity to restructure the way they do business. To change things around for the better, they’re leveraging this opportunity to create change, to do that in their business for significant positive results. Then lastly, I think entrepreneurs are either anticipating or experiencing an increase in new clients.
I think there’s a little bit of a lull for a number of companies probably in the April, May, June season, but we’re seeing that pick up and so I think the companies that are ready for that growth, that are anticipating it, that are even prepared to just pick up the small portfolios or larger portfolios that might be coming available with some people trying to get out of property management, which no doubt has proved itself once again, to be a stressful business. People that are poised for at metabolizing that kind of opportunity, I think, are going to do well. So I think those are some of the opportunities. Some of the ways that business owners are turning these lemons into lemonade.
Tony: Well, Daniel, it was great talking with you today and I thank you for all of your insight and all of the strategic suggestions you made today and I know that people out there will as well. I definitely appreciate your dedication to the industry. It’s just great to see and great to have you on the show.
For those of you who want some more data on what’s going on out there with COVID and property management, Buildium, of course, publishes reports all the time. We have two recent reports: Leasing Demand in 2020, that covers what property managers have been experiencing over the past six months, as well as another survey called on Property Managers’ Outlook on Growth. In October, we’ll be releasing the 2021 State of the Property Management Industry Report, which is a big deal. We do that every year with NARPM and are so excited to try and pull everything together and put it all into context for property managers out there. So thanks again for watching. Until next time.
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