Budget Breakdowns: Understanding and Reporting on Multifamily Budget Variances
Accountants know that no matter how much sweat they put into financial planning, budget variances are certain. Depending on the size, the variance may or may not get a second look.
But inside the numbers is critical information that may affect the long-term health of the property.
The most proactive multifamily property management companies understand the importance of variance analysis. That’s why they regularly report budget variances related to income, expenses, cash flow and other key accounting metrics for monthly or quarterly review.
What is variance analysis in accounting? It’s first looking at accounts and determining the difference between an actual amount and the revenue or expense budgeted. From there, it’s resolving the reason for the difference.
Through analyzing and reporting variances, budgeters get a clearer picture of how their assets are performing. A common perception is that a property that enjoys high occupancy or improved rents is succeeding. Yet revenue variances in income and expenses may argue otherwise.
Take a community that is at 98% occupancy on two-bedroom apartments and is fulfilling its plan to capture young households rather than downsizing couples. While occupancy is up 2% year-over-year, an analysis of two-bedroom floorplans shows that revenue is actually down 5%. Upon further investigation, the property discovers that it is getting a slightly lower price per square foot for these units because of rent concessions used to fill them.
Compounding the problem is that a review of utility data for the units shows total operating expenses have risen from the previous year. Factoring in revenue and expenses over a 12-month lease, the property will make significantly less profit on two-bedrooms for the year.
In this case, the revenue variance analysis provides some potentially eye-opening financial data for the property. The management company can use the variance information to determine next steps to increase occupancy and lower expenses through utility management.
Variance analysis trickles to bottom line
Understanding budget variances improves overall health of a property by enabling the management company to seize opportunities to increase income, curb expenses and forecast changes.
However, most property managers excel at filling apartments but struggle to understand financial statements. A variance may not jump out at them the way it does to a regional manager or portfolio analyst. It’s usually because no one has invested the time to teach them to read the numbers and to better understand their impact on the bottom line.
Some property management accounting solutions that facilitate budgeting and financial statements lack the critical component of variance analysis.
Identifying and explaining variances takes the trained eye of an accomplished financial analyst. The largest variances naturally stand out and often can be quickly explained by an impactful event, trend or action. For example, a gap in the renovation budget might be explained by an unexpected rise in materials prices attributed to a market change.
Smaller variances as portrayed in the two-bedroom example aren’t as noticeable unless the property manager or accountant looks for them. Yet they sometimes make a significant impact on the health of a property or portfolio. Simply put, 1% of $1 million is a lot of money.
Better understanding financial budget variances ultimately improves managing down to the cash flow level of the financial statement and shows how every dollar counts.
Tracking budget variances made simple
No matter the size of the variance, key stakeholders want answers when numbers trend either north or south of budgeted items. A property management accounting platform that enables easy review of accounts and explanation of variances is a budget specialist’s best friend.
RealPage Accounting’s Variance Analysis feature allows analysts to configure and track accounts that need to be renewed each month. The feature gives total control over identifying and explaining variances for more effective property management by using live data from the general ledger for the most up-to-date information, says Dan Newbern, Vice President, RealPage Financial Suite.
“Variance Analysis is a way to allow budget teams to review their financial activity and submit feedback of their operating budget,” he said during a recent webcast. “You simply choose the account group that you want to use, your time frame for reporting and your variance ranges.”
The financial report writer allows adding variance notes to any new or existing financial reports so financial information can be built quickly for owners.
In addition, users can choose whether to require an explanation for positive budget variances, and create multiple configurations for properties with different reporting requirements for management companies and owners.
Eyes on improving overall property health
Reporting budget variances is critical to determining the overall financial health of a property or portfolio. As the multifamily housing landscape evolves, budget analysts, property managers and stakeholders must understand exactly what the numbers mean.