The Year-End Audit
Making It Work for You

By Jim Chiswell

The letter arrives. You open it with great trepidation, but nothing can soften the blowof its terrifying message: You are being audited!

Even when you believe that you have dotted every "i" and crossed every"t" with great precision, whenever you read those words in an IRS letter or fromyour state labor department, it inevitably sends chills through your body. It is a littlelike driving down the highway with a police car behind you: You keep checking yourspeedometer and looking in the rearview mirror just waiting for the flashing lights tocome on.

An internal year-end audit should not invoke these types of feelings for you, yourmanager or any other employees. In fact, this year-end audit should be viewed as anopportunity, a chance to review the year's accomplishments, measure the results againstthe objectives and determine your actual financial results to the budget created 12 ormore months ago.

A lot happens in a year. New competition many have entered the market; a major employermight have closed; those break-ins sure didn't help nor did the leaking roof in the"C" building. No matter what the reasons, it is the outcome that you need toobjectively review. Establishing realistic goals and an achievable budget for 1999 canonly be accomplished with the benefit of the previous year's experiences.

But just what should this year-end audit consider?

1. The Financial Review

The first thing to nail down is how the actual numbers compared to the budgeted figuresin each category. If the actual rental income was $450,000 and you anticipated $495,000,what went wrong? Likewise, if the budgeted income for rents was $425,000 and you hit$450,000, what went right?

What specific units rented better or worse than projections? Did that rent increase gofully into effect in July like you had planned? Or when you look at your rent roll, do yourealize that you have 50 percent or 60 percent of all of your customers payingsub-standard rents?

Yes, I know all about the argument that we sure can't increase the rents on good ol'Charlie because he has been with us for years. Unfortunately, if you are not careful, youmay find yourself with a number of older tenants who are all 10 percent to 20 percentbehind the prevailing rates. When you try to move them a little closer to the actualstreet rents--with a $15 or $20 per month increase--they will sometimes leave. Had youkept them near the prevailing rents with annual increases, you may not even have to facethis potential problem.

Your financial year-end report of budget to actual needs to be shared with allemployees. I know owners who are very reluctant to do this because they feel that they aresharing too much data with their staff. If you are expecting your employees to meet thefinancial goals that you set for them in any budget, though, they must be fully informed.

In fact, they should be involved in the entire budgeting process. Once your employeeshave participated in the preparation of the year's budget they take an ownership in makingthe budget figures become reality. Plus, they can't say to you halfway through the year,"Gee, I didn't know that you expected to be getting $22,000 per month in rentalincome and 6 percent in miscellaneous income." How can they reach goals they don'tknow exist? It is just as much as their budget as yours if they help to prepare it.

For most companies, it is the budget that sets the goals for the year. Most companiesnever take the time to actually develop a list of specific goals and objectives for theyear ahead. It would be great if you would, but at least make sure that the process of theyear-end audit results in a well-thought-out budget.

2. Customer Profile Review

You can learn a great deal about your chances for continued success if you develop acustomer profile and actually use it as a planning and goal-setting objective. Take thisend-of-the-year opportunity to put your existing customers under a microscope.

Just who are they? What percentage are residential users? How many commercial customersuse your facility? How long are people staying? Look at this from several angles. First,what is the length of stay by unit size? Yes, I know that the students are only in therefor two to three months at the end of the year in your 5-by-5 and 5-by-10 units, but it isimportant information.

Who are your oldest tenants? How long have they been with you? Are their rents nearyour current street rents for new customers? If they are commercial customers, whatindustry groups are they from? Have you ever asked them for referrals? If not, why not?.

Where are your customers coming from? It really pays to chart your customer base by zipcode on a map. The nine-digit zip codes are easily accessible from the Internet or in thelibrary from a nine-digit zip-code book for your area. This will get you down to theactual block where they live. This data can show you if you have a market hole. If youhave an area with no tenants, you need to know why. If a new competitor is moving intoyour area, this information can assist you in forecasting the level of disruption youmight have in your customer base. Being forewarned is being forearmed.

When was the last time that you said "thank you" to your existing customers?You might be surprised how little it would cost to get a bunch of Blockbuster Video passesfor a free movie rental. How do you think your customers would react to a simple thank-younote with a free movie pass and bag of microwave popcorn from your storage facility? Youmight be very surprised. Unless you take a close look at your customers, you'll never knowwho to thank.

3. Fixed-Expense Investigation

It may seem like an contradiction to say that you should investigate your fixedexpenses. Yet, costs like real-estate taxes, utilities and insurance are all items thatcan be changed. Real-estate taxes are runaway costs that we all face. We are coming to atime when the $45 to $70 per square foot purchases that have been made over the pastseveral years are being used by assessors to determine property-tax rates.

You need to examine the property-tax cycle and what you can expect. In manyjurisdictions across the country you have very little time to file an appeal. You need toknow if you might be facing a $15,000 to $30,000 increase in taxes in the new year. I surewouldn't want to face my investors with the excuse that I just didn't realize that taxeswere going up that much. Would they accept that excuse? Don't let it happen to you.

If you have climate-controlled units, have you checked your HVAC equipment to make sureit is operating at optimum efficiency? Have you considered replacing your current lightswith more energy efficient ones? Maybe it is finally time to place your hallway lights ontimers or motion sensors instead of just keeping them on during operating hours. It isalso possible that you have been overcharged by your local utility. A careful review oftheir billings could reveal a billing error in your favor.

Property insurance is another area that many of us take for granted each year. Wesimply allow our local agent to roll it over with little question. I strongly suggest thatyou use the year-end audit process to get competitive quotes on your business. I knowowners that have reduced their costs by thousands of dollars in premiums while getting asuperior insurance product simply by insisting that their agent put the coverage out forbid. Make sure that you get to see the bid results. This will help to keep your agent onhis toes and help you to obtain the best deal for yourself.

4. Sales and Marketing Analysis

Each year the self-storage industry spends millions of dollars in Yellow Pages ads indirectories across the country. In many communities, we are being forced to place ads inthe "Baby Bell" books in addition to an independent Yellow Pages directory.However, are you measuring what book is really working? Are you asking callers respondingto ads what page they are looking at in the phone book? Most people will tell you. Thiswill also give you information that they are shopping from the Yellow Pages. Plus, itgives you a chance to take control of the call.

Something else to consider: You need to know if your "call conversion ratio"has increased or decreased since last year. OK, I'll back up for some of you. The callconversion ratio is the number of telephone calls that it takes to produce a unitrental. It is my opinion that self-storage is not sold over the phone. Instead, what issold over the phone is the willingness of the potential customer to visit your facility.So this ratio ties in two basic steps. Let's take a look at them.

First, how many callers inquiring about the facility actually come to the facility?Second, of the people that come to the office, how many of them rent units? Obviously thehigher the ratio of these two, the better off you will be.

If the ratio of rentals to phone calls is going down, you have a problem. If the ratiois going up, you are doing something right. These ratios are critical to measure. Even ifyou mystery shop your people on the telephone quarterly (which you should be doing, by theway), it is the number of phone calls that it takes to generate a rental that is yourprimary concern. You are spending a great deal of money to get the phone to ring. You andyour manager better be taking maximum advantage of your selling opportunities.

Do you really need to be paying for a full-color ad? Do you need a full page when athree-quarter-page ad can be just as effective? Could you use a one-third instead of ahalf page? When was the last time that you revised your Yellow Pages ad? Can you improveyour map? If your ad does not contain a map, get one. A map is far more importantthan all of those graphics showing boxes falling on people that do not help to generate asingle phone call.

Please don't let the local Yellow Pages salesperson simply convince you to just reuselast year's ad. It is the least amount of work for them to just get you to sign a reorder,but it probably is not in your best interest. Don't forget that you may actually be ableto negotiate some type of better deal because your salesperson needs just two more ads towin some type of contest or because you say that you are thinking about a dramatic cut inyour ad. You need to get them to pay attention to you. And always, always, get aproof of your ad. The auditing of your Yellow Pages expenses is important and should notbe forgotten. It is one of the largest fixed costs every year.

The balance of your marketing materials should also be reviewed. Are your businesscards current? I just hate to go into a facility to see the names of the old managerscrossed off the cards and the new ones written in by hand. "We had a lot of these oldcards left over and our owners don't want to spend any money on new cards until these areused up." Don't ever fall into that trap. Business cards are the cheapest advertisingthat you can do. If something changes, get new cards. Keep them fresh. Anotherhint: A map on the back would be better than printing your rental rates.

Look at all of your literature. Update the maps or other information that will help tosell your facility. When you decide not to change things, at least by considering everyaspect of your marketing materials, you are making conscious decisions to keep doing whathas been working for you.

5. Operations Review

Your year-end audit should also include a detailed review of each step of your currentoperation and the materials you are using. The first place to start is with your occupancyagreement or lease. When was the last time you had your agreement reviewed by yourattorney?

Each year, court cases and legislation are forcing owners to take a hard look at thecontent of their lease. Yes, I know that you still have 850 copies of the lease left touse, but if a change in one paragraph or the addition of a limit of liability clause couldsave you thousands of dollars in a possible lawsuit, just how expensive would those oldleases be?

Another document that must be reviewed annually is your Facility Rules and Regulations.In many rental agreements, this document is referred to and made a part of the agreement.I have lost count of the number of facilities that I have visited in the past year where Ifound the Rules and Regulations were a copy of a copy of a copy. In addition to how theylooked, it was clear that the owners of the facility did not consider them important. Goto your office and take a look for yourself. You might be surprised to see exactly whatyour employees are handing out to your new customers. There is no excuse for having animproperly copied document in your office. There are quick copy places in every city andvillage in America. These documents have been used in many cases against owners becausesomething that was being said in the Rules and Regulations was no longer true, yet hadnever been changed.

When was the last time you reviewed the letters that are being used by your managersfor communicating with delinquent tenants? Do they comply with federal and statecollections laws? Are they fresh in tone and content? I have seen letters that are stillbeing used with the old manager's names in the signature block simply because no one knowshow to change that copy in the software.

Have the letters you are using been effective in getting people in to pay? If not, whynot take it to a friendly competitor or another owner from across your state to see whatthey are using? Wouldn't it be great if a more effective letter could help reduce thecollection burden on your employees? Are your letters up-to-date with changes that havetaken place with your state lien laws? Use this year-end period as a time to double checkand improve your correspondence.

6. Maintenance and Physical Appearance Evaluation

Make a critical evaluation of all the day-to-day maintenance requirements of yourfacility along with those deferred items that you have had on hold. The roof leaks musttake priority over just about everything. When was the last time your gate system waschecked, belts tightened and lubricated? Just because the keypad is still working after itwas hit doesn't mean that you should wait to replace the pipe base.

How about your gutters? Are they clear and running free? When was last time thatsomeone was up on the roofs to remove all of the stuff that tenants or neighborhood kidshave thrown up, and that slowly rusts through your roof? It is amazing to me that we spendhundreds of thousands of dollars to build a facility and yet will fight with our managerabout spending a few hundred dollars in preventative maintenance to head-off a futureproblem. Make sure that your managers feel free to talk with you about the things thatthey feel that the facility needs.

When was the last time that you have driven by your facility at night? I have askedthat question at seminars and watched owners look down at the floor because they suredidn't want me to put them on the spot by asking them specifically. Does that sign thatyou spent $6,500 dollars on now say Charles Elf Stor--instead of Charlestown Self Storage?Are the lights sending a positive and secure image to evening drive-bys or are theysending a message that the owners don't care enough to even replace the burned out lightbulbs? Make sure that your project is selling itself at night like it is during the day.

How are the trees, shrubs and grass doing? If they are dying and look it, do you thinkthey are helping you to attract new customers? I don't think so. The same is true forpaving. I realize that for owners in the north it may be late to think about these thingsduring a year-end audit, but it should get you to add some dollars into the budget toprovide for repairing the paving and/or replacing those dead trees in the spring. Withoutthe budgeted dollars, these things will never get done.

7. Employee Assessments

Unless you have done an employee assessment during the course of the year, it should bedone as a part of the year-end audit process. You will only achieve what you can measure.Each employee deserves to have the opportunity to learn whether they are meeting yourexpectations. They also deserve a chance to give you feedback about the job and to askspecific questions about what is expected of them.

Properly conducted, the employee assessment can build on the information developed inthe year-end audit. It can help to alert you to potential personnel misconceptions abouttheir role in the business. They can learn where they missed the mark in the previous yearand you expect them to accomplish in the year ahead.

8. Y2K Compliance

Another item that must be added to the audit of 1998 is the issue of Y2K. If you don'talready know what that means, you will very quickly. Y2K symbolizes the issues associatedwith potential computer bugs with hardware and software being able to recognize the changefrom 1999 to 2000. First, you need to make sure that your current equipment will accept ayear-2000 command from your software. Many machines purchased just a few years ago willnot be 2000 compliant.

Are you using an electronic payroll system, getting direct deposit of checks or makingpayments electronically? You better determine if your bank is Y2K compliant. There are avariety of issues that all small businesses will face. For a good overview of this issue,I recommend that you look at the small business administration's web site at:www.sba.gov/y2k/. This is one audit issue that none of us can afford to simply ignore andhope goes away.

You have looked at your financial results, analyzed your customers, finished a reviewof your sales and marketing materials, considered the materials you use in your operationsand checked the physical condition of your property. However, the audit process is not yetfinished. Now you must communicate the results to everyone in your organization. Everyemployee should participate in the process, but the final results must be explained.

A company-wide meeting can provide an excellent team environment to get everyonepulling in the same direction. The ability to turn "You're Being Audited" into apositive will in large determine your success in the year ahead. Don't you think that itis worth the effort?

James Chiswell is the president of Chiswell & Associates of Williamsville, N.Y.Since 1990, his firm has provided feasibility studies, acquisition due diligence,professional witness services and customized manager training for the self-storageindustry. In addition to contributing regularly to Inside Self-Storage, he is afrequent speaker at Inside Self-Storage Expos and, beginning in 1999, will be penning abi-monthly column for the magazine. Mr. Chiswell may be reached at (716) 634-2428 ore-mail: [email protected].