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Budget Schmudget: Creating a Self-Storage Financial Forecast for Peak Operating Performance

Budgets are boring! Instead, learn how to create a financial forecast for your self-storage business that’ll help optimize operating performance and get all stakeholders on the same page, striving for the same goals.

If you’re like me, you hate the word “budget.” It feels limiting, boring. I used to resist creating budgets because, as an entrepreneur, I believe that if you need more money, you find a way to make more money! Recently, though, I’ve realized the power of using a financial forecast (formally known as budget). Forecasting allows all stakeholders in a business—owners, investors, operators and marketers—to get on the same page in thinking about the company’s future. Big things happen when we all paddle in the same direction and understand how our daily actions affect the big picture.

In large companies, the various departments are often siloed and may not always understand how their efforts fit within the larger corporate vision. Self-storage is a commercial investment and should be treated that way; but it’s also an operating entity. Every decision should be analyzed through the lens of the financial forecast to ensure it adds cash flow or value for the business, or some benefit for customers. (After all, if you aren’t good to your customers, you won’t have any!)

Financial forecasting is an incredible way to unify all facets of your operation. Each person in the organization should know where he fits. Marketing staff should know how many rentals are required so they can properly calculate campaign spending. Operations staff should know how many discounts can be given to hit rental targets. Investors should know how their asset is performing today and how it’ll perform tomorrow.

Even if yours is a smaller self-storage operation consisting of only a manager and an owner, you need to be on the same page—perhaps even more so! Your decisions affect the value of the business, whether you offer 10 units or 10,000. Every credit, discount, missed phone call, closed deal and sold insurance policy translates to a dollar amount that is amplified in facility value.

Financial forecasting gives all stakeholders the opportunity to envision the future, provide input, understand their roles and agree on a plan of action. Once you have a plan, all you have to do is follow it! Let’s take a closer look at how to create one.

Revenue Revelations

The easiest way to build a financial forecast is to export your monthly income statement to an Excel spreadsheet. Revenue lies in the balance between customers acquired vs. lost. How many units do you expect to rent each month? Look at your lead-tracking system, demand reports and previous year’s rental data to project your numbers. If you aren’t tracking demand and leads, please start now or call a qualified professional to help you!

If you rented 30 units last January, barring anything weird, you should rent about the same number next January. Storage is a pretty consistent business (which is why we like it). Rental forecasts are a little more challenging for new businesses or those in lease-up, but you should be able to look at the previous few months of operation as a guide or consult a feasibility study if you don’t have the previous year’s information.

Next, think about how you’ll acquire new customers to meet your projections. Will you offer a special or discount? If you know a new competitor is about to open, you’d be wise to model a special into your forecast. If you give a $1 move-in or first month free, don’t model revenue until the second month. Add in your administration fees, merchandise income, tenant-insurance or protection-plan income, truck-rental income, and any other revenue sources to get a clear picture of earnings for the year.

Corralling Expenses

Once your revenue is set, it’s time to examine expenses. In self-storage, most costs are consistent, but review them and make adjustments as needed. I typically start with advertising. How much will you spend on ads, and where will you spend it? This includes Facebook, direct mail, websites, pay-per-click, search engine optimization and referral fees. Keep referral fees separate, though, to get a clear picture of your customer-acquisition costs.

Review all of your expenses by category. The cleaner you keep your chart of accounts, the easier it’ll be to create a useful forecast.

Projecting dues and subscriptions, office expenses, utilities, and professional fees shouldn’t take too long. This is a great opportunity to review all recurring monthly expenditures, especially those that seem to creep up, to ensure they’re still valid. We all have SaaS (software as a service) expenses that are $10, $15 or $20 a month, but we often forget. The little things add up. If you’re a large operator, give your managers the office and utility budget. They should have the information for the items they can control.

Next, decide when you’ll schedule auctions and add those to the projection. How much do you think you’ll spend on repairs and maintenance this year? When reviewing staff expenses, think about whether you’ll give anyone a raise, hire a second person or expand office hours.

The two biggest expenses that are out of your control are property taxes and business insurance. Pay attention to those taxes, as they can be adjusted. Shop your insurance if you’ve been with the same provider for a few years. One operator I know saved $20,000 a year just by shopping around. I typically forecast these as one-time payments in the month they are due, but some people like to forecast them each month and move money to an escrow account. It works both ways, so do what makes the most sense to you.

Finally, review your vendor and utility contracts to ensure you’re getting full service for the cost. Can you move to a new supplier? Can you negotiate a lower rate? This is a great time to scrutinize every penny and make sure each expense is justified.

Know Your NOI

Once expenses are set, calculate your net operating income (NOI) by subtracting expenses from revenue. I like to include debt service (principal and interest on any loans) and capital improvements (big items such as roof replacement or repaving the parking lot). Interest is always found on the income statement, while loan principals and capital improvements are always on the balance sheet. You can’t look at your net income on the statement and connect it to the balance in your bank account. Loan principal definitely takes cash but doesn’t drop income.

We all know revenue is vanity, profit is sanity, but cash is king. I like to forecast my cash as closely as possible. Adding debt service and capital improvements under your NOI will give you a better picture of where your cash will be each month.

Check Your Forecast

Whew! You did it! Now that you have a forecast for next year, don’t ignore it. Conduct a meeting each month with relevant parties and compare results to how you thought you’d perform. If you’re beating the budget, perhaps you aimed too low. Adjust your projections to make you stretch.

If you’re falling short each month, why? Was the budget too aggressive, or does your team need more training? Did a competitor open nearby and change the market? Can you increase marketing to get revenue back to projection? Looking at your forecast each month is crucial. Look at actual vs. budget for the month as well as year-to-date. Sometimes a month can go high or low, but the year-to-date figure might still fall in line.

Having all stakeholders on the same page and holding each person accountable for progress is crucial in any business. There needs to be a common language and theme for people to make decisions and a way to know if they’re doing the right thing. Creating a financial forecast and reviewing it regularly is a great way to get your team in rhythm, no matter if you have one manager or 100 team members.

Magen Smith is a co-founder of Atomic Storage Group, a boutique self-storage management company, and owner of Magen Smith CPA, an outsourced accounting firm specializing in self-storage. She’s also a partner in Safe Space Development, which develops self-storage properties. Magen started in the industry as a facility manager and has held nearly every operational role. She has a passion for the industry, helping owners improve their businesses, teaching asset management and conducting self-storage audits. For more information, e-mail magen@selfstoragecpa.com; visit www.selfstoragecpa.com or http://atomicstoragegroup.com.

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