Benjamin Franklin famously said, “If you fail to plan, you are planning to fail.” The success of any self-storage business depends heavily on the planning process, and that begins with creating and maintaining an accurate and detailed budget.
Understanding your revenue and expenses allows you to make informed financial decisions and forecast growth. Moreover, a budget is a valuable tool to determine the health of your company and forces you to think critically about what decisions need to be made to expand profitability. You can use it set and meet objectives, measure performance, manage cash flow, and avoid spending money you don’t have.
As with most daunting tasks, knowing where to begin is often the biggest hurdle when building a budget. Thankfully, it’s easy to create a sophisticated plan in Excel or some other spreadsheet program.
The first step is to gather your self-storage facility’s historical financial data and make a list of all the ways money has come in and gone out of the business. You can’t know where you’re going if you don’t know where you’ve been. The further back you go, the better. This’ll establish the most realistic baseline, providing the best insight and opportunity to spot trends and identify areas for improvement. You’ll ultimately dig into this data to make decisions that’ll guide your budget planning and help you meet your business objectives.
At the top of your self-storage budget should be facility revenue. To better understand where and how the money is coming in, be specific and list income streams as separate line items. In addition to unit rentals, include revenue from truck rentals, security deposits, administrative fees, late and lien charges, tenant insurance, merchandise, and sales tax. For items that are less predictable, looking at the prior year’s ancillary activity as a percentage of total rental income is a good guideline to follow. When listing income sources that have a cost of goods associated, don’t forget to subtract those figures to arrive at an accurate gross profit.
Now that you have a good idea of how the revenue is being generated, look for trends. This’ll keep your forecasting realistic and help you avoid the dangers of overestimating projected income. It’ll also allow you to see ways to improve. Are you offering an insurance program to tenants, for example? What’s your total penetration? Have merchandise sales dropped? Can you identify why?
When forecasting self-storage rental income, remember to plan for rate increases. First, complete a study to understand where your rates are in comparison to the market. If you’re charging less than your competitors, you’re leaving money on the table.
Next, do an audit of your current self-storage renters. You might be surprised to see what each person is paying. There may be tenants who are still getting an expired promotional rate, for example. Because it’s acceptable to increase individual rates twice per year, make a plan that’ll ensure all customers are paying what they should. Continue this process until you’re maximizing the earning potential of every unit.
Controlling expenses is one of the most important aspects of operating a successful and thriving self-storage business. Like revenue, costs should be categorized to allow for maximum insight. For example, to really understand what’s being spent on repair and maintenance, make sure all expenses that contribute to facility upkeep are listed under that heading. It should cover all buildings and landscaping as well as things like equipment, pest control and security. It’s only by knowing what you’re truly paying that you can determine if each expense is realistic and necessary.
The same concept applies to payroll. Incorporate all costs associated with hiring, training and retaining employees. It’s easy to overlook expenses that aren’t recurring. If your facility is experiencing turnover, you know the cost of background checks and job postings add up quickly. Plus, the amount of staff required to meet your financial goals can fluctuate depending on where the property is in the stabilization process. If your self-storage business just opened, you might need to increase staffing to meet the leasing demand. If it’s well-leased with stable occupancy, you can scale back.
Tracking variable expenses will also provide worthy insight. If your overall property costs are higher than the industry standard of 30%, you may need to trim. Is it time to shop for new vendors or renegotiate with existing ones? Are there recurring charges for services you no longer use? Listing expenses and studying them over time will bring waste into focus.
Consult with your insurance brokers to understand what’s happening in the market and how that impacts your premiums. Insurance has been very volatile, particularly in California, and the best people to know what your insurance will cost when it comes up for renewal are those who work in the industry every day, so reach out to experts for guidance.
Finally, don’t forget to forecast costs associated with inflation. Because we’re experiencing the highest inflation in 40 years, the cost of everything from wages, insurance, taxes, utilities and licenses are rising. Planning for that now will protect you from surprises down the road.
Below the Line
There are items in your self-storage budget that are “below the line.” These expenditures aren’t dictated by the operation of the self-storage property and appear on your income statement after net operating income (NOI). Items like capital-expense projects, mortgage-interest payments, etc., don’t impact NOI and are excluded from the valuation of a property, but they’re important to include in the budgeting process. It can help project the cash position of the company and aid in decisions regarding owner distribution payments or whether capital injections will be needed to finance projects.
Investing in Your Investment
Once you have a complete financial picture of your self-storage facility, you can begin to make informed decisions about the improvements you’d like to make and the big projects to be done. For example, adding solar panels might seems like a good investment; however, your robust budget will tell you the immediate financial impact and the time it’ll take for the project to pay for itself.
Once you’ve created a self-storage budget, compare it to what actually occurs on a monthly, quarterly or year-to-date basis. If you’re off in your projections, figuring out why will make you more informed about the operation of your property and help you identify areas to which to pay more attention during the next budgeting season. Because your budget is a living thing, being proactive and adjusting it will ensure you aren’t caught off guard and are prepared for the future.
Christina Rita is the chief operating officer for StoragePro Management Inc., a third-party management company specializing in self-storage since 1986. With more than 30 years of management experience, she’s spent the last 10 years in the self-storage industry. As an accomplished operations executive, Christina drives revenue growth, establishes leading teams and develops business plans while building and managing operational strategies. To reach her, call 925.938.6300, ext.116, or email [email protected].