Why is budgeting and forecasting important?
Budgeting and forecasting is important because it helps organizations plan their finances effectively. Budgeting helps businesses estimate their expenses fairly accurately and thus, make the right business decisions related to finance, new hiring and other critical business areas. It also helps them in planning how, when and where their funds will be invested and offers some protection against unforeseen business emergencies. From the real estate perspective, lease forecasting and budgeting for lease expenses play a crucial role in helping both–landlords and tenants factor for the expenses related to the lease. Lease budgeting and forecasting is a small part of the overall budgeting process for an organization, but, when dealing with a large lease portfolio consisting of hundreds or thousands of leases, lease budgeting assumes a very significant role.
Lease budgeting tools: More than just spreadsheets
Talk about budgeting and the first thing that comes to mind is, spreadsheets: Complex cash flow predictions, ROI computations and assumptions all crammed into a spreadsheet. However that is fast changing, especially in case of lease budgeting, thanks to advanced lease management and lease accounting software platforms. These lease accounting and lease budgeting software allow you to-
-Get a 360-degree view of your leases and their key financial components
-Compute cash inflows and outflows in a few click
-Generate models and forecast lease-related income and expenses for a longer period of time
-Understand and make sense of complex lease data easily through visual means such as pie charts and bar graphs
What to consider when budgeting for your leases?
When preparing your lease budget, make sure you take the following items into account-
- The key lease elements you want to budget for. There are various expense items/cash flows in a lease. You need to identify which ones you want to budget for. Usually, CAM or common area maintenance charge is a big element, but there are others like real estate taxes, snow removal services, etc, which may have to be budgeted for as well.
- Rely on the last few year’s actual amounts to prepare a budget with minimal variance. Looking at the actual lease portfolio expenses of last 3 or 5 years will help you prepare a lease budget that’s as close to the actual expense as possible
- As with any other lease administration and accounting function, attention to detail is key when preparing your lease budget. Include forecasts for every single expense that you can account for.
- Look at the last few year’s variance reports. Variance reports tell you the difference between your budgeted and actual cash flows. Learning about the variances over the years and understanding why they happened will help you prepare a more accurate lease budget.
- Don’t forget to factor market forecasts and predictions. While it makes sense to rely on historical cash flow trends, also take into account market predictions for your lease locations. Market predictions can have significant impact on lease cash flows.
Resource planning for the budgeting process
Lease budgeting is time-consuming and labor intensive, even if you have the best lease accounting software at your disposal. Though it is not a continuous process, it needs to be done every year, in a timely manner. So, one thing for you to think through is, whether you have enough resources to devote to this process. Do you have an in-house lease administration or that can take care of your lease budgeting? Or are you relying on your accounting team? There are very specific lease elements to consider where you would need staff with lease analysis experience to weigh in. On the other hand, if you are relying on your lease administrators, you may end up diluting their focus from their regular lease administration tasks during the budget season. As a result, you may fall behind on maintaining your lease portfolio and keeping it up-to-date. You could consider enlisting the support of an experienced lease accounting and administration services provider. Especially when you have a large lease portfolio with hundreds or thousands of leases spread across the country. A lease administration vendor who specializes lease budgeting will add a lot of value to your budgeting process through their expertise, industry knowledge and experience. Alternatively, you can outsource your day-to-day lease administration activities to them during the budget season and have your in-house lease administration or lease accounting team focus on lease budgeting while your lease administration vendor’s team of experienced lease administrators ensure you are always on top of your lease portfolio.