A crash course in budgeting for the maintenance professional: empowering maintenance professionals with an understanding of basic financial operations can greatly enhance a community's NOI.

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Although maintenance professionals have mastered the extensive skills necessary to make daily repairs and to maintain their communities, few understand their communities' financial workings. For maintenance professionals to operate their departments successfully, they must have an understanding of how the money flows, why it is spent, how it is earned--and the crucial role that they play. When maintenance supervisors and technicians understand budgets and the basic financial operations of the community, the maintenance staff's positive impact on NOI will be enhanced greatly.

Unfortunately, maintenance staff members usually provide little input into the preparation of an operating budget. They may hear terms such as budget variance, vacancy loss and NOI; but they are never told what those words mean, how the concepts work or how the maintenance staff can influence them Consequently, they may go about their routines until they unknowingly exceed budget.

For hard-working and intelligent maintenance professionals to view the apartment industry as a viable career path, apartment owners and managers must provide them the tools to understand the financial side of their communities. Not only does this understanding help them to become better maintenance professionals and supervisors, it also opens doors to further development and advancement within the apartment industry.

At the most basic level, maintenance professionals should understand the maintenance and repair budget, the billing cycle. NOI and the direct effect the maintenance staff has on each.

Budget Basics

As with any business, an apartment community takes in money (income) in the form of rent and fees. and spends money (expenses) on items such as office supplies, maintenance, repairs and projects. To control and track these two main facets, management prepares a budget specifically for that community and sets financial goals for the following year.

A budget is a plan that outlines an organization's financial and operational goals. It can be thought of as an action plan: planning a budget helps a company to allocate resources, evaluate performance and formulate plans.

All communities within the portfolio must meet their budgetary goals for the company to reach its financial goals. That is why it is important that each community perform to its potential and within the set budget.

The basic process of planning a budget involves listing the company's fixed and variable costs on a monthly basis and then allocating funds to reflect the company's goals. A fixed cost is a known cost that must be paid whether or not any income is produced, such as mortgage payment, taxes and insurance. A variable cost is an unknown cost that will vary directly depending on the number of products produced--or apartments leased. Therefore, variable costs are estimated based on numbers from the previous year. For example, the higher the number of vacated units in one year, the higher the total cost of make-readies. Because this number is unknown when management creates the budget, the cost is an estimated variable cost.

Allocation is money set aside to purchase a specific item or an entire category of items, such as maintenance, repair or turnover costs. In short, a budget takes the estimated income and subtracts known financial costs (fixed) and unknown estimated costs (variable) and sets money aside (allocates) in specific categories so that if all goes as planned, the community will perform to management's goals. In the apartment industry, profitability is measured ill net operating income (NOI).

The Maintenance Budget

Each budget is broken down into different sections or categories, such as income, maintenance and repair (M&R) expenses, marketing expenses, administrative expenses and others. Within M&R, there are several subcategories, such as plumbing, electrical, HVAC and locks and keys.

Each of these subcategories is given a number called a cost code. This number is different for each company according to its accounting practices and represents individual M&R subcategories as well as all other subcategories within the budget. Plumbing may be cost code 6419; any time a staff member buys a faucet, flapper or aerator, the expense is tracked using that cost code. Each code number has a corresponding monthly and annual budgetary amount attached to it. For example, for large communities, the monthly plumbing allowance might be $850.

If the maintenance department spends more than what is allocated for a particular subcategory in the budget, it results in a negative variance; under budget spending results in a positive variance. Managers often receive monthly variance reports that give them a snapshot of the current budgetary cycle along with a year-to-date account of each category within the budget. This is the report they are reading when they politely tell the maintenance supervisor to stop spending money.

Tracking Expenses

It might seem difficult to track maintenance expenses when there are no receipts for everything staff buys, but a look at a sample billing cycle shows that it is easy to do.

The Invoice. When management sets up an account with a maintenance supply company, the apartment community agrees to pay the supplier after the products have been received. To inform the community of what it has purchased, the supplier sends an itemized invoice sheet. An invoice sheet states the products purchased from one order. This is the receipt. Each order is given a number called an invoice number. The invoice number is used to track the purchase from the initial order to final payment.

The P.O. Number. Often, management requires maintenance staff members to enter a purchase order (P.O.) number when they place their orders. The apartment company uses the P.O. for its own tracking purposes. For example, if a maintenance professional ordered five light bulbs and two toilets last Tuesday, he or she might give the supplier a P.O. number for tracking purposes. The P.O. will be printed on the invoice produced by the suppler for that order.

The Packing Slip. When the supplier delivers the items, maintenance staff always should check that the packing slip that is attached to the box the items arrive in and match it to the contents. It is also a good practice to keep the packing slips and attach them to the corresponding invoice when it arrives later or at least to give them to the manager.

Coding. When the invoice arrives onsite, notice that the supplier has been thoughtful enough to identify each item and place it into a generic category (plumbing, electrical, HVAC, hardware). To track expenses, simply place the category totals from the invoice into the cost code system and subtract the total from the monthly budgeted amount for that category. This is called coding.

Accounting. After coding the expenditures, a manager will approve those invoices and send them to the accounting office. The accounting office will cut the check, send it to the supplier and record the expense on the ledger. The maintenance department also should keep a running total month by month and year to date of all expenses. To track expenses, staff can use one of the many easy-to-use software systems on the market, a simple spreadsheet or even a pencil and a calculator.

Tracking expenses will give maintenance staff more flexibility within their operations, help them to track spending and determine when and if they should purchase an item. It will also make each staff member a profitable asset to his or her company.

Speaking NOI

NOI is defined simply as income minus expenses. Note, however, that although mortgages, taxes, insurance and capital improvements are expenses, they are not factored into a community's NOI.

NOI growth is one of the best ways to calculate a community's value and income potential. Take a look at its two main variables: income and expenses. Maintenance professionals obviously have a direct effect on expenses. The supplies and material they buy, the number of appliances they purchase throughout the year and the number of times they use a supplier or a licensed contractor all have a direct effect on NOI because those actions increase expenses.

The maintenance department also has a direct and significant influence on income. High-quality, timely customer service can make the biggest impact on income and expenses at any community. By decreasing vacancy loss (the amount of money lost while a unit sits vacant) the maintenance staff has positively influenced both the income and expense variables in the NOI equation.

According to SatisFacts.com, after a home purchase or rent increase, the top reason a person leaves an apartment community is because of poor maintenance. If maintenance professionals serve residents well, residents will stay longer and will tell their friends about the great service they received. This equates to less turnover (decreased costs), higher occupancy (increased income) and higher future rents because limited supply and high demand (even more increased income).

The Big Picture

To understand the financial side of an apartment community is to gain insight into the big picture. When maintenance professionals understand the positive financial impact they can have on any community, they become highly sought commodities within the industry. Most maintenance professionals can diagnose and fix maintenance problems, but to be able to fix both maintenance and financial problems they must gain experience with both. They should not be afraid to ask questions. Most things seem impossible to understand until we seek to understand them, and then suddenly they become second nature.

How Much Money Can I Spend?

Apartment professionals create the maintenance budget to optimize productivity while decreasing costs. Following are five questions maintenance personnel often ask about budgets and spending and simple answers managers and owners should know to communicate effectively with their maintenance staffs.

Q. How much money can I spend?

A. Communicate with staff about now much is available and why. If possible, provide an annual snapshot showing monthly budgets for each maintenance category and explain the coding system. Don't leave maintenance staff in the dark.

Q. How much should I spend on parts to stock my shop?

A. In a next-day delivery world, no shop should have more than five of any one item. Take inventory once a week and order once a week. If parts and materials have not been used in the last 18 months, purge them. Anyone should be able to step into a shop and find a part within two minutes. If it takes longer, staff is wasting time and money searching for things.

Q. When should I replace an item?

A. Replace an item when it is no longer worth the time to fix it. In the case of appliances, if a part costs more than $125 and it will take longer than three hours to repair it, buy a new one. Plumbing and electrical fixtures should be repaired until they become visually unappealing and hinder the leasing process.

Q. How do I make sure we are charging for all the repairs made on turnover?

A. The best way to make sure previous residents are charged correctly is to itemize turnover repairs. After making a list of parts needed for the turn, make an order just for that unit and use the unit number as the P.O. Then copy and place the packing slip for that order into the resident file so if there are any disputes, the resident can see exactly what was used and the cost of each item needed to bring the unit back to market.

Q. What is NOI and what can I do about it?

A. NOI is the measuring stick of each community's performance. Explain NOI to maintenance staff members and tell them how they can directly affect NOI for their community. Once they are informed and educated, management can involve the maintenance team on other budgetary and spending decisions.--Z.H.

Become a CAMT 

Earn your NAAEI designation as a Certified Apartment Maintenance Technician. Visit www.naahq.org for details.

Maintenance: What's In and What's Out

Providing residents with excellent apartment maintenance takes more than completing basic work orders and turning units. In 2007, it takes a commitment to maintenance as a profession, with the right training and initiative to increase the community's NOI and ensure satisfied residents.

In: Using environmentally friendly cleaning products

Out: Using toxic chemicals and harsh solvents when turning a unit

In: Mold-proof construction and upgrades

Out: Sick Building Syndrome (SBS) buildings that don't enhance human health

In: Energy-efficient upgrades using government money and tax credits

Out: Metal-pane windows, water-wasting showerheads and high consumption short-life light bulbs

In: English and Spanish education and training for personnel

Out: Sending maintenance staff to training they can't understand

In: Creating brand recognition for maintenance staff by outfitting them from head to toe

Out: Mismatched maintenance teams that residents can't recognize or don't feel comfortable approaching

In: Recognizing sectors of the population and understanding their particular needs

Out: Assuming all residents' needs are the same by not recognizing cultural, age and language differences

In: Technology and computerization of all maintenance processes and record keeping

Out: Hand-written work orders and lack of inventory control or e-mail access for maintenance staff

In: Promoting maintenance as a profession by recruiting, hiring, paying and retaining high-quality personnel

Out: Furthering the idea that maintenance is just a job that people fall into by providing poor training and few career options

In: Standardized professional maintenance training with the Certified Apartment Maintenance Technician (CAMT) designation that is recognized nationwide and across company boundaries

Out: Randomly trained maintenance employees within the industry

In: Seeking new products and tools on the market that save time, energy and money

Out: Continuing to use outdated tools and wasting time making complicated repairs when an easier and faster way has been discovered--Z.H.

Zach Howell, B.S., CAMT, is a Director and Instructor for Apartment Maintenance Institute. He can be contacted at [e-mail] or www.AMInstitute.net.