Forecasts Will Change. Here’s What to Do about It.

by Dana Erickson

The better equipped you are to anticipate and respond to changes, the better you’ll keep a lid on the cost of capital, protect your margins, reduce the risk of missing milestones, and make more efficient use of your workforce.

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Most businesses view seasonality as a calendar-driven phenomenon: Retailers see their sales spike every November and December, and hospitality businesses stock up and staff up for the tourist season. There’s a predictability built into planning for this kind of seasonal influence on budgets and forecasts. You grow familiar with the trends and you build your forecasts accordingly.

In large-scale commercial construction, however, seasonality takes on a different meaning. At a company like Fairfield Residential, developer and operator of luxury apartment complexes in 36 markets throughout the United States, we measure seasonality not by holidays or high seasons, but by the constantly shifting activities involved in building and operating a $200 million multifamily property.  

The average apartment complex takes about 16 months to complete—an increase of nearly half a year from 2013. Our projects tend to have an even longer lifecycle—generally two to three years from purchasing the land to opening the completed community. This is partially because we not only build out and finish these high-end properties, but we also operate the completed complex; we don’t just hand it off to someone else run it once we’ve earned a certificate of occupancy from the local permit office. 

Change is inevitable—so accurate forecasts are essential

But lengthening lifecycles also reflect an immutable law of business planning: The forecast you develop when you start a project will change. And it will likely change many times. So the better equipped you are to anticipate and respond to those changes, the better you’ll keep a lid on the cost of capital, protect your margins, reduce the risk of missing milestones, and make more efficient use of your workforce.

Which brings me back to our unique approach to seasonality. With a large construction project like ours, seasonality is measured by what must take place, and when, no matter what time of year it happens. The start of a project is slow—perhaps some grading of the site and laying in some services infrastructure. Then as construction intensifies, costs multiply. Costs settle back down toward the end of the project as we employ fewer subcontractors and we focus on finishing the build and transferring the project to our property management team so they can lease the units and service the residents. Managing those costs and anticipating when they will hit is key to a successful forecast.

Working on a build for two to three years, there’s plenty of opportunity for forecasts to change. For instance, while we incorporate flexibility into our forecasts to account for average rainfall and other factors, other delays always emerge. A subcontractor is late finishing a previous job. We can’t buy enough lumber because a major hurricane in the gulf has led to a nationwide shortage. Environmental impact studies take longer than anticipated. Permits are held up. Some delays can push back a project by six months.

Any of these delays puts pressure on our ability to forecast our cash needs vs. our spend. For instance, accurately anticipating when we will need cash to fund the next phase of a project can result in significant savings on cost of capital. If we draw cash too early, we’ll spend too much on interest over time. If we underestimate our cash flow needs, we’ll have to unexpectedly call on investor capital and likely pay higher interest rates because of it.

The bottom line: A significant miss in just one forecast could cost us tens of millions of dollars. And considering that at any given moment, we typically have 20 to 30 of these projects underway and carrying debt, it’s easy to see the multiplying impact that a lack of precision when developing forecasts could have on our business. 

In search of reliable data

It’s hard to imagine we once relied on spreadsheets to develop budgets and forecasts, but we did. It was not an efficient process. Different spreadsheets floated throughout the organization, with multiple parties working on completely different versions. Consolidating and manipulating data was difficult and time-consuming, and it prevented our FP&A team from doing the meaningful analysis they wanted to do. Planning was siloed and disconnected, with decision-makers having to contact finance for reports built around the latest data.

The problems with this approach sometimes surfaced, often painfully, in board meetings. The group presenting before you might have been working from different numbers. Then when it’s your turn, the information you’re presenting just leads to confusion. Suddenly, the data on which the board is basing important decisions is unreliable. Even unbelievable. 

I have another word for it: Unacceptable.

Embracing modern planning processes

All this changed after implementing modern planning processes using cloud software. This opened up an entirely new way of planning for cash flow, resulting in more accurate forecasts and reducing the costly surprises that once threatened visibility for investors and decision-makers in the company. It allowed our data to be integrated, and then managed from a single system.

We’ve experienced transformative improvements on multiple levels. They include:

  • Stakeholders always have access to current data. Where the latest data once solely living in finance—which put the FP&A team in the position of always having to correct or update incorrect assumptions and forecasts—now stakeholders throughout the company can see base their decisions on fresh data. Our new environment provides a single source of truth; no more conflicting spreadsheets or data silos.
  • Analysts have more time for analysis. In our spreadsheet days, we never had enough time for analysis, which prevented us from modeling what-if scenarios that would help us respond to delays with minimal cost impacts. Now we have that time, and it helps produce more accurate forecasts to keep costs contained.
  • We’re looking ahead, instead of just behind. Our old approach to planning was largely about producing reports that gave a historical view of the business—a byproduct of spreadsheets that give you a frozen-in-time snapshot of conditions, rather than an always-current view of the business. Now we’ve gone from reporting what happened to predicting what will happen. 
  • We’re doing a better job of managing workforce costs.  We implemented this new environment in corporate finance, and have since expanded it to personnel planning. Because we act as a general contractor during the building phase, most of the workforce engaged for our projects doesn’t directly work for us. However, we do employ construction managers prior to and during the build, and then hire property managers once we begin leasing units. Our new planning environment lets us more strategically resource construction managers so they won’t sit for six months between projects with no revenue to cover their salaries.
  • We have a better view into our overall ROI.  After we build and open a new community, we typically own and operate it for about five more years, and then we sell it to another property management company. So the entire investment lifecycle runs about eight years. Now, with a more agile and insightful planning and forecasting environment, we can do a better job of anticipating our overall ROI. This allows us to maximize our return on the hundreds of millions of dollars we’ve put into every project.
  • Investors have more clarity into our cash flow needs. By adjusting our cash flow model and seeing the results in real time, we’re able to give investors a more reliable picture of when we will need to make cash calls, and for how much. This allows them to plan better and we save money—potentially millions of dollars—by simply forecasting better.

Whether you develop multifamily properties, operate hotels and restaurants, manage a nonprofit, or provide cloud software, the benefits of a modern, agile planning and forecasting environment are universally applicable. Every business and organization, no matter how it defines seasonality, will face changes that disrupt the future you planned for. Build in the flexibility and agility to anticipate and respond to those changes, and you’ll always be much more prepared for what’s next.

Dana Erickson is senior financial analyst at Fairfield Residential.