Seven Ways to ‘Squeeze the Lemon’ During an Economic Downturn
Smart Self-Storage Operators Manage Revenues and Expenses
During uncertain economic times like these, self-storage operators look for ways to cut expenses and add revenue to get them through the downturn. But what are the most effective methods?
Cut staff? Self-storage typically employs small staffs, so this isn’t always practical. Cut salary? “An operator who says he will cut staff or compensation, he’s shooting himself in the foot,” says Stuart Wade, director of sales and marketing for AAAA Self Storage Management Group in Norfolk, Va. “Salary is a function of the environment and it’s not in the control of the operator.”
Looking to find someone who will manage a facility for $18,000 a year plus an apartment won’t help either. Competent and aggressive salespeople represent the new breed of self-storage management during these competitive times, commanding at least twice that compensation.
Cut office expenses? That could be another tough task. If a store is competently run, the primary expense items— real estate taxes and payroll—are likely outside the operator’s control. “You’re not going to get more juice out of the lemon by focusing on expenses,” Wade contends. “It doesn’t mean you should ignore it; it just means that your biggest expenses are not in your control.”
But don’t despair. Managing expenses and improving revenue can indeed help you maneuver through tough times. It’s a matter of managing your facility smarter. Here are seven suggestions you can use to do that.
1. what about those office expenses?
Many self-storage operations don’t us substantial amounts of stationery and other items because they employ electronic means to invoice or they simply don’t mail bills at all. “I don’t believe, unless there are extenuating circumstances, that office expenses should exceed $4,000 per annum,” Wade says. “If the manager is spending more than $4,000 and can’t point to a new fax machine or new copier, your manager may be a little reckless with the Office Deport card.”
You could stop mailing paper invoices and instead try e-mail. Or you could just stop invoicing altogether and give the new tenant a card containing the date payment is due, facility address, gate codes, and other pertinent information. This method, however, could trigger more late pays and delinquencies, which leads us to the next issue.
2. Stop the Freeloading
Taking action against slow payers can enhance a facility’s revenue dramatically. Many independent operators carry a high percentage of over-31 day aged receivables and that is a drain or operator income. Tenants who haven’t paid in over 60 days probably are not going to pay at all. Operators should take legal action against delinquent tenants through auctions or eviction notices to improve revenue and to make room for customers who will pay on time.”Collections, overlocks, late fees—those are all things that will generate more revenue,” says Paul Olson, principal of Commercial Cash Flow Advisors in San Jose, Calif. “Always being diligent about
getting people to pay is a key.”
To cut down on late payers, try to get them to sign up for automatic credit card payments. “That’s a smart way to go—it’s like an annuity,” Olson says.
3. Charge the Highest Rates on the Block
Raise your rental rates during a recession? Self-storage operators should continually study the rental rates in their market to make sure they are comparable to the competition. You may be able to charge similar rates if your facility has the same curb appeal and amenities as your competition.In fact, if your facility is modern and eye appealing, you might be able to charge more than your competitors. Numerous marketing studies have demonstrated how raising prices sometimes creates added value in the eyes of consumers. Some management consultants recommend raising street rates this time of the year when demand normally picks up. Very few existing customers will go to the trouble of exiting their units because of a $3 monthly rate increase. Yet this could represent a three or four percent increase in revenues for your operation. If you are fearful that increasing your rates will cause you to lose existing customers, then limit the raises only to new tenants.
4. More marketing, Less Marketing
When operators look to cut expenses, it’s easy to target marketing and advertising, but many management consultants advise against this. “That’s a mistake when people become bearish and cut back on their marketing,” Olson says. “The last thing you ought to cut is your marketing budget.”But many marketing efforts can be disjointed and unproductive. Marketing smarter can save money and still be effective. “Marketing is one of those voodoo words that everybody knows they need to do but nobody knows exactly how to spend it,” Wade says. “Operators throw a lot of stuff on the wall and hope some of it sticks.”
Operators can be like kids in a candy store when they get bombarded with ideas about using the Internet, billboards, radio, TV, and direct mail to market self-storage. Return on investment in marketing is the key, and operators need to measure the effectiveness of each medium. What’s more, media allocation can get out of whack. For example, operators may spend too much to advertise established facilities. “When I’ve just cut the ribbon on a store, I’m going to spend marketing money to build awareness,” Wade says. “When it becomes stabilized, I will pare it back.”
His start-up facilities spend about $15,000 a year on marketing, primarily on Yellow Pages ads, but only about $3,000 once they fill up.
Consider low-cost public relations measures to keep your company’s name on the minds of area residents. These efforts can include becoming active in community events or offering vacant units for local clothing and food drives. This kind of involvement often leads to free publicity in local newspapers and on radio and television stations.
5. Re-bid all services
It’s difficult to cut back or eliminate essential services such as parking lot sweeping, security, pest control, door maintenance, and landscaping, but you can re-bid them. Olson proposes approaching vendors with this caveat: “You should know we’re expecting you to come in lower than you were before because we’re going to have five other people bid against you,” he says. “That sounds draconian, but you’d be amazed how many times that will work for you.”
6. Save on Taxes
One method some operators use to increase their cash flow is a cost segmentation study. This procedure allows owners of self-storage faciities to leverage the depreciation in their buildings on a more accelerated basis. “Cost segmentation is taking depreciation you would normally get on your property and compacting it into a very short period,” says Olson, who conducts these studies for his clients. “So instead of having 39 years to write off your depreciation, you’re going to write it off over 10.”Depreciating building companents faster saves taxes and increases cash flow. “A lot of people don’t understand the relationship between depreciation and cash flow,” Olson observes. “Because of greater deductions, you pay less tax. Because of paying less tax, you have more cash flow.”
Components such as electrical wiring, piping, HVAC, and even the parking lot and landscaping can be depreciated over shorter periods. Cost segmentation works best for facilities that have been built or acquired in the last 12 years since the potential to capture more depreciation allowances is greater during that period. A cost segmentation study costs about $20,000.
7. Communicate, Communicate, Communicate
The stress of an economic downturn sometimes alters the behavior of owners and managers. “When small to medium-sized companies get into trouble, the stress starts to overwhelm them and instead of communicating more they communicate less,” says Herb Kay, president of HK Turnaround in Tucson, Ariz. “They tend to isolate themselves and the problems are exacerbated.”By keeping lines of communications open with the staff, employees may take it upon themselves to help you work out solutions. Employees are on the front lines every day and they may have suggestions on performing a procedure more efficiently or how to
Many economists believe the economic downturn will be relatively mild and eventually good times will return. But in the meantime, it would be wise for self-storage owners and managers to take a closer look at their operations to see where they can squeeze more opportunies out of their facilities.