Financial modeling fundamentals
Effective financial modeling in property development requires a deep understanding of how different types of costs and revenues should be handled. Two concepts that often come into play are Frequent Costs/Revenues and Periodic Costs/Revenues. These concepts are crucial for accurately forecasting budgets and managing cash flows, particularly in complex projects with varied timelines and revenue streams.
In this blog, we’ll explore these two concepts, how they differ from traditional distribution methods like even distribution, and why they’re essential tools in your financial modeling toolkit.
What Are Frequent Costs/Revenues?Frequent costs or revenues are those that recur at a regular interval, such as monthly, quarterly, or annually. The key characteristic of these items is that their total budget is tied directly to the duration of the project and the frequency of occurrence. The longer the project, the more times the cost or revenue will occur, which directly impacts the total budget.
How It Differs from Even Distribution:In an Even Distribution, you start with a fixed total budget and distribute it evenly over the duration of the line item. If the duration changes, the monthly or periodic amount adjusts to ensure the total budget remains the same.
For example, if you have a $12,000 contract with a consultant to be paid over 12 months, each month would see an even distribution of $1,000. However, if the project extends to 18 months, the monthly payment would decrease to $667 to keep the total at $12,000.
In contrast, with Frequent Costs/Revenues, the periodic amount remains constant, and the total budget adjusts based on the project duration. For example, if you have a monthly head office expense of $1,000 over a 24-month project, the total budget for this line item would be $24,000. If the project extends to 30 months, the total budget would increase to $30,000, reflecting the additional six months of expenses.
What Are Periodic Costs/Revenues? Periodic costs or revenues are those that occur only during specific periods within the project timeline, often repeating annually or in another defined cycle. This feature allows you to model scenarios where certain revenues or costs only happen at particular times of the year, or during specific phases of the project, while still accounting for their recurrence over multiple years.
How It Works: Periodic costs or revenues are defined by specifying both a start and end date for the overall time frame and a start and end month for the period in which the cost or revenue occurs each cycle. This method is especially useful for scenarios where income or expenses vary seasonally or periodically but recur throughout the project’s duration.
Practical Example: Let’s say you plan to rent out a unit as an Airbnb from January to March each year and then as a regular rental for the remainder of the year. You plan to hold this property for five years, starting in 2025. This setup results in two periodic revenue streams: one for Airbnb rentals from January 2025 to December 2029, with a period of January to March each year, and another for regular rentals from April to December within the same timeframe.
Mixing Periodic Items with Distribution Methods: When you combine a periodic line item with a distribution method like even distribution, the distribution will only apply to the periods specified. For example, if you allocate an $8,000 budget evenly over a time range from January 2025 to December 2026, with a period defined from March to April each year, the distribution will look like this:
This precise approach allows for detailed cash flow planning that aligns with the actual timing of costs and revenues.
For a deeper dive into how to apply Periodic and Frequent Costs/Revenues in our software, and to explore the full range of benefits these features offer, check out our dedicated blog here. It provides step-by-step guidance on using these tools to enhance your financial modeling and improve the accuracy of your project forecasts.
Understanding and correctly applying Frequent and Periodic Costs/Revenues in your financial model is essential for accurate budgeting and forecasting in property development. These concepts allow you to align your budget with the realities of your project, ensuring that all costs and revenues are accounted for in the correct time frames.
By leveraging these methods, you can enhance the accuracy of your financial models, streamline your cash flow management, and make more informed decisions that drive the success of your property development projects.
