October 27, 2022
If you were audited tomorrow, how would it go? If just reading that sentence made you sweat, you’re not alone, and there are many reasons why.
For most businesses, accounting is around 2% of operating expenses (OPEX), but for the average property management company, accounting is a whopping 26% of OPEX.
Along with unusually high volumes of bookkeeping tasks and invoices to process, the property management industry also struggles with a shortage of qualified property accounting experts. To top it all off, the available software solutions can be expensive, underutilized, and difficult to optimize. These issues compound each other, and we’ve found that leaves more than *half of property management companies with incorrect or past-due accounting leaving them open to liabilities and countless risks.
Prompt, accurate accounting is vital to their companies’ success and financial health, so how can property managers tackle these significant barriers to growth and profitability?
What’s important is to get caught up (immediately) and establish Standard Operating Procedures (SOPs) to stay that way. On the other side of overdue accounting is a world of flawless reporting—you can set actionable goals, plan operations accordingly, answer owner questions accurately, keep up maintenance, grow your door count, and pat yourself on the back for a job well done.
Accounting is more than a pending item on your to-do list. If you’re weeks, months, or even years behind, your operation is vulnerable to everything from audits to bankruptcy. The repercussions of back books grow exponentially the longer things go neglected, so it’s crucial to get current ASAP.
To inspire you to take action, we invite you to consider the top ways delayed accounting threatens your operation:
1. Increases your audit risk
Taxes are a headache in the best of times, but a skull-splitting migraine when the accounting is in disarray: you have a mountain of receipts and invoices to wrangle, and underpaying taxes leads to stiff penalties. Meanwhile, a few missed receipts over the course of a year add up to unclaimed expenses, overlooked deductions, and overpaying taxes.
It’s already tricky to comply with regulations and tax laws, so if the books are out of control, you’ll likely see penalties for non-compliance, record keeping, reporting, and filing. What should be a matter of simple arithmetic turns into a nigh-insurmountable task requiring massive labor hours to untangle—the result: missed deadlines, mistakes, penalties, and audits.
Remember: a fine is a tax for doing wrong; a tax is a fine for doing well.
2. Makes financial health unclear
Understanding your business means tracking every cent of operating costs, revenue, maintenance, churn, overhead, etc. According to Small Business Computing, the average US business has over $50,000 in outstanding receivables. The average PM has way higher volumes, so you’re leaving money on the table if your accounting is off.
Bad accounting means inaccuracies, outdated reports, and unreliable data. The ability to react and adapt to emergencies or market conditions is a direct function of good accounting and back-office efficiency. Your Key Performance Indicators (KPIs) should allow sound decision-making. Without a reliable idea of cash flow, you might spend insufficient funds on unnecessary expenses (despite how much the office might benefit from an espresso machine.)
Poor cash flow is the reason most companies fail, whether it’s an outstanding debt, unavailable funds, or low credit availability. Weak accounting hinders you from setting goals for the next week or decade, which prevents planning, tracking, and progress.
3. Strains relationships
Owners expect accurate, comprehensive, and up-to-date reporting on their investments. When the books are caught up, you can offer a precise picture of where things stand to make critical business decisions and avoid fines.
Overdue bookkeeping results in lost business and erodes trust as owners lose faith. Before you begin strategizing, you’ll need a well-tuned back office to help you reach your growth goals. If you’re trying to grow your door count, improper bookkeeping impacts your ability to raise capital or pitch to owners.
4. Expenses are harder to control
When the books are backed up, expense tracking, approval, and reimbursement are next to impossible. The most unnecessary impact of poor accounting is niggling fees from insufficient funds, overdrafts, or falling below a minimum balance. In addition to accumulated bank fees are those from lenders, vendors, or—as mentioned— the IRS.
If you’re not approving and categorizing expenses, filing receipts, and allocating costs, do you really know what your expenses are? Without an accurate picture, you don’t know how much the business (or you) spends, and unmonitored spending usually hits monstrous proportions.
Adopt a tech solution that saves receipts, approves, tracks, and categorizes expenses and reimbursements. Even better, let an expert guide you in selecting and optimizing a system that tracks expenses and supports operations.
5. Makes errors hard to find
The occasional flub may go unnoticed, but over time, those errors compound and snowball, leading to inaccurate reporting, budgeting, invoicing, and tax filing (again, increasing the risk of an audit). There’s a lot to get right, e.g., pricing, timing, collection, and follow-up.
You can maximize pricing while invoicing accurately and promptly when you’re on top of the books. Automating collection makes payments for tenants, vendors, and owners an error-proof breeze.
6. Increases your fraud risk
A disorganized operation is ripe for fraud. No matter how saintly and unimpeachable the team, if the books are messy and there aren’t policies for separate powers and checks, you’re at an unacceptable risk of loss to internal fraud.
The oversight and guidance of an outside accounting professional prevent this problem with adequate processes, separation of powers, checks, and balances.
7. Unpredictable pricing
You don’t know your overhead when your accounting is not accurately tracking expenses and labor. Without that, you can’t measure your margins and price to be strong and lean. Ultimately, poor pricing models create cash flow problems and stunt growth.
If the books are out of order, you might be providing inaccurate pricing or invoicing. You won’t know when to collect or if you’re charging (or paying) the right price.
Efficient accounting tracks employee time and expenses to allocate costs wisely. When you optimize pricing, you boost margins and improve cash flow.
8. Bad business
If the books are neglected, there’s likely something else overlooked behind the scenes of your operation. Even if you’re unaware, there’s a chance your staff notices and feels uncertain, frustrated, inadequately compensated, unappreciated, and overworked. When employees suffer, so does the bottom line.
Bookkeeping and human resources might seem like different disciplines. Still, when the books are in order, you can focus on managing human capital to improve company culture (maybe get that cappuccino machine) and, ultimately, profitability.
So… how can you get caught up?
Property management is inherently challenging even before the zillions of reasons folks fall behind on accounting, like hiring shortages, lack of expertise, and excessive volumes.
Outsourced bookkeeping and leaving the accounting to trained professionals (like Proper) can cut costs and ensure efficient operating processes and obsessively tended books. Our experts take the guesswork out of bookkeeping to bring and keep your books up to date. We’ll review bank reconciliations, tenant liabilities, property balances, and more to determine where you stand and the actions needed to get you caught up.
You’re probably thinking, “but trained professionals are almost impossible to find, and didn’t you mention an industry-wide lack of expertise?” While that’s true (and we’re glad you were paying attention), we know how hard it is to find qualified experts because Proper’s spent years curating the world’s best talent and expertise in property management bookkeeping.
In addition to real estate accounting specialists, we have experts dedicated to untangling past-due books: Our Historical Accounting team will get you all caught up, then implement processes and technology to keep you there!
If you’re unsure about the state of your books, let us help! Schedule a call with one of our experts and ask about getting a free mini-audit.