As a property manager, a fundamental and essential aspect of your role involves overseeing assets, income, and expenditures. Given the substantial cash inflows and outflows that characterize your business, from rent collection to vendor invoice management, it is important that you have a sound foundation in bookkeeping principles, established processes, and reliable property management accounting software to facilitate accuracy and efficiency in critical areas.
Below we will review 10 property management bookkeeping best practices and tips to help property managers stay organized, accurate, and profitable.
Maintain Separate Bank Accounts
As a property manager, it is imperative to keep separate accounts to handle security deposits in addition to the basic business account. This practice can provide accurate insights into the amounts owed to clients and the management fees.
Also, be aware of any required state procedures. Several states mandate landlords and property managers to maintain security deposits in separate escrow accounts to ensure the accessibility of funds when tenants vacate. Failure to adhere to the correct procedures may expose you to various liabilities and potential licensure issues.
Develop a Chart of Accounts
A chart of accounts is a comprehensive list of assets, liabilities, equity, income, and expense accounts that aid in the organizing and labeling of your transactions. While it is important to set up a chart of accounts, you also have the flexibility to customize it to best suit your business requirements. You may be able to utilize a simple Excel spreadsheet or upgrade to a property management software solution such as Fortress, which automates and customizes the creation of the chart of accounts.
Select a Property Management Accounting Method
Two primary accounting methods are available: cash and accrual. Under cash accounting, income and expenses are recorded when they are received and paid, respectively. In contrast, accrual accounting records revenue and expenses when they occur.
Most property managers use cash-basis accounting, however, it is important to avoid losing track of revenue and expenses. Property management tools and software can be extremely useful in monitoring all incoming and outgoing funds.
Choose a Bookkeeping Method
Next, determine whether you want to use a single-entry or double-entry bookkeeping system. In single-entry bookkeeping, each financial item, both incoming and outgoing, is entered only once (with the option to create a separate column for each entry). On the other hand, in double-entry bookkeeping, more commonly used in businesses, every transaction is recorded twice - once as debit and once as credit.
Manage Invoices and Receipts
It is crucial that you develop an effective way to manage all invoices and receipts. This may involve utilizing a general accounting program such as Quickbooks or property management software like Fortress, which is tailored to the needs of property managers’ accounting and reconciling.
Ensure that you maintain a record of all statements for money coming in and out of your business and establish a regular reporting schedule for yourself.
Maintaining Up-to-Date Collections
Exercise caution when allowing collections to become delinquent. In some cases, it may be reasonable to waive fees, but late payments can accumulate over time and eventually lead to negative impacts on your financial performance.
Again be mindful of any local and state guidelines, and be sure to accurately track residents with waived fees or late payments.
Prepare for Unforeseen Expenses
Even with diligence, unforeseen expenses may still occur. To avoid being caught off guard, it is important to establish a contingency fund. Additionally, reviewing expenses from the previous year, particularly the unexpected ones, can aid in estimating sufficient reserves to cover comparable costs for the upcoming year.
Regular Account Reconciliation
Monthly account reconciliation is a crucial step toward ensuring accurate bookkeeping. This process helps identify errors such as typos, duplicates, missing entries, and bank mistakes. It’s essential to conduct this process at the end of each month in order to verify that there are no missing funds or overpayments.
It may be a time-consuming process, but utilizing property management software can effectively streamline the process and save you time and money in the long run.
Maintaining Positive Cash Flow
Positive cash flow does not always equate to a positive financial standing. In property management bookkeeping, not all cash expenditures are classified as expenses. For instance, refunding a security deposit affects cash flow but utilizes a liability account. And purchasing costly equipment such as a computer is considered a fixed asset.
Maximizing Tax Deductions
Maintaining accurate records enables opportunities to examine finances for tax deductions. Examples may include deducting expenses for training, mileage, and bookkeeping services. Stay informed of tax codes and regulations and consider seeking the assistance of a tax advisor.
Proper bookkeeping practices for property management not only keep your business financially healthy but also ensure regulatory compliance and reduce liability risks. Implementing daily monitoring practices can assist in guaranteeing data accuracy while mastering the fundamentals and utilizing tech tools will provide an accurate snapshot of your business and support your growth strategy.