Accounting is a critical part of any business as it is the key to tracking and maintaining the financial health of an organization. It’s no different for the real estate sector; however, accounting for property management businesses tends to be more complex and challenging.
With multiple clients, high-volume transactions, and constant dealings with assets, income, and expenses, accounting teams often end up facing several roadblocks. The cost of making mistakes, however, is huge and can result in additional hours of work, potential legal problems, and even unhappy clients.
Let us look at ten common accounting challenges faced by property management companies and solutions for each one.
1) Incorrect classification of costs: There are various costs involved in managing a real estate business. It is important to maintain proper financial records for such businesses; however, many still continue to not have proper processes or structures in place.
A simple solution to this problem is to establish a chart of accounts. This is a list of all assets, liabilities, equity, income, and expense accounts. A chart of accounts will ensure that your financial transactions are organized and labelled.
2) Not segregating bank accounts: In certain instances, business owners make the mistake of using the same account for both business and personal use, which makes it challenging to evaluate profits and expenses.
You can easily resolve this issue by opening separate bank accounts, such as a basic business account and one for security deposits. In addition, some states require landlords and property managers to hold security deposits in separate escrow accounts – so do check your local laws regarding the same.
3) Poor record maintenance: Many property management businesses tend to deprioritize storage and maintenance of records. It is important to maintain records at regular intervals and also store them in a safe space.
You can resolve this issue with the help of an accounting software that can store and manage all your invoices and receipts. Furthermore, it will help you to regularly keep a record of all financial statements regarding your business.
4) Processing duplicate bills: Paper-based invoices and receipts can create a lot of havoc and confusion. In addition, you could also receive duplicate bills if you’re dealing with vendors and haven’t paid them on time. The easy way to resolve this issue is to set up a workflow that will cross-check bills over the last 3-4 months to ensure you aren’t making double payments.
5) Depositing money into the wrong account: It’s quite common to deposit money in the wrong account if you’re not double-checking. Unfortunately, this mistake can be quite costly and could even hamper relationships with your clients.
To resolve this issue, you need to set up a workflow with strict property management accounting procedures. This will ensure that your business runs smoothly and your money goes to the right place.
6) Not returning security deposits on time: This can potentially lead to legal problems for your business, which can further lead to you paying a larger sum as a security deposit if the renter claims damages. Therefore, one must first be fully aware of all the laws within your operating municipality. The next step is to set up touchpoints in the move-out process so that you can correctly track and process the status of security deposits.
7) Problems with HOA billing and payments: Delays or late payments to the house owner’s association or HOA can occur due to forgetfulness. This can result in hefty fines or even potential lawsuits. Setting up recurring bill payments is an easy solution that can avoid this problem altogether.
8) Paper-based invoicing and receipts: Reliance on paper-based invoices and receipts for accounting can lead to clutter, disorganization, loss of documents, and costly errors. Switching to digital documents is the most common solution to tackle these challenges as they can be stored online in a central location on a secure server. This will also improve accessibility and make it easier to find relevant files.
9) Overpaying for accounting services: It can be extremely costly to build an in-house accounting team. In addition, it can be difficult to scale and the added costs of hiring more accountants can leave a substantial dent in your account.
A common solution to the problem is hiring an outsourcing specialist to take charge of your accounting function. A specialist who’s well versed with the needs of the property management sector can manage your entire accounting function at a much lower cost and is also capable of growing seamlessly with your business.
10) Not doing account reconciliation: Maintaining accurate financial records is critical to any business and an important step in this process is to regularly reconcile your accounts. Reconciliation helps you identify typos, duplicates, missing entries, and bank errors. Some businesses avoid doing this as it can be extremely time-consuming and exhaustive.
A simple solution is to reconcile your book at least quarterly, if not monthly, with the help of an accounting software. Reconciliation will ensure that you’ve not missed out on money or have any overpayments.
Property management can be a demanding and challenging business. Accounting is an important aspect of property management and should be handled with care and precision. It is possible to resolve some of the most common accounting challenges with the help of best practices implementation.
However, if your business wants to optimize its finance and accounting function, it’s a good idea to consider outsourcing as it helps lower costs, improve efficiency, and better manage your financials.
If you’re considering transforming your finance and accounting function, then QX can help and support your F&A automation and transformation initiatives. Get in touch with our experts for personalized advice on how to transform your finance and accounting function.
Originally published Oct 27, 2021 11:10:07, updated Dec 08 2021
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