Effective and precise bookkeeping is crucial to the success of any company, and Commercial Real Estate is no exception. Properly maintained books provide useful information about the general health of an enterprise and help make decisions regarding significant improvements and development of the company. In this article, we discuss three common bookkeeping mistakes in Commercial Real Estate and give you some advice on how to avoid them.
Real estate bookkeeping involves several complex processes and procedures. Therefore, a minor bookkeeping mistake can result in severe monetary losses as well as compliance issues. A U.S. Bank study by Jessie Hagan found that about 82% of businesses fail due to poor cash flow management skills.
Importance of Efficient Bookkeeping in Commercial Real Estate
Efficient bookkeeping practices in real estate are essential for a variety of reasons. Some of the benefits include:
- Saves time and money
- Allows performing record-keeping tasks more efficiently
- Alleviates the stress related to tax payments, tax returns, and audits
- Enables you to manage your commercial real estate properties more efficiently
- Ensures accurate, timely, and efficient CAM reconciliation by streamlining the entire process
Here are three bookkeeping mistakes real estate business owners make when approaching their company’s finances.
Bookkeeping Mistake #1:
Overlapping Expenses Categories
The first bookkeeping mistake is creating overlapping categories for expenses. Maintaining a clean and organized record of expenses is critical for faster and efficient bookkeeping. Most costs incurred at a real estate business are pretty standard and straightforward. But business owners often create duplicate categories or fail to enter expenses under the correct category.
Without proper categorization of expenses, you are likely to group the wrong items together. As a result, you will either miscategorize or overcategorize expenses. It is important to mention here that individual expenses may be taxed differently. Through proper categorization, you can save a lot of money. Additionally, categorization also gives a clear picture of your current financial position.
To ensure you list your expenses properly, use standard categorization guidelines for bookkeeping. Starting a chart of accounts from scratch can be complicated, but STRATAFOLIO provides a detailed explanation of best practices in Setting up a Chart of Accounts for a Commercial Real Estate Company.
Bookkeeping Mistake #2:
Not Having a Secure Records Backup
Just like any other business, real estate business owners are also adopting going paperless through the use of cloud backups. In 2019, as many as 94% of small-sized firms had already switched to cloud backup. Some of the benefits of becoming a paperless office are:
- Time savings
- Cost-cutting
- Easy accessibility
- Less space consumption
- Better communication
- Improved Customer Service
But this does not necessarily mean that paper backups have gone entirely obsolete. While digital record keeping has its benefits, going paperless has several disadvantages as well: 1) your data is open to security risks and viruses, and 2) technical problems can make a paperless office a liability during audits.
That said, digitalization of receipts, without a doubt, streamlines & simplifies day-to-day operations. To avoid any security risks or loss of data, you must select a company that offers a safe and secure server for records storage.
Bookkeeping Mistake #3:
Trying to Do it All
Another common bookkeeping mistake that most real estate managers make is trying to maintain their books, despite having a minimum understanding of finance. According to one survey, 60% of business owners agreed they aren’t knowledgeable enough to maintain books.
While bookkeeping is an essential part of running a real estate business, the fact is that not everyone is good with numbers. And, not everyone knows how every transaction type should be recorded. That’s why you should consider the option of hiring a professional bookkeeper to sort out your business finances. An experienced bookkeeper has the required skill set to perform accounting tasks quickly and efficiently.
Protip: Take a bookkeeping class, even if you are planning to outsource bookkeeping services. If you don’t know the fundamentals of real estate bookkeeping, you will not be able to evaluate the performance of bookkeepers and the accounting tools they use.
Once you have decided to outsource bookkeeping, supervise but do not micromanage. Only an expert eye can spot subtle errors that a manager with no accounting background might miss. Besides, as professionals, they are also aware of regulatory changes that could affect the financial health of your business.
Beyond these common mistakes, there are a few simple bookkeeping rules that every real estate agent needs to keep in mind. Understanding how frequently to review your books and the distinction between bookkeeping and accounting can be a game-changer for your financial insight and ultimate success.
How Often Should You Reconcile Your Real Estate Books?
Successful bookkeeping for real estate investors requires accurate tracking of finances. Regular reconciliation, or matching your recorded transactions against bank statements and property management reports, is one of the most effective ways to ensure accuracy.
Normally, you need to balance books every month. This will catch errors like double payments, missing revenues, or incorrect real estate accounting postings early on. In the case of large portfolios or high-turnover commercial enterprises, weekly balancing can even be better in precluding expensive mistakes.
Reconciliation automation through a real estate investment accounting software platform, such as STRATAFOLIO, allows you to interface directly with QuickBooks and eliminate human errors. This not only saves time but also provides real-time financial visibility to the investors, allowing them to make intelligent, data-driven decisions.
In addition to reconciling regularly, it’s also important to understand the distinction between bookkeeping and accounting; two areas that work hand in hand in every successful real estate business.
What’s the Difference Between Real Estate Bookkeeping and Accounting?
While bookkeeping for real estate and accounting for real estate do intersect, they serve different purposes in your business operations.
Bookkeeping is documenting day-to-day financial activities, rent collected, maintenance charges, interest on loan, and utility bills, so that all things financial that occur are recorded and categorized correctly. This forms the foundation for accurate financial reporting.
Accounting does take those records and convert them into profitability assessments, tax returns, and projections for future performance. In other words, real estate investor bookkeeping keeps the figures organized, and accounting illuminates what those figures mean to your business.
Blending both roles, preferably within a unified platform such as STRATAFOLIO, provides you with a whole-of-picture view of your finances and simplifies your decision-making across your property portfolio.
Final Thoughts
It is high time to save yourself and your business from these bookkeeping mistakes! The health of your business depends directly on the health of its finances. You can always outsource bookkeeping to manage complex tasks.
It is only with proper tracking and monitoring that you keep an accurate record of cash inflow and cash outflow. Once you start understanding your real estate finances better, you can make better business decisions and save money in the long run.
The STRATAFOLIO Solution
STRATAFOLIO is an online software solution designed specifically for people who own or manage real estate, use QuickBooks, and want to streamline their operations to save time, increase profits, and reduce manual work.
STRATAFOLIO syncs with QuickBooks to roll up your company’s financial data in one easy-to-view location and also includes secure cloud storage for your documents. STRATAFOLIO’s expansive digital toolset provides your commercial real estate operation with the agility and adaptability needed to maintain costs and pursue financial resiliency.
Would you like to learn more about what STRATAFOLIO can do to help you manage your Commercial Real Estate Properties? Schedule a 1:1 demo to see how STRATAFOLIO can improve your operation, or contact us for more information.
About the Author
Carole Anne is the bubbly head honcho of Key Admin. She’s a BAS Agent Member of the Institute of Certified Bookkeepers, a Certified Xero Advisor, Advanced QuickBooks Online Advisor and has an Advanced Diploma in Business and Finance.
