Having multiple income sources is always great news. However, recording said income can be tricky. This is true especially for real estate and property management companies that lack sufficient systems to handle this complexity. This lack of clarity in the company’s financial standing gives way to significant financial and operational inefficiencies.
To avoid this altogether, the first step is to understand and maintain the practice of accurate bookkeeping. This helps companies ensure compliance and maximize profitability.
In this blog, we discuss bookkeeping for property management companies to ensure accurate tracking of income, operating expenses, and more.
What is Bookkeeping for Real Estate and Property Management Companies?
Real estate and property management bookkeeping refers to the systematic recording of all financial transactions. Typically, involving invoices such as service charges, rent collection, repairs and vendor and contractor payments. The practice of maintaining accurate financial records allows businesses to receive “clean data”. This data ultimately becomes the backbone of effective financial reporting and strategic decision-making
What Makes Bookkeeping Different for Real Estate and Property Management Companies?
Property management bookkeeping is very different from standard business bookkeeping. It is not only transactional record-keeping but also includes property-level tracking, fund division, and more. The following table illustrates the differences in bookkeeping between companies involved in real estate and property management and those of a typical business.
| Point of Difference | Bookkeeping for Standard Business | Bookkeeping for Real Estate and Property Management Firms |
|---|---|---|
| Reporting Needs | Financial reports are mainly made for HMRC. | Regular generation of client account reports, rent schedules and landlord statements is important. |
| Client Money Handling | Business records only its own incomes and expenses. | It is important to distinguish client and business funds from each other under Client Money Protection (CMP) rules. |
| Service Charge Accounting | It depends on the kind of service offered by the business. | It is important to track service charges separately and report the charges to landlords. |
| Tenant Deposits | Advance payments from customers are treated as deferred revenue. | Tenant deposits must be recorded as liabilities. The deposits must be protected in approved schemes like MyDeposits, Deposit Protection Service or Tenancy Deposit Scheme. |
| Bank Reconciliation | Reconciliation of business bank accounts is essential. | Usually have a three-way reconciliation process. |
What are the Challenges of Bookkeeping for Real Estate and Property Management Companies?
Real estate and Property mismanagement companies face a lot of challenges related to bookkeeping varying from mismanagement of client’s funds to VAT complexity. Some of the challenges faced by real estate and property management companies are
Mismanagement of Client’s Fund
For Real estate bookkeeping UK, it is important for real estate and property management companies to follow Client Money Protection (CMP) regulations. The CMP regulations state that all the funds kept on behalf of the landlords and tenants should be separated from business funds. It is important to ensure that the client’s funds are never used for operational expenses.
A lot of companies find it challenging to distinguish landlord and tenant funds from business accounts. Miscategorisation of clients’ funds, such as discrepancies between landlord accounts, tenant payments and bank balances, can lead to non-compliance, audit issues, penalties, and more.
High-Volume Transactional Overhead
High-volume transactional overhead is a major challenge for real estate bookkeeping UK. It is owing to the fact that these companies must track a high number of recurring payments, such as rent payments, and manage utility bills across different portfolios. This raised the standard for accuracy in VAT obligations, tenant deposit protections, client money rules, and service charges. Not processing transactions properly can result in cash flow issues.
Complex Financial Transactions
Complex financial transactions are a major challenge for real estate and property management companies in the UK. It is due to the fact that the income and expenses related to property often involve strict regulatory compliances, multiple parties, and layered accounting treatments.
For example, a single rent payment may pass through a client account, needs to be allocated to a tenant ledger, increase the balance of the landlord, and generate a management fee for the company. Along with this, the rent can include VAT as per HMRC.
The interconnected nature of transactions along with strict UK-specific compliance requirements makes financial recording even more complex.
Incorrect Management of Expenses
Inefficient expense management usually occurs due to high-volume and varied nature of property-related costs.
These companies often face a wide range of expenses, including contractor payments, utility bills, emergency repairs, and maintenance invoices for various properties. Without proper management, these expenses can be miscategorized or allocated to the wrong property. This misallocation can lead not only to a decrease in profits but also to disputes over charges and inaccurate landlord statements. Moreover, when it comes to regulatory oversight, incorrect VAT treatment on supplier invoices can result in reporting penalties from HMRC.
Disorganised Records and Year-End Pressure
Disorganised financial records are a serious challenge for real estate and property management companies. As these companies process a heavy volume of deposits, contractor invoices, landlord payments and service charges throughout the year, they are susceptible to data entry errors if not tracked in real-time.
When transactions are not recorded continuously, reconciliations are missing or there are no supporting documents, the financial data becomes unreliable. This lack of organized records may go unnoticed during the operational period but can create a lot of problems at year-end. This can create a lot of year-end pressure on the real estate and property management companies.
What are the Benefits of Bookkeeping for Real Estate and Property Management Companies?
A uniform and organised system of bookkeeping is very beneficial for real estate and property management companies. It helps the company avoid non-compliance and ensures that the company maintains accurate records for each financial transaction. Below are some of the benefits of bookkeeping for real estate and property management companies
Provides Accurate Financial Insights
Bookkeeping ensures that management fees, service charges, operational expenses and maintenance cost are accurately mentioned and categorised in the books.
Accurate bookkeeping provides reliable financial insights to real estate and property management companies. These insights help the company in better pricing of management fees and more accurate budgeting. Thus, it helps the company in taking data-driven decisions which promote strategic growth. Ultimately, having clear and up-to-date financial insight allows real estate and property management companies to work beyond reactive administration. It helps the companies to work with strategic confidence in a competitive property market.
Reduces Errors and Financial Disputes
When balances are recorded accurately, updated regularly and reconciled against bank statements, the discrepancies can be found on time and can be resolved. Provides accurate documents as evidence in case of any financial disputes.
Difference between Repairs and Capital Expenditure
In absence of accurate financial recording and categorisation, it can become difficult to determine whether an expense should be treated as repair expense or capital expense.
Bookkeeping maintains detailed transaction records and assigns the correct category to each transaction. It systematically records, categorizes and tracks all property-related expenses. Thus, bookkeeping provides the accuracy, structure and traceability needed to differentiate between the repairs and capital expenditure. In this way, bookkeeping makes it easy to differentiate between repairs and capital expenditure.
Makes Year-End Preparation Easy
As bookkeeping keeps accurate, organized and up-to-date financial records, it makes year-end preparation easier for real estate and property management companies. When records are maintained consistently and accurately, it becomes easy for accountants to prepare year-end accounts.
Accurate and consistent maintenance of records reduces the risk of duplicate payments, missing entries or unrecorded invoices. These risks delay the process of year-end preparation and bookkeeping helps to reduce these risks. Thus, bookkeeping ensures that all the balances are correct before year-end.
Conclusion
Meticulous bookkeeping for property management companies is often overlooked as a minor administrative task. However, for companies aiming for sustainable growth, bookkeeping is the crucial first step toward achieving that goal. Companies that neglect proper bookkeeping miss this opportunity to identify trends and patterns that can ultimately influence their future strategies.
There are two efficient ways for businesses to integrate bookkeeping tasks into their workflow: through automation technology and by delegating bookkeeping tasks to a reliable external service provider.
For automation, the strategic use of technology can streamline the financial recordkeeping process. Implementing bookkeeping software can automate many tasks, reducing human error and providing quick, accurate financial reports for companies.
In terms of delegation, hiring an expert like AcoBloom, offers significant advantages. Not only do companies benefit from the delegation itself, but they also gain access to service providers who specialize in the real estate and property management industry. Additionally, reliable service providers possess familiarity with and specialized knowledge of the appropriate legal jurisdictions.
