Acquiring a piece of commercial real estate is only the beginning. In order to manage the property and allow management to make strategic decisions, accurate and timely financial information must be available on demand. Drilling down one layer more, this means that the processes for recording accounting transactions in a timely manner need to be planned when the real estate is acquired, not ad hoc over time, so that expectations are clear across all levels of accounting and leadership. Spending time upfront will reduce issues later when hitting the potential speed bumps of adding and onboarding staff, management transitions, or early sale. Here are the five states of accounting processes planning for managing an investment in real estate:
Planning is Important
In fact, planning is potentially the most important function of management. Poor planning can leave organizations floundering and fighting fires, whereas proactive planning creates teams that are driven and focused. Planning begins with understanding the inputs that are available and the outputs that are required.
- For real estate operations the inputs are not only the day-to-day operational activity which property managers handle, but also the strategic top-level activity which the investment management team must address.
- Outputs range from the weekly cash forecasting to monthly close reports all the way to quarterly investor reporting. These outputs are both interdependent on each other and limited to the inputs which are available.
Knowing is Only Half the Battle
Once management is aware of the inputs and outputs, they can address the challenge of developing processes and allocating resources. For small organizations and organizations that are just getting started, it can be challenging to find the time to develop the processes and realize the additional resources that may be needed. In addition to this, real estate investment teams face additional concerns like finding the right property management company or taking the property management function in-house. Since the additional resources will only be required during the limited time frame when owning the property, it is commonly the decision to augment the company’s core accounting and finance team with in order to “lighten the load.”
There is No One-Size Fits All Solution
Management has multiple, sometimes conflicting, thoughts on the right solution for implementing accounting processes. This is where a thorough planning process can reap benefits such as reducing uncertainty and surprises, and duplicative and wasteful activities. Mapping out these processes can leave the team with, both a road map for implementation as well as a potential calendar/timetable for recurring tasks. This planning reduces negative outcomes and drives positive actions and means that any accounting team member who does a task is doing it in the expected way.
Power of Creative Thought
Planning by its very nature is proactive, which naturally means management is assessing multiple alternatives as potential solutions. In order to do this, alternatives must be discovered, discussed, and analyzed. To do this the team must put on their “thinking caps” and embark on a creative and innovative process of finding solutions. The process of discussing and analyzing these potential solutions then drives timely and effective financial reporting.
Process Decisions Are Made, So What Now?
Once management has made decisions on the processes governing day-to-day, weekly, monthly, quarterly and annual operations they need to be written in stone, or at least written. The written instructions can be distributed to team members, tasks can be assigned and controls over the process can be formalized. From then on, accountability can be expected of the accounting team and strategic decisions can be made by the company’s leadership.
LGA has a comprehensive Real Estate service team led by James DeCesar, CPA, Manager. Please contact Jim with any questions about how to best to plan out your Real Estate accounting processes or assurance services.
Written By James DeCesar