What backdrops a successful short-term or vacation rental business? The answer is effective property management. One of the fundamental responsibilities of property management is accounting and financial management. The survival of your business relies on the proper handling of your business finances. You can maximise the earning potential of your property by tracking how your expenditures and incomes stack by. There are commonly bookkeepers and accountants responsible for the financial affairs of a company. However, understanding property management financials is essential for every rental property owner or manager.
Income and expenditures are fundamentals of property management financials. On the one hand, when your business makes a profit, you’re keeping it “in the black”. In other words, there is a positive amount on the net revenue line in your income statement. On the other hand, when your net revenue is negative, you’re keeping your business is “in the red.”
Here are four primary financial reports that must be prepared every month to get your property management financials off the ground.
Financial Reports in Property Management
#1 Balance Sheet in Property Management Financials
A rental property balance sheet provides a monthly snapshot of your company’s financial condition at any point in time. It is also called the statement of the financial condition. The balance sheet summarises your rental property’s assets, liabilities and equity at any point in time. A balance sheet helps you check your rental property’s “net worth” or “equity”. That is to say, the difference between assets and liabilities. That is why it is called the “balance sheet.”
- Assets are the company’s resources with economic value. They include cash, accounts receivable, land, buildings, equipment, furniture, fixtures, accumulated depreciation and much more.
- Liabilities are the company’s financial obligations. They include wages, accounts payable, warranties, property taxes, accrued expenses and so on.
Microsoft Office offers a balance sheet with examples to get started. The templates are easy to use and customise.
#2 Income Statement
The Income Statement is also known as the Profit and Loss Statement. It is one of the most important financial documents on the road to understanding property management financials. It informs property owners to plan property management clearly and concisely. The income statement helps you understand your revenue outlook and cash flow. It also tells you whether revenue is sufficient to pay off all expenses. Reviewing your income statement lets you get on top of your business when maintenance costs, vacancies, late payments and more start eating into your bottom line. It determines incurred damages and compares them to budgets.
- Income: Property management fees, service fees, reservation fees, damage waiver, maintenance revenue, the interest received, residential and commercial rental income, capital and much more.
- Expenditures: Advertising and marketing costs, taxes, depreciation, accounting fees, legal services, Internet, insurance, utility bills, repair and maintenance, host and guest satisfaction, etc.
You can generate your financial statement in Excel. You can also use income statement templates like Bench’s or Wise’s.
#3 Cash Flow Statement
A Cash Flow Statement helps you manage your accounting. It ensures you have enough cash to keep operating. Though other financial documents might be excellent in showing how your revenue and expenditures stack by, they don’t necessarily inform you about the liquidity on hand. Don’t confuse profitability with cash flow. That is to say; you can be profitable and still lack cash and go out of business. The cash flow statement adjusts to the information recorded on your profit and loss statement, so you see your net cash flow. These statements are essential in financial analysis using accrual accounting. They show the precise amount of operating cash flow of your business at a specific time. You can track your liquidity accurately.
- Cash flow statements demonstrate changes in equity, assets and liabilities in cash inflows, cash outflows, and cash holdings.
- Cash flow statements allow you to create cash flow projections about the future cash flows of your business. Meanwhile, it helps you plan your liquidity for your long-term business goals.
#4 General Ledger in Property Management Financials
General Ledger aims at providing an overview of all the rental property’s transactions. Since it functions as a “master list,” bookkeepers or accountants shall prepare it explicitly. It records all the individual transactions of properties and organises them as follows:
- Balance Sheet Accounts: assets, liabilities, equity
- Income Statement Accounts: revenues, expenditures
These are the four principal financial reports of your business accounting. Together, they let you evaluate your performance by forming the accounting equation.
Further Tips on Understanding Property Management Financials
Create a Separate Business Account. If you have multiple properties, it is better to consider opening a separate account for each. Separating your accounts will help you keep track of your finances painlessly.
Choose your accounting method. There are two methods of Recording Transactions:
- Cash Basis: In this method, income and expenses are recorded once they change on hand.
- Accrual Basis: In this method, income and expenses are recorded when earned or incurred.
Generate financial statements. Generate financial statements by extracting the information from your general ledger and creating relevant reports.
Track deductible expenses. You can significantly reduce taxes on your properties if you deduct some deductible expenses such as repair and maintenance costs, legal fees, etc.
Document your expenses. Keep a record of all your incomes and expenses. Provide documentary support for your claims regarding authorised deductions you make.
These financial reports contribute to understanding property management financials. They let you get a good handle on the financial condition of your rental properties. Preparing financial statements can be tedious, time-consuming and stressful, especially when it’s almost your tax due date. Employ professional accountants or property managers and apply an efficient accounting system to monitor the financial “health” of your rental property.