Property accounting or business accounting in general is something not many enjoy doing given the admin work that is involved.
Looking at it the other way:
One who appreciates his/her numbers and can see the difference between what is on paper versus what hits the bank and does not turn a blind eye to the facts, is who will win.
The first year of our accounts weren’t great in all honesty and it was hard for us to make the portfolio to cashflow overall given we had multiple refurbs, reported issues at every step.
It was a bit of chaos in the first year. It made us wonder if this will really work at all?
Slow and steady, we managed to get the grip on our accounts, systematise it within XERO and have clear records against each property so we know which one is performing and which one is incurring losses.
The biggest driver for this post comes from the fact that, I hate accounts and realised that unless I do what I hate, I cannot succeed.
Not just do, but do it well and there are no two ways about it.
In Warren Buffett’s words:
Accounting is the language of business!!
XERO has become my best friend implementing a small system to manage my accounts. I covered the launch of this software when it was growing in my previous tech blog back in 2008.
Here are just the 20% of features that gets you 80% of work you need if you do it right and are a solo entrepreneur.
In short just 4 features that will help you take the first step to automate or semi-automate your accounts.
We reduced our time from days to hours managing our accounts each month with just these in our first increment of growth.
1) Bank Rules Within XERO Property Accounting
There are two things to consider when we talk about bank rules.
Don’t even think twice to integrate your business bank account with XERO. We just need that live feed of every transaction that you do and has to be reconciled.
XERO does give a bulk upload transactions option as well.
However, if system can automatically take the feed why bother?
Create the bank rules with any criteria you like based on payee, text in description, analysis code or any field with a criteria.
Above image shows a bank rule set for a mortgage interest on a property that comes in each month and is reconciled with just a click.
An account number that appears from “XYZ Bank Mortgage” company and amount is less than 300 GBP. Any transaction that matches that criteria each month gets reconciled automatically.
Once you set these rules for all recursive transactions you incur each month, reconciliation of accounts happens just in seconds or at the max minutes.
80% of transactions within property revolve around following things….
- Rentals each month for each property
- Insurance payments for each property each month
- Food and Travel expenses visiting your investment area
- Bank charges/interest payments (if you are lucky)
- Recursive monthly software/subscriptions
- Regular suppliers who will fix property issues and invoice
If you are able to build rules for above transactions to reconcile to bank transactions then 80% of your monthly reconciliation will happen within minutes.
To give you an idea within every 100 line items you see in your bank account, atleast 80 of them can be automated using bank rules for reconciliation.
2) Set Up Repetitive Templates Within XERO
Here is the thing about building any kind of templates.
Its laborious at the start but once you have tuned it for first few iterations, your later life is going to be much much easier and on fast track.
XERO provides a feature to define repetitive invoices and purchase orders.
You create a repetitive invoice or a purchase order and define how many instances you want to create based on a defined frequency (weekly/monthly….).
Moment you create one, your reconciliation task is just about clicking the OK button on the screen or even that could be automated without any manual intervention.
You either can retrospectively create those repetitive invoices/orders if you are reconciling the backlog or you can let system create them each period if they are recurring transactions each month/week.
3) Chart Of Accounts Within Property Accounting
I am no accountant but chart of accounts is simply list of accounting items that provides a breakdown of all the expenses and income.
Within XERO you are provided with default list of accounts that each of the transaction can be assigned to based on either incoming or outgoing of cash.
It just makes sense to define your own or re-use a short list of accounts that you will use within your company.
The only reason why I suggest this is, it gets you into that consistency defining your transactions.
More choice of items in the accounts list, more confusions and stricter the list stricter the control. This is more useful if multiple people are involved in managing the accounts.
4) Property Accounting Using Tracking Categories
Tracking categories helped us gain control on which property in the portfolio is eating up most of the cash flow in form of repairs/expenses and which one is doing better.
Tracking categories within XERO can help to see how different areas of your business are performing once setup.
Navigate to Accounts>>Advanced>>Tracking Categories and start adding your categories and associated options you would like to track against.
In our instance:
We just created a tracking category titled “Property” and have added each property as a category option as shown in below image.
Once you activate the tracking categories with options, you are in a position to reconcile transactions against each property and can even use them in rules/templates.
Each time a transaction is created in the form of an invoice or an expense, you now have a tracking category field that will enable you to mark that transaction against a property option.
This in-trun will enable anyone to verify their profit and loss report per property and have a comparative view of profit/loss across all properties.
Below image is just a snapshot of 3 months property accounts on 3 properties as an example for comparative analysis.
Its easier to just extract a report across number of months and spot the issues across the portfolio at a single glance.
For instance PPT2 (Property 2) above you see that there is no buildings insurance deducted for 3 months. This was due to the fact that insurance was paid as a single transaction for full year than recurring monthly.
PPT3 (Property 3), we had reduction in cashflow due to minor refurb that happened in that quarter.
All this control, conclusions within reports is possible since the data fed into the system is strong and is marked against each property using tracking categories.
Reports within property accounting are just an outcome of quality of data we input into the system.
Accounting may sound little hard and boring at the start.
If we put some effort to systematise it with just 20% of key features that a software provides, most investors will have 80% of their requirements sorted managing their portfolio.