Why Reviewing the Balance Sheet Helps Find Leakage

Balance Sheet? Why Should I Review This Report

I once had a discussion with a property manager who admitted they never looked at the balance sheet. I was shocked initially but thought about it. While the income statement is the report property managers use to look for variances and expense discrepancies, combining a balance sheet review with the income statement review shows a more complete story of the property’s financial position.

Assets – A Deep Dive on a Property Accounting Portfolio

The first items on the balance sheet are the assets.  These include cash and amounts due from tenants, vendors, and affiliates.

Cash account balances

• Include operating accounts, reserve accounts, security deposit accounts, and escrow accounts.  The property accountant should reconcile these monthly.  Amounts clearing these accounts should be recorded on the books as they happen.  For instance, the monthly mortgage should be recorded when the monthly invoice is received. These balances should be kept up to date daily.  It is very common for the property owner to request an accurate cash balance to make transfers.

Accounts Receivable

• The accounts receivable balance due from tenants.  This amounts matches the total amount due on the delinquency report.  Property owners should review the delinquency report to verify the amounts charged to the tenants are correct.  The fees include monthly charges, late fees, and recoverable amounts.  Amounts older than 90 days are of importance because a decision should be made whether these are collectible.  The property should have a policy in place regarding uncollectible accounts.

Tenant Billbacks

• If the property owner paid for expenses on behalf of the tenant, these amounts are in the tenant billback account.  Examples are repairs, utilities, and lawn maintenance.  The vendor or service provider invoice is the backup for the charge to the tenant’s account.  When the invoice is received for payment, it should be submitted to accounting to charge the tenant’s account.  Leaving these amounts on the balance sheet without review adds up over time.  The property owner ends up absorbing amounts due from tenants.  The tenant billback account should be zero unless an invoice was received at the very end of the month.

Prepaid Expenses

• These are the amounts due back to the property.  Prepaid expenses are invoices paid in advance.  In my experience in property accounting common prepaid expenses include insurance policies, services that are paid quarterly, and other expenses paid in advance to be expensed monthly

Accounts Receivable Other

• These amounts are invoices or expenses paid in advance.  The most common expenses are either a duplicate invoice or payment made for another entity.  These are usually recorded by the accountant and cleared before the next monthly report. Since these are mostly done in error, there will not be a balance in this account every month.  That is why it is important to clear this balance.

Liabilities – Identifying The Surprise Property Expenses

As important as amounts due from others is, the amount due from others is just as important.  While the cash balance shows how much cash is in the bank account, payables tell you how much of it is actually owed to others.  Not accounting for these amounts gives a false sense of how much cash is available.

Accounts Payable Vendors

• This balance matches the balance on the Accounts Payable Aging Report.  If there are invoices older than the vendor’s payment terms, then there is a breakdown in invoice payments especially if there are no cash flow problems on the property. Vendors need to be paid timely to avoid utility cutoffs or vendor liens.

Accrued Taxes

• Any amounts accrued for property taxes need to be reviewed for the property owner to account for them as they come due.  On commercial and multi-family assets the amounts due are substantial.  Not holding cash back or accounting for taxes will cause headaches at the end of the year.

Security Deposits

• Every property owner knows these amounts are due upon move out.  These amounts are not actually cash available to pay monthly expenses.  Some commercial property owners set aside a cash account for the security deposits.  In my experience in commercial property accounting, most do not so it important show these are held back and due upon move out.  In multi-family, security deposits are substantial so a separate bank account is required.

My firm bridges the gap between the property owner and the property manager review.  I provide accurate and thoroughly reviewed financial reports to prevent real estate financial leakage. If you have questions regarding your reports or if you need a review of your financial review process, contact me to get the conversation started to avoid the hidden costs of ignoring the balance sheet.