If you wish to thrive in the real estate market, your bookkeeping must be in order. Most real estate investors overlook accounting operations as they grow their business.
Efficient and error-free bookkeeping is the key to success for every business. And the same rule applies to the real estate industry. While you always have the option to outsource bookkeeping services, you still need to take an active role in managing the books.
A minor mistake in books can cause your business serious monetary losses as well as regulatory issues. About 82% of SME businesses fail due to poor cash flow management skills or poor understanding of cash flow.
There are several common bookkeeping mistakes that small businesses make. You must avoid these mistakes and follow recommended bookkeeping practices if you wish to thrive in the real estate market.
Read on to know:
- What these mistakes are, and
- How you can address them
1. Using Single Account for Personal and Business Transactions
One mistake that small real estate businesses often make is using a personal account for business transactions. While it may sound convenient since you have to manage a single account, mixing personal and business finances is simply a recipe for trouble.
Therefore, using a personal account for business transactions is a big no-no. Sooner or later, the financial regulator may ask you to provide a record of all the money that has come into your real estate business. If you had a joint account, it wouldn’t be easy to trace the cash inflows from the company.
If you are already practicing this mistake, change it. Opening a business account will take a short time but will save you a lot of hassle in the long run.
2. Overlap Categorization of Expenses
A clean and organized record of expenses is crucial for efficient bookkeeping. In a real estate business, costs incurred are mostly clear and straightforward.
Still, business owners often end up creating duplicate categories for expenses. Sometimes they fail to enter expenditures under the correct category. This could lead to grouping wrong items together. Consequently, you will either miscategorize or overcategorize business expenses.
Are you wondering why proper categorization of expenses is necessary? Different business expenses are taxed differently. If you label expenses under the wrong category, there is a possibility you may end up paying more taxes than you actually owe. In addition, correctly categorized expenditures give a clear picture of your existing financial position.
To make sure you list expenses correctly, use standard categorization guidelines for bookkeeping.
3. Not Maintaining a Paper Backup
Like most other businesses, real estate businesses are also adopting cloud backups. According to one survey, as of 2019, 94% of small-sized organizations had switched to cloud backup. There are several benefits of going paperless, including:
- Time savings
- Easy accessibility
- Less space consumption
- Better communication
- Improved Customer Service
But this does not mean paper backups have become entirely invalid. Though digital record keeping has several benefits, going completely paperless can have some disadvantages as well.
- Your data could be open to security risks and viruses
- Any technical problem during audits can prove disastrous
- Most taxing authorities, including IRS, often ask for paper trails, if deemed necessary
That said, cloud backups, without any doubt, make day-to-day operations smoother and more manageable. However, to avoid any security risks or loss of data, make sure you select a Cloud Service Provider that offers a safe and secure server.
You should also keep a paper backup of your data for at least some time, just in case your entire cloud system fails completely.
4. Trying to Do it All
Another common mistake that most real estate managers make is trying to maintain their books themselves. According to one survey, 60% of business owners agreed they aren’t knowledgeable enough to manage finances.
Bookkeeping is without any doubt an essential part of running a real estate business. However, not everyone is good with numbers; neither does everyone know how every transaction type should be recorded.
You may be able to save some money by not hiring the services of an experienced bookkeeper, but you will fail to maintain your books efficiently. If you are also trying to do it all by yourself, ask yourself what matters more to you: to control the business or run it successfully?
Therefore, it is recommended to hire a professional bookkeeper to manage your books and sort out your business finances.
A bookkeeper has the required skill set to perform accounting tasks quickly and efficiently. Only an expert eye can catch minor errors in the books. Besides, as professionals, they are always aware of the rules and regulations necessary for your real estate business to stay compliant.
5. Hiring inexperienced staff to manage the books
One deadliest mistake you can make is hiring an amateur bookkeeping team to manage your books due to budget constraints. You may be able to save costs, but you will lose out on business.
An inexperienced bookkeeper, who doesn’t know the accounting principles applicable to real estate, can be devastating for your business.
Thus, it is advised to hire qualified accounting staff with ample experience of working in the real estate industry.
Protip: Take a Bookkeeping class, even if you have outsourced bookkeeping services. Without knowing the basics of real estate bookkeeping, you would not be able to evaluate the performance of the bookkeepers. Also, you will struggle to understand the accounting tools they use.
Once you develop a better understanding of real estate finances, you start making logical business decisions.
Efficient bookkeeping has several benefits:
- It saves your time and money,
- It helps you in fast and efficient record-keeping,
- It lessens the stress related to tax returns and audits
- It enables you to manage commercial real estate properties more efficiently
- It streamlines the CAM reconciliation process
The health of your real estate business depends directly on the health of its finances. While you can do simple finance-related tasks yourself, always hire an experienced bookkeeper to manage complex tasks. It is high time that you save yourself and your business from the bookkeeping mistakes mentioned above.