8 Ways To Take The ‘Boring’ Out Of Bookkeeping

asleepWhen it comes to real estate investing, bookkeeping is a topic that people tend to avoid. 

It’s more exciting to focus on buying the next rental property or flip than thinking about where the money is going for the ones already purchased.

What most people don’t realize is that accounting is the language of money, and if you know the language, you can find ways to make and keep more of it.

That doesn’t mean you need to do the bookkeeping yourself.  Without the proper training and education or even enjoying working with numbers, it can very quickly lead to frustration and the books being done improperly or not at all.

 

Okay, so you’ve got a professional bookkeeper in place, and hired an accountant to advise you and prepare your tax returns. Now what?

How can you make bookkeeping less ‘boring’?

Years ago, I discovered I enjoyed digging through numbers in my financial reports (both personal and business).  Why?

treasureBecause it’s like a treasure hunt, and the more I dug into the numbers, the more money I would find.

Wouldn’t you like digging
through numbers

if you found money
every time you did?  

I thought so 🙂

Remember, I’m not talking about doing the bookkeeping data entry… I’m talking about reviewing your financial reports.  And there’s a BIG difference!

Bookkeeping and data entry is necessary, but it wastes your time (especially if you don’t know how to do it).

Reviewing financial statements produced by your accounting system (or provided by your bookkeeper) not only saves you money, it can also make you money by helping you make better financial and investing decisions.

 

Here are 8 simple ways I’ve found to not only take the ‘boring’ out of bookkeeping, but actually make it exciting (because you’ll be making or keeping more money!).

1) Find wasteful spending

credit cardThis is probably one of the most important uses of financial reports.  With accurate, up-to-date books, you can see each month where your money is going and come up with ways to save it.

I can’t tell you how many times I’ve dug into financial reports, only to find wasteful spending in one or more areas.  That financial ‘leak’ is an easy one to fix, but without financial reports, you don’t even know it’s happening.

Remember: A dollar saved is MORE than a dollar earned… due to taxes!

 

2) Identify underperforming assets

You have 20 properties and yet you still don’t have enough income to cover all your expenses each month. How do you know which property is pulling you down?  Detailed financial reports will tell you.

If you fix the problem property, or sell it and replace it with a better property, and your income will go up.

Alternatively, you can improve cash flow across all your property by identifying ways to boost income, and then track the improvements over time.

 

3) Track who owes you money

calculatorEach month your tenants pay you rent, but do you know who is behind a payment?  Who still owes you money from a few months back?

Many investors don’t track this information, but if you want to maximize your income and your profits, you absolutely need to know who has paid their full rent and who has not.

Otherwise you’re leaving money on the table, and it could cost you even more money by delaying an eviction (because they haven’t paid their rent).

And if you’ve hired a property management company to manage your property for you, do NOT rely on their financial reports for this!  They are not always accurate, and that financial loss is YOUR loss.  Always, always have the information entered into your own accounting system so you can run your own reports.

 

4) Stop theft

Despite all the technological advances for paying bills, many tenants still prefer to pay with cash.  This is especially true for lower income areas.

If you’re collecting all the rent in cash, no problem.  But if your property manager is the one collecting the cash, it’s very easy for money to just ‘disappear’.

I’ve heard countless stories of property managers or superintendants who’ve stolen thousands of dollars from landlords… all because there was no tracking of cash transactions.

Whenever you have a property manager collecting cash rents on your behalf, always insist on them issuing receipts to the tenants and giving you a copy.  And be sure to inform the tenants that they should not pay cash unless they receive a receipt from them.

Those receipts should then be entered into your accounting system, just like any other receipt or bill.  That way, you not only know all cash is being deposited, you also know who still owes you money.

 

5) Manage Cash Flow

Dcanada$50o you know when your mortgages are due? Have you planned for how you will make interest payments?  What about the 3 fridges and stoves you need to replace next year?

Good financial reports will help you see where potential cash flow problems can occur and allow you sufficient time to plan for and correct them.

This will not only reduce the stress of having to shuffle money around at the last minute, it can also help you avoid penalties or unnecessary interest charges on loans.

 

6) Determine Which Assets to Liquidate

If you’re planning to sell a few of your properties, you may need to renovate some of them. Your plan is to sell one, use the cash proceeds to renovate the others, and then sell those for higher prices.  Which property should you sell first to generate the most profit? 

Financial reports will help you with the answer.

Note that because of the way accounting works, the market value of the properties is not reflected in your financial reports. So you’ll need a 2nd piece of information – property valuations from a Realtor.

Combined with financial reports (to show your total outstanding debts), you can easily figure out how much equity you have in each property. The decision on which one to sell first will be easy to see.

 

7) Simplify Tax Time

accountingAccountants love it when you deliver a series of financial reports to him or her in a format they understand (using a good bookkeeper will go a long way towards achieving this). 

Accountants do not love it when you give them a shoebox full of receipts, and you ask them to do your tax return.

If you come prepared at tax time, you can spend relaxed time with your accountant, instead of scrambling at the last minute to prepare financial information or send them receipts.

Relaxed time is better because you’ll be discussing ways to make or save more money with your investments, tax planning for the coming year, and more.

Plus, your accounting fees will likely go down because you’re using up less of your accountant’s time.

 

8) Simplify reporting to Joint Venture partners (or even eliminate it!) 

If you plan on using other people’s money, you will need proper financial statements to report on an ongoing basis how their investment is performing, or at a minimum, provide them for tax time.  Otherwise, you’ll always be scrambling to pull the numbers together.

But the most important reason why you want good reporting is to see where it makes financial sense to not have a JV partner at all.

For example, with proper financial reports, you could see that instead of having a JV partner, it might make more sense to refinance the property with a new mortgage (or 2nd) and buy out their share.  Your interest costs would be higher, but you wouldn’t be losing half the profits to your JV partner.

 

As you can see, good bookkeeping and financial reports are very important for real estate investors.

And once you realize the money they can help you make and keep in your pocket, not only are they are not ‘boring’, but they can even be exciting! 🙂

How have you used bookkeeping to save or make money?

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Paul Blacquiere

Paul is an entrepreneur, investor, speaker, and educator.
He's experienced in multi-family properties, renovation, flips,
joint ventures, and is Canada's top RRSP mortgage expert.
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5 comments
Megan

Brilliant article and an enjoyable read. Thanks for sharing with us.

Reply
Ellen H

Hitting the nail on the head at this time of year Paul.
I have hired a book keeper and reputable accounting firm. Now I’m looking for a sure fire way to coordinate the two and ensure nothing is overlooked. Knowing what to expect and how to decipher the end results will also require a learning curve.
Is there anything you can suggest to achieve these goals?
Thanks
Ellen

Reply
    Paul Blacquiere

    Hi Ellen,

    Here are a few tips I recommend…

    1) Keep your chart of accounts under control – don’t let your bookkeeper add things just because they didn’t know where to put it

    2) Establish standards for data entry, and even for you submitting receipts to the bookkeeper (e.g. write down who it was for, etc)

    3) Have your bookkeeper update your books regularly, then review them in detail

    4) Your chart of accounts should be setup in a way that makes sense to you. It doesn’t have to match the format your accounting firm think makes sense to them. They will cross-reference everything at tax time.

    5) Learn how to read financial reports. This is huge! Most people skip this step, but if you want to learn how without falling asleep, I recommend the following easy to read book:

    https://www.spirepoint.ca/accountingbook

    Hope this helps
    Paul

    Reply
Richard Filion

Hi Paul,

Great article as usual. Thanks for sharing!

While I do agree with most of your tips, I do have to point out that certain aspects of #8 are debatable.
In the spirit of a healthy discussion :-), here are my thoughts:

– Win, Win, Win… I have issues with investors that would adopt a state of mind to attract money and JV partners with the intent (or the possibility in the back of their mind) of tossing the JV Partner in the future on the sole basis that it makes financial sense. I don`t think this type of approach should be encouraged at all.

– Good accounting software such as Quickbooks coupled with a competent bookeeper (wether you do it yourself or hire one) automatically takes care of JV reporting. It`s a non-issue. Reporting to JV partners is a click of a button and should be the simplest of the task. If a person, as a RE expert cannot produce these reports upon request, then they may want to rethink their strategy, and at the very worst not declare themselves as an “investor”.

– When I enter a co venture relationship, it is with the best of intentions and for the long term with the hopes of extending the relationship to future RE purchases… Will it always work? No, but at least I walked in with the same intentions in all ventures. That JV is bringing something you don’t have whether it’s cash or expertise, that should never be overlooked nor forgotten.

– I disagree that the most important reason of having good reporting is to see if it makes financial sense to not have a JV partner. Instead, it should be used to identify areas to improve as you suggest in your article as well as maximizing the ROI for both you and your partner. If the property is under performing, then you, as a RE expert screwed up, and you owe it to your JV partner as part of your overall CCI (Confidence, Credibility, Integrity) to turn the property on the positive side.

– At times, there are unforeseen circumstances that will make a property under perform, but the goal here should be to move on as a team to a new property, not toss your partner because it makes financial sense to do so.

– While I do not know you as that type of investor and I know you mean well, I find that tip#8 suggests that every “real” investor should fend for themselves, giving a negative connotation to the whole JV partnership. I hope none of my clients read this tip..

To sum up, should you ever know of an investor who reviews and ultimately uses financial reports to make a financial decision of tossing their JV partner, please share their name with me as I would never want to co-venture with them.

After all, I don’t think anyone deserves lending money and later to be disposed of, because it makes financial sense to do so! – at least I wouldn’t want to be that person.

Just my 2 cents 🙂

Cheers!

Reply
    Paul Blacquiere

    Hi Richard, good to hear from you! I’m always up for a healthy debate, although I agree with you on some points.

    I’m not encouraging or recommending investors bring in JV partners with the intent to ‘ditch’ them at the first opportunity. In fact, most well written JV agreements spell out exactly under what conditions a partner can be bought out, so there are really no surprises going into an investment (unless you hide that fact or your JV partner doesn’t get a lawyer to explain everything to them).

    It’s under those buyout terms that I recommend, if it makes financial sense, that you consider buying out your partner. If they still want to invest with you, you could offer them another investment — get their money moving faster by getting paid out, and then reinvesting. Alternatively, you could have them contribute the sales proceeds to their RRSP and then setup an RRSP mortgage with them. 🙂

    As for Quickbooks, I don’t think it’s a “non issue” just by combining it with a good bookkeeper. Not only do bookkeepers vary in their quality (this is a big problem most don’t really talk about), but the problem with QB is that there is no easy way to segment properties per JV partner. Some investors try to use classes, but it doesn’t work fully on balance sheets (even with the latest versions there are glitches). The only way to do this properly is with separate QB files for each JV. Check out my other bookkeeping article for more on this topic:

    https://www.spirepoint.ca/3-bookkeeping-problems-investors-must-avoid/

    As for the most important reason to see if you should have a JV partner at all, that is certainly debatable. Some investors prefer partners, others do not. Personally, I’ve done it both ways and after a lot of deals and alot of JV partners, I can honestly say I prefer secondary financing over JV partners.

    Not only am I not losing 50% of profits, but financing is MUCH easier to deal with. JVs require extra work such as producing special financial reports monthly or quarterly, multiple Quickbooks files for proper tracking, dealing with multiple tax year ends (this occurs when mixing personal and corporate holdings), keeping investors informed, overcoming worries about the investment or special situations, and more.

    In my opinion, if you can structure without JV partners, definitely do it. I think most people would agree that the only reason they’re sharing the profits is because they can’t do a deal on their own.

    And if you’re in an existing JV partnership and are tired of all the extra work, setup a buyout everyone is happy with. You’ll free up more mental, emotional and physically energy to do more deals and make more money (for you and your private lenders).

    I hope this clarifies things

    Paul

    Reply
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