The Hidden Threat in Financial Reporting: How Manually Standardizing Your Chart of Accounts is Hurting Your Bottom Line

Industry-leading commercial real estate (CRE) firms maintain a rigorous reporting cadence to ensure properties are operating at peak efficiency and generating maximum cashflow. Depending on the asset type (e.g., multifamily versus commercial), this reporting cadence could be weekly, monthly, or quarterly.

Property performance is gauged through two critical lenses: operational and financial. Diving into the financial aspect, robust reporting begins with a well-structured chart of accounts (COA). This COA is the backbone of accurate, scalable financial reporting across the entire portfolio.

Chart of Accounts 101

The chart of accounts is an organized listing of all the financial accounts in a general ledger. In commercial real estate, the COA is established at the property-level and is created/managed by the property management system (PMS) or accounting software. Providing a structure for categorizing all financial transactions, the COA is typically divided into five main categories:

1. Assets: These are the resources owned by the property that have economic value, such as cash, accounts receivable, and the property itself.
2. Liabilities: These represent obligations or debts owed by the property, including loans and accounts payable.
3. Equity: This is the net worth of the property after liabilities are deducted, showing what owners and investors truly own.
4. Revenue: This includes all income generated from regular business operations, such as rent and other property-related earnings.
5. Expenses: These are costs necessary to generate revenue, like maintenance, utilities, and property management fees.

Each category branches into sub-accounts, providing detailed insights into specific transactions. This hierarchical structure enables comprehensive tracking and reporting of financial activities, ensuring nothing slips through the cracks.

Using a Chart of Accounts for Financial Reporting Across the Portfolio 

The chart of accounts is used to track and report financial transactions at both the property-level and portfolio-level. Ideally, the COA is consistent across all properties, enabling owners, operators, asset managers, and other professionals to make seamless, apples-to-apples comparisons of property performance without the need for manual adjustments.

However, the reality is often more complex. Most portfolios have several different property management systems, each with its own unique COA structure and financial accounts. For example, one multifamily property may categorize administrative fees under “Management Fees”, while another lists them as “Administrative Charges”. Despite being in the same portfolio, this inconsistency poses a significant challenge for accurate reporting on property performance – and that’s just one example! Such discrepancies demand time-consuming reconciliations and hinder the ability to gain clear, actionable insights, complicating the path to optimal financial management.

The Risks and Challenges of Manually Standardizing Your Chart of Accounts

The harsh reality is that most commercial real estate professionals have resigned themselves to manually standardizing their COA using spreadsheets. While this practice is widespread, it comes with several risks and challenges:

1. Time-Consuming Process: Manually and repeatedly aligning financial accounts across different PMSs is incredibly labor-intensive, requiring extensive effort to ensure all entries match a “master ledger”.
2. Data Integrity Issues: Manual standardization can lead to inconsistent data entries, errors, and discrepancies, severely impacting financial accuracy and decision-making.
3. Unscalable Reporting: As operations change or the portfolio grows, manual processes become increasingly difficult to manage, disrupting workflows and posing challenges for generating reports.
4. Direct Costs: A firm must pay its team members to perform these tasks each time financial reporting is needed, with costs quickly adding up over the year.
5. Indirect Costs: Potential miscalculations from manual processes can lead to misguided strategies and costly consequences in the long run.

Accepting these risks can significantly undermine efficiency, accuracy, and profitability, emphasizing the need for more automated and standardized solutions.

The Undeniable Value in Automating Your Standardization Process

Utilizing software that automatically standardizes your COA across properties and PMSs offers significant advantages:

1. Accuracy and Consistency: Removing the “human element” to standardizing your COA reduces the risk of errors, ensuring financial data is accurate and consistent. This not only saves time and resources but also avoids the repetitive tasks involved in correcting mistakes.
2. Focus on Analyzing Data: Many professionals find themselves stuck in the 80/20 trap – spending 80% of their time collecting and standardizing data, leaving only 20% for analysis. By automating your COA, you can flip this ratio, dedicating more time to analyzing performance and extracting valuable and actionable insights.
3. Proactive Decision-Making: Automated COA standardization provides real-time access to financial data across the portfolio, empowering stakeholders to make timely, informed decisions and take proactive measures before issues escalate.
4. Apples-to-Apples Comparison: Standardizing your COA for similar asset types, such as multifamily or commercial properties, enables stakeholders to seamlessly compare property performance side by side and easily identify opportunities and risks.
5. Reporting at the Portfolio-Level: With a 1:1 match of financials across asset types and PMSs, you can effortlessly report on financial performance at the portfolio-level. This enables you to create a portfolio average to benchmark individual properties, quickly identifying areas of underperformance and opportunities for improvement.

Embracing automated COA standardization transforms tedious manual processes into streamlined, efficient workflows, ultimately driving better portfolio management and more informed decision-making.

Take Back Your Time… Set It and Forget It

In commercial real estate, one thing is certain: new financial data will always need to be reported on and analyzed. Today’s market dynamics demand that owners, operators, asset managers, and other professionals optimize their time and stay laser-focused on improving property performance. Asset and debt management software, like Lobby CRE, has revolutionized how multifamily firms access and use their operational and financial data by standardizing and automating ledger mappings. Schedule a demo today to learn more.