Making Sense of Your Statements...
Each month we provide you with two statements on your property: a Cash Flow Statement and a Detailed Property Report. Please open these reports by clicking on the text and they should each open in a separate window to which you can refer or, if you prefer you can print a copy of each statement.
We'll be referring to the reports in the following paragraphs so please open now as a reference guide.
Now we'll be going over the basics of these two reports. You'll learn what is contained in each section of each report and how to make sense of what's in the reports by using them together. When reviewing the reports I recommend starting with the Cash Flow Statement. Here you'll get an overview of the income and expenses of your property, the amount of money paid to the owner, changes in and total amount of Security Deposit Liability, and changes in and the total amount held of tenant Prepaid Rent.
The Cash Flow Report is straightforward. It breaks down for a specific month all items of income and expense by accounting categories and displays the net cash flow of the property. In a Section Labeled "Increase (Decrease) in Owner Capital Accounts" the amounts paid to the owner during the month are recorded as "Owner Draw". Other items that you might see in the ".Capital Accounts" area would be: Retained Earnings - an accounting item that makes things "add up" in a Balance Sheet essentially reflecting the difference between income or loss netted for payment to the owners. Transfers Between Properties - if we manage more than one property for you and need to use cash from one to cover expenses in another we create this type of transaction. Capital Contributions - when an owner sends us additional funds to add to their account.
The final section of the Cash Flow Statement is labeled "Increase (Decrease) from Other Accounts" and here we find any changes in Security Deposit Liability and Prepaid Rent Liability.
These two "Liability" accounts seem to bring about the greatest number of questions. Here's how they work.
When we put a new tenant into a property we charge the tenant an amount for a Security Deposit - typically an amount equal to the monthly rent. When the tenant pays the Security Deposit the software accounts for this by adding the payment amount to the cash in your account and increasing a Balance Sheet account called Security Deposit Liability. We use a Balance Sheet account because the Security Deposit is not income to you - it's simply an amount that we take in on your behalf to provide a degree of security that the tenant will comply with the rental agreement.
The program places Security Deposit Liability transactions in the area labeled ".Other Accounts." toward the end of the Cash Flow Statement - logically the transactions in this area are not changes in the Owner's Capital Account nor are they Operating Income or Expenses. So ".Other Accounts." is as logical a choice as any other. The Current Month column shows changes that take place in the Security Deposit Liability account during the month and the total amount of Security Deposit Liability outstanding is indicated in the Year to Date Balance column.
How about Prepaid Rent Liability? Let's say that your tenant pays May rent at the end of April. The system has to have a way to handle this or we'd end up with twice as much rent reported on your Cash Flow Statement in April as you'd expect and no rent in May. So when a tenant pays the rent early, the system places this early rent in a Balance Sheet Account called "Prepaid Rent Liability" - in effect setting aside the early rent so that when the next month's rent charge is entered the Prepaid Rent money can be used to "pay" the rent.
On the Cash Flow Statement in the ".Other Accounts." area, the Prepaid Rent Liability line indicates changes that have taken place in this account during the month in the "Current Month" column and the total amount of Prepaid rent liability outstanding is reflected in the Year to Date Balance column.
This can get kind of complicated however. Let's say that in a given month we've collected a Security Deposit from a new tenant of $1,200 and that in the same month we have cleared a departing tenant's $1,000 security deposit. To make things more interesting let's say that the departing tenant owed us $50 in rent and was charged $74 for cleaning but that the cleaning bill hasn't been paid yet. When we "Move Out" the tenant in an accounting sense, we'll first enter a "Credit" transaction to charge the tenant for the rent and the cleaning. We'll then write the tenant a check for the balance of the security deposit - $1,000 less $50 less $74 - or $876. In the Income section this will be reflected as $50 rent. In the expense section of the report it will be reflected as a minus expense - $(74) - because we've "collected" $74 in expense money from the tenant.
Finally in the ".Other Accounts." section we'll see a net change in the current month of $200 - the new Security Deposit of $1,200 less the $1,000 that we cleared on the departing tenant. The Year to Date Balance for the Security Deposit Liability line will indicate (assuming there's just one tenant in your property) that the total Security Deposit Liability is $1,200 - the amount we have collected from the new tenant.
Complicate this a bit more - what if you have ten tenants? Some are coming and some are going and for each increase and decrease the same arithmetic as above takes place. The most important thing is that the Current Month column will show the total net change while the Year to Date Balance will show the total liability for Security Deposits. A glance at your statement will thus show you the amount of cash that you have, your liability for Security Deposits and your liability for Prepaid Rents. If the cash on hand is greater than the sum of those liabilities then you're ahead and if it is less than that sum then you're behind.
EXCEPT.. What if you retain the security deposits? If you retain security deposits - all or in part - then the Year To Date total will NOT be equal to the total amount of liability you have to your tenants. The tenant records will reflect what the security balance is but the accounting reports will not - this only applies to a very few clients. Call if confused.
Finally there is sometimes confusion on what the cash balance reflects on the Cash Flow Statement. For example I've had at least one client that was convinced that the amount of cash shown on the report did not include the security deposit or prepaid rent liability amount - i.e. he thought that these amounts were held in addition to the cash balance. Short answer - NO! The cash balance is exactly that - the total amount of cash in your account on the date of the report. If you have $3,000 in Security Deposit liability but only $1,000 in cash in the account then you're in effect "overdrawn" by $2,000.
The second statement we issue is the Detailed Property Statement. This statement provides an itemized listing of Income and Expenses, with each category sorted first by accounting code then by date within each accounting code. While there is a standard report that is set up like a checkbook register, listing each item of income and expense chronologically, the report format does not provide enough room to give an understandable description of what each item is. We experimented with both and the additional detail in the Detailed Property Statement was preferred by all our "test" subjects. Almost all owners receive these statements at the beginning of each month that cover the immediately preceding month. We typically try and "close the books" on a month on or about the 30th, cut Owner Draw checks, and send out the statements as close as we can to the 1st.
A few owners receive their accounting statements on or about the tenth of the month. They will receive the above statements for the previous month - for example on December 10th we'll forward a Cash Flow and Detailed Property Statement for November - and in addition will receive a "checkbook register" type report that shows chronologically all activity in their account from the beginning of November through the 10th of December.
Frequently Asked Questions
1. I am one of several owners. I can't tell which owner receives what amount - instead there is only one entry for the Owner Draw each month. Answer: This is an artifact of the way the software is set up. I've requested that the software be changed and am seeking a way that we can write our own reports to indicate clearly what each owner of a multi-owner property receives. The data is there - i.e. a separate check is written to each partner - so it seems to me to be a simple and logical thing to include in the reports.
2. What are "Transfers Between Properties"? For owners of more than one property, we can "juggle" funds to ensure that each property has sufficient cash to meet all obligations. When we do this we enter what the software calls a "Miscellaneous Transaction" where we enter reductions in the cash in one ore more properties and additions to one or more properties of the same owner using "Transfers Between Properties" as the accounting category.
3. I like the check register type report. Why can't I have it rather than the one you send? The key factor at this time is that the check register type report doesn't provide sufficient detail - everything is truncated at a certain number of characters, which means that the details of each transaction are a mystery to you. We've asked that the report be modified to allow for multiple lines - again something that is quite easy to do in most database reporting programs. In case we don't get satisfaction soon we continue to pursue options that will let us design and use our own reports. Some owners don't receive the Detailed Property Report - which is the one that has the most information - because they require multiple months of reporting. The detailed report gets very confusing when more than one month is included in a reporting period. Hopefully within the next several months we'll be able to send one easily understood report.
4. How is my cash distribution calculated? At the end of the reporting period, after we've paid all bills and made any adjustments, we execute the "Pay Owners" function. The program looks at four things in calculating owner distribution amounts. First it checks for "Security Deposit Liability" and "Prepaid Rent Liability". To these amounts it adds the manually entered "Reserve Amount" which ranges from $150-$300 for most properties. This amount is subtracted from the cash on hand and a check is "cut" to the owners for the balance. The fourth thing the program looks at concerns multiple property owners only. If the program calculates that one property has less than the minimum required amount, it will enter a payable for a negative amount. Then when checks are "cut" the positive properties funds are first used to offset the negative amount and then the balance is issued to the owner.