Why You Should Not Use Excel For Accounting

First, let me confess that I love Excel. Having used Excel for years, I’m fully aware of its strengths, and will continue to use it to create spreadsheets, graphs, and tables. But for some unknown reason, there is a small group of property managers that continue to extol the benefits of using Excel as their primary accounting software.

I have to admit that this has me stumped. The accounting software of today in no way resembles the awkward software of yesterday. Today, most software products are designed with the end-user in mind, and include easy system navigation, intuitive data entry screens, and system tutorials to make it easy to learn your way around the system.

If you’re using Excel to run your property management business, you may want to consider the following:

Excel’s Primary Functionality is NOT Accounting – Excel’s primary function is creating spreadsheets, not processing transactions, or producing financial statements. Yes, it can be used for those things, but typically with accounting software; not in place of it. As a result, users will spend an inordinate number of hours entering Excel data manually, because it does not have the capability to share data. So anytime your tenant pays rent, you’ll be posting that payment in your checkbook, your accounts receivable journal, and your tenant record. With regular accounting software, you post it once.

Propensity for Errors Increases – The lack of a central database and no double entry accounting system in Excel also means a lot more repetitive data entry. And each time you have to re-enter the same data, the likelihood of making an error increases dramatically. Also consider that without the safeguard of a double entry accounting system, it’s very easy to end up with out of balance accounts.

Lack of a Reliable Audit Trail – Accounting software has become valuable to business owners because of the ability to ensure that data is accurate and secure. Excel offers no such protection; meaning that formulas can be changed, entries accidentally (or purposely) deleted, and transactions erased, all without leaving a trace of the original entry behind.

Ease of Use – or Lack Thereof – While it’s fairly simple to create spreadsheets in Excel, making it a functioning accounting program requires another level of skill that most Excel users will never attain. Creating an invoice, printing a statement, or processing a financial statement in Excel can take up valuable time, while accounting software allows you to create those items in minutes.

While Excel will continue to provide a valuable benefit to property managers, it can provide many more benefits and less headaches by using it for what it was designed to be.

Audrey Wardwell, Broker/Owner
36 North Properties, Inc
CalBRE: 01746254
www.36northpm.com
p: 831-320-7116
f: 831-309-5584

 

 

 

 

Posted on 19. Feb, 2014 by in Business

Rental Property – How to Project Cash Flows and Returns

If you are thinking about buying some rental properties as investments, you should probably understand how to project cash flows and evaluate the investment returns you hope to achieve on your hard earned invested cash equity.

There are really two types of returns that we can earn on investment property, first is appreciation in value which is the most common hoped for return. Secondly, and much more important but generally overlooked by investors, is the cash flow picture the property will generate.

The vast majority of investors buy real estate with the hope that it will go up in value. This is really a big mistake because many properties, particularly the prize “location, location, location” properties have corresponding negative cash flows on operations that may negate any true increase in wealth from one’s long term appreciation in value.

So a savvy investor needs to look at the cash flow picture and buy properties with positive cash flows, not negative cash flows. As an example of this in Monterey, one could buy a nice condominium for $500,000, which would rent for about $2,300 per month. That rent, minus all the maintenance expenses, HOA fees, insurance, property taxes, and mortgage payment would have a deficit on cash flows of about ($1,000) per month, or ($12,000) per year.

So while a buyer is hoping some appreciation in value will earn him or her a fair rate of return, that appreciation has to additionally compensate for all the money he has to take out of his savings to cover the negative cash flows. Those negative cash flows, on this example, could span several decades and hundreds of thousands of dollars before the property turns positive.

Alternatively, there are many properties that cash flow positive from day one as an investment. A moderately priced house or condominium unit, only a few miles away from downtown in the $150,000 price range, might generate $1,200 per month in rent and positive cash flows of $225 per month. That’s $2,700 per year of positive cash flow. As a side note – the appreciation in value, over the long term, will probably be similar on both properties anyhow. So why not go for cash flow plus appreciation in value!

To calculate a cash on cash return, we divide that $2,700 positive cash flow by the cash equity we invested, maybe $40,000 on the $150,000 property for a cash on cash investment return of 6.75% on our money. And that’s a really good deal! Especially compared to the fancy prize condominium that might generate a negative (8.5%) return on our invested equity.

As a long term investor, I can assure you that positive cash flow properties, so properties that pay all the bills and provide a rate of return on your money, are much better investments than negative cash flow fancy prize properties that just drain money from your bank account. Hopefully you’ll understand this concept before you buy that prize!

Posted on 29. Nov, 2012 by Leonard Baron in Real Estate