How Accurate Bookkeeping and Management of Capital Helps
Updated: May 25
1. Gauging Overall Business Performance: It is impossible for a business to be sustainable without knowing or keeping track of the money coming in, the outgoing cost, and knowing which properties they are from. Proper bookkeeping provides a blueprint to the business and makes it easy to see how well things are going. The numbers within the business change every week, quarter, and month. Therefore, it is important to have a system for tracking every time and expenses made; this allows you to know where the business stands.
2. Gauging Specific Performance: Just as proper bookkeeping allows you to gauge your overall business performance, it also makes it easy to see the performance of each project/investment. Being able to see the performance of each individual project helps you determine what your ROI is and if it is on track with what was initially anticipated. There are going to be multiple investments and projects throughout the course of each year, and proper bookkeeping allows you to know the total cost to generate a return. This will give you an idea of which projects and investments have the highest yield.
3. Cash Flow: Keeping track of cash for is important to any business, but is especially important for real estate investors; at any point in time deals may come your way, and you need to be able to make quick sound decisions when the opportunity presents itself. If you’re unsure what your cash flow situation is, it can be nearly impossible to take action. Proper bookkeeping let you know what your cash on hand is, and also let you know the health of your business.
4. Credit Score: Real estate professionals’ most important asset is their credit score! Having a good high credit score gives you access to many different financing options as well as keeps your interest rates low and vice a versa for a low score. It doesn’t take much to pull us credit score down, simply missing a credit card payment could eventually lead to having a collection show up on your credit report. Tracking your cash flow and your expenses allows you to be able to pay all your bills on time and avoid any oversights.
5. Tax Season: Keeping track of your bookkeeping reduces the time needed to get everything together to file your taxes and can reduce the stress associated with tax time each year. Instead of scrambling at the end of the year to try to find all documentation for every expense and income and trying to track down every receipt, proper bookkeeping keeps that staff organized and put in a centralized system so all that is necessary to be done is to print out the financial statements of the business and given to your CPA/tax preparer and let them do their magic.
6. Properly Paying Workers: As you grow your real estate business, you may need extra help and may need to hire agents, property managers, contractors, maintenance personnel, etc. You will need to properly classify your workers as either employees or independent contractors. When someone is classified as an independent contractor you do not deduct taxes from the wages or pay employer taxes, and if a person is classified as an employee you have to do that taxes on wages and pay employer taxes for each employee. In order to ensure you classify the workers correctly use the US Department of Labor's 6 part economic realities test which can be accessed here, follow the IRS requirements, and make sure to learn what your state specific rules are.