Your cash flow report is the lifeline of your property. Knowing how to read it is essential to understanding the overall health of your commercial properties. Listed below are five things you should be checking every month. If questions arise, always contact your professional property management team.
Income pays your property’s expenses, debt service, and wallet when enough remains. Always check your gross income and compare it to trailing months. If it is higher or lower than normal, ask why. A vacancy or a missed laundry check could mean a lower than normal income. Market rate changes, rent increases, or added revenue streams could mean a higher than normal gross income. Either way, keep track and question this amount every month to ensure your property generates the highest possible income.
Operating expenses are day-to-day costs to run the property. Fixed, variable, and periodic are examples of expense categories you will see on a report. Expenses paid every month, quarter, or year are periodic. Periodic expenses can also be fixed or variable. Fixed charges remain the same as occupancy fluctuates. Examples of fixed periodic expenses are insurance and property taxes. Variable expenses are those which fluctuate depending on occupancy. Examples of variable periodic expenses include utility bills, pest control, and maintenance. If the variable expenses are significantly higher or lower than average, ask why. If an unusual expense shows up on the report inquire as to what the nature of the expense was and why it was necessary.
Capital expenses are permanent improvements that increase or upgrade the value of your property. You should require estimates from several contractors for these projects since they are often expensive. Examples of capital expenses include installation of new windows, a new roof, or replacement of a HVAC system. You should always have a signed contract with the vendor performing the project. Make sure to check these items on your cash flow report to see that the final bill matches the estimates provided by your property manager. If they do not, inquire as to what changed and why.
Below-the-line means the items below net income. This section reports items like owner distributions, contributions, prepaids, and accrued items. You should carefully review these items as they directly affect your cash flow. For example, this section reports your monthly distributions, which should match the amount received on your bank statement. In addition, this section deducts prepaid rent. This is because cash paid for a future debt should be reported on the corresponding month’s cash flow statement. If the report lists a distribution that you did not receive ask your company executive for an explanation.
This is the final and most important piece to the cash flow report. This section is located at the very bottom of the report. It shows your remaining cash after all expenses, debt service, and distributions are paid. Make sure that it is positive. Otherwise your property lost money during the month. The cash flow section will indicate beginning and ending cash. If your cash flow was positive, your ending cash will be higher than beginning cash. Owners should always make sure this amount is high enough to provide a cushion for turnovers, major expenses, and property taxes. You and your property management team should agree upon this cushion by taking into account turnover rates, property age, and property size.
Overlooking any of these items could mean loss in revenue, higher expenses, or even overdrawn operating accounts. Your professional property management team should be recommending ways to increase revenue and decrease expenses to boost your properties overall value. After all, even the smallest changes can have large effects on your bottom line.