fbpx

Time Is Money: Automating Your Accounting Process

We love accounting, however, we do recognize it is a support activity for real estate entrepreneurs; albeit an important one!  With that being said, you’ll want to find a way to minimize your time in the accounting process, so you can concentrate on your primary objectives.  No matter the size of your business, here are a few ways you can introduce some automation into the process!

The Right Accounting System

Firstly, these tips do not assume you have any particular, current setup.  However, there are certain systems that will lend themselves more so towards automation than others; namely cloud-based accounting software.  By default, online accounting software like Xero or QBO promotes elimination of the traditional accounting tedium. Desktop counterparts (ie: QuickBooks Desktop Pro) make great strides as well, but they are not as flexible when it comes remote usability and integration.

Throughout this article, the term ‘system’ is thought of as your chosen, digital means of performing accounting functions.

Whatever system you use, you’ll need to find a way to handle one of the most monotonous accounting tasks.

Automate Data Entry

Simply put, without data, you are “out of gas”.  In the form of a simile, data is like the gas that fuels your accounting engine, and in this case, your “gas” is the transactions you create in the interest of your business.  Whether they are contractor payments, rental income, loan payments, or any other type of transaction, you’ll need to input these bits of information into your system. If you don’t bring your transactional data into your own system (solely utilizing bank statements, property management statements, and/or online banking), analysis will be unnecessarily difficult.

The easiest way to collect your transaction data comes from connecting your bank directly to your accounting system.  This can be done securely and easily with most of the popular accounting software. The process usually involves you entering your account credentials through a secure connection within the accounting software; you would usually do this for checking or credit card accounts you use for business.  This connection will allow for an automatic, steady stream of transactions into your system, as long as the bank remains connected to it.

Granted, some people may not be able to connect their accounts to their system (using Excel, banks don't allow it, internal policy restricts it [people are not comfortable with it]). In this case, many banks allow for a download of transactions. You can export these transactions in different formats (CSV, QBO, QFX, etc.). Once these transactions are downloaded from the bank you can import them into your chosen accounting system.  This, of course, involves more steps than the prior process, but you still can avoid inputting every single transaction.

This doesn’t mean you cannot manually enter transactions.  For software setup for automatic bank import, the transactions are not automatically ‘accepted’ as valid or part of your register, rather, they in a state of ‘limbo’.  So when you manually enter a transaction, you are inputting it directly to your register. Once in the register, your accounting software will automatically match congruent transactions, avoiding a duplicate entry situation.

This naturally leads us to the question, what about the unique transactions imported that are in limbo?  

Automate Categorization

Once the transactions are in your system, you need to categorize them: what were they for?  Automation is facilitated by the way you transact business. Do you write a lot of checks? Do you use cash?  Do you use ACH? Usually, the methods of paying vendors via cash and check tend to create additional steps in clarification.  A juxtaposition best shows this point.

With cash transactions, your only source of clarification is your personal record keeping - digital or physical.  Even with that information, you’d have to identify the associated withdrawal from the business account. With checks, you will need to login to your bank and look at the memo or look on your physical checkbook to see for what and to whom you wrote the check.

In comparison, with electronic payments like ACH, the memo you create for the transaction shows up on bank statements or in the accounting system upon import.  You can use this memo to help you recall what the transaction was for without leaving your software. However, to affect automation, many accounting software solutions include functionality that allows you to create conditional rules that aid in categorization. For instance, if you pay your handyman contractor, David Smith, for a plumbing repair in your rental on 123 Anywhere St., you can put in the memo “David Smith Plumbing 123 Anywhere”.  Let’s say you were using QuickBooks Online as your accounting system. With “bank rules” you can set up a rule that looks somewhat like the following:

For Money out of Checking Account

When Bank text contains “David Smith”

And

Bank text contains “Plumbing”

And

Bank text contains “123 Anywhere”

 

Set transaction to Expense, Payee to “David Smith”, Category to “Plumbing” and Class to “123 Anywhere Rd.”.

 

And you will select  “Automatically add to my books”.

 

Now, whenever the ACH is imported into QuickBooks Online, it will automatically categorize it as an expense with David Smith as the payee, under the plumbing category, and tagged to “123 Anywhere”.

Of course not every situation will be so “cut and dry” and it doesn’t have to be this detailed, however, the more clarity you can establish on the front-end the better. 

As a side note, machine learning algorithms are being used more by cloud accounting software to predict the correct categorization and make suggestions.  The more consistency in your categorizations, the better.

The consistency of bank account organization can play a major role in automation.  If you are able to separate the purposes of an account for a particular property, business, or project, you can then make sure every transaction that is imported from that account is assigned the proper tag for that interest.  You can always change the purpose of the account per each project you complete (in the case of flippers) but as long as you change any internal processes you created (bank rules, spreadsheet formulas) in reference to the delegation, your accounting system will keep up.

With a little work and organization, you can have this aspect of bookkeeping on relative autopilot.  What other aspects of the accounting process can you automate? Stay tuned for part 2 of this article!

Join us at a Virtual Workshop to get your tax questions answered live by our CPAs!

2 Comments

  1. Caroline at Costa Rica FIRE on February 24, 2019 at 4:14 pm

    Agree that the data transfer is so critical. We have just two credit cards but the transactions download with different fields and different categories. We do our bank categories manually as well. It does add up in time but is still just a couple of hours per month, and it’s time well-spent to dig into the transactions and see/ feel firsthand where everything is going.

    • Kevin Smith on February 26, 2019 at 12:21 am

      Thanks for leaving a comment Caroline! It’s definitely good to have a hands-on approach. Once you figure out a recurring pattern you can throw a little automation in there as well, freeing you up for more value-adding tasks.

Leave a Comment