The Health Benefits of Reconciling Daily
The tongue and cheek title of this article is meant for Letting Agents and Estate Agents. For such agents, having their client money reconciled daily means they can sleep soundly each night, knowing one of their biggest business risks and admin headaches is safely under control.
Unfortunately, the reality for many agency owners is that they are not reconciling daily or even monthly. Matt Goddard, who built the Reapit financial ledger functionality, recently said that 60% of agents he encountered were not reconciling frequently. Over time this can lead to material hidden risks for agency businesses and for their clients too.
Here are just a few examples of where events can lead to the wrong balances being recorded, creating business risk:
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Income for one client landlord is booked to another’s.
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Supplier bills related to one property are incorrectly allocated to a property.
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Agency fees are paid before rent is received for a client.
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Rents in arrears are carried forward expecting to be paid but in reality are irrecoverable.
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Floats held are not maintained up to date.
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Balance errors are carried forward, for months or even years without reconciling.
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Non-resident landlord deductions are not made at the point of rent receipt.
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Late supplier bills are added after a client statement has already been finalised.
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Deposits are not transferred to escrow or registered promptly leading to potential error when updated months later.
When these errors finally come out – and eventually they will, it may be very hard to unpick the transactions to find the error. As a result the poor agent has to dip into their own balance sheet cash balance and make up any shortfall. If the error is substantial it can impact the agent’s ability to trade and in rare cases, lead to administration, as it did for ARPM in 2021, in the UK.
Moreover, if the owner of the agency wanted to sell the business, a potential buyer will also expect the seller to warrant the accuracy of the client account – reducing the agreed sales price for any errors that emerge in the 18 months post closing.
What is involved in a cash reconciliation?
To understand why daily reconcilings are important, let’s look at what is involved in a cash reconciliation of any agent.
Each month an agent collects rents for their client landlords. This can be for 30-50 properties for a startup agent or 500+ properties for an established branch. The money is collected and paid straight into a Client Money Bank Account. Most ‘pay-ins’ happen on the first of each month. The agent should reconcile this money received every day and allocate the money correctly to the client it belongs to. This could be a landlord, tenant, supplier or if unsure assign to a temporary suspense account.
On the surface, this sounds simple and logical. To a professional and experienced property client accounting bookkeeper this process is straightforward. But when an agent hires a bookkeeper that is in-experienced in property lettings/client accounting or a bookkeeper that only works say 1 or 2 days a week or the owner does the client accounting to save money and then juggles performing a reconciliation against say meeting a new client meeting and the chance to win new business – it becomes easy to skips days and try to reconcile at the end of the month. Then when the end of the month comes, faced with a big long list of transactions to reconcile and time pressure, it becomes easy to to inadvertently make a mistake or process in summary. For example consider:
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Rent for Client A is due of £1,200, but only £950 is received.
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At the same time a bill related to Client B is raised £950
- But the bill is incorrectly allocated to Client A’s property…
The Challenge of Delayed Reconciliation
The error may not be picked up until Client A, who holds, say 20 properties, goes through their detailed statements and raises the issue 3 months later. Now un-picking all the transactions that have happened subsequently becomes a big task and admin headache. So instead, the busy agent opts to pay Client A from their own funds to keep them happy and carries the error forward in their accounts in the hope that they will have time to find and correct the error later.
A good way to think of a client bank account is a fast flowing conveyor belt of debits and credits flowing past daily. It is better to allocate them as they pass by that day, than waiting until you have a large stack of them at the end of the month. To do the reconciliation, the agent needs some corresponding transactions to reconcile against. These ‘primary accounting’ records should give all debits and credits for rent invoices, supplier bills, management fees and client payments etc. If a system does not generate these primary accounting records, eg. using a spreadsheet, then the task becomes even tougher.
At the end of each day, reporting just the total bank balance in a client account is largely meaningless – an agent needs to be able to accurately allocate the balance between all client landlords, tenants, suppliers and anything unsure post to suspense.
Why is Daily Better than Weekly or Monthly?
In simple terms, reconciling daily versus monthly gives agents more snapshots of a client account, at a moment in time. This makes it easier to unpick if an error is made and also minimises the chance of ending a day with funds not correctly allocated. It helps them sleep sounder too!
Whether you are a startup agent with up to 50 properties or 500+ properties – reconcile daily and enjoy the health benefits – it’s that simple.
Plus why risk losing your client money protection?
An agent managing client money has a mandatory responsibility to provide client money protection to their clients and tenants. This not only includes rent and deposits but also monies associated with repairs and paying suppliers.
Local authorities have the power to take action if an agent is not compliant, as set out by the government note (statutory guidance). This requirement was originally introduced in April 2019 and can be enforced with a fine of £30,000.
There are a number of Client Money Protection Schemes (CMPs) available in the UK. They are: Client Money Protect, Money Shield, Propertymark, RICS, Safeagent (previously NALS), UKALA Client Money Protection.
These bodies set out the rules and responsibilities to be compliant with their schemes.
To be compliant means following the rules set out by any number of the UK’s providers of client money protection schemes.
What is best practice for agents?
CMP schemes and professional associations set out sound operating principles for handling client money, so there is no need to reinvent the wheel. Below are links to some relevant examples.
Best practice covers:
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Hold only clients money in the client money bank account – do not run agent office costs and expenditure through the client money bank account.
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Complete reconciliations periodically.
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Follow a review and sign-off process that reconciliations balance. Retain a history of approvals.
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If a client account does not balance, any agent money in the client account should automatically be considered as belonging to clients.
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Client money should be held in a bank account that is immediately accessible.
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Confirm with the bank that the client money bank account cannot be set off against any claim brought against the agent.
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A Client bank account should have the word “Client” in its title.
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Operational procedures for handling client money should be documented and added to the agents website.
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Any monies held in suspense should be clearly itemised and understood and not left for long periods on account.
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Any monies received should be allocated promptly. If unable to allocate after 3 years, those monies should be donated to a registered charity.
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Obtain written confirmation from clients before recharging bank fees related to the client money bank account.
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Operate controls to protect ledger systems that manage client money including data backups, security and firewall protection.
A good example of operating processes is the RICS and Client Money Protect.
Additional CMP rules
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Maintain professional indemnity insurance.
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Agree to an audit, if required, by the professional association or company designated.
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Disclose immediately if there has been any misappropriation, dishonesty or any other concerns which may result in client money not being able to be transferred to a client.
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Provide authorization for balances to be confirmed with the bank providing the Client Money bank account.
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Agree to an annual ‘health check’ or accountants declaration if client balances exceed a threshold balance.
How can LoftyWorks help?
LoftyWorks has an expert team of highly qualified bookkeeping and property professionals with collectively 50-years experience.
Consulting:
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Advice on setup and structuring of bookkeeping processes
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Help resolving balances in existing accounts
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A Balance scorecard of how well an agent is operating
Client Accounting Services:
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Daily bank reconciling
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Rent collection
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Process contractor payments
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General accounts query handling
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Process landlord payments
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Producing and sending landlord statements
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Manage property expenses & invoices
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In-arrears chasing
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Monthly KPI reporting
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Revenue assurance
Property Management:
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Coordinating day-to-day maintenance
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Keeping up to date with ongoing compliances – GSC, EICR, EPC
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Arranging periodic inspections – carried out by 3rd party
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Working on tenancy contracts renewals
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Working on the end-of-tenancy contracts
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General query handling
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Legal notices
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Deposit returns
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Negotiate dilapidations
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Right to Rent Checks
Interested in our help? Submit your enquiry to talk to an expert. Or message us in WhatsApp on +44 330 321 3500.
