How Managing Agents Can Improve Their Service Charge Accounting Processes
Qube Talk: Service Charge Accounting Insights
Welcome to another episode of Qube Talk, where we discuss all things service charge accounting.
I'm Ray Armand, and I'm joined by CJ Ralfe.
Today, we're doing something a little different.
Usually, CJ and I plan our episodes in quite a lot of detail so we know exactly which points we're going to cover.
This time, we're taking a more informal approach.
Imagine we're sitting down with you, the managing agent, over a cup of coffee and simply having a conversation about the challenges we see every week in service charge accounting.
We're also sharing a little about what Qube Accountants has been doing over the past year and how we've been supporting managing agents in different ways.
How Qube Accountants Supports Managing Agents
Ray Armand:
Before we get into the practical advice, I thought it would be useful to talk about some of the different ways we've been working with managing agents over the last year.
CJ Ralfe:
It's definitely been a busy 12 months.
Historically, our core service was preparation and review of service charge accounts.
We still really enjoy doing that because there's something satisfying about being involved from the preparation stage through to the final reviewed accounts.
But we've also increasingly been doing review-only work, where the managing agent prepares the accounts internally and we carry out the independent review.
We've also worked with clients where Qube prepares the service charge accounts and another external accountant or auditor completes the final review or audit.
So there are quite a few different ways we can support managing agents depending on how their finance function is structured.
Supporting Managing Agents With New Site Handovers
Another area we've been helping with is financial handovers when managing agents take on new developments.
CJ:
When a managing agent takes over a new site, they may receive a closing fund statement or handover information from the outgoing managing agent.
We've been helping clients work through that information.
That could involve:
Reviewing the closing fund position
Tying it back to the last signed service charge accounts
Identifying obvious inconsistencies
Highlighting potential red flags
Identifying information that may still need to be requested from the outgoing managing agent
This can be really useful because it means that when the next year-end accounts come around, some of that work has already been done.
If the opening position hasn't been reviewed properly, problems can otherwise surface much later when you're trying to prepare the first set of service charge accounts under the new managing agent.
Different Managing Agents Need Different Levels of Accounting Support
Ray:
Although we're ultimately working in one specialist area—service charge accounting—the way we deliver that support can vary enormously.
That's because managing agents structure their businesses differently.
Most managing agents have an accounts department that is separate from the property management team.
But even then, the level of accounting experience within that finance team can vary.
Some managing agents operate in a very tight-margin environment and can't necessarily afford to employ qualified accountants internally.
They may have good bookkeepers who are excellent at data capture but don't necessarily have technical accounting knowledge around:
Debits and credits
Accruals
Prepayments
Year-end adjustments
Financial statement preparation
Other managing agents may have highly experienced internal accounts teams.
The type of support required depends on the experience and resources available internally.
Preparation, Review or Both?
The sector guidance around service charge accounts allows for different approaches to the year-end process.
A specialist accountant might be engaged to:
Prepare and review the service charge accounts
Review accounts that the managing agent has prepared
Prepare accounts for another accountant or auditor to review
Increasingly, we've also seen larger managing agents struggling to find enough experienced accounting staff.
Recruitment challenges aren't unique to service charge accounting.
Across the wider accounting profession, many businesses are struggling to find the right level of finance talent.
For a managing agent with a large portfolio of developments, that can create a serious bottleneck when dozens or hundreds of service charge accounts need to be prepared.
That's an area where an external specialist can step in without necessarily disrupting the managing agent's existing relationship with their review accountant or auditor.
Helping Managing Agents Understand Their Service Charge Accounts
CJ:
Another issue we've seen is that a managing agent may send their information to an external accountant, receive the finished service charge accounts back, and then struggle to understand exactly how the final figures were produced.
That's particularly difficult where the managing agent has a less experienced accounts team.
Then imagine going into an AGM.
A director or leaseholder starts asking questions such as:
“Why did we spend £10,000 on this?”
“Where did this debtor balance come from?”
“Why is the electricity expense different from what I expected?”
You need to understand what sits behind those figures.
Providing Detailed Transaction Support
Where we receive sufficiently detailed information, we can often provide managing agents with a clear breakdown of what makes up the final expense figures.
For example, if you've given us a detailed expense transaction report, we can import or work with those transactions and then make the necessary year-end adjustments.
At the end of the process, we can provide:
The final service charge accounts in PDF
A detailed transactional listing
A breakdown of what makes up each expense category
Information showing how the figures tie back to the accounts
This can be extremely useful when you're speaking to directors or leaseholders.
Be Prepared for Questions at AGMs
Ray:
I've sat in meetings where somebody looks at the accounts and says:
“We spent £10,000 on this category. Can you explain exactly what that was?”
That's a completely reasonable question.
But it's uncomfortable if the managing agent doesn't have the detail available.
If we've prepared the accounts using detailed transactional information, we can help you go into those conversations with much better supporting information.
You can see exactly how the numbers were built up and answer questions with more confidence.
The Coffee Question: Why Are Service Charge Accounts So Painful?
Let's imagine we're sitting down over coffee and a managing agent says:
“I'm really struggling with my service charge accounts. They're taking too long, they're painful to prepare and they're creating friction with my clients. What should I do?”
What would our first piece of advice be?
Start With Your Financial Systems
CJ:
The first thing I would look at is your system.
Managing agents are fundamentally there to manage properties.
The business is operationally driven.
You need good systems for managing the site itself.
But one of the biggest problems we see is that those operational systems don't always generate good-quality financial information.
That makes it harder to:
Understand costs
Identify financial problems
Produce year-end reports
Send useful information to the accountant
Explain expenditure to leaseholders
At the end of the day, you're collecting service charge money and spending it on behalf of leaseholders or freeholders.
You need to be able to explain how that money was spent.
Operational Systems Still Need Good Financial Reporting
Yes, operationally the grass needs cutting.
The fire systems need maintaining.
Repairs need completing.
Contractors need managing.
But at the end of the year, the leaseholders receive service charge accounts showing how their money was spent.
If your financial reporting doesn't support that, you're going to have problems.
So the right system is important.
It doesn't always have to be a complicated system.
But it needs to be able to generate the information you require.
Is It the Software or the Process?
Ray:
Is this mainly about the software the managing agent uses, or is it also about the processes?
CJ:
It's both.
The software makes a difference, but so do the processes built around it.
Choosing Property Management Software
Property management software is expected to do an enormous amount.
It may need to manage:
Properties
Contractors
Maintenance
Resident communication
Purchase orders
Service charge invoicing
Client money
Bookkeeping
Financial reporting
Because the software is expected to do so many different things, the bookkeeping and financial reporting functionality can sometimes be weaker than the operational functionality.
If you're currently choosing property management software, don't only look at the operational features.
Look carefully at the bookkeeping and accounting reports as well.
Speak to other managing agents.
Speak to accountants.
Ask what reports the system can actually produce.
What if You're Already Tied Into Your Software?
Changing software isn't always realistic.
Many managing agents are deeply embedded in their existing systems.
Data has been built up over years.
Staff know how to use the software.
Clients may already be using resident portals.
So changing systems can be a major project.
The good news is that you can often compensate for weaknesses in the software by building better processes around it.
Systems vs Processes
Ray:
I think words such as “systems” and “processes” can sometimes sound more complicated than they really are.
A system is usually the software you're using.
A process is simply what your team does.
It's the step-by-step task.
And one area where we think many managing agents miss an opportunity is that they focus on the day-to-day bookkeeping and then jump straight to the annual accounts.
There's very little happening in between.
Don't Treat Service Charge Accounts as a Once-a-Year Exercise
One of the biggest mistakes is treating the service charge year end as something that only needs attention once a year.
If you only properly review the financial information at year end, problems may have been sitting there for months.
Instead, create a short monthly or quarterly financial checklist.
This doesn't need to be a full set of year-end accounts every month.
You're simply checking that the information still makes sense.
Monthly Financial Checks Can Save Time
CJ:
If you're reviewing your financial information throughout the year, the year-end process becomes much easier.
Look at the reports your system can generate.
Ask:
Does the debtors report make sense?
Does the creditors report make sense?
Does the bank balance reconcile?
Are expenses being allocated to the correct site?
Are any strange balances appearing?
Are there old items that should have been cleared?
Even if the reporting from your property management system isn't perfect, you can often develop workarounds.
You might use Excel or other tools to turn the information into something more useful.
The key is understanding what reports are available and reviewing them consistently.
Make the Final Month Just Another Month
Ideally, if you've reviewed the financial information every month, the final month of the financial year shouldn't suddenly become a huge project.
You should already have 11 months that broadly make sense.
Then you complete month 12, carry out the usual checks and prepare the information for your accountant.
That's a much better position than reaching year end and discovering 12 months of problems at once.
Twelve Small Checks Are Better Than One Huge Check
Ray:
Managing agents sometimes think:
“Why would I want to do 12 checks when I could just do one big one at year end?”
But that one huge review usually takes much longer overall.
It creates more stress.
It creates bottlenecks.
And it becomes much more difficult to investigate old transactions.
Little checks throughout the year can actually save time.
What Should Be on a Monthly Checklist?
You don't need dozens of complicated checks.
Start with five or six key areas.
For example:
Debtors
Run a report showing who owes money.
Look for:
Old balances
Unexpected credits
Negative balances
Amounts that don't make sense
Fix those issues while they're fresh.
Bank Reconciliation
Compare the bookkeeping balance with the actual bank balance.
If you have separate designated accounts for each site, check that the figures reconcile.
Expense Coding
Review unusual expenses.
Make sure costs are allocated to the correct development and the correct service charge schedule.
Creditors
Review unpaid supplier balances.
Make sure old or unusual items are investigated.
Inter-Site Transactions
Check that costs or payments haven't accidentally been recorded against the wrong site.
Even quarterly checks are better than waiting until year end.
Fix Errors While People Still Remember Them
CJ:
In larger managing agents, we sometimes see expenses belonging to one development accidentally recorded against another development.
Imagine that happened in the first month of the year.
If you identify it that month, it's usually easy to correct.
If you wait until three months after year end, that transaction may now be 15 months old.
People don't remember what happened.
Documents are harder to find.
Suppliers may need to be contacted.
And the correction can become much more complicated.
Old Errors Can Affect the Balance Sheet
Even when an accountant can remove an incorrect cost from an expense category at year end, the problem may not disappear entirely.
If cash physically left the wrong site's bank account, there may still be a balance that needs to sit on the balance sheet until the money is properly corrected.
So identifying these mistakes early isn't only about convenience.
It can materially improve the quality of the year-end accounts.
You Don't Need a Qualified Accountant to Perform Every Check
A managing agent may think:
“We don't have qualified accountants in our internal team, so how can we do this?”
You don't necessarily need a qualified accountant to perform many of the basic checks.
A good bookkeeper who understands the system and has strong attention to detail can do a lot.
The important thing is to teach them what to look for.
Bookkeepers Can Quality-Check Their Own Work
Ray:
In my other accounting practice, we use monthly and annual checklists for our bookkeepers.
There are certain things that require an accountant.
But there are also many checks a bookkeeper can carry out on their own work.
They've done the data capture.
They often remember the transactions.
They're actually very well placed to identify something that looks strange.
For example, they might notice a negative balance and remember:
“I wasn't sure about that transaction when I posted it.”
They can investigate and correct it before the information reaches the accountant.
Financial Reporting Problems Can Snowball
CJ:
Poor financial reporting tends to get worse if it's left unresolved.
If a bin isn't collected, that's an operational problem.
You can organise another collection.
You can fix it fairly quickly.
But when the financial information becomes messy, it can start snowballing.
And once a leaseholder spots an error, something important happens:
They start looking more closely at everything else.
If you receive an incorrect invoice from any supplier in your own life, you're much more likely to scrutinise the next invoice.
The same thing happens with leaseholders.
Once trust is damaged, they start checking everything more carefully.
The Two Big Takeaways
If we're sitting down over coffee with a managing agent, the two main recommendations so far would be:
1. Choose the Best Software You Can
If you're selecting new software, pay close attention to the accounting and financial reporting functionality.
Don't only evaluate the operational side.
2. Carry Out Regular Financial Checks
Whether your software is brilliant or limited, don't leave financial reviews until year end.
Ideally perform checks monthly.
If that's unrealistic, at least perform them quarterly.
One Practical Improvement You Can Make This Week
We don't want you to finish this episode with a huge project list and then do nothing.
Instead, make one improvement.
By the end of this week, choose one additional financial check to implement.
For example:
At the end of every month, our bookkeepers will run the debtors report and investigate unusual balances.
Or:
Every quarter, we'll reconcile each service charge bank account to the bookkeeping records.
Or:
Each month, we'll check whether any expenses have been posted to the wrong development.
Start with one.
Once that becomes normal, add another.
Train Your Team With Simple Video Instructions
Ray:
One very practical way to implement this is to record a short training video.
Use Loom or another screen-recording tool.
Ask one of your senior team members to record five minutes showing:
How to run the report
What they are checking
Which issues to look for
What to do if something looks wrong
Then send that video to your bookkeeping or accounts team.
You've now created a repeatable process.
And you've moved one step closer to having fewer year-end queries and fewer service charge accounting headaches.
Better Processes Mean Better Service Charge Accounts
The core message of this episode is that good service charge accounts aren't created only at year end.
They're created throughout the year.
They come from:
Good bookkeeping
Appropriate software
Clear processes
Regular checks
Accurate coding
Bank reconciliations
Debtor reviews
Creditor reviews
Early correction of errors
Good communication between property managers and finance teams
The cleaner the information is throughout the year, the easier the final service charge accounting process becomes.
Don't Wait Until the Accountant Finds the Problem
A specialist service charge accountant can help identify issues.
But accountants can't work miracles.
If the underlying records haven't been maintained properly for 12 months, the year-end work will naturally take longer and involve more queries.
The best outcome comes when the managing agent and accountant work together.
The managing agent maintains strong financial processes throughout the year.
The specialist accountant then applies the necessary year-end accounting adjustments and independent review procedures.
Qube Accountants' Flexible Support for Managing Agents
At Qube Accountants, we work with managing agents in different ways depending on
their internal resources.
That may include:
Preparing and reviewing service charge accounts
Reviewing accounts prepared internally
Preparing accounts for another external accountant or auditor to review
Supporting financial handovers when taking on new developments
Helping investigate opening balances and handover information
Providing detailed transaction support behind the service charge accounts
Helping managing agents improve financial processes
There isn't necessarily one model that works for every managing agent.
The right approach depends on your portfolio, your finance team and your existing systems.
LISTEN HERE
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Why Not Get in Touch With the Team at Qube Accountants?
Are your service charge accounts taking too long to prepare?
Is your finance team struggling with year-end backlogs?
Are you finding that your property management software doesn't produce the financial information you need?
Or would you simply like a second pair of eyes on your current service charge accounting processes?
Why not get in touch with the team at Qube Accountants?
We specialise in service charge accounting for managing agents and understand the operational and financial challenges involved in managing residential developments.
Whether you need help with:
Service charge account preparation
Independent reviews
Financial handovers
Year-end accounting
Detailed transactional reporting
Reviewing bookkeeping processes
Improving monthly financial checks
Supporting an overstretched internal accounts team
we'd be happy to have a conversation.
Sometimes, a relatively small process change can make a significant difference to the quality of your year-end accounts.
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