Page 22 - RC14-EDGE-Spring Issue-1Z

Business SOLUTIONS
Accounting Technology:
Could it be a New Profit Center?
Greg Fuhrman
Yardi
Y eah, you read it right. You’re probably thinking: How is it
possible to increase profit by implementing technology? How
does accounting fit into
the real estate lifecycle in a way that
enhances the underlying value of my
investments?
Like most real estate firms, you
probably ran a lean accounting
department in the early days, choosing
to focus instead on raising capital and
acquiring and managing a profitable
real estate portfolio. If you were using
off-the-shelf general ledger software
and spreadsheets to manage your
firm, then you are keenly aware of the
risks and challenges, which include
repetitive input of data into redundant
systems, long accounting cycles and the complexities of manually
manipulating data for quarterly reporting. The accounting process was
simply a cost of doing business, and you accepted its effect on your
bottom line and your rate of return.
But to handle the demands of managing a growing investment
portfolio and servicing an increasing number of institutional investors,
you have to address your accounting function. You are faced with
three basic challenges: the cost of the necessary staff to meet the
demands of a growing enterprise; the risk inherent in using traditional
accounting systems that were once acceptable but have grown to a
disproportionate scale; and the need to provide assurance to investors
that you are able to adequately manage both.
The Cost of a New Hire
According to the 2014 Salary Guide, Accounting and Finance, published
by Robert Half, the lowest salary in the U.S. for a divisional controller, spreadsheets and manual reporting that require an army of human
before bonus compensation, is $82,250; while the lowest salary in the
U.S. for an accounting staff (up to one year of experience) is $47,500.
Tack on an annual bonus, employer payroll taxes, 401(k) match, decent
medical and dental insurance, and that divisional controller’s annual cost processes, top to bottom. By adopting the right technology platform
is estimated at $115,000 while the annual cost of an accounting staff is
about $60,000.
Example: Let’s look at an example using a hypothetical firm. ABC Fund
Management has four private equity real estate funds with $2 billion
20 Realcomm
of assets under management and $1.2 billion of capital commitments.
ABC’s finance function consists of 10 people: a chief financial officer;
a director of financial reporting; a
director of tax; a corporate controller;
two divisional controllers and four
accounting staff members with an
estimated annual cost of $1.1 million.
ABC’s objective is to increase capital
commitments over the next three
years from $1.2 billion to $3 billion.
Given that ABC uses QuickBooks
and spreadsheets to manage their
business, they will need to hire
three divisional controllers and
six accounting staff members to
manage this growth. What will this
cost ABC?
Once these new hires are on board, the estimated annual cost to ABC
is $705,000. A fund manager, on average, will earn annual management
fees of 1.5% of committed capital. How much of the $1.8 billion in
new capital to be raised by ABC will be needed to pay for their new
accounting staff?
This should give ABC’s principals pause, knowing that they will have to
raise $47 million in new capital before they break even in terms of new
accounting staff. Closing cycles are not going to shorten and the risk
and inefficiencies will continue and perpetuate with each new investor
or investment that is added. Furthermore, while most principals will not
hesitate to add people to the accounting team, they also know that with
each incremental employee added to the firm, there is the risk that the
employee will not work out or will leave before the firm has realized a
return on the employee’s training. So the real cost of ‘staffing up’ can be
expected to exceed the actual cost of the new positions needed.
The Technology Alternative: Automate Accounting Processes
With growth in mind, the forward-thinking investment managers
at ABC will consider an alternative to the traditional QuickBooks,
capital. Accounting, rate of return and investor reporting are all simply
calculations of the data resulting from transactions and asset operations,
right? Today’s technology has the capability to automate these