The financial responsibilities of professional property managers don’t come with a handbook, but this expert panel comes pretty close.
In this recording from TWLX 22, Daniel Craig of ProfitCoach leads an incredible panel of industry experts, featuring Allison DiSarro of Enterprise Bank & Trust,
Kristin Johnson of HomeVault, and Joe Polverari of PURE Property Management.
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Hosted by Daniel Craig
Featuring Allison DiSarro, Kristin Johnson, and Joe Polverari
Produced by Andrew Smallwood, Laura Mac, and Carol Housel
Edited by Isaac Balachandran
Related: Check out the other property management podcasts we recommend for single-family property managers.
Episode Transcript:
Joe Polverari
You don't need an MBA or have to be a business professor or run 55 companies to do this, you just have to sit down and think to yourself, or maybe with a group like this, hey, you know how you think about your budgeting cycle? What do you think about your planning cycle? What do you expect to get out of it? What's the typical range of investment for you in a group like this is really excellent for something like that. So I would say a little bit of forward thought will help you execute your business and realize the value of your business. And to the extent you want to grow your business, it'll certainly provide a solid foundation to enable you to do that.
Daniel Craig
Great topic. Coming up here, are financial insights and mastery. And we've got some great panelists. Do we throw off the panelists, and slide guys to see who is on the panel? I don't know. We want to spotlight those folks, but we're going to talk about finance and insights. And I know when we talk about this topic, like, you know, anytime you bring up accounting and banking and finance, entrepreneurs just get giddy with excitement, right? Because that's what entrepreneurs are wired to think about debiting credit. No, not at all. And so I want you to think about the discussion here in terms of something that will excite you, and that is the mindset and discipline of the entrepreneur that will lead to the kind of mastery that will produce the kind of financial results that you're wanting to see in your business. Okay, so that's what this is about. Now, at the end of the day, if you're going to run a successful business in this industry, you do have to be on top of the mechanics of financial management in terms of those banking and counter pieces. And so we've got some great experts on that as well. So let's go ahead and introduce the panelists. Just a higher level. We've got Joe Calvary with PURE PM, Kristen Johnson also with PURE, and Alison Massaro with Enterprise Break and let them do the detailed introductions of themselves. And we start with you, Kristin. How did you become a finance-related expert in the PM space? You and I go back a while, so I don't have any qualms about calling you a finance expert in the finance space. And what are some of your biggest lessons learned over the years?
Kristin Johnson
I mean, so I started out in property management actually as a real estate paralegal, and we did a lot of mergers and acquisitions throughout the country, and I oversaw a lot of the legal side of things, but I always was intrigued by the finance side of it. And I have kind of a knack for accounting and found my way into a kind of overseeing that for our company and then eventually being asked even by the state in New Mexico to be on an advisory board for them on best practices for finance as well. So that's kind of my transition into finance. And then I think your second question I think is about lessons learned. Yeah, well, I think, you know, being the steward of other people's money is huge. Right. And that's really what we are. We're the stewards of their biggest investment, which is their property. But if we can't figure out the accounting piece and we screw with people's money, then we can get in a lot of trouble. So I think it's probably just the lesson of making sure that that's the top priority of knowing what you're doing and being a good steward for others.
Daniel Craig
Kristin, I know that you know, for the majority of your time in this industry, you have run your own PM shop and now you're a part of a team at PURE that's looking at the finances of acquisitions. And so just at a very high level, you know, what are some of the big opportunities that you're seeing in terms of how property management companies can and need to be strengthening their financial position and their financial management?
Kristin Johnson
You know, probably my number one suggestion is for people to actually learn and understand what a three-way tie-out is. I have been shocked over the years, you know, doing acquisitions for our first company that Shawn and I started, Independence Capital. And then as we became involved and as I transitioned into PURE and doing some outside consulting stuff as well, just the number of people who don't understand what a three-way tie-out is. You know, you have to treat every transaction with the mentality that it has an impact on something. And you can't just plug numbers in to make things balanced. I've seen too many times where people have created a slush account if you will, or a slush property where they're like, Oh, I can't get this reconcile this month, so I'm just going to book it to this property, and click the reconcile button and move on and that's not proper accounting. So, you know, be really cognizant of every transaction that you're making and what it does to impact the bottom line because if the money is not there, you have to find it. You can't rush over it and put it in a slush fund.
Daniel Craig
So I think where that comes from, Kristen, is entrepreneurs running and gunning. And I think there's this mentality that, you know, sort of at the end of the day, what, what comes out in the wash in your bank account is sort of what's left to you as an entrepreneur. And so accounting is kind of what you need to do to report to the IRS at the end of the year and pay your taxes or not. But that doesn't really work in this space where the money that you're managing isn't just your own. At the end of the day, it's other people's. And so I think there is an important shift in the entrepreneur's mind that has to occur when you come into this industry in particular. And that is that accounting is not an afterthought of property management. In many ways. Property management is accounting. So that's an important shift. Thanks for calling out. Let's go to you, Alison. How did you become everybody's favorite banker in this industry? I'm just going to say what are some of the biggest lessons learned?
Allison DiSarro
What can you say again at the end next? I think, you know, I'm happy to be here. I actually specialize in the trust account setup itself at Enterprise, which was formerly seacoast. And there's a reason why I said that, and I'll get to that with my lesson. But so how did I get into essentially starting with the bank and why did the banks and property management companies back in 2010? The bank really wanted to get into it, but mainly we wanted to get into it because it's pretty valuable you know, it's pretty valuable money for banks, obviously. But getting into that industry, I realized I could just be a banker and just bank these companies for the same reason that maybe any other bank makes them. Or I can really listen to what's the issue here? What's the issue in the industry and what needs to be solved? And I realized very, very quickly in that first year that we were just having a lot of issues with their trust accounts. And it really stemmed from the trust accounts set up at the bank itself. So no one was really in a true trust account. They were just in a bank account with the nickname of a trust account. So how was I going to solve that? I essentially spent all of 2010 and a good portion of 2011 not even really working. I think I produced nothing that year because I spent that whole time just meeting with a lot of attorneys, and FDIC contacts, really just trying to figure out, okay, how do we solve this problem? And then I took it and I ran with it and I've been doing it for 13 years now and really enjoying it. But I guess what I would say my biggest lesson so far is that there is zero information out there, right? Like what? The real estate commission, which is what a lot of people really put all of their eggs in and believe in, is really very contradictory to how attractive can't really be set up. And people think that if they're just going to pass an audit, if they're if their goal is to pass, not it, then they're fine. They can usually pass that audit. But really, what's the priority? Is the priority passing an audit or protecting your client's funds? And that's my priority. And that's what I try to help customers with.
Daniel Craig
Awesome. Great feedback. Let's go to you, Joe, and obviously, Joe, your background is in software and mergers and acquisitions. And so I just kind of want to hear from you. You know, what are some of the perspectives that you're seeing as particularly important for this industry to have and be aware of as you have built-in skilled care over the last couple of years?
Joe Polverari
Yeah. Good afternoon, everyone. Happy to be here. And let me say quickly that Alison is my favorite banker and Kristin is my favorite accountant, just for the record. So everybody knows. But yeah, I've been in property management for almost two years. There's a very young company right now, and prior to that, I spent a lot of time running financial services firms and so always had a heavy, heavy background sort of deep in compliance and basically, you know, not doing bad things with other people's money. So the parallels there are actually right on point. I would say the difference is and the thing that's been most interesting now is we've acquired now 50 companies in less than two years and we've seen 50 different sets of books and 50 different ways of accounting is that most of the businesses that we encounter and this will not come as any great surprise or kind of operating subscale from a financial perspective. And by that I mean typically the person doing the books is also doing three or four of the things, or they may not have the systems, they don't have the audit capabilities that you would have in a larger scale platform. And so I think what that lends itself to is, you know, to say it plainly, you know, a lot of the deals we see, there's just money missing. And that means it's not in the right account. It's been unintentionally diverted somewhere else that never existed. And there's kind of a lack of what you would call process and control from an auditable perspective. So if you were doing a gap audit on a lot of these companies, you wouldn't pass. I mean, a lot of the companies that we see don't even have EBITDA, for goodness' sake. Right. And so they don't do sophisticated accounting because they can't they're doing 100 other things and trying to grow their business and build the best, you know, an enterprise they can build as an entrepreneur. And that's totally understandable. So we come in and look and see and say, okay, what's going on? And now I'll say 5050 acquisitions. In less than two years, we can safely say we've seen every kind of permutation of things that are going on there. You know, the good news is, you know, the people in this industry are highly ethical and awesome. So most of the things we discover are not intentional and they're easily rectified. And you rectify them by putting a great accounting reader in my Kristin or you have a banker that runs literally almost 100% of your trust accounts like Alison. And so you get the best experts in the business you can scale around. And then it's just a question of how quickly you can process the exceptions as you see them. When we see, you know, we buy about three companies a month, so we see about three different sets of books and records at any one time. It's fascinating.
Daniel Craig
Yeah, that's a great perspective. And, you know, one of the things that come to mind here is when it comes to the financial management of the business, a lot of I think entrepreneurs want to think that that's something that they can delegate. And certainly, there are aspects that can be delegated. But I think what's coming out of what everybody's saying here is that the buck stops with the entrepreneur in terms of making sure the basics are being crossed and eyes are being dotted. And so we want to help you do that in this session, and we want to empower you to own that mastery and insight into your financial performance. We're going to break this down into two basic sections. We're going to talk about the basics of banking and accounting and what are some of the most important things to have to keep in mind in terms of managing the baseline of how you're handling other people's money. And then we're going to get into financial performance, folks. You can run a phenomenal property management business that's delivering great customer experience and, you know, be making very little money on the quality operations and in many cases don't correlate to quality profit. And a lot of that has to do with the awareness that you as an owner have around the key levers of financial performance in your business. So we want to dig into that a little bit and we want to ask you your question. So go ahead. And if you've got questions on finance, banking, and accounting that you want us to be sure to hit in this session, please just dump those in to chat and we'll keep an eye on those. Let's go ahead and kick it off. I'll never forget one of the first webinars that I did in this industry. I made some passing comments about some guy that we had come across who had lost $150,000 due to mismanagement of his trust account. He was upside down $250,000 and in the middle of the webinar, someone chats to me and says, Daniel, that's nothing. My number is three times that much. And within a few months, that same guy reached out to me via email and said, I'm still in the business because we just went upside down due to mismanagement of our trust funds. So the reality is this is an industry where those kinds of catastrophes happen. So, I'll send you this one. I think we want to just start by creating some fear for people to take action on what are some of the biggest catastrophes that you and maybe you, Kristen, have seen in terms of fraud or audit or just, you know, monies going.
Allison DiSarro
The fear tactic? I love this. I actually will say this is actually like one of my favorite subjects is fraud. Yet it's also a serious thorn in my side as a banker. So we see it all right. I mean, I could go on and on and on about all the horror stories. I'd say probably the worst one that I have seen. And I wonder if this is actually the same person that you're speaking about, Daniel, who is actually a client of mine. And over a year period, I hope I get these numbers right. It was a very long time ago when over a year period his accountant was a company account and it was an internal account. It stole over $400,000 from his trust account and she did it. I should say that they did it two different ways. One signature scam. So he had a signature of fans and she had the rights to you that that's essentially why people get signature fans so that they don't have to sign the stamp themselves but still be within real estate or division of real estate guidelines and also by creating a vendor. So she created a vendor and he was paying for that vendor. That vendor was actually it actually ended up being somebody that that person knew. So they were kind of in on it together with somebody who was not within the business and who also had access to a bank branch contact. So they were able to steal this money over a year period of time. Now, what's even worse about this is that this person was actually the godmother to this person's child. This is how long they've known each other. They have known each other since high school. They were basically family members. He put all of their trust in this person. And, you know, I think that that's probably the worst case. But that's actually very common in this industry. It's usually you know, you find it, you hear it, I hear it all the time. I'm sure all of you guys hear it all. And, you know, they say, oh, my accountant, I can trust her with everything. I trust her. Clearly trusted my firstborn. Right. So unfortunately accountants get all the slack here, but I will say that that's usually where it starts. You just have all your trust in someone. They breach that trust and the money's gone. And there's really nothing that he could do about it.
Daniel Craig
Yeah. Yeah. Okay, that was part of your inducing idea. Kristen, I just maybe want to ask you if you can just give a scenario where there's no fraud, no no intentional, no malfeasance, but just, you know, mismanagement. What are some of the, you know, common ways you've seen people end up upside down in their trust accounts?
Kristin Johnson
So, you know, I actually was helping with a clean up on some books not that long ago, and I came across a property that was set up and it was labeled, you know, something very generic like ABC property, and there was no owner tied to it and no tenant had ever lived in the property. And there were all of these adjusting entries on it. So there would be some income, and there would be some debits. And I was like, What is this about exactly? Look, can you explain this to me? And they're like, Well, you know, we get to the end of the month and we're trying to get the account reconciled and we're off a few dollars. We just put a plug on this property. It balances. And, you know, we're off and moving and like, yeah, that's okay, well, we're talking to the tune of $200,000, but in the negative that this account is off. So that is money that the trust account is short, right? That the management company has misplaced. And rather than dealing with it and finding where the money is at, they're just putting plugs into this fake property and moving on with their day.
Daniel Craig
So that's great. Yeah. So, I think that's a great segway into letting's go and talk about some banking and accounting best practices. Kristin, I'll start with you. You mentioned specifically this question of a basic triple tie. I don't know that we want to get to the mechanics of what a triple playout is a today, but there are resources for that. What would be some of the basic, you know, checks and balances that everybody on this call as a broker-owner needs to make sure that they have in place in their company so specifically?
Kristin Johnson
So the triple tie question, it's actually fairly easy, right? Like you're looking at your bank account balance, you're looking at your ledger balance and you're wanting to make sure that your property balances add up to that amount as well. You want to make sure that you're not having any negative show up on properties, which happens obviously when you're forcing funds using Paul's money to pay for John's expenses, and vice versa. You want to make sure that you're never going into the negative on a property or an owner account, depending on the way that your portfolio works. But you should never see a negative on a general ledger. When you're looking at your bank, your bank balances. The only time you would ever see that is if you are forcing payments to borrow from somebody else's accounts, which is co-mingling, right? So that's a huge issue and I see that quite often as well. There's co-mingling happening. So that's number one. Oh, man.
Daniel Craig
I mean, those are two really big ones. Maybe we just touch on the segregation of duties for a moment. You know, you know, you don't ever want the same person depositing money at the bank also entering deposits in the books. Any kind of feedback on just the overall safe segregation of duties for folks to keep in mind?
Kristin Johnson
Yeah, absolutely. So if you're the one entering the bills, somebody else should be approving them. Somebody else should be issuing the payments. One thing that I love about Alison Enterprises is that they have a function called positive pay. So, you know, Alison can speak more to the fraud that's happening outside of what we can control and people getting a hold of checks and cash environment and even I'm hearing HGH is becoming a huge fraud point as well. But make sure that you're uploading those files to positive pay every day and verifying whoever is uploading should be verified. Following that, that positive paid file is correct and they should not be the same person that was writing the checks. Right. So if it is a, you know, an oversight person, that's, you know, in our office, you would have seen early on that, oh, this you know, this vendor is getting paid $400,000 this year alone. That's not a vendor we even use, you know, we that's something that could have been prevented by having somebody else with oversight authority. It's not the same person that's writing the checks.
Daniel Craig
That's great. I just want to do a little plug here for the nonprofit accounting standards. Folks, if you're not familiar with this resource and this may be a good place to do a little introduction of myself on this profit coach, a couple of years ago our firm hired us because we do full service, financial advising, corporate accounting and trust accounting in the space. NORTHCOM hired us to write the note from accounting standards. And one of the key things that I'll call out here is this financial controls guide. And so this is a really, really, really great place to get started in terms of, you know, what are the essential broker owner responsibilities, you know, how does this trickle out reconciliation work, and what are some basic recommended controls and procedures for every property management company here? So this is a great resource if you're looking for something like, hey, how do I dive into what Kristen and Joe, and Alison are talking about? This is a great resource available to not be members. And if you're not a team member on a call today, then it's a quick membership fee to get that way and this is certainly worth it. So want to make that resource available. Let's go to you, Alison. Let's talk about the banking side. What are some of the banking best practices that you're seeing are really making a difference for folks that people need to be aware of?
Allison DiSarro
You know, actually. So Kristen really hit the nail on the head positively. Okay. So, you know, just like you said, you have to have a segregation of duties. Right. But I think even beyond just within your office. Right. Like your banker can't be your accountant, your corporate accountant can't be your trust accountant. Right. You really have to have people doing you can't have a jack of all trades essentially. Right. Like having everyone focus on what they're good at. Actually, brings me back to the keynote speaker today. Made a comment. The term he used was pretty specific ignorance. Right. So has somebody strategically ignorant of anything else that they have to focus on, just tunnel vision? So I definitely am on board with that. But I really want to focus on the positive. I think that that's the number one thing that you can do when you're utilizing your bank for fraud prevention. A lot of the fraud that we've been seeing in this industry, even though I talked about internal fraud as a horror story, a lot of it that we've been seeing is external fraud. And it's kind of tricky external fraud, which will bring me to the positive introduction. But it's tricky because, you know, sure, a lot of people think like it's a fraud, which is correct. You're absolutely right. It's very prevalent right now. But when it comes to checking fraud, it's not just like someone steals your checks and writes a check for whatever amount and you might catch it. A lot of what's been happening is, you know, for instance, I'll give you an example. Someone write the check for you. The company writes, a check for $400. It goes out, you know, it clears. You see that there is a check for $400 written with that check number cleared perfectly. But what may have happened is that maybe somebody stole that check out of the mail and washed that check with the name. So you're really not going to find out until maybe, you know, three months later when you hear from that vendor that they never received that check. Well, now, your accountant compromised. So there is a portion of positive pay. Most banks have it called pay in cash positive. So what that does is that actually checks against the name of the payee on the check as well. It is a service that you have to sign up for with your bank. A lot of people think that it's just too much work and they don't want to do it. I personally don't think it's a lot of work. I don't know how much you want me to dig into how it works. I'll try and do it for like a 60,000 right level, so to speak. So really is it this you're essentially telling the bank software what checks you wrote out and that allows the bank to go ahead? Again, it's all through software, but that allows the bank to go ahead and clear those checks as presented to the bank. Now, a check against a couple of different items, for instance, the amount and the check number. Hopefully, your bank has paid a match as well, as I said, and it will check against the payee as well and it will just clear. So that's step one. Okay. You have to tell the bank, usually, you can just pull up a file from your software and upload that into your bank portal so that the system matches that. If it doesn't match, it doesn't match for one of two reasons. One, there was a fraud. Or, two, you know, you forgot to tell the system. So then it goes into exception and you can clear or reject those items from the exception report each day. Now, I think that's where people think it's a lot of work, right? Because you are having to go into their mind every day. But you really shouldn't have to go in every day to just be able to tell it what you wrote and then not have the exception. Now, as Kristen said, you want to have somebody approving those who's not who's also not uploading those. But I think if you're not doing that, the very, very, very least that you can do at your company is daily reconciliation. And whether you do that internally, when you have somebody actually focus on just the trust account and not the corporation as a whole, or you have a third party resource, do that like a third party accountant, for instance. It needs to be done because you don't want to be at a loss. Right? Like, For sure, if the accounts are compromised, you may have to go through extra steps with your bank, and maybe open up a new account, but at least you're not losing the money. Banks only have a certain amount of time to return items, and that's a pretty big misconception. And not your industry, just a general customer that banks think, oh, the bank can just go ahead and give you the money back at any time we have. We're regulated as well and we only have a certain timeframe to return those funds.
Daniel Craig
Great. Hey, folks, that's some really, really distilled best practices there for how to stay on top of other people's money in this industry. So thank you, Alison and Kristen, for that feedback. Take action on that. And again, get your hands on the new accounting standards financial controls guide, and a big shout out to our plan for producing that guide. All right, I'm going to segway to financial performance. We've got a question for Joe. This is coming in from Michelle to good sweet segway here. What are the most important numbers that you're looking at when evaluating a company? Are you using specific calculations?
Joe Polverari
Great question. Thank you. You know, there's a couple really recently that are or that are important. The first is, you know, how does the business perform from what I'll call it, a direct or a net margin perspective? Right. And so this is effectively what is the profit of the business most of them don't have EBIT in the conventional sense that you would think about it in a corporate context. So it's really down to the margin, which is effectively what the owner or proprietor is taking home every year. And if you have a relatively sophisticated organization, you look at the direct margin because there are probably some expenses that are being offloaded into another entity. If it's kind of a sole proprietorship, you're looking at the net margin because everything is kind of flowing through the business. So we look, we look at that and see where it is, but not so much where it is, but where it could be from our perspective. And we've got, you know, the benefit of, you know, having done this 50 times and having, you know, I think it's at last count, 2000 years of property management experience in our firm. Right. So we know a little bit about how to look at a property management company and how it should run. And so we look at it for what it is doing today and what its potential tomorrow is. And a lot of the delta between what it does today and what it could do tomorrow from a profitability perspective is in stuff that comes kind of in two categories. One of the best things about this business is most of the leaders of these businesses are really what I would call full-scale entrepreneurs. And by that I mean they've got their hands in all sorts of entrepreneurial endeavors. In fact, I don't think we've met a single company yet that doesn't only run one company. Right. So, you know, a common thing we see is you've got a property management business and you probably have a brokerage or a realty and you run a maintenance company as well. And somehow all of these things get confused in a single series of accounts when they should really, you know, in a perfect world, they would look like a line of business that would make it easier for the operator. It would make it cleaner for people like us to look at companies and try to figure out, you know, what they look like down the road if they were to join PURE. And so there's an unnecessary set of avoidable confusion that is created by the fact that entrepreneurs will be entrepreneurs. And we're more interested in doing things than, you know, maybe laying the groundwork to cleanly account for them on the back end, because that's not as fun. You know, no offense to the accountant crowd, right? But it's just more fun to go out and do your business. And the second place companies the second thing that we see frequently is what my co-founder, Mike calls the run-through in the business. And the run-through is things that you do personally, that you put through the vehicle that is your business. And so, you know, we've seen all kinds of examples. I've seen vacations to Disney World, and I've seen Maserati lease payments. I've seen, you know, everything in between. And those are stuff that's not really business related, although there is potentially a tax benefit of doing it that way. It really detracts from what is the bottom line of the business and what's the forward potential of the business. And those are the two most common sources of issues. And I think there's a little bit of a tweak out there that I'm starting to see. What's more, it's becoming it's not yet a trend, but some people in the industry are starting to do it. And it makes a lot of sense structurally as folks who have multiple lines of business, which, as I said, about 100% of the people we see have begun to structure them in what I would call a more sophisticated way. But it's easy. They have what I call a holding company, and that's the company. It could be Daniel LLC, Ryan, and Daniel LLC. That's where all the run-through is going. Daniel LLC provides services to all the operating companies, which could be property management, brokerage maintenance, whatever, and that kind of structure. While it sounds complicated because we've gone from 1 to 4 is actually much cleaner when you get around to tax and you actually want to know what you're looking for from looking at it from a profitability perspective. And then it allows you to look into each line of business cleanly if you will, property management, brokerage maintenance, whatever it is, and see how it really performs. And when you see how it really performs, you can start to make better decisions about it. And the decisions that I think, you know, personally, it's only one man's opinion are important is there's a culture of being reactive and a lot of property management businesses where as long as things are like not blowing up, we're kind of okay with that and we're not looking too far ahead if we don't have to. And I think that's not a great strategy. As the industry starts to change more rapidly and frankly grows, there's a lot more money at stake now for people to participate in the industry. And so the number one metric we look at for our business and as we think about bringing businesses into our business is R or annual recurring revenue. And so annual recurring revenue, if you're not familiar with it. And I'm not an accountant, I'm an economist and a rehabilitated M&A lawyer. Right. So I'll give you the plain English version. The definition of annual recurring revenue is basically your next 12 months' revenue, right? What does that look like for you? And the way you get at that is kind of a shorthand basis from a property management perspective is what's the value of the contracts I have signed from a management fee perspective now what's my estimate of leasing and other fees that I'll make off those properties? And then what will I make, you know, on maintenance? If I do that, then you kind of roll all that up and you have a forecast of what your revenue and correspondingly your expenses will look like over the next 12 months. And so we look at companies, we say like, what is their R now and what can it be if we were to bring them into PURE and spread a lot of the stuff that they don't like to do, like accounting and leasing and all the Common Back Office stuff spread it across the corporate infrastructure and let them just work on growing the business of making it profitable. So I guess the two themes would be to think about being proactive. When you think about your business, you can actually do it relatively simply. It doesn't have to be difficult. And then really have an eye on, you know, what does my revenue look like this year and how reliable is that for me? So I can make good economic decisions in the business?
Daniel Craig
Great, great feedback. And I just want to put three exclamation points on Joe's point about segregating the different divisions. Again, a little shout-out to the Nabi chart of accounts. They'll just throw up throughout this value proposition here when it comes to the Standard Chartered accounts. And if you're looking for a way to do this within one set of books, Joe gave an option for doing it in several sets of books, which is an option as well. But the Navin Chartered accounts really help with financial clarity around separating the divisions and then also give you a way to actually calculate some of those key metrics in a careful way, in an accurate way, in terms of, hey, what is the revenue per unit and how do I use that to get calculations around annual recurring revenue and whatnot? So that's a great place to get started in getting some of that kind of financial clarity that Joe's talking about. So you can make smart decisions related to each specific business unit. Kristen, let's go to you and just say, all right, when it comes to managing the financial performance of the property management business day in and day out, what are some of the metrics that you guys have found to be really influential in actually optimizing the bottom line of the business?
Kristin Johnson
So for us, we always paid really, really close attention to detail here. It's probably the number one indicator of profitability for a property management company because we are so labor-heavy. So if you can figure out ways to optimize your direct labor efficiency, that will directly correlate to your profitability. So that's probably my number one. We always looked at revenue per door. You know, we always set really high goals for ourselves, our revenue per door wise, there's property management that is a lot of stacking nickels to make a dollar. And so there's and there's a lot of ways that, you know, we didn't ever really call them. We hated referring to it as fee maxing, but it was valued maxing. So how can we create value through services we always wanted there to be a direct service related to it, whether or not it was a hard service or you know, we provide this feel-good thing, but it was always some kind of value that we were adding. And so really driving up that revenue per unit was a big thing that we always paid attention to as well.
Daniel Craig
Great feedback. I'll just add a couple to those. So Kristen touched on direct labor efficiency. Again, you know that that basic calculation being how many dollars of revenue do we get for every dollar we spend on labor? You can improve that either by increasing your revenue per unit or by, you know, lowering your cost of labor through gains in efficiency or perhaps, you know, leveraging global talent. So to mention that one revenue per unit and I just want to underscore revenue per unit to go off Kristin and Joe's points and that is that you know one of the most significant things that we see in this industry in terms of how people turn around their financial performance is by just a little bit more attention to pricing. And this is a world in which a 10% improvement in revenue per unit can result in a 100% increase in the bottom line. That's how powerful this labor is. And so, you know, it's great that we're in the middle of a triple leadership exchange in terms of all that being, you know, how can we as folks in this industry continue to hone in on the ways that we can deliver value and create value? And if you're thinking about that and not just how do I get the property leased, but a bigger picture conversation around how do I facilitate the end result objectives of my owners and then monetize that, you're going to be head and shoulders above the crowd in terms of actually running a profitable business and revenue per unit is one of the best ways that you can measure and monetize and monitor that. Obviously, bottom line profitability. Joe talked about that. Another one that we would just recommend to you is managing your overhead, your non-Labor overhead in terms of some key buckets of expenses, then monitoring those as a percent of revenue. So how much should we spend on facilities as a percent of revenue? How much do we spend on payroll taxes and benefits as a percent of revenue? How much do we spend on just other operating expenses as a percent of revenue? And again, you can get some really great benchmarks from the normal accounting standards in terms of where you should be in those buckets. We've seen people spending, you know, way too much on some of those buckets and completely gobbling up their profits and not even knowing it. In two other quick metrics that I'll just mention briefly here, being a new unit, unit churn, this is a great way to really keep a pulse on your overall client experience. What's the rate at which units are churning out? It's always humorous to me when I talk to property managers. I've never met a property manager that had a churn problem because of service. It's always the market, right? And there's no doubt that the market plays into these things. But. But you do churn as a result of service issues and you need to know what that is and what those issues are. So keeping a close eye on that can really help you improve your customer experience. And then from a scaling perspective of the unit acquisition cost, how much does it cost for us to add on a new unit once you've delegated some of those other tasks as Joe is talking about and really poured yourself into growth, you need a metric to be able to measure your return on investment in terms of the time and energy that you're and the and the expenditures you're putting into growth. And this is the metric to really make sure that you're scaling your growth efforts efficiently. So hopefully those will be some of the key metrics that will help you in that regard. Joe, you talked a little bit. I'll just start to wrap up here and any other questions, folks, go ahead and throw and chat. Joe talked about sort of, you know, the future focused on any based on your just background in general in finance, any best practice recommendation is on budgeting and forecasting and really just getting out of the rat race. If I'm going to do the next thing, really planning the financial future, the outcome of a business.
Joe Polverari
Yeah, a few. At the risk of being heavy-handed, I don't recommend this for every single enterprise. Right. But the larger you get, the more necessary it becomes. You know, we tend to look and not just in the property management space, but in a lot of previous businesses that have grown large and scaled and fintech and e-commerce and other places, you know, including public exits. You look at things in a three-year cycle and that may sound like, whoa, I'm thinking about three months. Three years is awfully long for me. But if you can look at it in a three-year cycle where it pretty much understands what's going to happen in year one, and by that, I mean strategically and economically. So what are you going to do this year? What is it going to cost? What do you expect to get back? So a lot of the items that you're touching on as well, they're going to do at the broken out in a more eloquent way. But it's generally, you know, what do I do? What do I spend and what do I get if you know, that kind of year, one year, your two should be a little, you know, a few big ideas in there for how you grow your business, assuming that's what you want to do. And most of the businesses I'm familiar with have been, you know, kind of grow at all costs. Right? That's just the training and the mandate for those sorts of technology businesses up till now. And then your three is something really aspirational. What do I want to be when I grow up? And then you roll that three-year cycle forward on a yearly basis with the emphasis being, I want to make sure my year one plan, the first year ever, the year I'm in the next four quarters is pretty set. And that means I've thought about what economics looks like. I thought about the initiatives I'm going to do so I can track them, I can measure them, can grade myself on how well I did and I can see what the results have been. What's my return on investment for the effort I put in, and if nothing else, just the fact that you have an infrastructure in place like that and it doesn't have to be some great treatise or constitution about how you run your business. It can be, you know, written down on a napkin if it has to be or can be on a PowerPoint slide. Now, here are the three things I'm going to do. Here's what they cost, and here's what I expect to get. And by the way, I suggest you keep it at three. What are the big three things you're going to do and how you can imagine just getting that kind of thought, unless you're the kind of person who can keep everything in your head perfectly at all times, which, you know, I know a few, but let's face it, not many of us could do that? It will help you when all else fails and when times get tougher when the business gets crazy in a good way or a bad way. If you kind of go back to that, it will orient you to what your mission is. And that's a mission you will have been thinking about. And so just a little bit of time, you know, it's always like practice, like you want to play, right? So this is really practice. So think about how I want to do something. Think about what I'll get out of it and then start doing it and then feel free to adjust it every quarter as you go forward and then as you get comfortable with that cadence, start thinking bigger and start putting more structure around it. Like I'm going to have my budgeting done in the fourth quarter of every year. If you run out of calendar quarter and then I'm going to execute that budget the next year and just that simple stuff and you don't need an MBA or you have to be a business professor or I've run 55 companies to do this. You just have to sit down and think to yourself, or maybe with a group like this, hey, you know, how do you think about your budgeting cycle? What do you think about your planning cycle? What do you expect to get out of it? What's the typical range of investment for you in a group like this is really excellent for something like that. So I would say a little bit of forward thought will help you execute your business and realize the value of your business. And to the extent you want to grow your business, it'll certainly provide a solid foundation to enable you to do that.
Daniel Craig
And folks, that is a great place to hit. Pause on this breakout. Thank you so much, Allison, Kristen, and Joe, I appreciate the thoughts and feedback shared. Thank you, everybody, for the questions.
Andrew Smallwood
That's all for today's Triple Win Property Management podcast. Thank you so much for listening. Thank you so much for sharing a piece of your life with us. We do not take it for granted. I also want to give a shout-out to Carol Housel for everything she and our team does to make this possible. It's crazy to think about. Over 5000 professional property managers have press played on episodes and season one and season two now, and we really want to encourage you to keep giving feedback because more and more people are listening. It's getting better and better and better thanks to everything that you're sharing with us. If you liked this enough to listen, I want to encourage you to share it with other people. You can give us feedback directly on the social media channels, Facebook, LinkedIn, and wherever you're hanging out, you can also send us an email, at triplewin@secondnature.com we just want to give more we're there's no sales pitch here just want to offer more resources that help you find and stack your next triple-win and become a triple-win-driven property manager. So where can you find that? You can find a private Facebook group. You can find our blog and find our newsletters find more resources all at RBP.secondnature.com to search for what you're looking for there and every time we see you, we want to see a better version of you and your business. To that end, keep it going, feel inspired, take our encouragement and we'll see you next time.
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