Cash Management For the Multifamily Property

Multilevel scrutiny assures successful cash management. The key areas are:

1. Capital project spending,
2. Day to day variable expenses,
3. Payroll expense,
4. Petty cash,
5. Fixed costs,
6. Integrity of cash accounts, and
7. Maintenance inventory needs

Capital projects is reasonably simple. The operator must have firm fixed detailed budgets for these activities. To assure value, a bid process that solicit responses from 2 or 3 proven firms is a key component. Next, the operator's in house staff often can supplement the activity to significantly reduce costs. In short, the least expensive approach is normally a blended in house operations contribution to the contractor. For example, in house painting resources will normally improve bid prices by 50% or more over the contractor sources. For large projects, the Company should augment with additional temporary salaried support to gain the potential efficiencies. Next, before and after photos of all work combined with manager and maintenance technician inspection of all completed work should be a requirement for final payment.
Day to day variable expenses should be driven from an operating budget produced by a cooperative effort of property staff, the management company and the investors. Supporting this, to the extent possible property managers should not have the authority to commit contracts without either investor or manager supervision. Additionally, all management should be compensated to some degree based on the spread between revenue and expenses. This step goes far to assure that the best value is achieved. Overlaying this, the management company should develop expected costs for each type effort protecting the Company from gouging by contractors. Finally, contracts for ongoing service should require multiple bids and should require regular rebidding. Finally, management should be working to standardize approaches to reduce ongoing costs such as different materials that reduce ongoing costs, etc. to steadily manage costs down and over time dampen expense growth. Thus cost control is a first step toward this part of cash management. The second part is requiring checks to be written outside of the property and requiring management oversight as a sanity check on costs.
Payroll expense requires a straight forward review of time sheets by multiple managers combined with a review of the taxes calculated. Following up this, checks should be audited by the internal staff from time to time after cancellation to assure that checks actually were written and cashed as expected by the intended authorities.
Petty cash should require collection of receipts for use and submission of receipts before replenishing the funds. This combined with budgetary limits on these funds will generally prevent abuse.
Fixed costs are simpler in that they are to given sources such as local taxes, insurance, debt service. Because of this there is little ability to pilfer funds from this area. However, assuring these items are paid regularly or appropriately accrued is a critical step managing the multifamily investment.
Integrity of cash accounts is one of the largest challenges. The surest method to protect accounts from fraud is to institute several key items:

• Require multiple signatures on checks,
• Require the accountant and other responsible financial persons to take regular vacations that will require others to assume these responsibilities,
• Have an outside accountant check the accounts and assure that the numbers are making sense at all levels,
• Audit accounts randomly but on a regular basis

The last area to discuss is maintenance supply accounts. While not directly a cash account, the use of an inventory system is a critical step to assure that supplies are being used appropriately on the apartment complex and that this can't become a point of abuse around ongoing expenses.
Finally, the Company should combine all of these efforts with accounting support from a resources that can protect the business from other sources of financial abuse. Fraud management requires a watchful eye for groups attempting to bill the company for services not received and for other banking weaknesses that may result in cash losses.

Blake Ratcliff's company offers a full range of due diligence support.
Due diligence skills include:
1) markets,
2) submarkets,
3) comparables,
4) property condition,
5) improvement and operations modifications, and
6) property inspection.
Services:
1) report support,
2) appraisals,
3) investment structure,
4) business planning,
5) financial modeling,
6) debt and equity financing,
7) accounting and financing planning, and
9) management / systems planning and oversite.
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