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Ensuring financial controls during decentralization.

Ensuring Financial Controls During Decentralization

Gathering information with accuracy, timeliness, detail, and breadth is crucial in property management. Equally important is the high level of responsibility we must take for financial controls. Timeliness of portfolio reporting is also crucial. Essentially, our business demands more and more information in less and less time.

At the same time, the foundation of effective management is people - having strong personnel throughout the organization who are encouraged to operate with maximum flexibility and responsibility.

Our firm's basic requirement for an accounting system was that it reinforce our management style of flexibility and decentralization. We spent three years developing a study of our system requirements, then prepared a request for proposal of software and hardware suppliers, and wrote an implementation plan. The entire effort was coordinated by our management information services department and received input from virtually every department.

The control paradox

We had to balance our fiduciary responsibilities for financial control with the full range of our convictions and concerns for management.

We found that we were not alone in this juggling process. In a recent article in the Chicago Tribune, Tom Peters, author of In Search of Excellence, writes about what he calls "the control paradox". "Less is more", says Peters. Less paper-driven central control and more genuinely ceded self-control for those closest to the action translates into tighter control overall.

Peters goes on to consider the human factor: "If workers are trusted, respected, properly trained, and inspired to pursue an exciting or worthwhile goal, then you can create a high control environment with a minimum of formal controls".

This philosophy fosters strong management at the property level. While certain controls are necessary in the financial area, we have found that delegated responsibility has improved productivity and given employees a sense of accomplishment.

Implementing the system

The technological advances made in the last few years in the computer and communications fields made a successful decentralized information system possible.

This article will not discuss the technical aspects of our computer system. It should be clear, however, that our computer system is the basic tool that makes our decentralized management and accounting system possible, functional, and efficient.

We selected standardized, compatible, and reliable hardware for headquarters and all sites. We identified an existing software package that most closely fit our needs and customized it to meet our requirements for interfacing between the properties and headquarters. It took quite a long time, but we now have a modular, automated, integrated, management/accounting system.

Establishing parameters

for operating budgets

Operating budgets play an integral role in the decentralized program. Annual budgets for each property are established as a result of forecasts, evaluations, and analyses of conditions and of information developed at the local and corporate levels at meetings of headquarters and operations executives with property managers.

Property managers are given both the responsibility and the authority to manage the operations of their properties within the parameters of their budgets.

Once budget guidelines are established, property managers have to closely monitor actual results as they compare to the budget. Cash flow reports are reviewed by the on-site property personnel as well as by operations and financial control groups. Variations that may occur from budgetary parameters must be explained in sufficient detail by those responsible for property operations.

The budget is used not only as a measure of property performance, but also as a tool for cash funding to the property for payment of operating expenses. Funding is limited to the amount budgeted for the period, and any additional funds that may be needed require a special request approved by senior management.

A property accountant at each site is responsible for all accounting-related duties. In addition to tenant billings, collections, payment of invoices, and payroll, they are also responsible for gathering sales information from the tenants, reconciling bank accounts, and closing the month-end accounting cycle. With a full accounting system, they are able to produce monthly operating reports immediately after the month ends.

The advanced computer system enables each on-site office to have actual computing power instead of merely being a data collection point for processing at a central computer location. Each property is able to maintain a complete, standardized accounting system that provides timely information and transmits that information to the central computer through telephone lines.


We have found that our system offers great benefits from a property management standpoint. We get cash-flow reports the day after month-end, and sales analysis reports are usually available for review by the marketing director within 30 days after the end of each month.

If a few tenants were late with their sales reports and the marketing director wanted to see a completed sales analysis, he or she might ask for an updated report, which could be generated and available immediately at the center. Under many centralized systems, it would be necessary to wait for the following month when reports would be run again and distributed from the home office.

A few days after the end of the month, the accountant has produced a cash-flow statement and reviews the report with the manager. If questions arise as to the activity in any particular expense account, the accountant has sufficient supporting documentation to show every transaction that affected each account. In addition to vendor history reports and open accounts payable aging reports, a fully detailed general ledger is produced, providing monthly and year-to-date activity.

In a centralized system where reports are distributed from a home office to the property manager, the necessary back-up information is not always available. If, for example, questions arise about an income or expense account item, calls to the home office might not be handled as a priority by an accountant who has audit deadlines, quarterly portfolio reporting, or 17 other properties to be closed for the month. Inquiries to the home office can be frustrating ordeals that eventually lead to questions not being asked and thus a property manager who does not have all the facts.

Maximizing our investment

We made a major investment in a system that results in the availability of extensive data. To maximize its value, it was critical that we institute procedures to fully utilize this information.

We have established a regular monthly procedure whereby an analysis is prepared by the property accountant and manager comparing the actual income and expenses to the monthly budget. Explanations for significant variances are provided and sent to regional and corporate offices. This information is generally available within a week after month-end.

Senior management is able to review operating results, aged accounts receivable status, and sales reports in a timely manner with additional comments and analyses provided by those most closely involved in the operations. Aged arrears reports are available for managers daily, weekly, or monthly, in varying degrees of detail.

If a senior vice president has a question about a report, he or she feels comfortable calling a property manager directly, knowing that the questions will be answered by the person who is responsible and most knowledgeable about the property.

Obviously, rent collection is a critical function of shopping center management. When on-site staff has immediate information on collection status, they can follow up with late tenants more easily and efficiently. Our system not only provides the necessary status reports, but also automatically generates late notices to the tenants. Timely and accurate data available on a regular basis or upon request enables the property management team to maintain a consistent collection program, leading to better cash flow.

Improving tenant

relationships and business

The relationship between management and tenants is extremely important in the success of a shopping center. Our decentralized system gives the manager and accountant full information about tenant lease clauses and billing history which centralized systems often do not provide. We find that this on-site expertise is beneficial, since tenants are billed for common area maintenance as well as their base rent, they frequently want to question management.

Tenants generally feel much more comfortable dealing with a knowledgeable site staff than with corporate offices. We have been told by tenants that the difference can be "like night and day."

We are even able to help retail tenants by sharing information about their sales as compared to other retailers at the mall, in their own field, or in other centers throughout the country.

Strong tenant relations may also lead to improved collections. For example, a substantial real estate tax charge was billed to a department store. The tenant had questions and spoke to the mall accountant who had prepared the bill. She had all the supporting documentation and was able to resolve all the tenant's questions. Two days later a check for $183,000 was received.

The total period from billing to collection was 10 days. While other circumstances may have played a role in this prompt payment, the ability to respond promptly to questions certainly was helpful.

Reporting to investors

Our criteria for accounting and management go well beyond property management. As fiduciary for sophisticated institutional investors, we have to make timely, detailed, and accurate reports on a regular basis. Reports may also be required by partners, mortgage companies, or other third parties.

Such reports generally cover portfolios consisting of several properties. They require information to be gathered from the properties, combined by portfolio, then assembled. We have developed technical solutions to enable us to transmit the information from the remote sites to home office through a single accessing call, which can be made daily or as needed.

Financial controls

are centralized

As all executives know from experience, it is never easy for responsible parties to relinquish control when they maintain ultimate accountability... even when they are committed to the concept of delegation or decentralization. Most often firms centralize accounting functions in their home office primarily because of the control factor. They feel more comfortable when they can keep accounting and treasury functions as well as operational responsibilities under one roof.

At Schroder, the financial control group reviews monthly property accounting in the home office. A limited audit program is followed which includes review of certain areas of the property's activity.

For example, tenant billings are monitored to ensure that they are in accordance with leases. Property procedures are also monitored to determine such things as proper approval on invoices. Accounts-receivable status is reviewed to see that rents are received on time, and bank accounts and reconciliations are closely scrutinized. The accounting software program used at the property locations provides sufficient documentation for audit trails of every account in the general ledger.

Cash management

Evaluation of the advantages and disadvantages of decentralized accounting has to give great weight to the subject of cash management. How can cash be controlled effectively when separate accounts exist at each property location? How can the cash be invested and the return be maximized when rents are being received and disbursements paid at numerous locations around the country?

These are valid questions, but sophisticated cash management systems developed by major banks now make it possible to achieve maximum return on cash assets while providing increased control and security.

Our cash management system entails maintaining two separate accounts at each property. Rents are deposited upon receipt into the rental account. Expenses are paid from a separate operating account, funded periodically within established budget constraints based on cash requirements, from centralized accounts. Keeping receipts separate from disbursements is the first step to maximize use of cash.

Our computerized cash management systems allow us to monitor separate rental account balances daily. We achieve maximum return on our cash by transferring funds automatically from the local accounts to corporate accounts daily or upon request.

This system provides us with the benefits of centralized cash management techniques without sacrificing the benefits of decentralization. Sweeping daily receipts from property accounts into pooled high-interest-bearing accounts increases the investment potential substantially.

Cost considerations

Decentralization entails shifting property-related clerical and recordkeeping responsibilities to on-site offices. This reduces the workload at the home office while increasing it at the property level. It also entails extensive training of on-site personnel to teach them the new system. We now have annual meetings of all accounting personnel to refresh and upgrade their skills and reinforce their understanding of the system.

Our company never had a fully centralized system for handling property-related receivables and payables in the home office, so we never were actually required to reduce our clerical and administrative staff. However, when we moved to a more comprehensive decentralized approach with on-site computers and an integrated accounting system, staff responsibilities changed.

Our home office financial accounting group assumed more analytical and supervisory responsibilities with greater emphasis on portfolio accounting and reporting. This was necessary due to the extensive reporting requirements now expected from institutional investors. It has also given us the flexibility to grow without proportionately increasing corporate overhead, as would most likely be the case in a centralized environment.

On the other hand, having such a high level of capacity at each center would be far more expensive. In practice, we are able to have capable middle-level people operate the system at each center, with the more complex analysis managed at headquarters. We are particularly pleased that we have not lost any people in the transition.

Administrative costs at the property level include costs for the computer equipment, which can be leased, as well as payroll and related expenses. Most standard commercial tenant leases today allow for on-site administrative costs to be included with common area maintenance or operating expense, which are therefore attributed to the property and recovered.

In some cases, the size of a property may not warrant the associated costs or be able to absorb an on-site management staff. Because we wanted to standardize the accounting system at as many properties as possible, we decided to handle the problem by regionalizing the accounting for several properties at one centrally located office.

We had several office buildings in one area that were fairly small, so we established a regional office with an accountant and computer at one of the properties to service four sites. This approach allowed us to allocate the costs over the four properties while still being able to decentralize and maintain a standardized system.


Establishing a decentralized accounting/ management program with strong controls, based on an advanced computer system, has worked extremely well for our company. It gives us the data we need to allow the high-level analysis required for portfolio management as well as property management.

Its success is both the product and the result of how our people work with the program and with others: it allows everyone to work to their highest capacity levels. People at the properties who input data also relate to tenants; managers work smarter and better; headquarters accountants become analysts, not bookkeepers; and property managers function as asset managers.

Steven M. Bither is vice president and operations controller for Schroder Real Estate Associates.

Schroder Real Estate Associates, with headquarters in New York City, is one of the longest established investment advisory firms in America concentrating exclusively on commercial property. Since 1972 Schroder has been advising pension funds and other institutional investors in the United States and abroad and has been buying, managing, and selling office buildings, shopping centers, and industrial properties. It currently manages about $1 billion of equity real estate.
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Author:Bither, Steven M.
Publication:Journal of Property Management
Date:Sep 1, 1989
Previous Article:Strategic planning for the management business.
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