Pat Head, Rub Stomach: the Financial Control Challenge

The Overlap: Bridging Estates Management and Accounts Payable

 In this episode of 'That Retail Property Guy,' host Gary Marshall explores the relationship between estates management and accounts payable within a retail setting, especially the importance of communication and collaboration between property and finance teams. He discusses the significant expenditures retail businesses face, including rents and service charges, and the complexities of tracking and managing these costs effectively. The episode also delves into the intricacies of financial periods and calendars, offering insights into how they impact business planning and profitability. The key takeaway is the value of understanding and optimizing the Venn overlap between estate and finance functions to drive profitability, efficiency, and better business outcomes.

00:00 Introduction to That Retail Property Guy

00:16 Understanding the Venn Overlap

00:52 The Retail Office Layout

03:58 Challenges in Property and Accounts Communication

05:51 Demystifying Property Accounting

11:37 Financial Calendars Explained

15:37 The Impact of Financial Periods on Business

21:59 Conclusion and Future Topics 

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Transcript

0:00

Welcome to That Retail Property Guy with your host, Gary Marshall. In each podcast episode, we delve into topics from the perspective of a retailer as tenant. We hope you'll be entertained, enlightened, and maybe a little inspired. In other episodes, we discussed the super harmony that can be created when we look closely at the Venn overlap between the back office functions of estate management and accounts payable. Now, as you probably know, a Venn diagram shows two or more overlapping shapes. It's used to highlight the commonality in that overlap between two or more groups or ideas to highlight their common interest to indicate their shared values. But you might well ask, how does this apply To property and accounts. In what sense is there a sweet spot in the overlap of those two functions? Well, imagine if you will, a retailer's office building, a big expanse across a couple of floors, a big open plan arrangement with a buzz of excitement from the various teams, which all contribute to the success of a retail business. Now imagine a grand staircase rising up from reception through the middle of that floor space and at the top you might head right for the estate management function, the asset managers, the strategic planners, the data analysts, maintenance and compliance, the professional services relating to property. But if you head left, you might encounter the functions of the accounts payable and receivable teams, the finance controller, the capex project controllers. Bear in mind, these are both subsets of the overall much bigger function of running a successful retail business. So it's easy for estates to be a small team nestled among a much larger team, maybe group or sales or IT or even other aspects of finance. And property accounts. might nestle alongside general GNFR, goods not for resale, but operate in a completely different way, not reliant on the familiar invoices and purchase order numbers, but instead handling payments which become liable based on long contracts known as leases. Often property outgoings are the biggest or perhaps the second biggest area of expenditure in any retail business with a physical bricks and mortar presence, whether that's high street, retail parks, regional shopping centres or any hybrid of these. Rents and service charge often constitute the biggest expense to a retailer perhaps second place only to HR costs. And despite the upsurge in online retail, many retailers still have a substantial physical retail estate and their business will be less successful without it. We all recognize that there's been a seismic shift since the retail boom time of the 1980s and 90s, when new brands proliferated, leases were generally granted for 25 years or more. New shopping centres sprung up everywhere like mushrooms. But retail property is still the key point of sale for many retailers, often offering a support into digital, such as click and collect services. It's a fair challenge to many retailers to distinguish which pound value of sale, started life or ended life, As an online click, or a physical visit to a store, the channels meld together seamlessly, supporting each other. So let's go back to that staircase. At the top, turn right for estates and property, turn left for accounts. There, at the top of the stairs, is a shared landing with a water cooler and a breakout area, a few sofas or a photocopier. And this is typical of the Venn overlap of property and accounts. Both teams gather there. Their paths cross. There is literally an opportunity to discuss, share views, ask questions, learn about other processes, have eureka moments when it's possible to highlight a pinch point or a common delay or confusion, and to quickly form a solution. But maybe the two teams don't talk to each other. Maybe they're shy, hesitant, a bit standoffish, separated despite a common objective, who knows why, but often they don't talk to each other. They might feel divided by technical vocab, which describes processes which are unfamiliar to each other. They don't see any stepping stones across that divide. Basically, many asset managers or estate managers and property people focus intently on leases and valuations and landlord relationships and negotiating deals, but know very little about the accounts teams, where the invoices are checked and where the rents get paid and coded to ledgers, where balances and statements are reconciled, where three year plans are set, where supplier relationships are managed. And of course, where statutory accounts are finally prepared. And vice versa, the accounts team often see themselves as finance, not property, more closely aligned to general accounts than specialised property work, which seems to be beyond an invisible divide, which is an impediment. to good communication and teamwork. But what if somebody could facilitate that, and drive changes, improvements, resource saving, stress releasing, efficiency building, cost cutting, profit raising outcomes. The Venn overlap at the top of the stairs, where left and right overlap, could be the key to greater profit, tighter controls, better processes, and systems with more efficient use of money. Look at it another way. Poor systems, processes and controls lose money. Generally you could consider it small change down the back of the sofa, not huge individual amounts, but in aggregation it's enough to notice and enough to make a difference. It's straight off the bottom line as lost profit. And how big does that sum have to be to get your attention? A thousand pounds? A hundred thousand pounds, a million pounds. If you're unfamiliar with property accounting, let's demystify Bear in mind, some of this stuff can mean considering several aspects in unison, a little bit like being able to pat your head and rub your stomach at the same time. Ready? Let's start with GLs and cost centers. Property payments might be rent or service charge. Business rates, insurance, or the many other cost obligations that are part and parcel of being a tenant of a commercial lease. These payments might be manually inputted or be generated by an automated process in a database. They might be repeating regular charges. Or ad hoc one off charges. They might be individually approved by an estates manager, especially after concluding a deal with negotiations, or they might be pre approved in the database that auto generated them. But putting those payments into an accounting or banking system and being sure they go out as expected is only part of the challenge. Tracking them, ensuring they come and go from the right piggy bank or jam jar is just as important. Some landlords. Their agents and in fact some internal asset managers don't always realize that these payments don't just go out of a big petty cash shoebox after which nobody gives a hoot what got paid. There is pretty much always a requirement for someone to monitor expenditure, to check the outgoings, to manage against expectation, to measure the benefit gained from each pound or euro spent. In general, most retail tenants want to distinguish rent from service charge, and so on. So whether the tenant is a smaller business doing their accounting in Excel, and there's nothing wrong with that, or a medium business using an online accounting package like Sage, or a larger business using a dedicated application like SAP, that tracking normally happens by organizing transactions into specific categories. Like columns labelled rent, service charge, insurance and everything else. These individual columns act like piggy banks or jam jars, and they help to keep the various payment types separate. The columns of transactions combine to form the start of a ledger. And in that sense, modern software isn't really that much different from the old Victorian leather bound books, where a clerk made painstaking notes at the top of the page with a big quill pen. Breaking the expenditure into chunks allows the finance team to be precise about business profitability. The list of GL headings or GL codes can be as extensive as the finance team needs it to be, drilling down to a level of detail that helps make it clear where small or large costs arise and where small or large profits are made. Tracking against expectation is key. Somebody needs to check and be sure what's being paid out and when. This isn't just about checking individual invoices, it's about monitoring the sums and the patterns and the frequencies. An accounts clerk might approve an enormous stack of rent invoices without stepping back to gain a better perspective. But the finance controller should do exactly that. Look for the patterns, look for the exceptions, notice the outliers, spot the trends, and measure everything against what was expected. If the expectation for rent payments on a store is four quarterly payments of 25, 000, the finance controller should notice if five payments went out, or if four payments went out but at 30, 000. Sometimes it's possible that five quarterly payments might fall due in a business's financial year. To the non specialist, this might sound odd, but if the lease contract specifies that rent is due in the landlord's bank on a specific date, then the tenant has to organise payment. On the nearest working day, but then you have to throw in bank holidays, festive breaks, weekends, financial year end, and so on. And the tenant might just have to physically process five quarters in a single financial year. If the business had planned for this, then everything's okay. But if it didn't and cashflow wasn't ready, well, it could be a big problem. More on this later when we discuss financial calendars. Now the controller should notice if maybe an accounts clerk assigned the wrong GL label or GL code. Or maybe to the wrong cost center. Essentially this means that maybe business rates was coded as rent. So this skews the rent GL and leaves a hole in the rates GL. Or that rent for store 2 was coded against store 1. So this skews the rent GLs on both cost centers. And, of course, another outcome could be a duplicated invoice, so only four items were due, but five went out. The finance controller has to be vigilant to notice these errant transactions, to enforce better attention to detail, and to organize the fixes, to reverse the error and input the right details, so all the expected square pegs sit nicely in the expected square holes. So going back to authorizing those invoices for payment, it's important that the invoice inputter and the invoice approver assign the right GL label or code and the right cost center to any invoice or payment or receipt. And obviously the diligent estate manager should ensure that anyone who authorizes or approves or codes a property invoice should know exactly which GL and cost center to use. Or maybe know someone else who does and who can give them guidance. Taking a guess at this stage is really, really unhelpful. Once the mistake is in the system, it usually takes far more work to find it and correct it than it would have taken to check it and get it right in the first place. Garbage in, garbage out and all that. Okay. So now things might get a bit dizzy. Remember, rub your head and pat your stomach at the same time. Let's discuss. Days and weeks and months, or a calendar year versus a financial year. Most of us buy our diaries or calendars based on the traditional calendar year. For example, starting on the 1st of January. There's also a standard tax year, which in the UK starts on the 5th of April. Though that itself is a rollover from long forgotten times, and makes very little sense to anybody except His Majesty's Revenue and Customs. But many businesses operate with a customised financial year, so often not starting on the 1st of January or even the 5th of April. This customised year, commonly known as the FY or Financial Year, represents the year of business that gets reported in the business's statutory accounts. At a very simple level, a business might have been created and launched on the 1st of June, so its financial year could renew on the anniversary, the 1st of June each year. But whatever the basis for the year, the business will have a plan of activities, of expenditure, of likely income, of payment dates, and of tax deadlines. Now we all know that a standard calendar year is 365 days. That's 52 weeks and 12 months. It seems easy to consider an annual rent as monthly by dividing it by 12. That's how it works for most monthly transactions, like gym membership, or maybe your rent. But if you think about it in greater detail, you can see a potential issue. Not all months contain the same number of days or weeks. And I mean, that's just confusing. February usually has 28 days. March has 31, April has 30, and so on through the year. Even the traditional quarters of a year are not actually quarters. They're not the same length in terms of day count. And this is all because a calendar year is 365 days. Which is a pretty odd number to divide into. So to navigate a smoother course through this date based confusion, some businesses choose to run their accounts in a parallel system where they split their financial year into periods, which are kind of like a month, but which impose a greater degree of consistency. They might create a financial year calendar. of, say, 12 periods, like 12 months, but in a pattern of 4 4 5. And no, that's not a football formation. It's 4 week, 4 week, 5 weeks. 4 plus 4 plus 5 equals 13. So that's a financial quarter. 4 financial quarters is a year of 52 weeks. But of course, it totals 364 days, not 365 like the real calendar. So the finance wizards have solved one problem and started another. They've smoothed out the bumps to make a virtual calendar that's more consistent and more easily analyzed, but already it starts to not look like a normal calendar year. And when that financial year, or FY, comes to an end after 364 days, they'll start a new FY. So they're celebrating new FY in the finance calendar a day earlier than the anniversary of the prior year. It's like your birthday slipping forward a day each year. If they started last year on the 1st of June, next year could start the 31st of May, and this pattern repeats with successive years. This can cause headaches for anyone looking at both the finance calendar and the actual calendar, or at least trying to consider the impact of one on another. Financial calendars are very useful, if not actually perfect. Using this periodised financial year. Finance can prepare their three or five year plans. They can forecast the busy periods, which might be the run up to Christmas or the summer holiday or back to school or other seasonal peaks and troughs. They can look for consistent patterns or unexpected variances. They can be assured that all the pegs and the holes are square, but they need to be aware that some dates in the real world are flexible. For example, Easter. It isn't always the same date, so activity associated with Easter doesn't always occur in the same period. So if a retailer does a lot of business at Easter, say as purveyors of fine chocolate Easter eggs, their whiz kids might want to compare Easter in one financial year with Easter in another financial year, but might have to do some juggling. I recall one finance manager being caught out by the Easter effect. The business ran a calendar from the 1st of April. And in 2015, Good Friday and Easter Monday fell on the 3rd and the 6th of April. But then in 2016, the following year, they fell on the 25th and the 28th of March. So in the business year from April 2015, that's two lots of Easter eggs, and two lots of costs and profits associated with Easter activity. But then the subsequent Easter didn't fall until the 14th and 17th of April 2017. Two Easters in one year. And none at all in the next year. And that's happening again this year. Easter Sunday 2024 was the 31st of March. But in 2025, Easter is much later, on the 20th of April. So between the 1st of April 2024 and the 31st of March 2025, no Easter. And this can play havoc with financial planning and forecasting, especially for a business that specializes in holidays or travel and chocolate or lamb production. Of course. Most dates in the real world are fixed, but the financial period dates can change as the cycle of a 364 day year repeats itself. I recall one inexperienced journalist lamenting how a particular business seemed to be underperforming in a year compared to the same weekend period the previous year. But they'd failed to notice one important point. As the financial calendar had moved, so had the period in which Black Friday fell. If they looked a little closer at the two calendars, they would have seen this and realized the impact of Black Friday falling in the following period. But smart analysts who understand this stuff can interpret the data. Planners within a business and investors on the outside can look at the data, can use the consistent pattern to compare current year with prior year, can monitor activity, and can demonstrate growth or the lack of it and therefore make advised business decisions. Managing this calendar requires a lot of attention. There are regular housekeeping tasks and activities in the week approaching each period end, and then again in the week after it, and again when approaching the half year, and yet again before and after the actual year end. Timing is crucial. I recall one finance manager getting exceedingly irate at a support team who had missed a deadline and had therefore been late posting a very important series of transactions. Think of it like doing a big task on Monday when it should have been done on Friday, but the period had closed over the weekend. So these transactions were out of time and impacted all the wrong expectations. Okay, they could be undone and corrected so they fell in the right year, but all of that was even more work. which shouldn't have been necessary if they'd respected the financial calendar. The year end accounts go forward as the declaration of earnings for tax and are often the focus of specific attention for investors and auditors. There's usually a lot of activity within a business to predict what those end of year figures will look like. Whether that's for tax planning or profit share planning, cash flow planning, strategic business planning, and of course I'm not suggesting any sharp practice, but an astute finance manager would be aware of payments due in or out and their likely impact on the cash balance in the bank and the indication that this might give to the outside world. They might lean one way or the other, urging a prompt spending spree or quickly tightening the purse strings. I knew of a finance director many years ago who decided to not pay the rents which fell due for the March quarter and the 1st of April until after the start of the new financial year on the 5th of April. So the business ended the financial year with a healthy bank balance which seemed to indicate a certain position. But also ended with a lot of angry landlords and a long list of rent arrears which had to be paid in the first week of the new FY. But then as a year rolled around, the same FD faced a predicament. If a year of rent is paid in four quarters, well In this FY, he'd already paid four quarters, even if one was actually a late quarter from the prior year. He now needed to avoid paying what looked like a fifth quarter in the same year. So he was obliged to delay that fourth quarter again for a second year, and then afterwards in each consecutive year. So whatever the logic and basis for delaying that original quarter, he created a legacy of problems for future years. Although for that particular business, there weren't that many future years. Of course, these financial periods create an overlap of challenges for estate managers, looking at property costs arising on dates in a real world calendar. And for finance managers, managing company finance, cashflow, tax auditors, and profit statements. The main takeaway point is to always consider actuals versus operationals. The real due date versus the payment trigger date. The date range of the actual invoice versus the operational periods in the financial calendar. The asset manager reading the lease might see one scenario based on. Traditional quarter days, while the finance team see a completely different scenario based on their financial periodic calendar. Generally speaking, monitoring these management's accounts requires the application of split logic, two actions, which can sometimes seem counterintuitive. And you remember I said, it's like having the ability to pat your head and rub your stomach at the same time, but here we are back on that landing. So consider, who occupies that then overlap space in your business? Who is sufficiently knowledgeable in both areas to add the glue to ensure the organisation of end to end process like rent payment and other property occupier costs? How many pounds of sales of products does it take to get enough margin to then pay 1 in property costs like rent? So how much harder do sales teams have to work to cover that 1 that gets lost through poor management of property costs? In other episodes, we'll discuss these examples in more detail. About duplication, about not getting completion statements right when deals are concluded. Of credit balances not being transferred by the landlord from an old lease to a new lease, and then never recovered and lost from sight, and of not ensuring that managing agents only invoice what they're entitled to invoice. There are millions of pounds at stake. Thank you for listening to That Retail Property Guy. Be sure to like, share, and subscribe so you can never miss an episode. For more information, visit thatretailpropertyguy. com. Thanks again for tuning in.