When companies think about purchasing lease accounting and lease administration software, many make the mistake of considering these tools as a cost of doing business. The mistake is understandable, because the decision to invest in these tools is often driven by the need to get compliant with the new lease accounting standards. Organizations are focused on this goal without understanding what else they stand to gain, and the potential for a significant return on investment.
If you’re not actively looking for that ROI, you might miss the chance to recoup your investment, plus a lot more. By taking full advantage of the full capabilities of lease management software, you can save much more money than you spend.
PROBLEM: Paying more than you owe for leases
If you’re not tracking all the details of your carefully-negotiated leases, you’re almost certainly paying for things you shouldn’t. By properly managing leases and auditing lease payments, companies have uncovered millions of dollars in hidden waste and overpayments, such as:
- Making extra payments. Many property leases will include a free month’s rent at some point during the lease. Even though it’s clearly stated in the contract, chances are the landlord will bill you anyway. If you’re not checking payments against contract terms, you are paying more than you owe.
- Continuing to pay for expired leases. Even worse, we see companies continuing to make automatic payments on leases that expired or were canceled. That happens when you’re not checking the lease end date before making the payment.
- Paying for things that are the lessor’s responsibility. Maintenance and repairs are often needed on leased assets. For real estate, you’ll need HVAC, plumbing, and electrical work. For vehicles, you’ll need oil changes, tires, and repair work. Computer equipment and copiers need maintenance and software updates. If you automatically pay for these services without checking the contracts, you might be paying for things that the lessor is responsible for.
- Paying an inflated share of CAM expenses. In a leased building, shared operational charges (also known as common area maintenance or CAM expenses) get divided among the tenants of the building. For example, you pay a CAM charge covering utilities, landscaping, and cleaning based on the percentage of usable space you occupy in the building. But what happens when that percentage changes? You might think to reevaluate your CAM expense if you give up some space, but what if the landlord added a new wing or otherwise added more usable space to the building? That reduces your percentage of space and should change your CAM charges.
- Paying for things you didn’t get. In the process of negotiating lease terms, especially for property leases, it’s common for a landlord or agent to throw in the initial cleaning, new carpet or a paint job. However, these “freebies” often don’t end up being free, because you get charged after the fact. If you’re not tracking what you are obligated to pay, no one questions the bill and you pay for something you shouldn’t.
- Paying inflated rent increases. Real estate leases often include yearly rent increases. These escalations might be based on a percentage, a percentage of sales, or complicated formulas based on market factors. If you’re not checking rent increases to make sure the amount agrees with the lease contract and is calculated correctly, you could be paying too much for many leases in your portfolio. Even worse, the wasted expense gets compounded every year with new rent increases.
The point is, if you are not tracking all the terms of your lease contracts and regularly validating payments against those terms, you’re definitely paying more than you owe.
SOLUTION: CAM audits catch lease payment mistakes
If you’re guilty of overlooking many of these lease payment mistakes, you’re not alone. Before ASC 842 came along, few organizations were tracking the details of lease contracts and the accuracy of payments. However, now that leased assets are on the balance sheet, and making a much bigger impact on financial reporting, that’s changing quickly. Those mistakes are coming to light and getting noticed by financial leadership as well as auditors.
Don’t wait for your CFO to question your leasing expenses and uncover payment errors. Your lease accounting and lease administration software can help you uncover lease payment errors by flagging payments that don’t match your contracts with CAM audits. Armed with that information, you can correct the situation with your lessors and recover overpayments. Plus, moving forward you can proactively validate every payment so you never pay too much again.
PROBLEM: Missing lease renewal deadlines
Many lease contracts include renewal options that allow you to renew at a favorable rate as long as you notify the lessor by a specified date. If you miss that date and fail to notify the lessor of your intention to renew, you lose the chance to get that locked-in rate. At that point, you’re forced to pay market rate to renew the lease. If you have made that mistake before, you know that one instance can cost you millions.
SOLUTION: Critical date alerts prevent costly errors
Your lease software can track all the deadlines and notification dates for exercising options (not just renewals, but options to cancel or purchase). You can set up customizable alerts to let key staff members know when deadlines are approaching so they can take action in time.
This brings up an important point: you need to track ALL the details of your lease contracts to get these cost-cutting benefits. If you’re only tracking the minimum data needed for accounting calculations, you’re missing out on the true value of lease management software.
PROBLEM: Poor lease vs. buy decisions
Speaking of purchase options, basing a lease vs. buy decision on incomplete and inaccurate payment data can lead to poor choices. You could decide to purchase assets that would cost less to lease, and vice versa.
SOLUTION: Lease data analytics deliver reliable intelligence
When you’re deciding if it makes sense to exercise a purchase clause within a lease, you need accurate data about the costs associated with the lease. When ALL your lease data is centralized within a lease accounting and administration platform, you can create reports that show every payment and every cost associated with that lease. Armed with that reliable data, you can compare the cost of continuing to lease with the cost of exercising the purchase option.
PROBLEM: Scattered lease data
When lease data lives in multiple, unconnected systems throughout your organization, there’s no easy way for everyone to access complete, up-to-date information about your leases. Without that complete picture of all your lease-related expenses, it’s easy to make poor financial decisions.
SOLUTION: An integrated, single source of truth
With leases now having a much bigger impact on your company’s financial picture, your financial leaders need visibility into lease data. The various teams that work with leases, such as Real Estate, IT, and Legal, also need access to all the details associated with leases. A complete lease platform provides a single source of truth that integrates with your other enterprise systems, including your ERP, facilities and asset management systems, contract management tools, and analytics platforms.
Your lease platforms provides more value when it can help to drive better decisions related to leases across your organization.