From Compliance to Optimization: Harnessing Lease Controls for Business Success
Lease accounting standards implemented over the last few years (ASC 842, IFRS 16, GASB 87) require all organizations, whether they be private, public or government entities, to account for their leases on the balance sheet. This paradigm shift has ushered in a more comprehensive reporting process, demanding greater attention to detail from finance teams across industries.
While for many, the path toward achieving lease accounting compliance was a challenging one, it has also put organizations in a position to take advantage of their lease management practices and implement a strong lease controls framework. In doing so, they will recognize substantial business benefits, including:
Maximized Value and Reduced Costs
Real estate leases are an expensive portfolio of holdings for any business. On average, retailers spend about 11% of their annual gross sales on rent, according to data from NewMark Merrill, and office users can spend up to 20% of their business revenue on rent. Rent fees are just part of the cost structure of a lease. Most businesses will spend $2.14 per square foot on energy consumption, $2.15 per square foot on maintenance and $1.68 on cleaning – as real estate costs increase, business operating costs increase in step.
Although real estate equates to significant cost expenditures, businesses rarely know the true extent. Research from the Visual Lease Data Institute (VLDI) found that 71% of organizations are not confident they know the full cost of their leases. Technology-backed lease controls – defined as policies and procedures designed to prevent or detect unauthorized acquisition, use or disposition of these assets – can change that.
When organizations have proper systems and processes designed to safeguard and manage their leases, they will gain insight into the full value and cost of each lease, allowing them to be proactive in responding to lease obligations, like maintenance responsibilities, rate increases and CAM charges, as well as understanding termination rights if a lease isn’t working for or benefiting the business. In addition, proper lease control systems can help businesses save money. Data from Accenture shows that proper real estate optimization, which can only be achieved with strong lease controls in place, results in annual real estate operating expense reductions in the 12 – 20% range.
Streamlined Processes and Reallocated Resources
Sustained lease accounting compliance takes an enormous effort for finance and compliance teams as they attempt to keep track of all the moving parts and pieces of their organization’s lease portfolio. By implementing dedicated lease management technology that provides a customizable lease controls framework, organizations will greatly simplify their lease management and reporting processes.
In fact, a 2022 VLDI survey shows private companies save an average of 600 hours when utilizing lease accounting software to manage lease controls. This is particularly valuable in light of the severe shortage of accounting professionals.
A 2021 report from The American Institute of Certified Public Accountants found that fewer people are entering the accounting field with bachelor’s degree candidates down 2.8% and master’s degree candidates down 8.4%. Still, three-quarters of companies plan to continue to hire new graduates at the same rate each year. Implementing technology that facilitates strong lease controls can lessen the time spent on manual tasks and empower accounting and finance teams to tackle more strategic work, helping businesses address the talent shortage by better utilizing their existing resources.
Increased Focus on Business Objectives and Growth
The Visual Lease Data Institute found that 45% of companies have overpaid rent or expenses due to inadequate lease controls, meaning they’re not properly managing, tracking and analyzing these agreements. In many cases, this cavalier approach can compromise an organizations’ ability to grow in what are already challenging economic times.
Businesses with technology that supports proper lease controls can better respond to market real estate availability, create a real estate strategy that reflects their needs and gain an upper hand in negotiations without the pressure of time constraints. With a functional and targeted real estate strategy, companies and government entities will improve operations, minimize capital expenditures and realize organizational growth.
