If you fail to put in place the right infrastructure, resources and procedures needed to optimally manage your lease portfolio, you could be courting disaster.
This disaster could take the form of lost or misplaced documentation, missed end-of-lease deadlines, complications when renegotiating lease terms, or not fulfilling the return conditions of a leased item or asset.
This blog gives you four important strategies to help you avoid costly disasters by increasing the effectiveness of lease administration in your company, and shows you where to look for hidden savings you might have missed in all the mess and confusion.
1. Understand Your Lease Portfolio Fully
If your organisation has a haphazard approach to lease management, then there isn’t a moment to waste. The first step to identify issues in your lease portfolio that could be costing your organisation time and money, is getting a firm grip on the administration of leases across all departments, countries and lease providers.
This means reading the small print in order to understand the terms and conditions of every lease in your portfolio. Part of the document examination process should include establishing an ongoing reporting system. This allows you to quickly disseminate information to the relevant people within your organisation, so terms are honoured, and potential issues and red flags handled without delay.
2. Prioritise Real Estate Leasing and Find Hidden Profits
Lease management is often overlooked as a strategic priority even though the various stages of the leasing life cycle have the potential to drive profits. This is set to change with the introduction of new lease standards that will move companies’ lease portfolios from the backroom to the balance sheet.
After human capital costs, real estate leasing is typically the second largest cost on a company’s books. According to the Property Data Report 2016, 55% of commercial property (by value) in the UK is rented by businesses that prefer not to commit capital and management time to owning the property they use.
When your lease portfolio remains unprioritised, it’s easy for your company to miss hidden economies in your portfolio. This can be in the form of changes in lease models that offer increased flexibility for those who find innovative ways to adjust their leases and could result in solutions that are more economical for companies. These savings are easy to overlook when lease management is not treated as a strategic priority.
3. Comply With New Lease Standards or Pay The Cost
The International Accounting Standards Board’s new lease standard, IFRS 16, that comes into effect on 1st January 2019, will affect every company that accesses the use of assets through rentals or leasing in the following ways:
- The new requirements will do away with most off-balance sheet accounting for lessees and redefine a number of commonly-used financial metrics, like the gearing ratio and EBITDA (earnings before interest, taxes, depreciation and amortisation).
- Lessors’ business models and offerings will change as lease needs and the behaviours of lessees change. It will also affect market development in leasing with a focus on services over physical assets.
- Lessees’ business processes, systems and controls will place a greater demand on data as a result of the on-balance sheet accounting of the new standards.
The new leasing standards will require organisations to understand and implement the rules sooner rather than later, to avoid increased implementation costs and fallout from failing to comply.
4. Digitise Lease Management And Drive Savings
Companies that have clung to the old, familiar ways of lease administration—those unwieldy excel spreadsheets come to mind—will soon discover that new and evolving technologies are critical to the implementation of the new standards and a company’s ultimate compliance with IFRS 16. By investing in lease management software, organisations can:
- Reduce time and space wasted on lease detail and documentation storage and processing.
- Store lease agreements under one virtual roof which will allow a lease administrator to generate tailored reports and datasets—an easy way to keep tabs on contracts that are overdue or overly expensive, and take the necessary action.
- Ensure all your leases, past and present, are compliant with internal and external accounting standards.
- Provide a full audit trail, even when your organisation’s people and their responsibilities change over time. This not only makes internal structures easier to manage, but also highlights issues that may have occurred in the past that can then be fixed for the future.
- Keep images of lease agreements and associated documents secure and fully backed up in cloud-based storage.
- Generate tailored reporting to help you visualise your data in a simpler way, giving you quick access to the size of your leasing portfolio, up-and-coming deadlines and the savings you’re making.
- Notifications and alerts help you keep track of every lease and schedule, avoiding automatic or evergreen extensions of leases at the primary rate. This applies equally to assets that have limitations to their usage, such as vehicles or office equipment.
- SaaS (software as a service), is a software solution that is licensed on a subscription basis and centrally hosted. It is designed to grow with your business while the vendor is responsible for updates which could otherwise prove costly for businesses to design, develop and deploy.
- Place you in a stronger position to re-negotiate better lease deals when you have detailed reports and audits at your fingertips.
Leasing remains popular for most organisations because it allows businesses to better manage their cash flow and balance sheets. It is for precisely this reason that lease management should be made a strategic priority—the only way to ensure it becomes a profit driver in your company and always works in your favour.
If you would like to find out more, then download An Expert View on Everything You Need to Know About Leasing. The free guide explores topics such as: what a lease is and its basic principles, the difference between an operating and finance lease, the important lease documentation and reporting, a stage-by-stage analysis of the leasing process, advice and guidance from start to finish of lease, and information on the new global lease accounting standard and its proposed effects.
Innervision specialises in lease portfolio management, helping medium and large companies understand what they lease, how much this cost and where they could save money. They are able to centralise your lease portfolio with their software and LOIS, and deliver compliance and consistency, putting you in control of your lease portfolio.