Most mortgage experts are aware that running a successful mortgage firm necessitates accounting knowledge. Your company’s books and records are the yardsticks by which the rest of the world measures your progress. You must be able to explain the figures, understand where they came from, and know how to keep on a lucrative path as a business owner.
The Difference Between Accrual and Cash
Cash accounting is simply the process of recording transactions that occur when money is exchanged. The day you write the check is the day the bill payment is recorded. The revenue is recorded on the day you make a deposit. It is easier to account for business this way, but it is impossible to match income and expenses for a mortgage firm using this manner. Â Consider switching from cash to accrual accounting to improve your efficiency.
The largest monthly expense at most mortgage banks is commissioned, which is paid the month after the loans are closed. Most mortgage banks make money at two important moments: when the loan is funded, when fee revenue and discount points are received, and when it is sold. Funding and sales revenue might occur in the same month, however, loans are typically sold the month after they are funded.
Earnings are likely to be harmed in the first month after switching to accrual accounting. If your organization earns the majority of its revenue when a loan closes and pays loan officers the following month, your transition month will display significantly lower earnings, all else being equal.
The excess expenses that are being shifted into the previous month will be offset by adding fair market value to your warehouse loans. Before publishing your financials for the first month, have a third party, such as your accountant or auditor, check them. A month-long trial run will reveal the effects of switching to accrual accounting, and it’s a good idea to prepare your investors and creditors for the transition.
How many auditors have excellent news to report? I haven’t come across many, but they can and should be a key component of your company’s success. A mortgage executive should know the audit partner at the accounting firm conducting the audit by the first name. Nobody benefits from an acrimonious relationship between your firm and your auditors. If you don’t get along with your auditor, you should either make amends or locate another auditor with whom you can form a working relationship as quickly as feasible.
Although the auditor-client relationship is vital, it is not a substitute for knowledge, particularly in mortgage banking. I recommend that you hire an auditor who has at least five other mortgage banking clients. An auditor who has worked with other clients in the business will be more knowledgeable about the standards; they will spot chances for profit that others would overlook, and they will be a better resource for industry best practices. You have a winning auditor when you combine it with audited financial statements that your correspondent investors and warehouse banks already trust.
Accounting Procedures And Policies
You may not be a public corporation, but you must still be accountable for everything that occurs within your organization. The Sarbanes-Oxley Act of 2002 requires CEOs and chief financial officers of public companies to ensure that their company’s financial statements and disclosures truthfully portray the company’s operations and financial status in all material aspects.
Despite the fact that Sarbanes-Oxley was enacted in reaction to unscrupulous actors in a few large corporations, it essentially established a standard that all organizations should follow. When business owners consider going public, one of the first things on their to-do list is to become ‘Sarbox’ compliant, which entails documenting rules, procedures, and systems for each activity that potentially affect the company’s financial statements. The accounting department is the logical first destination.
But let’s put Sarbox aside for a while. Do you have faith in your company’s procedures, controls, and personnel to prevent embezzlement and theft? Is your self-assurance backed up by established policies and procedures that you and your workers are aware of and follow?
Every executive should examine and update accounting rules and procedures at least once a year. Furthermore, every executive must adhere to the company’s established rules. If an executive breaks the rules, it gives others permission to do the same or to disregard other rules that have been established.
For owners, some rules are self-evident. Reimbursement for meals and entertainment, for example, should be granted exclusively to the company’s highest-ranking official present at the dinner or function. This prevents managers from authorizing their personal spending by transferring the bill to one of their workers and then authorizing that same employee’s expense report. To avoid a lone employee from funneling money out of the organization, the individual drafting the documentation for a loan closure should not be the same person ordering or approving the financing wire for that transaction.
People Are a Asset
We’ve all heard it, but the people we employ are assets that don’t appear on the balance sheet as a line item. You must get rid of persons who handle money if they cannot be trusted for whatever reason.
Another issue arises if you trust people but not their math. In many circumstances, maintaining the individuals you trust and allowing them to make errors (one at a time and only once or twice) will result in the development of some of your most essential relationships. Obviously, you want personnel in your accounting department who will be honest and forthright. Because they had access to your funds, they will know more about you than most other individuals by the end of their time at your company. They can see how you handle money, which is information that others lack.
Accounting employees must be discreet, rule-abiding, and bondable, even if they are not bonded. They need to know what their job entails and how much it pays because there’s a considerable chance they’ll figure out how much you and other employees make and compare it to their own compensation. A good accounting employee is someone who is constantly asking for a raise, especially when others are getting raises.
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