What is the Importance of Lease Management and How to Improve the Practices?
Lease management means to track and optimize every aspect of the company’s portfolio of leased assets. Today, under the new lease accounting standards, corporate or non-profit organizations must record both payment liabilities and right-of-use assets that are related with leases on their balance sheets. Lease management process is efficient that benefits the business and organizations in different ways.
Until recently, a number of companies across the globe were not paying much attention to their asset and property beyond paying the bills. Lease was only considered a cost of doing business, and managing obligations and lease terms was not a priority. But today, lease management has become an essential practice that influences financial reporting & the bottom line. By 2027, the lease management market is expected to surpass $6,252.3 million, up from $3,721.6 million in 2019.
What is Lease Management and Why it is Required?
In a non-profit or corporate organization, lease management means to track and optimize every aspect of the company’s portfolio of leased assets. Suitably managing leases, not only real estate but also vehicles, technology, and even assets that are controlled as part of service agreements can help the organization to significantly reduce the expenses related to leasing. A coordinated effort is required between numerous teams for lease management to perform these tasks:
Lease negotiation and decision making that includes lease length, lease structure, and lease v/s buy options
Lease administration tasks: tracking upcoming renewals and practicing options, updating lease data, and managing operating expenses
Lease accounting tasks, such as payment of lease-related charges, calculating liability figures & asset, recording journal entries, generating reports, and executing re-measurement when leases change
Why Lease Management is Becoming Important?
Earlier, under the old rules of lease accounting, leases had a slight impact on financial reporting and were not included on balance sheets. But today, under the new lease accounting standards, corporate or non-profit organizations must record both payment liabilities and right-of-use assets that are related with leases on their balance sheets.
Thus, adding the value of the entire leased portfolio can be a big change and can also make a huge impact on the outcome of the financial reports. This also means that the risks related to the poor lease management and lease decisions are magnified. And hence, financial leaders must carefully analyze and manage leasing decisions, expenses and administration practices.
How to Establish a Lease Management Process?
Traditionally, lease negotiation, accounting, and administration were done in silos with little to not any coordination between the teams that handled each task. This led to scattered data, inconsistent lease decisions, and often, pay excessively for lease expenses owing to the lack of audit capabilities and centralized records.
Effective lease management involves cross-functional collaboration and centralized access to lease management tools and lease data.
- Centralize Lease Data & Management Tools
The first step for teams to work together & efficiently on lease management is to collect all lease data in a central repository, which creates a single source of truth and an audit trail for all lease changes and decisions.
In order to set the teams up for effective lease management, choosing a software platform such as Visual Lease will enable the organization to centralize ALL data related to lease contracts. Besides, it will provides tools for automating auditing expenses and lease administration tasks.
When the whole team managing leased assets is making use of the same system to update schedule payments, lease data, and create accounting journal entries, all team members are always working with the most current data.
- Develop Leasing Policies
With technology and centralized lease management tools in place, an organization can now analyze the lease data and discover which leases are working fine and which are costing the organization more money than realized. Using those insights can help in determining how the organization wants to standardize leasing decisions.
For financial leaders, it is the best practice to work with lease administrators, negotiators, and accountants to comprehend current practices and establish cost-effective leasing policies.
- Create Lease Application & Update Processes
In order to ensure if an organizations’ accounting team always has precise lease information to feed financial reports and balance sheets, it’s necessary to establish standard practices for each group that is involved in acquiring & maintaining leases. This also includes processing new leases, handling lease terminations, and documenting lease changes.
Every time leases change, an organization’s lease accounting must be updated. Choosing software that automates lease re-measurement and modification is a smart way to minimize the burden on the accounting team.
- Set Up Controls
The complexity of financial reporting has increased due to the addition of leases to the balance sheet. This means that more oversight is needed to guarantee accounting accuracy. Besides, process validation and internal monitoring are required to ensure that all lease management procedures and policies are being followed.
Some of the important ways in which a lease management software can aid the process:
Documenting every lease term, calculating every payment, and making changes if payments don not match the lease terms
Offering audit tools to find late fees and overpayments
Allowing to customize approvals essential for lease accounting tasks and lease administration
Providing a track of audit for all lease changes
Lease management process is efficient that benefits the business and organizations in different ways. Organizations should take this opportunity to examine and overhaul the lease management practices & policies while working towards lease accounting compliance.
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