There is a very important lesson every real estate investor can learn from banking i.e. real estate banking. A life lesson, even. The importance of knowing how to balance your books and close your accounts like top bankers do the world over. It's not easy to manage finances when you're an entrepreneur or a self-employed person. But it's not impossible - just prepare yourself for a bit of chaos and don't overcomplicate things all at once! This post breaks down the essential steps any real estate investor should take to get their finances in shape so they can focus on making money, rather than spending it.

1. Get An Account And Pay All Your Bills To It

The first step is easy - open an account with a bank and have all your bills go to it. Put all your rent checks, tax payments, property management fees, and anything else you need to pay into the same account. It's easier for everyone involved if you don't have too many bills coming in and out of different accounts. That way your manager will know when to expect their check and you won't lose a payment or two in the meantime.

2. Break Down Your Expenses Into Categories

Now that everything is going into one account it's time to break down what's there into categories so you can make sense of them all. This is the fun part! Take some time to break down what goes into your property management fees, how much you pay each month for taxes, what you budget for your workers and what's your own share of that. It's up to you exactly how you divide it up for yourself.

JUST A HEADS UP - If you're managing another person's properties and they are paying the bills, make sure you talk with them about it first. In order to do this, keep their checks separate from yours so they can identify the expense from their expenses. When everything is all said and done, make a list of all the checks written in one column so everyone can see where their money is going!

3. Create An Income Statement

Now that you know where your money is going, it's time to create an income statement so you can balance out everything. This part of the process is arguably the most important because it will give you a chance to see where your money is coming in and exactly how much of it you have left to work with at the end of the month. Use our template below to get started:

Adding It All Up: Income - Expenses = Net Profit

Now that there's more than just an idea about what goes into managing accounts, it's time to break down what kind of sums up your net profit each month. Here are a few steps we recommend before you calculate your profits.

1. Add Up Your Net Income

2. Subtract Your Expenses Or Add Up Your Costs. (Whichever one is least complicated!)

And just like that, you've got your net income and you can see exactly how much of it you have left to enjoy - or invest! But let's not get ahead of ourselves. The next step is to create a balance sheet so you can account for everything you have coming in and going out over time.

4. Build A Balance Sheet

Now you're on to the fun part! So what's a balance sheet? Glad you asked! It's basically a financial statement of your income, expenses, assets and liabilities without any zeros involved. The numbers on the balance sheet will be much smaller than those on your income statement. That's because we are talking about percentages and not costs or credits so there'll be fewer decimals and much less math. Here is a sample balance sheet template to help keep everything organized:

Balance Sheet Template (Template via BlueVenn)

You're doing great! But just because it's not the most complicated spreadsheet in the world doesn't mean it can't get messy. It means it can be!

5. What Goes On The Balance Sheet?

As you can see, there are tons of boxes to fill in. When it comes right down to it, not every single thing goes in every single box. The only things that should go in every single box are assets and liabilities. Deficit boxes like Accounts Receivables and Accounts Payable should be created for each transaction so you're able to track the money that's coming in and going out over time in a complete financial picture.

6. Take A Good Look At Your Assets For Real Estate Banking

Now that all of the income and expenses are accounted for, it's time to look at your assets. The purpose of the assets section is to give an overview of everything you have at your disposal that is valuable in some way. Don't be shy with what you list! If you think of something else that might be considered a potential asset, make sure to list it!

In the above example, there's a lot of different things listed under different categories such as Cash on Hand, Real Estate Investments, and Investments Made on Loan. If you're a seasoned investor and are still dipping your toe in the pool of real estate investing, this might be a bit overwhelming to look at. Again, don't let it get too crazy or complicated. You can always add more columns as your business grows.

7. What Might Be On The Liability Sheet?

As you can see above, there are two types of possible liabilities on the liability sheet: those that will need to be paid back and those that will not. Common examples of both include debts, salaries, taxes, etc. Again, don't be afraid to list any future liability that may be coming up in the near future. The purpose of this sheet is to look ahead and analyze your potential liabilities for the next year.

8. Track Your Expenses Over Time

The purpose of this section is to track where your money is going (or coming from) over time, so you can see if there's a pattern or if something needs to be adjusted within your budget. This type of financial record keeping goes a long way in helping you keep accurate records when it comes to taxes because at the end of the year you'll have all the information necessary to get yourself reimbursed for business expenses!

9. Create A Cash Flow Summary

The last step is to sit back and take a look at everything you've just created. Now that the pile of receipts and statements is in front of you, try to break down your expenses into categories that you can use to create a cash flow summary for your real estate banking. Set up the list in categories like Operating Expenses, Maintenance Expenses, Property Management Fees (we explained this above), Income Taxes (depending on where you live), and any other expense that can be categorized as an expense. This will give you a clear idea of how much money goes into your expenses each month, which is what helps us figure out how much money comes in.

10. Check Your Profit With A Profit And Loss Statement

The final step in the process is to calculate your net profit. The goal is to take everything you've learned and create a basic profit and loss statement. This will give you a general idea of how much money you're making each month so you'll know whether or not your profit from the month was large or small compared to others in your area. If there's a large balance that wasn't covered in the above steps, it's time to do an income statement for that month so you can get the proper amounts of data.

Basically, the goal of a profit and loss statement is to show how much money was made from sales, customer service, and other activity during a specific timeframe. We can look at your profit and loss statement year over year and compare it to how much money you made in previous years to see if your business is growing (or shrinking).

The steps above are the basic procedure for creating a profit and loss statement. Before diving into specific instructions about how to make a profit and loss statement, there's one other crucial element we should talk about...

11. Set Up Your Accounts For Tax Fairness

One of the most important things that go on your income statement is taxes. We've talked about creating a balance sheet but what about a liability statement? It's all the same process for creating a new liability! So long as you keep good records, you'll be doing yourself a favor in the long run. This will help you stick to your budget and it will help you plan for the future if there are any upcoming payments like taxes that will need to come out of your monthly income.

A liability statement isn't just for personal use, it's also great for tax purposes. You can use this information to prove that certain expenses were legitimate business expenses such as marketing materials, travel costs, and more. You can also use this information to help you keep track of what you owe the taxing authority.

Like a balance sheet, the liability statement is a way for your business to show how much money it has coming into the company and how much money is going out. You can make sure that you're following your budget by looking at both of these statements and comparing data over time. The goal is to have accurate records so you'll be able to create reports that will set up your exit strategy for when it's time to leave a business or transfer ownership.

How To Create A Profit And Loss Statement Yourself

Creating a profit and loss statement doesn't have to be complicated. The following video will give you the basic instructions on how to create a profit and loss statement for your business. We'll start with the most basic example which includes everything you need:

1. Get Your Numbers Together

First off, get all of the data together that you had listed out in Step 5 of this tutorial. You'll be using this data every time you do the report, so don't think too hard about what you're doing or try to make it fancy!

2. Add Your Operating Expenses

Take a look at each type of expense (again, just like we did in the balance sheet). Total up all of the expenses you had during the month. If you're having trouble figuring out what to count as an expense, you can always take a look at your balance sheet and use that as a guide.

Be sure to include everything from labor expenses to property management fees. We'll talk about how to find the best numbers for your situation later on in this post. The important thing is that you put these numbers together now and let them stay consistent over time so that it's easier to compare your profit and loss statement year over year.

3. Add Your Income

Next, go to the income section and add everything up as well. This is largely based on your sales, but you can include other income streams if you have them. In the example above, we included both sales and customer service income. If your company also does things like provide marketing or consulting services, you can include those numbers here as well. Just remember that all of these numbers should be accurate when compared to the balance sheet so that it's easier to calculate profit and loss.

4. Plug Numbers Into The Formulas

Now that everything is all in the same place, it's time to plug things into the correct formulas. We'll be using this equation to create a profit and loss statement for our fictional business:

Income - Operating Expenses = Profit

This formula is pretty straightforward since it's using the numbers you already have plugged into your balance sheet. If you're having trouble following along here, take a look back at Step 5 where we explained how to create a balance sheet.

5. Calculate The Profit

Now you're ready to calculate the actual profit. In order to do this, subtract the operating expenses from the total income and then put that number on a new line. Add that number up and then divide it by how many months you had in your year (for example, if you had 34 months in your year, it would look like this: $2,000 - $2,000 = $0). This will give you your profit for this specific month. Now it's time to see how much money you made on average each month. Check out this previous blog post for more information about calculating net sales per month when using a standard cost system.

6. Calculate The Losses

Next, you need to take your operating expenses and subtract them from the total income. This is where you will see where your losses are coming from. For example, if you had $2,000 in revenue and $2,000 in expenses and you lost $250 each month last year, your calculations would look like this: $2,000 - $1,150 = -$750

The key here is to make sure that all of the numbers are added up correctly so that the profit and loss statement makes sense. This can be a difficult process at first but once you get used to it it will get much easier. FAQs on real estate banking

What Is A Profit And Loss Statement?

A profit and loss statement is a calculation of how much money your business made or lost over a certain period. In its most basic form, this is calculated by figuring out the net income for a business. You can do this by subtracting operating expenses from revenue. Most small businesses will use the formula like this:

Income - Operating Expenses = Profit (or Loss)

This formula can be adjusted depending on what type of expenses you have, but it's not needed to calculate your total profit or loss for an entire year. You just need to keep good records of what you're spending and how much money you bring in each month.

The important thing to remember is that you should only use the net profit and loss in your calculation. You should keep operating expenses out of the equation because those are just necessary costs for doing business. The end goal is to create a profit so that you've covered all of your costs and you have some extra money left over.

When you're just starting out, it's best to take a look at how much money you're actually making each month. This will help you build a better budget. If you have trouble with this, check out our online accounting program which can help with sorting expenses into different categories to make them easier to track as your business grows.

How To Use A Profit And Loss Statement For Taxes

When you get ready to reconcile your profit and loss statement for tax purposes, make sure that the numbers you've put into the equation match what was on your balance sheet. You want to include all operating expenses in with your income. Then, subtract them from the net revenue for each month so that you have a good idea of how much money you made overall.

From there, you can take that number and use it to calculate your taxable income. You'll be able to see where you're making a profit or losing money which will help you decide if paying taxes is appropriate for the year.

How To Use A Profit And Loss Statement For Projections

There are many different ways that you can use your profit and loss statement for future planning purposes. This can play a big part in determining where your business is headed as well as how much money you'll need to reinvest in the next year.

One of the most common ways that you might see this used is as a budget. You can break down your business income and expenses for the next year so that you have a good idea of how much money will be coming in. From there, you can use this information to create a budget for each month.

If your business makes $500,000 per year with $200,000 in operating expenses, it's likely that you'll make $300,000 in net income and $300,000 in taxable income after all of the individual expenses are paid for.

For more information, you can visit Calculate investment property return without a spreadsheet.