A lease is a lease, right? It is true that all leases are contracts and share some of the same characteristics, even though specific rights and obligations can vary due to differences in the underlying leased assets. Some leases, like those for real estate assets, are easy to identify and track due to their large financial value, lengthy term, and the underlying asset’s relative permanence. These leases are typically monitored closely due to their importance in business operations. On the other hand, identifying and managing leases for other smaller assets can be tricky. Smaller contracts may originate from many disparate functions within an organization. Multiple procurement processes also might exist, and for global organizations, the challenges are even greater. Below are our 5 tips to Know. Right. Now. to effectively manage your equipment leases.
1. Centralize the Process
Depending on company structure and current processes, equipment leases can originate from many functions or individuals. We have seen leases originate in procurement, human resources, IT, warehousing and logistics, manufacturing facilities, and even from small satellite office managers. The most efficient way to capture all leasing activity is to create and implement a single process that all stakeholders follow, combined with a central document repository. Putting this in place allows for centralized equipment lease administration, tightens internal controls, supports lease accounting requirements, and can reduce financial obligations.
2. Utilize Technology
For organizations with more than a small handful of leases, a technology solution will be necessary to help manage the documents and lease information. Software that is built specifically to handle non-real estate assets accommodates the nuances of equipment leases, including moving assets in and out of inventory, tracking end of term obligations, evergreen arrangements, and more. The software can typically report on lease data for overall lease management, support payments and lease accounting, and in some cases enable lease vs. buy analyses and source bids for future leased assets.
3. Manage Inventory Changes
The inventory of leased equipment assets is dynamic and constantly changing. Assets can move in and out of service and from place to place depending upon their nature. Combined with lease accounting standards that require accounting at an asset level, managing the asset inventory from a lease administration perspective can be complex. For example, if a leased forklift becomes unusable and is returned to the lessor, that forklift should be removed from the leased asset tracking system, the lease administration system, and the payment process. The removal of the asset from service may also affect the lease accounting schedules depending upon the nature of the change and internal accounting procedures. Extrapolated over all the asset changes that can occur and you can predict the effort that might be required.
4. Track End of Term Dates and Requirements
Some equipment leases automatically renew unless the lessee notifies the lessor that it intends to terminate the lease. If not closely monitored due to decentralized processes or staff turnover, it is possible to miss critical lease dates. In addition, some leases may require specific maintenance, cleaning, or other activities occur prior to terminating a lease and returning the asset to the lessor. Failing to abide by these covenants can result in payments for out of date or obsolete assets and negatively affect financial performance.
5. Stay Up to Date
Many equipment lease portfolios have a large amount of ongoing activity to be recorded, and it is usually recorded after the event has occurred. The number of lease vs. buy analyses, asset inventory changes, new leases, expiring leases, lease accounting calculations and more can be overwhelming when looked at on a periodic basis. If not maintained on an ongoing basis, the data can become unreliable. This can lead to missed lease dates and require clean-up projects, which can be expensive to undertake. If you have reporting deadlines or audit requirements, these can also be affected if the database is not kept current.
These are only a few ideas on how to effectively manage your non-real estate lease portfolio. While it is true that all leases have some shared characteristics, understanding and managing equipment specific rights and obligations supports accurate payments and lease accounting calculations. Refining leasing processes reduces internal control risk while increasing the understanding of what is leased and where. And finally, accurate lease data allows organizations to report, analyze, and make strategic decisions at a macro level. Managing all leasing activity is a best practice to monitor obligations and protect financial performance.
What is your organization doing to manage your non-real estate leases? Have you considered technology to support your efforts, from sourcing to lease administration to lease accounting activities? If you are looking for professional support that strengthens your team, no matter where you are at on your lease administration journey, Scribcor can help. Our team works with leases of all types, and we understand that equipment portfolios have different needs than their real estate counterparts. We would love to work with you. Contact me today to learn more.