Budgeting is important for body corporate & home owners associations. Budgeting carefully and in advance of the financial year end to revise levies at the start of the new financial year, is a very important financial management discipline for bodies corporate and home owners associations. In this way, income and expenses are correctly matched in a consistent annual cycle. Typically a new budget should be formulated in the 10th month of the financial year, incorporating a detailed maintenance inspection with forecast maintenance costs in the budget. Levies are then determined in line with the section participation quotas for sectional title buildings by deciding on the total income required to cover forecast costs plus a reasonable surplus to maintain a reserve fund ideally equivalent to 3 months of levy income. There should then be ample time for the trustees to approve the new financial year budget (they do have the authority to revise the levies by up to 10%), for owners to be advised in writing of a levy increase with one month’s notice and for the levy statements circulated in advance, to reflect the increased levy from the beginning of the financial year. It is important that longer term maintenance projects which may entail a significant capital cost such as repainting, lift replacements, waterproofing and structural repairs are provided for well in advance, to avoid the disruption of special levies and significant levy increases as far as possible. Surplus funds saved for a medium to long term maintenance project should be saved in an appropriate interest bearing account (designated as a trust account if managed by a managing agent) ideally at money market related interest rates.
Buildings which start budgeting after a new financial year has started and which delay the approval and levy increase implementation until an annual general meeting, slowly lose ground with income falling behind costs for at least part of the financial year. The strict and disciplined budgeting approach outlined above is a cornerstone of effective financial management for body corporate and home owners association properties and promotes healthy cash flow, reserves and service delivery including maintenance. Typically buildings that operate in this manner achieve positive property asset growth appreciation above average for their location. Prompt and proactive maintenance delivery equally creates a strong impression of positive property and facility management service delivery and a culture of prompt levy payments by owners.
Cash flow difficulties in a property typically arise in the event of significant levy arrears, municipal billing issues or large, often unexpected maintenance requirements at a property. Where reserves have been depleted, decisive action needs to be taken to turn around the cash flow difficulties with special levies, levy factoring solutions or a loan, as options to remedy the financial and cash flow predicament. Trafalgar Financial Services has a range of financial products specifically designed to assist buildings in cash flow distress, all of which are available with management and advisory support. Typically the funding and cash flow support necessary are very small compared to the property asset values concerned and when applied quickly and decisively achieve a very significant benefit to the property’s wellbeing. Exiting a levy factoring contract can typically be quickly achieved once the arrears have been recovered and with a month’s notice thereafter.
Written by Andrew Schaefer (Managing Director)
