Good financial and cash flow management is at the heart of all well-run and efficiently operated community housing schemes, including Sectional Title schemes, shareblocks, retirement developments and Home Owners’ Associations (HOAs).
And the basis of this, says Andrew Schaefer, MD of leading property management company Trafalgar, is a comprehensive and accurate annual budget. “When drawn up correctly, this will ensure that the income of the scheme (mainly derived from the levies payable by the owners) is sufficient to cover all of the projected day-to-day expenses for the year ahead, as well as the scheme’s statutory contributions to the Community Housing Schemes Ombud Service (CSOS) and – in ST schemes - a reserve fund created in terms of a 10-year maintenance plan.
“When budgeting, the trustees or directors obviously also need to take into consideration any large outstanding debts to suppliers or service providers, as well as any levy arrears and the actual monthly levy collection rate, which affects the scheme’s cash flow.”
It is also important for them to remember, he says, that the budget may reveal a need to increase levies by more than the official rate of inflation. “Of course it is important to focus on cost effectiveness and ensuring that income is spent as prudently as possible, but it is also essential to ensure that there will be enough income to cover expenses, otherwise there is a risk of creditors not being paid, services being discontinued and maintenance not being attended to promptly and consistently.
“It is good to try to keep levy increases as low as possible, but this aim has to be balanced against the reality of the income needed to meet the scheme’s needs as well as some reserves and tolerances to enable it to meet unexpected expenses. Essentially, the levy income is set to cover the forecast expenses, and a deficit budget should not be a consideration. The budget also gives the breakdown of how the levy income is expensed, which is a common question from owners.”
Schaefer says Trafalgar also always recommends that ST trustees and HOA directors use what is termed a 9/3 budgeting process, which is based on nine months of actual expenses in the current financial year and three months of forecast expenses, as the basis for developing the budget for the next financial year.
“This method enables them to finalise the budget for the next year well before the end of the current financial year, to project what levy increases will be necessary to keep the scheme in the black, and to communicate that information to the owners.”
A problem for many schemes currently, he notes, is that they are waiting until the end of the financial year to compile a budget for the next financial year, and then only holding an AGM to get this new budget approved up to four months later in the case of ST schemes, or even six months later in the case of HOAs.
“This of course results in levy increases lagging behind expenditure increases, which has a negative effect on cash flow and can also result in the owners being faced with much higher levies the following year to catch up, or in special levies having to be raised for any unexpected expense.”
However, the 9/3 method can prevent this from happening, as outlined in the Trafalgar webinar on effective budgeting and financial management, which can be viewed at https://www.trafalgar.co.za/webinars/.
It means, Schaefer says, that the AGM can be scheduled much closer to the financial year-end, so that the scheme’s budget can be timeously approved and the new levies implemented right at the start of the new financial year.
“In Sectional Title schemes, 9/3 budgeting also means that it doesn’t even matter if the AGM is delayed, because legislation empowers the trustees to approve the administration fund (day-to-day) portion of the budget themselves and then to implement a levy increase of up to 10% from the first month of the new financial year to keep the scheme’s income in line with the forecast expenditure. If necessary, a further levy increase can then be implemented after the AGM.”
By Trafalgar.
