Administrative Fund budgeting for your scheme and why timing is important

Budgeting for any sectional title scheme is incredibly important. The budget sets the tone for the ensuing financial years spend the scheme envisages, and by extension the value each member can expect to receive from the scheme.

Budgets are far too often regarded as a merely administrative function, with very often schemes merely adding a perceived as adequate 10% increase to the previous year’s levy. Little regard is had for the actual needs of the scheme and unfortunately the overriding concern, is to keep the levy as low as possible. While this goal is admirable, the schemes levy should always ensure that the needs of the scheme are addressed, as the levy is merely a function of the expenses of your scheme.

When drafting your schemes budget, the most important point to consider is, “What is the financial position of my scheme right now?” The current financial position of the scheme will immediately affect the administrative fund budget, and most likely also the reserve fund budget. If the scheme is insolvent or its liquidity is in jeopardy, it means the previous budget was insufficient to cover all expenses.

When starting budget preparation for your Administrative Fund, have a look at your schemes Service level agreements. These costs are normally a greater chunk of your scheme’s expenses and each year many agreements state the annual increase as well as dates. These must be incorporated into the budget, or at the very least present an ideal opportunity to tender for new pricing in the market. Carefully analyse your maintenance spend as in many instances excessive spend on reactionary maintenance is a symptom of a larger issue which needs attention and could be catered for in the 10 year plan.

We also recommend separate line items for some of the scheme’s expenses, most notably water, electricity (where pre-paid is not an option) and domestic effluent. These municipal costs normally account for 50% or more of the schemes total expenses and tend to increase the administrative fund, and by extension reserve and CSOS levies, exponentially. If shown separately owners would be able to see and track their usage more accurately, which could be critical to early identification of maintenance issues such as leaks, which tend to be costly and contentious if not identified early.

Timing for budget preparation is imperative. All too often, schemes and managing agents wait until the end of the financial year to start the preparation of their budgets, as they prefer using a full financial year’s actual spend. Budgets are contentious issues and not to be taken lightly, demanding adequate attention and care in their drafting. By waiting until the end of the financial year, the draft budget will realistically only be finalised two months into the financial year. At this stage it may become evident that an increase is needed which can only practically be effected the month after in the next financial period of the scheme. This results to a substantial portion of the years forecasted income already lost before you have started, leaving the scheme with an immediate budget and income deficit. To further compound your problems, the increases the trustees may do without AGM approval can only be done at year end, as per Prescribed Management Rule 21(3)(b), which could force your scheme to wait for their AGM.

Zenteq strongly believes that the way in which a schemes budget needs to be approached demands a substantive, personal and practical approach, ensuring the fiscal health of your scheme and mitigating erosion of value of your asset.

Elwin Els from Zenteq

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