Preparation of a budget is one of the most important tasks a committee must undertake in their year to year operation. The following are general principles which strata communities may consider when preparing their budgets.
The previous year end accounts are reviewed prior to commencing preparation of the following year’s budget, to ensure each line item accurately reflects the expenditure therein. It is important to reflect on the actual results of the previous year as a starting point to budget for the following year. Whilst previous expenditure is not necessarily a clear indicator of future expense, there may be patterns that are relevant. Further, it may be necessary to review the second year prior for any patterns that may take longer than annually to appear.
New Bodies Corporate or Owners Corporations may have little historical data to analyse. In this circumstance, a particularly conservative approach should be considered until expense patterns become clear. These patterns could take around 3-4 years to emerge.
Once an understanding of the historical patterns is established, the next step is to project these forward for the next 12 months. Each expense line item (for example, Pest Control) should be individually examined using both the historical data and information available about likely future trends. The Building Management team (if one exists) and the Committee are a critical source of information when determining the future trends, owing to their detailed knowledge of the common property and associated maintenance requirements. Trends need to take into account expenses which could be described as “once-off” items, and also changes in requirements. For example:
Once the expenses have been determined, the income (levies) can be identified.
For Administrative Funds, levies should be set at a point that supports the expenditure. The impact of any carried forward surplus (or deficit) needs to be analysed at this point. For example, if there is a carried forward deficit balance, the levies for the budget year may need to be increased to reduce the deficit. Where levies need to increase, it may be possible to do so over more than one year. This can soften the impact on owners, whilst simultaneously being financially prudent.
For Sinking Funds (known Maintenance Funds in Victoria and New South Wales), levies should be set at a point which takes into account the balance suggested in the Sinking Fund Forecast (SFF), and any expenses which are expected but not included (or anticipated) in the SFF.
The above information is general and basic advice on how to approach the formation of a budget. Each Body Corporate and Owners Corporation requires specific analysis of their past and future financial requirements when preparing budgets. If you require assistance or advice on preparation of a detailed budget for your strata scheme, talk to SSKB. Our experienced Community Managers provide strategies to deliver positive results to your body corporate.