A community scheme’s financial wellbeing is dependent on the scheme executives of the scheme having a good idea of the expenses that are likely to be incurred by the scheme during the ensuing financial year and ensuring that there is sufficient income to meet those expenses.
This requires some degree of financial acumen by the scheme executives in implementing strong cash flow management of the available cash resources of the community scheme to meet the monthly outflow of cash that must be used to pay for the various anticipated monthly expenses as and when they occur. Provision needs to be made for reserve funds to be put aside for any unexpected expenditure that may have to be paid in the event of some unforeseen emergency.
Community Scheme legislation requires that a Scheme must maintain sufficient levels of funds to reasonably cover the Scheme’s annual operating expenses and future maintenance and repair costs. These expenses along with the required income to meet these expenses are included in the annual budget that is prepared by the Scheme Executives. It is essential for the scheme executives to understand and manage the monthly cashflow of the scheme.
The scheme’s budget of income and expenses that is drawn up annually by the scheme executives at the start of the new financial year, forms the basis for any cashflow management of the scheme’s available cash resources. The budget is presented at the AGM of owners for their consideration and approval.
The monthly income of the scheme must be sufficient to cover all the anticipated expenses for each month of the financial year ahead usually based on actual expenses incurred plus an anticipated inflationary increase. These expenses would include payments to service providers employed to perform various services to the scheme, any charges raised by and due to the local municipal authority or to Eskom, legal fees that may be expended for the recovery of levies not paid by members, a bad debt provision for member levies not paid on time that month, and in some cases, to cover finance charges and monthly repayments for loans that may have to be taken out by the scheme to cover such levy arrears or other expenses as approved by the owners. The ability of the scheme to collect the full quantum of the money owed to it each month will have a huge impact on the financial well-being of the scheme in general.
A community scheme’s income is in the main, obtained from levying members through a monthly contribution payable to the scheme for the administrative costs. Alternative sources of income may be rental income obtained by the community scheme renting out common property or any property that they may own, and interest income from any investments that may have been made of excess reserves that the owners may deem necessary.
Once the budget of income and expenses has been approved by the majority of the members, the elected scheme executives must pass a resolution that requires the members to pay a monthly contribution (levy) in the amount and in the manner that the governing legislation for that community scheme dictates. All members of a community scheme are also required to contribute to the running costs of the Community Schemes Ombud Service (CSOS) by paying a pre-determined monthly levy amount, as is legislated by the CSOS Act.
Additional levies that are raised to be paid by owners in Sectional Title Schemes include paying a monthly contribution to the Reserve Fund that provides for the building up of a cash reserve to cover future maintenance, repairs and replacement costs for the scheme’s major assets, based on a budget drawn up on the basis of the 10 Year Maintenance Plan, and even a special contribution payable for a necessary expense that wasn’t included for in the approved budget and that cannot be delayed until a new budget is to be considered by the owners at the next AGM.
A scheme cannot pass a deficit budget where expenses exceed income, in other words budgeting to make a loss. It should be realised by members when considering the budget, that a community scheme budget usually has very little manoeuvring room in it. There is often very little reserve allowed, with every expense that the scheme will incur being accounted for. Often members want the budget income to be cut as they are unhappy with the size of the percentage increase that the income side of the budget requires to ensure that the income meets the expenses, but this can only be done if the services provided for in the budget are reduced and other expenses are cut.
While it is always the intention to keep the size of levy increases from year to year to a minimum, this has to be weighed up against the financial realities facing the scheme members, who still expect the same quality and quantum of services received in the past but aren’t able to or prepared to provide the monetary resources for the scheme to pay for these services. The scheme members need to ensure that any budget they approve has some cash provision set aside to build up an emergency fund, so there are funds available for any unexpected expenses. This prevents the need for a special contribution (levy) to be levied on owners by a trustee resolution to cover the cost of such an unforeseen event.
Whitfields will provide support in whatever way it can, in assisting scheme executives and residents residing in the community schemes that we manage, along this road of compliance with legislation governing dispute resolution in community schemes.