Bank the Strata Money

Money makes the (strata) world go around!

But, things are different for strata corporations (compared with people and other organisations) since strata corporations do not have the flexibility and choice individuals do about what to earn and spend and strata corporations do not have profit or social good objectives to work towards and guide finances like business and not-for-profit organisations.

Rather, strata corporation finances are a closed loop of setting budget for anticipated expenditure, collecting money from owners when needed and spending it appropriately.  At the end there should be (all things going well) nothing left over and no shortfall.  If there is that surplus or shortfall is taken into account in budgeting and collecting.

This is also the pattern for sinking or reserve funds but simply over a longer period so it’s less obvious than annual budgets (and often owners and managers do not hang around for long enough to recognise it).

When it goes wrong (usually because there’s a shortfall of funds) the following unpopular things become necessary.

• Planned activities like repairs, upgrades, legal actions, etc need to be deferred.  This delays things, can add to cost and, in the case of important repairs, can expose strata corporations, executives and managers to legal liabilities.
• Creditors don’t get paid on time.  This can also delay service or product delivery, incur late charges, spoil relations between strata corporations, managers and creditors, cause the strata corporation to have to change suppliers (or find cheaper suppliers).
• A special levy has to be raised to cover the shortfall.  This makes everyone unhappy (especially those on fixed incomes, like pensioners and investor owners).
• The next cycle’s levies (usually the next year) needs to be higher than they should to catch up the shortfall.  This reduces yields on investments, puts extra pressure on resident owners and makes the apartments less attractive to buyers compared to those in strata corporations with lower annual levies.
• The money needs to be borrowed to cover the shortfall and repaid over time (effectively) converting a one off special levy to make up the shortfall into a special levy to repay the loan.  This also makes future levies higher than they would be: reducing yields on investments, putting extra pressure on resident owners and making the apartments less attractive to buyers compared to those in strata corporations with lower annual levies.

So, a few things seem critically important to get this process right (or as right as possible).

Better Budgeting – Getting the estimated expenditure as right as possible is very important and this involves properly assessing what needs to be paid for (and when), estimating the likely cost, provisioning for some unknown but likely costs (like legal fees, emergency repairs, dispute costs, levy recover expenses, extra management time, etc) and having supporting data, material or reasoning to explaining the estimates.  

Owner Information – Explaining the strata corporation's financial position, the expected future expenditure, the underlying basis for those estimates, the need to raise the correct amounts and the consequences (short, medium and long term) of not doing so to owners when they have to decide about strata levies can make all the difference.  It’s inevitable that owners will want lower strata levies so this desire needs to be managed since no-one really wants to save a bit of money now if they have to pay more than the saved amount later.

Timely Strata Levy Collection – Collecting strata levies from owners in sync with the expenditure is the most critical aspect of effective financial management since the usual quarterly levy cycles mean that (on average) 25% of the strata corporation's annual funds should be paid at the beginning of each quarter and spent during those 91 days.  Strata levies that are unpaid into the second or third quarter can cause cash-flow pressure and if the number of owners in arrears is high enough, a cash-flow crisis.  If 10% of the owners don’t pay for 2 or three quarters the strata corporation is 7.5% behind cash-flow needs before the year is over.  

Getting Interest – Where there are levy arrears strata corporations should always insist on recovering interest because it’s a penalty on owners and will help ensure more timely payments in the future and it’s a bonus for the strata corporation.  That’s because in most cases the strata corporation does not suffer any penalty when it defers expenditure, uses reserves to pay for things or manages to avoid penalty interest from creditors.  So, in effect the strata corporation gets 110% of the levy when it will only have to pay 100% (and not more) of it’s bills.

Stopping Leakage – When a strata coporation has collected owners’ levies it needs to make sure the money is preserved so that there is no leakage (and ideally the money increase by the inflation rate).  Leakage can occur in many ways including bank charges, lower than market interest rates, poor management of investment funds, incurring late payment and other unnecessary charges, fines, making small (and apparently inconsequential) payments, etc. 

Covering Shortfalls – When things don’t go according the budget it’s important to deal with (and cover) the shortfalls.  Typically that occurs when something ends up costing more than expected, unpredictable things occur or there’s some legal or other action.  And, usually strata corporations cannot choose to defer or avoid the activity.  In such cases, unless the inevitable shortfall is covered the annual budget will run out before the year ends.  Using reserves is only a temporary fix as the reserves will need to be replaced anyway.  In those cases decisions need to be made about whether to have a special levy, borrow money or change plans and/or re-allocate expenditure … and made promptly.

Accurate Reporting – If the strata corporation's financial position is properly recorded and reported then everyone will know what has (and has not occurred), understand why and the impacts and be better placed to make better decisions in the future.  Unfortunately, most of the prescribed financial reporting is inadequate and often confuses owners since it is typically a mixture of cash and accrual accounting, does not explain cash-flows, does not involve a quasi-balance sheet and does not properly compare actuals to budgets or track things over multiple periods.  It’s no wonder owners, executives and managers aren’t making the best financial decisions in strata corporations when they get low quality reporting. 

Since it’s 2011 I’m sure we can do a lot better with strata scheme money than we’re doing and allow owners , executives and manager spend time worrying about more strategically important decisions in their strata corporations.

So, see you at the bank with the strata money.

Francesco ….