25 Jan 5 Principles of good financial management for bodies corporate
While a body corporate is not deemed a business in the sense that its goal is to make money, it is important that a body corporate is run with sound business principles in mind. To achieve this the trustees must manage the scheme in a responsible manner to ensure it is financially independent and secure.
There are five key principles of financial management that will stand a body corporate in good stead in their goal of achieving financial independence, these are:
Body corporate trustees have to prepare a budget of income and expenditure every year where careful consideration must be given to everything the scheme intends to spend money on.
A budget that does not provide sufficiently for necessary expenses will leave a scheme short of funds, possibly resulting in neglected maintenance or service providers not being paid.
On the other hand, an inflated budget will result in high levies and disgruntled owners, and may have a negative impact on the marketability of the units.
Collecting levies and arrear levies
A body corporate cannot function when the members do not pay their levies. A well-managed scheme will have a documented collection policy, followed meticulously by the trustees and managing agent. Owners should be aware of the collection policy including the interest payable on arrear or late payment of levies and legal implications for owners who continue to not pay their levies.
Collecting sufficient levies allow the trustees to attend to maintenance – both emergency and planned – and to pay all creditors and services providers in time.
Saving for the future
Since October 2016, when the legislation around sectional title management changed, schemes have been obligated to save money for future expenses by drawing up a maintenance repair and replacement plan (MRRP), listing all major capital expenses for the scheme over a running period of 10 years.
This allows the scheme to make monthly provisions for expenses anticipated in the future. A scheme that has an up-to-date MRRP will collect the funds required for future maintenance from the members over a longer period, reducing the financial impact on members.
Spending the scheme’s funds
As mentioned earlier, a body corporate is not a business in the sense that profit makes up the driving force. For bodies corporate, trustees are responsible to ensure the timely maintenance of the building and common property, using the funds collected for this purpose.
Appointing suppliers requires due process and must be managed by the trustees with the assistance of the managing agent. One of the best indications of a well-managed scheme, is a scheme that spends money on maintenance on a regular basis. It also illustrates how serious the trustees take their responsibilities towards the scheme and its members.
Short- and long-term planning
For any scheme to be financially secure the trustees must apply their minds to short- and long-term planning, especially around maintenance-related items. Short-term planning generally relates to annual maintenance requirements and items that do not require major capital investment. Provision for short term-expenses should be made in the administrative budget.
Long-term planning is effectively done by drawing up a MRRP. Here, costs are generally high and cannot be serviced by the ordinary levies collected monthly. Important items that need to be planned for are items such as painting the complex, replacing the roof, modernization or replacing the lifts.
The importance of good financial planning for a body corporate cannot be under-estimated. Ultimately, trustees are responsible for this process and must be astute in this process. The financial position of the scheme must be checked regularly against the approved budget to ensure that the mandate given to the trustees to spend the body corporate’s money is adhered to.