Empowering The Body Corporate: 8 Steps To A Strong Administrative Fund Budget

Posted: May 30, 2024

Empowering The Body Corporate: 8 Steps To A Strong Administrative Fund Budget

Prescribed management rule 26(1)(e) made under the Regulations to the Sectional Titles Schemes Management Act of 2011 provides that the trustees must prepare draft administrative and reserve fund budgets and present them to owners at each AGM.

This article focuses on the creation of the administrative fund budget, breaking the process down into eight straightforward steps, helping you navigate the task of preparing this crucial budget with confidence.

  1. Look at the amount of cash available in the administrative fund at the previous financial year end as reflected in the body corporate’s financial statements. Examine the Annual Financial Statements, particularly the balance sheet or statement of financial position, and at the bank account balances.
  2. Estimate the body corporate’s expected administrative fund expenditure for the coming financial year. This amount can be calculated based on last year’s administrative fund expenses with the appropriate expected increase for the year, taking into account any extraordinary expenses in the last year and any planned additional expenditure for the coming year. Take into account the prevailing economic conditions, such as the inflation rate and the interest rates applicable to borrowings and investments. Look at the financial statements for previous years and see if there are any special circumstances or trends that you need to take into account.
  3. Add the expected expenditure line item by line item to the budget. Where a number of items or issues fall into the same category, the budget should show a total amount and a breakdown into the principal sub-categories.
  4. Don’t fall into the trap of under-estimating expenses in an effort to limit an increase in levies or to keep the increase under a certain percentage. This may well result in a shortfall necessitating a special levy later in the year, which can create the perception that the body corporate’s finances are not being properly managed. Calculate the expected expenses realistically to ensure the body corporate’s operational expenses are fully covered.
  5. Where an anticipated expense item is substantially different to the previous financial year’s expenditure on that item, notes to the budget should give reasons for the difference.
  6. If discounts are to be offered to incentivise owners to pay levies by the due dates, the budget should take into account the effect this may have on the body corporate’s cash flow, keeping in mind that the discount will be available to all owners.
  7. Similarly, if penalties are to be imposed, the effect on the body corporate’s cashflow should also be taken into account.
  8. Considering all of the above, determine the total income required to fund all administrative fund expenses for the coming year and use this figure as the basis upon which to calculate owners’ administrative fund levies according to their PQs or based on a section 11(2) rule, whichever is applicable.

If you’d like to take a deep dive into sectional title financial management, consider joining our Advanced Sectional Title Financial Management Masterclass starting 20 May 2024. This comprehensive three-week course covers all the legal aspects of sectional title financial management, from the basic principles of body corporate governance to the complexities of investments and taxes. You will gain a deep understanding of the different funds and accounts that a sectional title scheme requires, the various contributions and levies, the maintenance of proper financial records, and the requirements for audit and insurance. The course has been designed with the busy working professional in mind. It is structured in a logical and easy-to-follow manner, and divided into three weekly modules that can be completed in your own time. For more information or to sign up please email: info@paddocks.co.za

Article reference: Paddocks Press: Volume 19, Issue 4.
Article Date: April 2024
Author:  Jennifer Paddock

This article is published under the Creative Commons Attribution license.

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