I am often in awe of Property Managers. As well as technical ability, they need a range of “soft skills” and buckets of emotional intelligence. One of the problems with these soft skills is that they are intangible and therefore difficult to measure and this can create a problem when it comes to assessing how well a Property Manager is performing.
One concrete measure that can be used to measure Property Managers’ performance is the variance between actual and budgeted expenditure expressed as a %. This number should be readily available from the annual service charge accounts and as budgeting is essentially a financial discipline it is a skill that the service charge accountant can help with. This assistance can range from ensuring that the number appears prominently in the service charge accounts to advising on the budget process itself.
The importance of the service charge budget
The service charge budget is right at the heart of the relationship between Property Manager and Lessee and an explanation of significant variances between actual and budgeted expenditure is now a requirement under the 3rd RICS Code and ARMA Q. Furthermore, there is nothing more that can test the bond of trust between Property Manager and lessee than a large and unexpected excess service charge demand arising from the failure to budget expenditure accurately at the start of the period. The stakes are high! This is one skill that the Property Manager needs to get right.
Five tips to improve budgeting
- The cost plus % approach is the most common budgeting technique. It involves taking the current year’s expenditure and adding an arbitrary % increase. Although it is the easiest approach to adopt, it is also the riskiest and it is prone to significant error from year to year. The cost plus % approach should be used with care!
- If you are using the last set of service charge accounts to help you prepare your budget, remember that the accounts will usually have been prepared on an accruals basis. This can distort the cashflow impact of expenditure and so a large cash payment just before the year end that partly relates to a future budgeting period can have a major impact on the actual costs recorded in the accounts for the budget year. This can throw out the budget v actual comparison.
- Trends should be reviewed over more than one year. There can be a tendency to just look at actual expenditure for the previous year. However, a three year review of expenditure may provide a better overview of expenditure trends.
- Focus on material expenditure headings in the Income and Expenditure report first. This can be done by ranking expenditure lines in the budget from highest to lowest. Reserve expenditure will always need special attention.
- Incorporate peer reviews into the budgeting process. A colleague or senior manager should always review the budget before it is finalised.
Property Managers who can forecast future expenditure with a degree of accuracy are worth their weight in gold and they should be rewarded accordingly. Accurate forecasting helps to manage expectations and keep lessees happy. And after all, isn’t keeping lessees happy what we all want?
If you would like further information on this article or to see how the Haines Watts Service Charge team can assist you with your accounting requirements then please contact Gordon Whelan on 02380 276323 or Paul Jepps on 01525 717424.
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