How many times have you, as an agent, had to explain service charge account figures to property owners and justify why they do not tally with the ‘real’ cash figures?
This is a perennial point that gets raised by newly appointed RMC/RTM directors and causes a level of frustration that never quite goes away.
With some blocks, a property owner may be an accountant, and they understand why the figures do not tally with a simple ‘cash’ view of the world. This can be a double-edged sword, as accountants can often expect service charge accounts to be completed to the same level of detail as corporate accounts. However, this level of rigour and cost is not necessarily justified.
The biggest issue, it seems, is that most property owners have no experience with accounting terminology and struggle to understand why the expenditure in the accounts does not tally with the invoices processed in the period. They also struggle to establish how much cash they have available to spend.
They expect the financials to be managed on a simple cash basis, as if they were managing domestic funds. It’s easy to see how this approach would be easier and more straightforward for smaller, simpler blocks, where the amounts involved and the number of transactions is relatively low.
When grappling with this conundrum, we often get asked ‘can you produce cash accounts?’, but this is not the answer. The reason is that once you get past the basics, there is no prescribed format for a balance sheet derived from cash accounting, leaving room for interpretation about what should be included and how.
The questions most property owners and directors are trying to answer are:
- ‘How much cash do we have available to spend?’ This seems a simple question, but presenting only the cash account balances does not do it justice. Debtors and creditors need to be included in a step-by-step breakdown. This helps illustrate the difference between cash currently held, cash that is already committed and therefore cannot be spent, and cash that is expected to be received.
- ‘How much have we spent this year?’ and ‘Why do the accounts show a figure different to the sum of invoice values?’ What property owners are often asking for is the total value of supplier invoices, rather than the expenditure recorded in the accounts. The difference arises because the accounts include adjustments for accruals and prepayments, meaning the reported expenditure will not necessarily match the unadjusted invoice figures.
- ‘Why does the reserve fund shown on the accounts not equal my cash balances in the bank?’ People struggle with why the reserve fund balance does not equal cash. We recommend the following approaches to help agents and accountants provide greater clarity for property owners:
Rationalise Adjusted Expenditure in the Accounts
The key question to address is: ‘Why is the expenditure in the accounts different from the total value of the invoices recorded in the management system for the same period?’ The answer lies in our two friends, accruals and prepayments. We therefore recommend that accounts include a note that breaks down the adjustment to expenditure ledgers.
This should list each expenditure ledger, showing the expenditure reported in the day-to-day management system based on invoices, accruals applied to that expenditure, the prepayments and any other adjustments applied, together with the final adjusted figure.
This allows property owners to see figures that tally with the management reports within their block management system and understand how accruals and prepayments have been applied to each ledger, resulting in the figures reported as expenditure in the Income and Expenditure Statement.
Rationalise Reserve Funds with Cash Balances
We believe an additional note in the accounts would help by providing a step-by-step reconciliation of the reserve fund balance shown on the balance sheet with the cash balance.
Essentially, this involves starting with the reserve fund balance and making a series of adjustments. These include subtracting tenant reserve arrears, surplus for the year and any loans to the service charge fund.
They also include adding tenant reserves paid in advance, deficit for the year, creditors, accruals and reserves expenditure not yet paid. The resulting figure can then be tallied back to the balance sheet value.
Provide a ‘Net Cash Balance’ Statement
One of the key questions property owners ask when making decisions with their agent about work priorities is: ‘What do we have to spend?’ The simple answers typically fail to satisfy the property owner, particularly when they look at the bank balance but do not understand how other financial figures relate to cash in the account.
Providing a net cash balance statement can give less experienced property owners a clearer understanding of how much cash is available to spend.
The statement starts with the cash balance(s) at the top, then shows, step-by-step, how liabilities reduce the amount of cash available to spend before adding any receivables. This should be divided between service charges and any restricted reserve funds.
By presenting the information this way, the property owner is able to see how the different figures fit together and determine for themselves what they have available to spend. In turn, this takes the onus away from the agent having to explain and defend a position.
We believe this is a much more useful day-to-day statement than the balance sheet, which typically confuses property owners.
For help with preparing service charge year-end accounts, find out more about SCOAP (Service Charge Online Accounting Package), our online software designed to simplify and streamline the year-end accounts process.
Send us a message at www.blocksonline.co.uk/contact/ to find out how SCOAP can support you.
