A quick and easy guide to help you better understand and interpret your strata community financials.
What is a balance sheet?
A balance sheet is a financial statement that reports a company’s assets, liabilities, and shareholders’ equity at a specific point in time. It provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.
The balance sheet is used alongside other important financial statements such as the income statement and statement of cash flows in conducting fundamental analysis or calculating financial ratios.
The balance sheet shows the total owners funds at the end of the reporting period, also known as working capital.
What is an Income and Expenditure statement?
An income and expenditure statement is a type of financial document designed to identify all forms of income that is received within a given period, while also documenting all payments or expenditures that were related to that same period.
How do I use the above to determine the financial stability of my Strata Company?
ESM recommends Strata Companies always keep a healthy working capital. This can vary depending on the Strata Companies funding, but generally speaking, a minimum should be between 25%-35% of the total budget.
Total owner’s funds
The total owner’s funds should be taken into consideration when determining the amount, the Strata Company is going to levy each owner for the next financial year.
The total owner’s funds is the amount of funds held by the Strata Company at any given time. They are calculated by determining the Strata Company’s total assets, minus any liabilities. The owners may consider this amount along with other factors when setting the levies at the Annual General Meeting.
What is working capital?
- Working Capital is the liquidity levels of the company for managing day to day expenses which covers items in the budget such as maintenance and repairs and accounts payable.
- The working capital is shown as the “Total Owners Funds” on the Balance Sheet. This is the Strata Company’s total assets minus its total liabilities.
Income vs expenditure
The Budget and levies are two different topics. While they should give each other consideration, there are many different factors that determine your levies compared with budget.
Budget
When determining your budget, you are trying to ascertain with a reasonable degree of accuracy, your anticipated expenditure which is largely based on what was spent during the previous financial year period. It is also important to make provisions for what you think the Strata Company will need to spend for emergencies and unexpected maintenance.
It is also important to budget for working capital to ensure that the Strata Company does not simply expect to spend only what is required.
Levies
When considering the levies, whilst the budget gives us the grounding to consider cash flow requirements, and anticipated working capital, it doesn’t give you any indication as to what the levies actually NEED to be until you’ve considered at least all of the options.
Setting a budget is easy. Funding the budget is more difficult and requires more consideration usually. But if you simply try to “raise levies in accordance with the budget” then you are setting yourself up to mismanage the cash flow and financial position of the strata company.
On average, the biggest expenditure accounts of the budget is building insurance, service utilities such as water usage, electricity usage and gas use and gardening and cleaning.
Common expenses for a Strata Community
Here is an overview of the most commonly used general ledger items for respective scheme sizes.
You can use the financial reports such as the balance sheet and income and expenditure statement to determine the financial stability of your Strata Company and how it is performing.
Having between 25% – 35% working capital in the bank is a good guide to how well the Strata Company is at budgeting and raising income for emergencies and/or unexpected repairs.
A healthy bank account and working capital will most likely mean that there will be no nasty levy increases in the near future. We always recommend that you read the minutes of the last General Meeting to see what the Strata Company has planned.
Need a copy of your strata community financials?
You can now download a copy of your scheme financials 24/7 using our online portal, click here to access to portal.
Still have questions?
Contact your designated Strata Company Manager, click here to contact us.
