Service charges within properties can be a hidden nightmare for those who don’t expect them. Suddenly these maintenance and running costs for communal areas of a building have to be charged out for someone to pay, usually tenants and leaseholders.
Whether you’re at the receiving end of paying these, a landlord-owner who needs to raise them to recover expenditure, or a middle-man property-manager organising these; there’s 3 bottom-line numbers you need to be aware of.
We come across these often within the accounts for businesses, and unless you have these services charge figures quantified and understood then you’re storing up problems for the future.
The Three Numbers to Know About
As you sift through sets of service charge figures, accounts, and budgets, here are the three key numbers to dig out in order to understand the basics.
1. The Budget
They should have a set annual budget that charges are raised against, which makes sense in that it is predicting what the shared costs will be for communal areas of the property over the forthcoming year.
Whether it’s day-to-day things like cleaning or gardening, or an allowance for forthcoming repairs; they should all be in a budget for the next year.
Therefore find this out and make sure the charges match this, and not any previous budget, say.
If there are numerous people paying into this, then also clarify the exact amount apportioned per liable-person.
2. The Balancing Charge
At the end of each accounting year, a set of accounts should be provided for the service charge to calculate exactly what was spent.
Sometimes these need to be formal accounts certified by an accountant, and sometimes more of an internal accounting process; either way, you need to know the reality of costs for the year.
You then simply deduct off what budget-charges have been raised (and hopefully paid) during this year to see what the net difference is against the actual costs, otherwise known as a balancing charge.
So if you spent a bit more then the budget, maybe from unforeseen repairs or price increases, then an additional adjustment charge will be raised. However if the amount spent was below the budget, then a balancing credit will be raised and money paid back.
3. The Sinking or Reserve Fund
Service charges can have a provision in the expenditure known as a sinking fund or reserve fund, the idea being that money is stored away each year towards bigger one-off costs into the future such as redecorating.
Therefore, not only check what any current year’s contribution is towards this, but what the current balance is as it may have accrued to a fair sum of money over previous years as well.
Longer-term this will help you see whether this is sufficient to fund future additional costs, failing which an additional budget or balancing charge will be needed at some point as above.
Cracking Down on Service Charges
As you try to understand how service charges need to be accounted for, whether that’s something you need to pay or to receive, then cut to the chase and quickly discover the above three key figures; the budget being charged, the balancing charge being raised, and the sinking or reserve fund being kept.
You can then add these into your accounts and financial plans, not only for the current period but for the next few years in order to help more accurately determine the true running costs of your property interest.
Able Accountants are local accountants with experience with property costs, who have a helpful blog with tips and tricks.