We are alerting all of our clients that this year is a year when budgeted expenses may be inadequate, largely as a result of increasing energy costs. Upon review of the monthly financial reports from property management firms, we are finding that many properties are experiencing an increase in energy costs.  This increase may cause an annual operating deficiency at year end. Our firm suggests two procedures for monitoring the monthly reports that would highlight potential problems.

First, using the budget comparison report, we suggest a review of the variances between budgeted and actual expenses. This budget report is a powerful monitoring tool; however, the budget format widely used in the industry can mask a situation similar to what is occurring with energy costs this year. The issue is that energy costs are seasonal rather than incurred equally throughout the year. The majority of the reports that we see simply divide the annual budget for energy by twelve. When this format is used, it becomes expected that in the spring the actual energy costs will exceed the budgeted amount. The missing piece is that we normally find that two-thirds of the annual energy budget is used by midyear. The remaining one-third tends to be used in late October through December. Therefore, we normally expect that the amounts incurred for energy to be above the amount budgeted for the first six months of the year, however, they should not be more than thirty-three percent above the budgeted amounts.

A second procedure is to determine if the operating fund’s balance has decrease and/or there is an increase in the amount of unpaid bills. Cash is king! If operating cash is dropping, it should serve as a warning sign. In addition to monitoring changes in operating cash, monitoring of monthly unpaid bills is critical.

It is crucial that financial monitoring be in place and that rapid action is taken when an expense significantly exceeds the budgeted amount. We are encouraging all our clients to work with their property management firm, and our firm, to determine if an increase in common charges is necessary.  If an increase is needed, we encourage properties to act timely to implement any required increase. This can help insure that the 2011 financial statements will not show an operating deficit.

Czarnowski & Beer is ready to assist our clients in:

• Evaluating variances between budget and actual expenses to determine if there may be an operating deficit in 2011.
• Maximizing tax benefits for owners.
• Determining adequacy of reserve funds; suggesting ways to provide long-term funding mechanisms; and reviewing investments in the reserve fund.
• Maximizing income by reviewing collection policies and miscellaneous income.

On our website there are various articles and information regarding upcoming webinars on industry topics. In addition, each client that has asked to be included has their own personalized webpage on our website where owners can access their property’s prior year financial statements and tax deduction letters.

If you have any questions or need additional information, please contact Stephen Beer at (212) 397-2970, Ext 1204.