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Where Does It Go? The Problem of Financial 'Leakage'

The vast majority of co-op and condominium boards are well intentioned and work diligently with their management and accountants to draft and monitor their annual budgets—and recalibrate them as necessary. Despite their best efforts to keep costs under control, however, many communities find that expenses often exceed their projections. Even in the absence of an unforeseen crisis or major repair project, it often seems like money is just leaking out of the system. The question is, where does it go—and how can we plug up the leaks when we find them?

Financial Leakage Defined

Avi Zanjirian is a partner at the accounting firm of Czarnowski & Beer and works with clients in New Jersey and New York. According to him, financial leakage is more often a result of inattention than of outright negligence or fraud. To find these blind spots, “We look at it from an auditor’s perspective,” he says. “You might be paying electric, water usage, and repairs, and all are within budget. But at the same time, you may not be looking at all the line items regularly to make sure they’re working efficiently.” Zanjirian recommends taking a hard look at every line item in your budget on a year-to-year basis, and assessing whether you’re getting the most for your money (or even just getting what you’re paying for) from your community’s vendors and service providers. “Do you have the best vendors, contract terms, etc.?” Zanjirian says. “As contracts expire, you should be checking this.”  

Another factor Zanjirian points out is the popularity of using autopay systems to send out payment for recurring bills. While the convenience of a ‘set it and forget it’ payment option is undeniable, it can often mean that less close attention is paid to cash outflow every month. This is why it’s important to periodically take a close look at your community’s accounts payable, as well as to conduct an end of year review to determine whether costs went up, and if they did, why? “It could be because no one negotiated a new contract or a misplaced charge,” says Zanjirian.  “In terms of metered services like electric and water, are meter readings estimates or actual? Too much stuff is on autopilot.” 

He goes on to list other areas that should be scrutinized: “Are we looking at real estate taxes and protesting them every year? Energy repairs, supply and maintenance, and service contracts should also be evaluated every two to three years. The same should be done with professional services like auditors, attorneys, engineers, and architects.  There’s also the minutia, like cleaning supplies. But boards should remember, you generally get what you pay for—especially with professional services—so don’t try to save a few dollars on an attorney or an accountant and expect top shelf service.”

Eric Fudeman, a partner with Needham, Massachusetts-based accounting firm Bloom Cohen Hayes, agrees. “As accountants, we don’t judge what is unnecessary and what is necessary. A board sets a budget for a year, and upon regular review, if some expense seems really high to the industry norm, I might question it. But we don’t refer to it as ‘leakage,’ though. Our view is that the board simply didn’t budget properly. If there are leaky toilets or water running someplace, you might have excessive water bills. Or if you have high common area electric bills it might be because there is too much heat. To get the best price for services, boards should also rebid, rather than just renewing contracts. For example, perhaps your board isn’t rebidding snow removal and paying a higher price than they should be.”  

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