The money in the account and the money that is spoken for

Three distinctions do most of the work in understanding why that happens. Each is simple on its own. Together they explain why a budget that balances across a financial year can still fail in a particular month.

Demanded is not collected

A service charge budget records what a block intends to spend and what each leaseholder will be asked to contribute. It is a statement of intent. The bank statement is a statement of fact, and the two rarely match.

The difference is arrears, and on a small block arrears concentrate in a way they never do on a large one. On a block of 12 flats, two leaseholders who have not paid represent a sixth of the year's income. On a block of 200, the same two are a rounding error. Small blocks therefore need to read the gap rather than the budget, and to read it early, because by the time a shortfall is obvious the remedies have narrowed to borrowing or a further demand.

Reading the gap means asking one question at each demand date: of the sum demanded, how much actually arrived, and from whom? That is a different question from whether the block is on budget, and it is the one that predicts whether the bills can be paid.

The aggregate figure hides the part that matters. A block that has collected 90 per cent of what it demanded may be in a comfortable position or an uncomfortable one, depending entirely on whether the missing tenth is spread thinly across every flat or sits with one leaseholder who has stopped paying altogether. The first is a timing problem and usually resolves itself. The second is a debt, and it calls for a different response on a longer timescale.

Section 20B of the Landlord and Tenant Act 1985 gives a further reason to keep that question current. Where relevant costs were incurred more than 18 months before a demand for payment is served, the leaseholder is not liable for the part of the service charge that reflects those costs, unless they were notified in writing within that period that the costs had been incurred and would be charged. Costs that sit unbilled do not wait politely.

Collected is not available

Money that has arrived is still not money a block can make decisions about. Two things stand in the way.

The first is legal. Under section 42 of the Landlord and Tenant Act 1987, service charge contributions are held on trust and are to be used to meet the costs for which they were paid. They are not the agent's money and they are not the company's general funds. That trust is the starting point for thinking about what a balance is for, rather than an administrative footnote.

The second is arithmetic. A good deal of the balance is already committed. Contracted spend runs whether anyone looks at it or not: cleaning, grounds maintenance, lift servicing, buildings insurance, the management fee. Work already instructed is committed from the moment it is instructed, not from the moment the invoice arrives. And a reserve fund contribution, where the lease provides for one, has been collected for a purpose that may be years away. It is not available for this year's difficulties.

The discipline is to write down what is spoken for before treating anything as spare. One list, kept monthly, showing contracted annual spend, work instructed but not yet invoiced, and reserve contributions collected. Subtract that from the balance. What remains is the only figure that answers the question people think a bank balance answers.

Timing decides solvency, not totals

A year can balance across 12 months and still fail in one of them. This is the distinction that catches blocks which are not in any real trouble at all.

Service charge income arrives at demand dates, commonly two a year. Expenditure leaves continuously, with occasional large items. If a major bill falls after the first half year's money has been spent and before the second half year's money has cleared, the block is short, whether or not the annual budget was correct.

Major works sharpen this rather than soften it. Where qualifying works would result in the relevant contribution of any one leaseholder being more than £250, section 20 of the Landlord and Tenant Act 1985 and the Service Charges (Consultation Requirements) (England) Regulations 2003 require consultation before the full cost can be recovered. Consultation takes time, and that has an underrated consequence: the spend becomes visible well before it lands. A block that knows in January it will be consulting in March also knows roughly when the money leaves.

A reserve fund is worth understanding in the same terms. Its purpose is to move money from the years that can spare it to the years that cannot, which makes it a timing instrument rather than a savings account. That only works if the contribution is treated as untouchable in the years when the block is comfortable. A reserve raided to cover an ordinary shortfall has not removed the shortfall. It has moved it to the year the roof needs doing.

The practical form of all this is a cash flow laid out month by month across the financial year. Opening balance, expected receipts, committed outgoings, closing balance, 12 times over. The pinch month identifies itself immediately, and it often falls earlier in the year than expected.

The question worth asking at the next meeting

Directors of a residents' management company (RMC) or a right to manage (RTM) company are company directors, with the duties that role carries, and nothing about it requires them to be accountants. What it does entitle them to is a question that any competent managing agent can answer.

The question is this: on the first of every month this year, what will be in the account, and what is already promised out of it?

An answer to that is 12 pairs of numbers. It takes no accounting knowledge to read. It exposes the pinch month before it arrives. And it turns a conversation about whether the balance looks healthy into a conversation about whether the block can pay for what it has already agreed to buy.

Ryan Joneson, Founder, GlassJar