Five Mistakes that Can Ruin Your Budget
One of your most important duties as a homeowners association (HOA) board member is fiscal stewardship. And at the core of that duty is your annual budget.
Developing a budget may not be a lot of fun. It certainly can be stressful trying to anticipate your HOA’s financial needs. However, one thing you can do relatively easily is to make sure you avoid some common budget pitfalls. To help you recognize—and dodge—typical budget blunders, we’ve created a list of the five most common mistakes we have seen HOA boards make.
Your annual budget is much more than just a bunch of numbers. It provides the framework for maintaining a quality lifestyle for your community’s residents. Learn from the mistakes that other HOAs have made to keep your finances as healthy as possible.
Need help with your annual budget? A knowledgeable property management company can show you how to take a more strategic approach to your budget planning and help you stick to the budget you create. Find out more. Contact FirstService Residential, the leading property management company in Illinois, today.
Developing a budget may not be a lot of fun. It certainly can be stressful trying to anticipate your HOA’s financial needs. However, one thing you can do relatively easily is to make sure you avoid some common budget pitfalls. To help you recognize—and dodge—typical budget blunders, we’ve created a list of the five most common mistakes we have seen HOA boards make.
1. Suddenly raising common fees
It’s no secret that the price of products and services continues to go up. Unfortunately, many boards fail to plan for these inevitable increases. To make up for shortfalls, they are then forced to raise common fees all at once.
Instead, assume that prices will rise at some point, and increase your HOA fees gradually in anticipation. This will ensure that you have the money you need to cover expenses without creating unnecessary surprises for homeowners. An experienced property management company can be a big help when it comes to planning more effectively.
2. Using a special assessment to fund regular operations
Special assessments have their place. For example, you may want to use them to fund a particular project, build your working capital or boost your reserve fund. However, it is never wise to depend on a special assessment to pay for regular operations or maintenance simply because you didn’t allot enough money for unexpected costs.
Consider, for example, how weather may influence your operating costs. The record-breaking heat in Illinois this past summer meant that HOAs faced higher-than-normal electricity costs. And if predictions of heavy snowfall pan out, HOAs will also need to pay more for snow removal this winter. Plan for events like these so that you won’t make the mistake of using special assessments to pay your bills. Also, don’t use a contingency line item in your budget to solve the problem. It is likely to create more problems than it solves down the road.
3. Neglecting to adequately fund reserves
Without enough money in your reserve fund, your HOA will not be able to make needed capital improvements (for example replace equipment, upgrade systems, replace a roof or undertake a paving project). Illinois requires condominium associations to establish and maintain a reserve fund; no such requirements exist for townhome or homeowner communities.
Regardless of statutory requirements, you should always include contributions to your reserve fund in your annual budget. This not only enables you to fund needed improvements, but many banks require that you have a reserve fund before they will approve a loan. The best way to know how much you need to include in your annual budget for funding reserves is by conducting a thorough reserve study. This will tell you the amount you need in your reserve so you can plan your annual contribution.
4. Having a budget deficit
There are two ways to know if you have a budget deficit:
It’s no secret that the price of products and services continues to go up. Unfortunately, many boards fail to plan for these inevitable increases. To make up for shortfalls, they are then forced to raise common fees all at once.
Instead, assume that prices will rise at some point, and increase your HOA fees gradually in anticipation. This will ensure that you have the money you need to cover expenses without creating unnecessary surprises for homeowners. An experienced property management company can be a big help when it comes to planning more effectively.
2. Using a special assessment to fund regular operations
Special assessments have their place. For example, you may want to use them to fund a particular project, build your working capital or boost your reserve fund. However, it is never wise to depend on a special assessment to pay for regular operations or maintenance simply because you didn’t allot enough money for unexpected costs.
Consider, for example, how weather may influence your operating costs. The record-breaking heat in Illinois this past summer meant that HOAs faced higher-than-normal electricity costs. And if predictions of heavy snowfall pan out, HOAs will also need to pay more for snow removal this winter. Plan for events like these so that you won’t make the mistake of using special assessments to pay your bills. Also, don’t use a contingency line item in your budget to solve the problem. It is likely to create more problems than it solves down the road.
3. Neglecting to adequately fund reserves
Without enough money in your reserve fund, your HOA will not be able to make needed capital improvements (for example replace equipment, upgrade systems, replace a roof or undertake a paving project). Illinois requires condominium associations to establish and maintain a reserve fund; no such requirements exist for townhome or homeowner communities.
Regardless of statutory requirements, you should always include contributions to your reserve fund in your annual budget. This not only enables you to fund needed improvements, but many banks require that you have a reserve fund before they will approve a loan. The best way to know how much you need to include in your annual budget for funding reserves is by conducting a thorough reserve study. This will tell you the amount you need in your reserve so you can plan your annual contribution.
4. Having a budget deficit
There are two ways to know if you have a budget deficit:
- You are having difficulty paying vendors on time.
- Your annual forecast for the coming year and your annual financial statements do not match up.
If either of these situations exists, you may need to add a special assessment, especially if you are more than 60 days behind on your payables. It is crucial that you pay your vendors promptly in order to continue receiving the best service, so be sure deficits do not prevent you from doing so.
5. Assuming that certain expenses are fixed
Evaluate your so-called “fixed” expenses while you are developing your annual budget. For example, instead of simply annualizing vendor costs, consider whether you might be able to negotiate better rates. If this is not an option, shop around for more competitive rates.
You may also be able to save by:
5. Assuming that certain expenses are fixed
Evaluate your so-called “fixed” expenses while you are developing your annual budget. For example, instead of simply annualizing vendor costs, consider whether you might be able to negotiate better rates. If this is not an option, shop around for more competitive rates.
You may also be able to save by:
- Asking your community manager to limit overtime hours
- Making your systems more efficient
- Locking in lower rates for utilities and fuel
Remember that a national community management company with an established local presence will be able to provide the best of both worlds: the buying power of a large company, as well as strong relationships with local vendors. This translates into lower rates and trustworthy referrals for services that your community needs.
Your annual budget is much more than just a bunch of numbers. It provides the framework for maintaining a quality lifestyle for your community’s residents. Learn from the mistakes that other HOAs have made to keep your finances as healthy as possible.
Need help with your annual budget? A knowledgeable property management company can show you how to take a more strategic approach to your budget planning and help you stick to the budget you create. Find out more. Contact FirstService Residential, the leading property management company in Illinois, today.