It can be a daunting task, but creating an effective budget is critical to your association’s success. It’s also your fiduciary responsibility as a board member. You and your fellow board members need to consider several important factors as you work on building a budget that will help grow your community’s property values and quality of life. The budget you build today will impact your community for years to come, so you want to get it right. Read on to learn more about how to create a budget that works.
Any good budget is going to include the following components:

  • Revenue: While revenue primarily comes from regular assessments, you might be able to find additional revenue from leasing spaces, selling advertising in your newsletter, creating recreational memberships and generating interest from investments. Do not consider special assessments as part of revenue when planning your budget.

  • Operating Costs: Include vendors, staff, professional fees (lawyers, management), utilities, insurance and more.

  • Reserve Fund/Study: Fund your reserve properly to cover replacement of critical components down the road. Your reserve fund must be guided by a reserve study that predicts the useful life and replacement costs of those components.

Tip #1: Understand your community’s long-term goals and plan accordingly.

Your budget affects much more than the current fiscal year. Choices you make now, especially when it comes to maintenance and reserves, have long-term impact. By looking at the long game, you will be able to

  • Enhance property values within your community.

  • Proactively address residents’ concerns, expectations and understanding of their community’s financials.

  • Minimize financial surprises that may lead to special assessments.

  • Maintain and improve your community cost-effectively over time.

Tip #2: Start planning your budget six months ahead.

It takes time to gather the information you need, including planned fee increases from your vendors. The earlier you collect that data, documents and other insights, the easier it will be to build your final budget. In those early months, it’s important to

  • Identify goals and objectives. Ideally, the budgeting process should begin with a goal-setting meeting. The objective of the meeting is to determine what expenses must be covered by the association for the budget’s allotted timeframe.

  • Create a budgeting schedule. Your governing documents likely outline when budgets must be shared with association members and when approvals must be secured. Simply work backwards from the start of your upcoming fiscal year.

  • Review governing documents. Your association’s governing documents will offer detailed guidance on assessment payments and increases, reserve contribution amounts, whether the budget must be presented to and/or ratified by homeowners, etc.

  • Examine previous budgets, looking for past trouble spots. This exercise is helpful in spotting line items that are consistently over or under budget. And while you review them, think about line items that could be eliminated or added.

  • Review financial statements. These documents should be provided to you by your property management company and include your association’s income statement, the statement of cash flows and balance sheet.

  • Investigate legal requirements. Laws vary from state to state. Work with your association counsel to ensure your board complies with all applicable laws, which can change often.

  • Conduct a community survey. Asking homeowners what matters to them will help with buy in down the road and make everyone feel like part of the process. 

The right professional property management partner will be able to help you collect this information efficiently and quickly.

Tip #3: Create a larger finance committee that goes beyond your board.

Your budget needs input from a variety of sources and points of view. Creating a larger finance committee helps residents feel more invested in the outcome of the budgeting process. They feel heard. Your board may get unexpected insights from this group that will change the way you approach your budget. Consider having that committee, working with your professional management team, craft a wider resident survey that gets input from everyone in the community.

Tip #4: Understand that regular assessment increases are important.  

No one wants to cost homeowners more money. But raising assessments by smaller amounts on regular basis is responsible way to make sure your association has the funding it needs in the face of rising costs, including insurance and utilities. Bonus: small increases now help prevent unpopular special assessments later!

Tip #5: Communicate clearly and regularly for trust and transparency.

Maintain empathy in your communication process. Engage with residents where they live, metaphorically, not just literally. ““Some of the more successful budget meetings were where board members made community investments relatable by breaking them down using realistic examples,” explains Maureen Connolly, Client Accounting Business Partner at FirstService Residential.  I’ve heard board members say, ‘Think about utility bills, for example. If they are rising for you, they are rising for us and the rest of our community too.’ It’s about articulating financials by putting them into layman’s terms, rather than using technical terms.”

Hold a town hall to discuss the drafted budget. Virtual options make it easier to include a larger group of residents. Ideally, your finance committee or multiple board members should present, which emphasizes community involvement in the budget's creation. If needed, include subject matter experts (insurance agents, reserve specialists) to answer resident questions, boosting trust and transparency. Visual aids like pie charts make the budget easier to understand. Remember that not everyone learns or absorbs information the same way, so have the budget available in writing as well as via visual aids.

Tip #6: Make your reserve study the path to financial peace.  

Funding reserves consistently is essential for any community association's long-term financial stability. However, boards may struggle to predict which components will need replacement, when that will happen, and the associated costs. A reserve study, conducted by experts, will help your board determine the useful life of major components like elevators, pool motors and more. It’s a good idea to conduct reserve studies no less than every three years.
Treat your reserve study as a living document that can change as needed. “Just because your reserve study says you need to replaster your pool in 2026, doesn’t mean you have to. Check with your pool vendor and have him give you an opinion as to whether it really needs to be replastered in 2026 or if you can push it to 2027,” said Tina McWilliams, senior community manager at FirstService Residential.
With a well-structured reserve plan, everyone who enjoys the community's amenities shares the cost of maintaining them. This prevents the unfair burden of major replacements falling solely on residents who happen to live there when the need arises. Without reserves, surprise expenses force special assessments, straining homeowners' budgets. Adequate reserves safeguard property values and offer residents peace of mind, knowing that funds are already set aside for future community needs.
Georgia doesn’t have a requirement for associations to fund reserves, but it’s best practice to save that money now and avoid special assessments later. Consult your governing documents and association attorney to make sure you fulfill your fiduciary duties as a board member.

Tip #7: Keep reserve items and operating budget items separate.

Generally, your operating budget covers routine maintenance and smaller expenses, while the reserve fund is for significant future replacements. Your property management team can guide you in classifying expenses, ensuring you maintain a healthy balance between the two. Proactive maintenance, funded by the operating budget, can actually extend the lifespan of certain components, giving you more time to build reserves. Neglecting maintenance, however, risks premature failures, potentially leading to special assessments and dissatisfied homeowners.

Tip #8: Get a property management partner that can get you the best values.

A good property management company will be able to leverage its purchasing power to
negotiate business terms with vendors on your behalf. From landscaping to insurance, a great management company will have a network of trusted vendors they can recommend when you’re going through the vendor selection process.
While all these best practices are key to successful association budgeting, the most important element is to work with an experienced property management company that understands their importance and will make your job as a board member easier. To learn more about how a professional management company can help simplify budgeting and other complex management tasks, contact FirstService Residential today.

Friday April 26, 2024