Budgeting for Your Future: Nine Steps to Make Your HOA Dollars Count

Another budget season is here once again, and that means that the boards of homeowners associations are busy planning, analyzing—and grinding their teeth. We know that developing your HOA’s annual budget is not an easy task. However, with the guidance offered in the following nine steps, you’ll be able to get through the process more easily—and without needing to visit your dentist.
 
1. Create an ad hoc planning task force.
Your planning task force will act as the liaison between your board and your community management company as you begin planning. It’s best if your task force includes the board president and treasurer, along with your community manager and the heads of your budget and finance committees.
 
2. Hold a session dedicated to strategic planning.
Run by the planning task force, a strategic planning session helps ensure that board members are on the same page about the association’s future. Use this time to set your priorities for the upcoming year and assess your commitment to each item. Have your management team in attendance and, if possible, your CPA, attorney and insurance agent.
 
3. Determine your short- and long-term objectives.
How your HOA spends money over the next year needs to be based on your long-range vision for the community. What are your goals for the next 3 to 5 years? Which aspects of your community do you want to preserve and which do you want to change? Answering these questions is necessary before developing your budget. It’s a good idea to survey homeowners or to have a committee collect data on what homeowners want.
 
4. Update your reserve study.
When is the last time your HOA had a reserve study done? If it’s been 3 years or more, now is a good time to get a new one. Include preventive maintenance programs and scheduled replacement costs in your HOA’s 3- to 5-year plan. Anticipating these costs now will prevent your board from having to add a special assessment later.
 
5. Analyze past financials.
Your past financial statements and balance sheets can play a big part in helping you plan for the future. However, it is best to compare what you budgeted in past years to actual costs in order to prevent future miscalculations or costly oversights. Determine your HOA’s financial stability by looking at:
 

• The percentage of homeowner delinquencies (should be no more than 3 to 5 percent)
• The excess amount you have in your operating fund (should be about 10 to 20 percent of your annual assessments)
• Cash reserves (should be adequate to handle planned expenditures)

 
Ideally, past boards will have left behind detailed rationales for expenditures. Whether they have or not, it’s important that your board document its rationale for major expenditures going forward.
 
6. Review trends, and anticipate changes.
Review some of the key areas of your operations, what they have cost your HOA in the past and how you have benefited. Ask your service contract providers and utility companies about expected cost changes. Investigate possible ways you might be able to reduce your costs, for example by installing more efficient appliances or technology. Include planned improvements or upgrades in your calculations. And don’t forget to include anticipated changes to your payroll over the next 3 to 5 years, such as additional staff or changes in the cost of healthcare, which can significantly affect your budget.
 
7. Estimate your revenue.
Consider all your sources of revenue, including investments. Depending on the needs of your HOA, you may want to apply that income to your operations or to your reserve fund. In any case, make sure you are accounting for all expected revenue in your 3- to 5-year plan.
 
8. Look at tax implications.
Look over your planned projects and any reserve expenditures to determine if they will affect your taxes. Pay special attention to any items that could generate revenue. Discuss these tax implications with your CPA, and plan for them now.
 
9. Create your budget.
Once you have pulled together all the necessary information, analyze your data to come up with an estimate of your future needs. Get actual costs from your existing vendors and contractors so that your numbers will be more accurate. Include the following categories in your long-term budget:
 

• Administrative expenses (consulting, management, audits, computer services, bank charges, etc.)
• Service or contract costs (landscaping, maintenance, recreation, etc.)
• Insurance costs
• Utility costs
• Capital reserves
• Revenues from sources like assessments and investment interest

 
Remember, you are not just planning for the upcoming year. Your budget lays the groundwork for the future of your community. Taking an organized approach simplifies the job of creating your annual budget and also helps you put your community on a successful path for years to come.
 
A good community management company can provide valuable assistance when it comes to creating an effective budget. FirstService Residential is dedicated to the long-term financial success of the HOAs we manage. As a national company with a strong presence in Arizona, we enable communities to reduce costs by leveraging our close relationships with local vendors as well as our national buying power.
 
For more information on budgeting, or to find out how we can help you lower your HOA costs, contact FirstService Residential, Arizona’s leading community management company.