Beware of These Five Budget Busters
Unfortunately, for many board members, “annual budget” is just another term for “big headache.” It doesn’t have to be that way. By staying aware of common budgeting pitfalls, you can make the creation of your annual budget less of a hassle – and ensure an entire year of minimal money woes while you’re at it.
To help you get there, here’s a list of five things that tend to blow association budgets. The best HOA management company will partner with you to help manage these budget busters so your community can avoid paying the price – literally and figuratively – later.
- Double-digit maintenance/common charge increases. Some associations delay increasing the budget for operating expenses until every three to five years. This results in a consistent maintenance/common charge for a while, followed by a sudden, surprising increase that’s larger than expected. As an alternative, try increasing the maintenance/common charges by a small percentage each year, rather than keeping them the same for a few years and then suddenly raising them. This will help accommodate the inevitable rise in these costs in a more gradual way.
- The “not-so-special” special assessment. Special assessments can be an alternative tool for good fiscal stewardship – but only when they are used appropriately. Avoid implementing special assessments as a means to keep pace with rising maintenance/common charges. Instead, reserve special assessments for funding specific projects, raising working capital, or enhancing reserve funds. A normal contingency line item in the budget will often allow the association to address the unforeseen annual issues and will provide relief from the items that come along in the normal course to cause a deficiency to the budget.
- Underfunded reserves. Reserve funding is a disciplined task to maintain the useful life of important capital items like roofing, paving, facades and large projects. A percentage of your association reserves must be included each year in your budget and must follow a specific statutory requirement. Maintaining these reserves isn’t just good for operations – many lending institutions require it. It all starts with planning, so be sure your budget accounts for a proper reserve study that is sufficient to address the expected (and even, sometimes, the unexpected).
- Deficits. The “d word” is, unfortunately, sometimes just part of the business of running an association. A strong indicator of a deficit is if the age of your payables is greater than 60 days. If that’s the case, it’s a good idea to fund this amount as a line item in your budget or with a special assessment. Another indicator of a deficit is if the forecast for the coming year is markedly different from what the audited financial statements are reporting. It’s important to maintain good relations with your vendors through timely payments, and this strategy will help prevent deficits from getting in the way of that.
- Fixed expenses that are in need of repair. When you’re creating your annual budget, nothing is a given – even fixed expenses. You may be able to reduce these by re-evaluating vendor contracts, finding more competitive service providers, and asking your community manager to reduce overtime. Energy is another big one – have your systems evaluated for efficiency, and talk to your HOA manager about locking in electricity, gas and fuel rates. If you’ve got the right homeowner association management company, they can leverage their relationships with vendors to provide more competitive pricing for you.
The best community management company will help you avoid these five budget busters – and partner with you to create and help manage your community’s annual budget. They’ll be there for you after that too, ensuring that you adhere to the strategies you’ve put in place to maintain the integrity of your budget. That includes everything from expense tracking, cash flow control, planning capital improvements and making market projections to minimize (or eliminate) surprises.
Most of all, remember that your annual budget is more than just the annual numbers. It forms part of the longer term strategic plan for your community – to keep it financially healthy for many years to come. Mind the potential pitfalls and you will find that it’s a way to create a blueprint for success throughout the entire year and beyond.
FirstService Residential, North America’s leading property management company, can show you how a well-planned budget process can add up to savings for your community. For more insight on “budgeting for success,” contact FirstService Residential today