Seven Best Practices for HOA Budgeting
Budgeting…If you are like most homeowners association board members, you don’t rank it among your favorite responsibilities. However, it is one of your most important tasks. The effectiveness of your annual budget has a long-term impact on your HOA’s financial health and residents’ quality of life.
To create an annual budget that works well for your HOA, follow these seven tips.
1. Apply a strategic approach.Ideally, you should have a 1-, 3- and 5-year financial plan, and your annual budget should reflect this plan. In addition, anticipate any large projects that you will not be able to fund in the upcoming year.
Review current vendors to determine which of them are planning fee increases or service changes in the year ahead and to evaluate your satisfaction with them. You may want to shop around for new vendors, or at the very least, renegotiate for better fees and service terms. With a vast network of vendor relationships and the ability to evaluate and negotiate for quality services, a national community management company can help.
2. Put the needs of your community first.The objective of all of your budgeting decisions should be to improve your community and enhance the lifestyle of all the residents who live there. Therefore, keep your personal interests, as well as any other special interest, out of your budget decisions.
3. Be meticulous with expenses.You may be tempted to simply annualize expenses from the previous year, but avoid doing so. You will get more accurate insights into the needs of your community if you carefully review each expense.
4. Manage delinquencies.All HOAs deal with delinquencies. If you anticipate having any, you will need to include them in your budget as “bad debt expenses.” Remember that your community’s basic services will be at risk if you have too many receivables. Apply a strict collections policy, and make sure that you charge late fees consistently to help reduce the number of delinquencies. Unfortunately, you probably won’t be able to completely eliminate them, but you can minimize them.
5. Review your operating fund.You need to maintain at least enough in your operating fund to pay for a month of maintenance in order to avoid having a shortfall. No HOA board wants to spring a special assessment fee on residents to cover operational expenses, so look for unique ways that you can generate income and reduce expenses. Above all, avoid adding a contingency line item in your budget. It is likely to present problems down the road.
6. If you must, make those difficult choices.Perhaps your accountant has suggested some tough solutions during your audit. Now may be the time to put them into practice if you are facing shortfalls. You also may want to consider adding a budget line item for a potential gap or an accumulated deficit. Another alternative is to levy a special assessment.
7. Follow the rules.Make sure that you are doing everything “by the book” (that is, according to California law and your governing documents). For example, although your board can legally transfer funds temporarily from your reserve fund to your operating fund, California law requires that you communicate the board’s intent to consider the transfer in a notice of meeting. Also, make sure that you have proper internal controls in place so that funds cannot be misappropriated or wasted.
Budgeting is a big job, but it has the potential to make your community a better place to live if you and the other board members manage your annual budget well. To learn more about how to develop an effective annual budget, contact FirstService Residential, California’s leading community management company.
Looking for more budgeting best practices? Download our in-depth white papers below:
Getting Your Annual Budget Off the Ground – And Right on the Money
Smart Financial Planning for Your HOA
Pay Now or Pay More Later? Making the Most of Your Reserve Study and Maintenance Budget
Four Things You May Not Know About Community Insurance
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