When you are on the board of a homeowner association (HOA), budgeting is a critical part of your responsibilities. Your community’s budget provides the sound structure for all of the initiatives that your board wants to accomplish. It is more than a series of numbers; it’s the framework for reaching your community’s goals. That’s what makes it so important—and what can make it so stressful.
Unfortunately, many boards are challenged when it comes to creating and managing their budget. That’s where a quality community management company comes in. Experienced management teams have created numerous budgets, and they’re experts in the best practices involved in crafting a budget that will help your community accomplish its objectives.
To get you started, we’ve provided these six basic principles of budgeting.
1. Keep GERT in mind as you develop your budget.

That may sound like a nonsense word, but it’s an acronym for everything you’ll need to remember to create a successful budget:
  • Goals and objectives of your association
  • Estimated common element expenses and income
  • Reserves that you’ve calculated
  • Timeline for your budget
Taken together, these four elements create the framework for budgeting successfully. Focusing on the goals of your HOA helps you focus on the big picture while you’re sifting through the details. Estimated expenses and income form the numerical foundation. Reserves provide an important resource for capital improvements or, if necessary, a source of revenue. And the timeline is critical to delivering your budget so that it can take effect promptly.
2. Collect necessary documents.  

This probably isn’t the first budget your HOA has ever created. Even if it is, many of these documents are monthly records that you should have on hand. Either way, you should be able to access past documents that provide the data and the structure you need to build a good budget. Try to gather the following items:
  • Past budgets
  • Financial statements
  • Association documents
  • Monthly management report
  • Schedule of delinquent unit owner accounts
  • Vendor contracts
  • Wish list items
3. Determine your budget categories.

You have defined your GERT and collected important historical data and records. Now it’s time to compile all that information into budget categories and line items. Every budget is different, but you probably need to include most of the following items.
Operating budget:
  • Estimated common expenses
  • Expenses per unit owner
  • Management fees
  • Administration
  • Security provisions
  • Maintenance
  • Insurance
  • “Other” expenses (specific to your community or part of the state)
  • Landscaping
  • Provision for bad debts
Reserve budget for projects such as:
  • Painting the building Roof replacement
  • Replacing the roof
  • Resurfacing driveways or a pool
  • Capital expenditure or deferred maintenance greater than $10,000
4. Keep these considerations in mind.

As you fill in the sections in Step 3 with data, think about:
  • The level of service and amenities you want to provide residents
  • Whether owners offer or design any programs (classes, clubs, events, etc.)
  • Historical data that may affect how you budget for the upcoming year
  • Economic variables (such as changing gas prices, utility costs, labor costs and insurance premiums, and wages)
  • How your maintenance fees compare with properties of a similar size and with similar services and amenities
In addition, you’ll want to closely review your vendor agreements, see if there are any anticipated changes in their rates and factor those in. Be sure to budget for capital improvement projects if you wish to avoid special assessments. Your HOA document requirements will provide more information on maintenance requirements and costs associated with your common elements.
It is also a good idea to plan for some upkeep (such as painting) before the community actually looks like it needs it. Keep in mind that the older your property is, the greater your maintenance costs will be. Putting off maintenance can increase costs for a community of any age. A good community management company will have the tools to help your HOA schedule and budget for predictive maintenance. For more details on managing maintenance costs and your reserve fund, download our comprehensive white paper Pay Now or Pay (More) Later?.

5. Understand your revenue sources.
Of course, your budget isn’t just about money going out. It’s also about what is coming in. Know how your budget will be funded and look for every possible source of revenue. Beyond the assessments paid by each owner, this can include rent, interest and other sources. You also need to determine a payment schedule and, if necessary, take collection actions so your budget does not contain funding gaps.

6. Use the right software for the job.
Now that you have the right mindset, a good plan, all the necessary background information and a framework, it’s time to track your budget with financial software. Although you could use spreadsheet programs such as Excel for PC and Numbers for Apple products, they will only provide you with the basics. The best professional community management companies have advanced systems and tools to help in the production and ongoing analysis of budgets.
You should now be on the path to successfully creating your HOA’s budget. Yes, it’s still a lot of work, but it’s not a mystery anymore. Just remember that your budget isn’t simply a spreadsheet. It’s the driver for positive change and for ensuring the financial health of your community.
Find out how an experienced community management company can help guide you through your budgeting process. Contact FirstService Residential, California’s leading community management company.

Looking for more best practices? Download our white papers today:
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
The Long and Short of HOA Short-Term Rentals
Wednesday September 21, 2016