Preparing your association’s annual budget...it can be a source of stress, but more importantly, it’s a valuable opportunity to ensure the financial well-being of both your association and homeowners. Proper association management hinges on this financial tool for both short-term and long-term planning, so it’s important to follow some guidelines.
The importance of your budget cannot be overstated. It drives your maintenance plan, your social activities, capital improvements and more that affect property values and the lifestyles of your residents. Megan Keohen, a general manager at FirstService Residential, believes that a focus on property values drives a successful budget. “Everything else, including resident satisfaction, flows from property values,” she explained. “Plan your budget with property values in mind, and everyone’s happy.”
On the flip side, if you don’t have an effective, actionable budget for your community, you can’t provide social activity programming, implement a preventative maintenance program or make improvements to your community. Residents’ lifestyles will suffer and could become unsatisfied with your association, which can lead to increased turnover and even vacancies, negatively impacting your property values.
To prevent those problems and secure your association’s longevity, we have created seven tips to help your association prepare an annual budget that works.
1. Plan long-term.
Yes, it’s your annual budget, but you’ll want to look beyond the current year. Every community should have 1-, 3- and 5-year plans. This is the time to anticipate projects that can’t be funded from your current reserves—review your reserve study and preventative maintenance plans. Look at year-to-year trends on items like utility rates and other expenses you know you have each year like landscaping and insurance premiums.
2. Look at your fund balance.
Your operating fund balance should be, at minimum, equivalent to one month’s maintenance. If you’re not quite at that figure, you may need to consider an assessment to cover the gap. Our experts recommend striving to maintain three months of budgeted expenses. Furthermore, refrain from using a contingency or emergency line item in your budget – it’ll just spell trouble later on. When you’re putting this part of the budget together, be sure to consider every source of revenue you can.
3. Mind your expenses.
When preparing your annual budget, go through your expenses one by one and resist the temptation to merely annualize each one from the previous year. Look for ways that you can save money on expenses through bulk buying, reviewing your vendor contracts and making your community more energy-efficient.
4. Eliminate (or at least reduce) delinquencies.
Delinquencies are an unfortunate fact of associations. With this in mind, consider current expected delinquencies as bad debt expense when preparing your budget. If your association has an aggressive collection practice, you may be able to control delinquencies, but not completely avoid them. Delinquencies should be no more than three to five percent of your membership at any time. If you charge late fees, be sure to charge them consistently – and remember, high receivables put basic services at risk for residents.
5. Make the tough choices.
There’s no two ways about it: this may be the time to make some difficult choices. Your association manager may have given you a list of recommendations on ways to cut costs or generate revenue in a letter that comes with your audited financial statements...if so, now is the time to seriously consider those ideas. You may also want to include a line item in your budget to accommodate accumulated deficit or a potential shortfall. As an alternative, you could also levy a special assessment.
6. Follow your established processes.
Sometimes, how you do something is as important as what you do. Be sure to get board approval for all reserve expenditures, and make sure you have good internal controls in place to eliminate the possibilities of misappropriation or waste.
7. Put residents first.
Budget considerations don’t happen in a vacuum – they can profoundly affect your homeowners. That makes it essential to avoid politics when it comes to budgeting. Remember, you’re all involved with your association for the same reason: to maintain the quality of life your community’s residents enjoy, as well as enhance their property values.
There’s no reason to put off creating your next annual budget. Just remember – you’re not planning for the next year, you’re planning for the longevity of your community. The financial health of your community, including your property values and the lifestyle of your residents, all hinges on creating a budget that works for your association.