Discover the 8 Steps of Budgeting Process
Preparing your association’s annual budget, while one of your responsibilities as a member of the Board, is probably not high on your list of favorites. And understandably so – the budgeting process can certainly be a major source of stress for anyone involved. The key, however, is to see the process as a valuable opportunity to not just ensure the financial well-being of your association and its homeowners, but also to plan for years to come. As effective association management depends on this financial tool, it’s important to follow the 8 steps of budgeting process.
Here are some tips for preparing an annual budget that works:
1. Mind those expenses.
When preparing your budget, it’s easy to fall into the habit of taking annual expenses from the previous year and carrying them over into the new year. Resist this temptation. Instead, go through your annual expenses one by one and determine which ones are a must in the new budget year.
2. Review your vendor fees.
Review your current list of vendors and determine if their fees will be increasing for the coming year. If so, then you should plan accordingly in your budget. Remember, one of the advantages of having a community association management company is that the good ones will have purchasing power that may help you negotiate better rates and fees with your vendors.
3. Look at your fund balance.
Generally speaking, your operating fund balance should, at a minimum, be equivalent to the cost of one month of maintenance. If you’re not quite there, you may want to consider an assessment to cover the gap. When preparing your budget, make sure you are anticipating every source of revenue available. And to avoid trouble down the road, refrain from using a contingency line item when possible.
4. Think long-term.
It may be an annual budget you are preparing, but you’ll want to look beyond the current year. Every community should have short-term and long-term goals that include a 1-, 3- and 5-year plans. When preparing your annual budget, think about those projects that can’t be funded from your current reserves.
5. Work to eliminate, or at the very least minimize, delinquencies.
Unfortunately, delinquencies are often a given when dealing with an association budget. With that said, you should consider your current delinquencies as a “bad debt” expense when preparing your budget. With an aggressive collection plan, delinquencies may be brought under control, but it is rarely possible to avoid them altogether. If your association charges late fees, make sure you are charging them consistently – and remember, high receivables put basic services at risk for your residents.
6. Make hard choices.
Budget time is usually the time to make some difficult decisions. If your association manager gave you a list of recommendations with your audited financial statements, now is the time to seriously consider those ideas. You may also want to include a line item in your budget to address accumulated deficit or a potential shortfall. An alternative to that is to levy a special assessment.
7. Process makes perfect.
Sometimes, how you do something is as important as what you do. Make sure your Board reviews and approves reserve expenditures, and evaluates the internal controls you have in place to eliminate the possibility of misappropriation and/or waste.
8. Put homeowners first.
Always remember, budget considerations, while the responsibility of the Board, can have a significant impact on your homeowners. Thus, it is especially important to leave politics out of the equation when it comes to budgeting. It helps to remind yourself why you got involved with your association in the first place: to maintain and enhance the quality of life of your residents.
As a Board member, one of your top responsibilities is to be a steward of your association’s finances, and that starts with preparing a budget that works. Remember, your budget is more than just a spreadsheet, it is a tool to move your community to action. Follow these 8 steps of budgeting process to get you on the right track and keep your community financially healthy for many years to come. For more budgeting insights and best practices, contact FirstService Residential, North America’s leader in residential property management.
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