Eight Easy Steps to Preparing a Budget that Works
Preparing your association’s annual budget can certainly be a stressful process. However, it's important to remember that the budgeting process is a valuable opportunity to ensure that your association is in good financial shape, now and in the future. Your budget should be seen as a tool to move your community to action, and as such, it is important to follow some guidelines.
Below are eight tips for preparing a budget that works:
1. Be mindful of expenses.
One of the easiest things to do when working on your annual budget is to carry expenses over from one year to another, but you must resist this temptation. Instead, go through your annual expenses line by line and assess whether the expense is a must in the new budget year.
2. Look at your vendor fees.
When preparing your budget, it is good practice to reach out to your list of vendors and ask if their fees will be increasing in the coming year. If increases will be occurring, then plan accordingly. Keep in mind, one of the many advantages to having a community association management company is that they should have purchasing power to help you negotiate better rates and fees with your vendors.
3. Review your fund balance.
As a general rule, your operating fund balance should be equivalent to, at least, the cost of one month of maintenance. If you’re not quite there, it may be necessary to levy an assessment to cover the gap. Additionally, as you prepare your budget, consider every source of revenue available, and when possible, refrain from using a contingency line item. This will undoubtedly help you avoid trouble down the road.
4. Think long-term.
Don’t let the term “annual budget” fool you. In preparing your budget, you definitely want to look beyond the current year. Every community should have 1-, 3- and 5-year plans. So when you’re working on your budget, think about those projects that can’t be funded from your current reserves.
5. Eliminate, or at the very least minimize, delinquencies.
Unfortunately, delinquencies are to be expected when dealing with an association budget. Keeping this in mind, you should consider your current delinquencies as a “bad debt” expense when preparing your budget. If you association has an aggressive collection plan, delinquencies may be brought under control, but don’t expect to avoid them altogether. If you charge late fees, be sure to charge them consistently – and remember, high receivables put basic services at risk for your residents.
6. Make difficult decisions.
Budget time usually calls for some hard choices to be made. If your association manager gave you a list of recommendations with your audited financial statements, now is the time to seriously consider them. Also consider including a line item in your budget to accommodate accumulated deficit or a potential shortfall. Alternatively, you could also levy a special assessment.
7. Process makes perfect.
Sometimes, the process you follow is just as important as what you are doing. Be sure to get Board approval on all reserve expenditures and have the Board evaluate the internal controls you have in place to eliminate the possibility of misappropriation and/or waste.
8. Put homeowners first.
Last but not least, try to remember that budget considerations don’t happen in a vacuum – they can have a significant impact on your homeowners. Thus, it is especially important to avoid politics 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.
One of your principle responsibilities as a member of the Board 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 numbers, it is a tool that when properly used can mean success for your community. If you follow these simple steps, you’ll be on the right track to keeping your community financially healthy for years to come. For more budgeting insights and best practices, contact FirstService Residential, North America’s leader in residential property management.