Preparing a Better Budget in Seven Simple Steps
Where does financial fitness for your association begin? With your budget, of course. And that makes preparing one among the most important tasks for board members. It also tends to be one of the more challenging tasks. But don’t look at this undertaking as a chore or a headache – instead, see it as an opportunity.
After all, with the right budget in place, your community association will have the ability to provide programs for residents, maintain and improve amenities and preserve the financial stability of the community.
A sound budget can make a real impact on your board and community, and it all begins with these seven steps.
1. Know it’s more than an “annual” plan.
For smart budgeting, it’s good to think beyond a single year. In fact, it’s recommended that your budget accommodates planning for one year, three years and five years. That way you have time to look ahead and plan for bigger capital projects that can’t be accomplished immediately with your current reserves. You can’t expect vendor fees to stay the same over time, so make sure your long-term planning accounts for this with anticipated increases. Working with a good community association management company can help – nationwide companies will have the buying power to possibly keep these fees low.
2. Consider your fund balance.
Here’s a rule of thumb for your operating fund balance: it should be equal to at least a single month of maintenance costs. If it’s under that amount, a special assessment might be in order. As another tip, steer clear of a contingency line item. This part of a budget is really just a pitfall you might stumble on later. Finally, some associations neglect to consider all sources of revenue beyond HOA dues, such as laundry equipment or amenity fees, so make sure you’re taking everything into consideration.
3. Don’t annualize expenses.
Even the most seemingly-reliable expenses can’t be counted on to stay consistent every year. That’s why it’s so important to resist the urge to annualize certain costs. Instead, go through each of your expenses individually and make sure you arrive at a figure that is unique and relevant to what’s coming up, not what’s happened in the past.
4. Make delinquencies a priority.
Unfortunately, there’s just no way your association can avoid delinquencies. Acknowledging this fact does have one positive, though: it helps you arrive at a more realistic budget. Consider all of your current or anticipated delinquencies as bad debt expense and factor it into your budget accordingly. Even if you have a highly aggressive approach to collecting delinquencies, you’ll likely never be able to avoid them completely, so it’s important to acknowledge the role they play in your financial picture. Charging late fees are one approach to mitigating the problem, but you have to be consistent about it. Above all else, keep in mind that if your receivables are too high, your basic resident services may be put at risk.
5. Don’t shy away from the difficult parts.
Sometimes, hard choices need to be made. Many of these become evident in the letter given to you by your association manager detailing budgetary recommendations. This usually accompanies your audited financial statements. Take a look at these recommendations and give them a chance to work – even if they’re difficult decisions to make. Further, make sure your budget has a line item for accumulated deficit or potential shortfall. You could choose to levy a special assessment instead, as well.
6. How you do it is important, too.
There are a few things you want to consider when it comes to your process as well. It’s best practice to get board approval for your reserve expenditures, and it’s in the best interest of your HOA to examine your internal controls to safeguard against misappropriation and waste. Further, New Jersey law mandates that your budget is detailed and includes expense classifications such as “the maintenance of improvements listed on the master deed or declaration.” The statute also requires that you provide a copy of the budget to owners within 30 days of its adoption.
7. Remember who you serve.
Your budget isn’t just a spreadsheet or a collection of numbers. It’s a roadmap for how your residents will live. So remember to put your members first and keep politics out of the process. Your role as a board member is to ensure a good quality of life for everyone. Your budget should serve that purpose, too.
For more insights and best practices on preparing a sound budget that will ensure your association’s financial well-being, contact FirstService Residential, New Jersey’s leader in community association management.