Seven Steps To Crafting a Budget That Works
Working on the annual budget for your association can be a source of stress, but it can also offer a great opportunity to protect the financial health of both your association and your homeowners. Proper community association management hinges on this financial tool for both short-term and long-term planning, so it’s important to follow some guidelines.
Before beginning the process, make sure that you take into account all applicable state and local laws and regulations. For example, § 47F-3-103 of the North Carolina Planned Community Act outlines standards for owner notice and ratification of the budget. It states that “Within 30 days after adoption of any proposed budget for the planned community, the executive board shall provide to all the lot owners a summary of the budget and a notice of the meeting to consider ratification of the budget, including a statement that the budget may be ratified without a quorum. The executive board shall set a date for a meeting of the lot owners to consider ratification of the budget, such meeting to be held not less than 10 nor more than 60 days after mailing of the summary and notice. There shall be no requirement that a quorum be present at the meeting. The budget is ratified unless at that meeting a majority of all the lot owners in the association or any larger vote specified in the declaration rejects the budget. In the event the proposed budget is rejected, the periodic budget last ratified by the lot owners shall be continued until such time as the lot owners ratify a subsequent budget proposed by the executive board.”
When you are ready to begin, here’s a basic process for preparing an annual budget that works.
1. Examine expenses.
When working on your budget, go through your expenses individually and resist the temptation to simply annualize each one from the previous year.
2. Eliminate (or at least minimize) delinquencies.
Delinquencies are an unfortunate fact of life for associations. As you prepare your budget, consider current expected delinquencies to be bad debt expense. If you charge late fees, charge them consistently. If your association has an aggressive collection practice, you may be able to control delinquencies, but there’s often no way to completely avoid them. Remember that high receivables put basic services at risk for residents; reminding residents of that risk may help resolve some delinquencies.
3. Make the tough calls.
The cold, hard fact: budgeting is when difficult choices come up. If your community manager provided a list of reserve funding adjustment recommendations in a letter provided with your audited financial statements, this is the time to give consideration to those items. You may also want to include a line item in your budget to accommodate accumulated deficit or a potential shortfall. Alternatively, you could levy a special assessment.
It is also important to understand the difference between mandatory expenses and discretionary expenses. Just like with household budgets, there is a need to make decisions within discretionary expenses between needs and wants. You should also take into consideration priorities for the community.
4. Check your balance.
Your operating fund balance should be, at the minimum, equal the costs of one month’s maintenance needs. If you don’t have that amount on hand, you may need to consider an assessment to cover the gap. Don’t use a contingency line item in your budget – it’ll just spell trouble later on. When assembling this part of the budget, be sure to consider every source of revenue you can, which may include clubhouse rental fees, newsletter advertising, social event sponsorships, etc.
5. Think long-term.
Every association should have financial plans that look ahead for the next year, as well as three and five years ahead. This is the best time to anticipate projects that can’t be funded from your current reserves. It’s also a best practice to take a look at your current vendor list and determine if you need to plan for increases in any fees. Remember that a good association management company will have the purchasing power to help you negotiate better rates and fees in some cases.
6. Put homeowners first.
Budget considerations don’t happen in a vacuum – they can profoundly affect your homeowners, regardless of the type of association you have or property you live in. As a rule, avoid politics during the budgeting process. You’re all involved with your association for the same reason: to maintain and enhance the quality of life for everyone in your community.
7. Process makes perfect.
Be sure to get board approval for all reserve expenditures, and take a close look at your internal controls to eliminate the possibilities of misappropriation or waste. Often, the way in which something is done is just as important as the end result.
Your annual budget is more than good practice – it’s an important opportunity to get your association on the right track to financial success and keep it there. For more budgeting insights and best practices, contact FirstService Residential, North Carolina’s leading community association management company.