Creating Your Next Budget: Nine Easy Steps
It’s that time of year again – time to start working on next year’s community association budget. Already? Yes, already. Budgeting for next year should start about halfway through the year so that it isn’t rushed.
Timothy Snowden, executive director of Philadelphia high-rise operations for FirstService Residential said that budgeting doesn’t have to be a time for stress. “The budget process should go smoothly – there’s no reason to panic,” he said. “Some boards overthink it. But most budgets aren’t complicated, and if you stay on top of your financials all year long, it won’t be difficult to do each year’s new budget.”
We know that budgeting isn’t necessarily easy, but there are things you can do to make it less stressful and more rewarding for everyone involved. Read on for expert advice on how to budget more easily.
1. Plan strategically.Get your board and association management team together to make sure everyone has an aligned vision for the future of your community. If possible, it’s great to include an auditor, attorney and insurance agent as well. Set priorities for the coming year, and pin down your level of commitment to each one. The most important thing a board can do in making budgeting is create a timeline and abide by it.
“Just scheduling dates for the meetings is a large part of the process. Most of our associations in Philadelphia require that we deliver a budget to them by September 30,” Snowden explained. “The initial budget is delivered to the board treasurer. We start in July and have a first draft by end of August – that’s my goal. That means that, by Halloween, there’s been time for a review by a budget committee and entire board. We definitely want budgets approved by Thanksgiving. That allows us to make sure that billing is correct and provides time to notify residents of any increase in assessment.”
2. Rely on committee input.Snowden said he feels that assembling a “task force” adds a note of panic to budget proceedings. “We teach people in Philly that budgeting should be a smooth process,” he said. “Your community association manager should put together first draft and hand it off to the treasurer. If there is a budget or finance committee, then they should look it over and approve it.”
3. Review your reserve study.You’re probably looking at a three- to five-year plan, which is the perfect timeline for planning scheduled replacements of reserve items and ongoing preventive maintenance programs.
When budgeting, Snowden reminds boards that reserve funds and operating funds must be separated. “Reserve funds are meant for replacing things we already have on property,” he explained. “If the board decides to add more annual plantings, for example, that must be paid for from operating funds, not reserves. They must be segregated.”
He also cautions boards against lowering the reserve contribution rather than raising assessment fees – it’s a sure way to be underfunded when something needs to be replaced. The reserve plan needs to be incorporated into the board’s five year plan. Snowden recommends having two five year plans: one for operating funds and one for reserve funds.
Keep in mind the limitations of your reserve fund and what it is allowed to cover. Snowden said that anything that’s technology-driven, such as computers and surveillance systems, is usually not included in the reserve study. They are funded by your operating fund because they are replaced due to obsolescence. Also remember that reserves are not meant to fund a capital improvement. “It’s tempting,” Snowden said. “But don’t do it.”
4. Create a plan for long term goals.Where does your community want to be in three to five years? What things should be changed? What is working well? What are resident expectations? These are the questions that you should answer before budgeting begins.
“When you start talking about a five year plan, you’re laying out expectations right there,” Snowden said. “How often do we redo corridors? How often do we update a lobby? Some communities want the corridors updated every three years, whether or not they need it, and that needs to be factored into the budget as part of goal setting.”
5. Plan for taxes to avoid surprises.“Make sure you understand your taxes. Condominiums and HOAs will pay very little in taxes, but co-ops are taxed differently. It’s important to plan for that,” Snowden said.
Your annual assessments are not taxed, but if you have any projects that generate revenue for your association, you need to be aware of the tax implications for them. “I worked with an association that leased two parking spaces for 99 years each, but then they got hit with pretty high taxes on that revenue. You need to plan for that.”
6. Know what revenue is coming into the association.Take a look at all of your revenue streams, especially investments. The income generated by those investments can be applied to your reserves or your operations and should be budgeted accordingly. The path you choose depends on your association, but either way, make sure you’re accounting for the next three to five years.
7. Watch for trends.Talk to your utilities and service contract providers about anticipated increases and decreases. Explore ways to lower costs through technology (such as energy efficient appliances and updated lighting). Consider what community improvements might be on the horizon.
Snowden explained that you can budget based on trends or on zero base. Zero-based budgeting is exactly what it sounds like: you start from zero for the upcoming budget and figure out what you will need for the future instead of looking at the past. Snowden said that some things are easier to do from a zero base, and payroll is a big one. It’s good idea to analyze trends when discussing items like utilities, but budgeting for payroll from trends is a mistake.
8. Analyze past data.Analyzing past balance sheets and financial statements will help you determine what may lie ahead. To get more out of this part of the process, compare your actual costs to what was previously budgeted. This can help you avoid costly oversights or miscalculations in your upcoming budget. To assess your full financial stability, look to unit owner delinquencies (they should be held at 3-5%), budgeting a contingency (5-15%) and adequate cash reserves. It will help if the past association board has left detailed rationales for their expenditures. If they haven’t done so, it’s time for you to begin.
9. Create your budget.
You’ll do this by analyzing past data, projecting what you’ll need in the future, and getting real cost data from your current contractors and vendors. Your long-term budget should include categories such as: income (or revenues), which includes assessments and interest from investments; administration, which includes the cost of consulting, management and audits, along with bank charges and computer services; services or contracts, which includes costs from recreation, landscape and maintenance vendors; property protection, which encompasses preventive maintenance and repairs whose costs are spread out evenly over time; and lastly, utilities and capital reserves.
If you’re still feeling unsure about working on your budget, help is available. Snowden said that his team conducts an annual “school the treasurer” session for any board members who want to attend. It covers the budget process, what each person’s role is and what they can expect from FirstService Residential.
There’s no reason to put off your next annual budget. You’re not just planning for the next year; you’re planning for the long-term quality and longevity of your community. For more on long-term budgeting, contact FirstService Residential, Pennsylvania’s leader in community association management.