Seven Steps To Crafting a Workable Budget
Creating an annual budget for your association can be a source of stress, but it can also offer a great opportunity to protect the financial well-being 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.
Let’s take a closer look at the basic process for preparing an annual budget that works.
Before beginning this process, make sure that you know all applicable state laws and regulations. For example, the Pennsylvania Uniform Condominum Act requires that copies of each budget approved by the executive board must be promptly distributed to all owners. The owners have a right to reject any budget within 30 days after the approval with at least a majority vote.
1. Examine expenses
When working on any budget, go through your expenses line by line and resist the temptation to merely annualize each one from the previous year.
2. Look at your balance
Your operating fund balance should be, at the minimum, equal to one month’s maintenance costs. 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 you’re putting this part of the budget together, be sure to consider every source of revenue you can, which may include consistent enforcement of violations.
3. Plan for more than the coming year.
It’s an annual budget, but don’t stop there. Every association should have plans that look ahead for the next year, as well as three years and five years out. 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 their fees. Remember that a good association management company will have purchasing power that may help you negotiate better rates and fees if needed.
4. Consider delinquencies.
Delinquencies are an unfortunate fact of life for associations. As you budget, consider current expected delinquencies as 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 no way to completely avoid them. Remember that high receivables put basic services at risk for residents; reminding residents of that risk may help with some delinquencies.
5. Be ready for tough decisions – and make them.
There are no two ways about it: budgeting is when difficult choices come up. If your community manager provided a list of recommendations in the letter that comes with your audited financial statements, this is the time to seriously consider those ideas. You may also want to include a line item in your budget to accommodate accumulated deficit or a potential shortfall. As an alternative, you could also levy a special assessment.
6. Remember that the “how” matters
Often, the way in which something is done is just as important as the end result. 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.
7. 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. This makes it essential to avoid politics when it comes to budgeting. You’re all involved with your association for the same reason: to maintain and enhance the quality of life for everyone in your community.
Your annual budget is more than good practice – it’s an 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, Pennsylvania’s leader in community association management.