Seven Steps To Preparing a Sound Budget
Working on the annual budget for your association can be a source of tension or stress, but it also provides the best opportunity to protect the financial health of both your association and your homeowners. Proper community association management relies on this financial tool for both short-term and long-term planning, so it’s important to follow some guidelines and best practices.
Before beginning the process, make sure that you are aware of all applicable state and local laws and regulations. The South Carolina Homeowners Association Act requires that a copy of the association's annual budget for the past three years must be maintained and held in a place easily accessible to the homeowners association's members; the law also requires that the “budget must reflect the estimated revenues and expenses for that year and the estimated surplus or deficit as of the end of the current year. The budget must delineate all fees or charges for recreational amenities. The association shall provide each member with a copy of the budget or written notice to the member's lot or unit mailing address or alternate address provided in writing by the member that the budget is available pursuant to Section 27-52-160(C).”
Let’s take a look at the basic process for preparing an annual budget that works.
1. Check your operating fund balance.
The association’s operating fund balance should, 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 consistent enforcement of violations or amenity fees.
2. Minimize or eliminate 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 your association has an aggressive collection practice, you may be able to control delinquencies, but there’s often no way to completely avoid them. If you charge late fees, charge them consistently. Remember that high receivables put basic services at risk for residents; reminding residents of that risk may help resolve some delinquencies.
3. Evaluate expenses.
While working on your budget, go through each expense line item; avoid the temptation to simply annualize each one from the previous year.
4. Be ready for tough decisions – and make them.
The cold, hard fact is that budgeting is when difficult decisions rear their heads. If your association manager provided a list of recommendations in a letter provided with your audited financial statements, this is the time to give consideration to them. You may also want to include a line item in your budget to accommodate accumulated deficit or a potential shortfall. Alternatively, consider levying a special assessment.
5. Take care with your process.
Sometimes, the manner in which something is accomplished 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.
6. Plan for more than the coming year.
Every association should have financial plans that look ahead for the next year, as well as three and five years in the future. As a best practice, take this opportunity to review your current vendor list and determine if you need to plan for increases in any fees. This is the best time to anticipate projects that can’t be funded from your current reserves. A good association management company will have the purchasing power to help you negotiate better rates and fees in some cases.
7. Put homeowners first.
As a rule, avoid politics during the budgeting process. 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. 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 the best 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, South Carolina’s leader in community association management.