Seven Steps To Preparing a Workable Budget
Preparing your association’s annual budget can be a source of stress, but it’s also a valuable opportunity to ensure the financial well-being of both your association and 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 steps to preparing an annual budget that works. Before you begin, be sure to be aware of all state and local laws as it pertains to community association budgets.
1. Check your balance.
Your operating fund balance should be, at minimum, equivalent to one month’s maintenance. If you’re not quite at that figure, 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.
2. Don’t just look at the coming year.
Yes, it’s an annual budget, but don’t stop there. Every community should have plans that look ahead for the next year, plus three years and five years out. This is the time to anticipate projects that can’t be funded from your current reserves. Remember, section 55-514.1 of the Virginia Property Owners’ Association Act lists minimum standards for the frequency of reserve studies and the budget funding of the study’s findings. 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. A good association management company will have purchasing power that may help you negotiate better rates and fees.
3. Examine expenditures.
When working on your annual budget, go through your expenses individually and resist the temptation to merely annualize each one from the previous year.
4. Make the tough calls.
There are no two ways about it: this is the time that difficult choices come up. Your community manager may have given you a list of recommendations in a 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.
5. Take delinquencies into account.
Delinquencies are an unfortunate fact of associations. It’s best to consider current expected delinquencies as bad debt expense when crafting your budget. If your association has an aggressive collection practice, you may be able to control delinquencies, but there’s no way to completely avoid them. If you charge late fees, charge them consistently – and remember, high receivables put basic services at risk for residents. Reminding residents of that risk may help with some delinquencies.
6. Mind the process.
Sometimes, how you do something is as important as what you do. 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. Consider your members.
Budget considerations don’t happen in a vacuum – they can profoundly affect your homeowners, which 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, Virginia’s leader in community association management.