FROM THE HOA FILES: It’s budget time again
September 10, 2010
Does your association struggle with preparing a balanced budget on time? Now is the time to carefully consider the obligations, needs and expectations of the association. Follow these guidelines for successful budgeting:
1. Review the association’s governing documents for budget requirements and timelines. Establish a calendar working back from the end of the fiscal year.
2. Conduct a SWOT analysis that evaluates the internal strengths and weaknesses of the association and external opportunities and threats that might affect it. A budget is only part of the strategic planning process. The board must be equipped with the information needed to fulfill the association’s responsibilities.
3. Identify and separate fixed costs from variable costs. Be sure to differentiate the essential line items from the discretionary ones. Discretionary expenses may be pared down to assist with balancing the budget.
4. Budgeting may never be exact. Be reasonable in your allocations, but assume nothing; each line item must be researched and justified.
5. Create the budget in the same format as your financial statements so you can compare apples to apples.
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6. Ensure you are separating your reserve fund from your operating fund, and budgeting the income and expenses for each fund. This is “fund accounting” and required for proper association reporting.
7. Federal guidelines now require that at least 10 percent of the budget is established for your reserves for capital expenditures and deferred maintenance. As reserve revenue is usually received from the members as a portion of their assessments, a budget line item should expense these accumulated reserves from the operating fund to the reserve fund on a monthly or quarterly basis.
8. Consider creating line items for bad debt (to address uncollectable assessments and possible foreclosures), operating contingencies of perhaps 5-10 percent, and insurance deductibles.
9. Involve the members and communicate the budget. Solicit feedback through general meetings, committee participation or surveys. Upon presentation of the budget, support the data with a statement on the board’s decisions, explaining any major changes, especially any assessment increases. Visual aids, such as graphs or charts, can help the members grasp the impact of data comparisons.
If you haven’t commenced your budget process yet, now is the time. Be prepared and you will be thankful.
Murray Bain is a community association consultant and is certified by the Community Associations Institute as a Professional Community Association Manager (PCAM). He is based in Frisco, Colorado, and can be reached at 970-485-0829, or firstname.lastname@example.org. As always, seek the counsel of professionals; your attorney, accountant, your management.