Fall is the time that many community associations do budget planning for the
coming fiscal year. A carefully structured budget is essential for proper
maintenance and preservation of association assets. The board, budget
committee, property manager and accountant should start the process early to
properly analyze the information.
The ultimate purpose of an annual budget is to calculate the maintenance
fees to charge the owners. There is two parts to the budget: The Operating
Budget reflects on-going expenditures such as utilities, management,
maintenance, supplies, etc. The Reserve Budget addresses major common
area components that require periodic repair and replacement like roofing,
painting, paving, fencing, pool equipment, clubhouse, etc. Combining the
anticipated operating expenses with an annual reserve contribution produces
the amount of money needed from maintenance fees and other revenue sources.
Examining a few basic budgeting guidelines, let's do the numbers:
1. Gathering Information
Get budget projections from all standing committees like social, newsletter, pool management, etc.
Obtain proposals and projected fee increases from service providers like the landscaper, management company and utility companies, etc.
Poll the owners for "wish list" items.
Conduct a Reserve Study (or review and revise the existing one). The
Reserve Study identifies all major common area components for which the
association has repair and replacement responsibility, estimates the
remaining lives of these components, calculates the repair and replacement
costs and establishes a funding plan to avoid the need for special
assessments. Reserve studies are 20-40 year projections and are typically
prepared by reserve study consultants.
2. Expenses
Study the history of expenditures for the past three years. Do trends or
patterns emerge? Review last year's budget and financial statement line by
line. How accurate was last year's projected budget? What can be learned
that can be applied to this year's budget? What changes should be considered
which will increase or decrease usage of electricity or other utilities?
What about inflation?
3. Revenue
All sources of revenue must also be carefully considered. These will include
maintenance, late fees, interest, fees for amenities, RV storage, prepaid
expenses, investments and accounts receivables. Will the community have any
new services or amenities which will generate additional income?
4. Drafting the Budget
Once you have gathered and analyzed all the information, you're ready to
begin drafting the new budget. List items that are "necessities" and those
on the "wish list." Add new operating expenses and all rate increases on
those existing. Determine how much will be added to the reserve fund. Be
prepared to go through several drafts before everyone is satisfied.
5. Determine the Maintenance Fees
After all expenditures and income have
been calculated, the homeowner maintenance fee can be determined. To do
this, follow this mathematical equation:
Total operating expenses plus annual reserve contribution minus
miscellaneous revenue equals the annual homeowner maintenance fee. Divide
this figure either equally or by percentage (according to the governing
documents) and then by 12 months for the monthly maintenance fee for each
owner.
6. Year End Financial Statement
A year end financial statement measures the actual performance against the
budget and using the most current one will help enormously in preparing a
future budget.
7. It's in the Details
Do you have enough detail in your budget line items to accurately track
costs (like Repairs-Roof, Repairs-Electrical, Repairs-Fencing, etc.) or have
you been lumping them all together ? (For a sample list of accounting
categories, go to www.regenesis.net)
Do the figures add up? Total revenue minus total operating expenses should
equal the annual reserve contribution.
Produce a budget that shows side by side actual versus budget on a monthly
basis.
Set your budget based on historical information (facts), not to produce a
desired maintenance fee (fiction).
Remember to replace reserve funds borrowed to meet operating shortfalls. Include descriptive notes that explain new or large line items or significant variances from the previous year.
8. Get Professional Help
A CPA budget review can help identify areas of financial weakness and advise
on corrective measures. Don't keep making the same mistakes over and over.
When doing the numbers, make sure you do it right. Be well informed, ask
the right questions and carefully plan the annual budget to ensure a sound
financial future for their community.
Thanks to Lauren Bush, Russ Hoselton, Richard Kirkpatrick and Grace Morioka
For more information on this subject, see www.Regenesis.net.
Published: October 13, 1999
Use of this article without permission is a violation of federal copyright laws.
 Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues.Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at . |
