September-October 2016 Issue
The ABCs of Budgeting
Budgeting is reviewing, researching, analyzing, educating and building confidence! In the world of homeowners association management one of the most important services a manager can provide is assisting a board of directors in developing either a historical trend or zero-based budget. The process starts long before the fiscal year-end deadline. Months prior to the budget meeting(s), each manager should provide the tools needed for the board of directors to prepare a balanced budget. A few of the steps to assist in this process are comparing actual expenses to last year’s budget, reviewing maintenance contracts, checking public utility proposed rate increases, reviewing insurance coverage and updating reserve study allocations.
Recurring maintenance contracts should be reviewed for scheduled increases or contract renewal periods. Each contract should have a starting and ending date. The provisions to renew should be clearly stated. Some contracts have a built-in automatic increase or automatic renewal that should be noted prior to reviewing projected expenses. Many of the utility companies provide their customers with information on yearly rate increases and proposed billing changes. Insurance premiums are a large budget line item. The Board should meet with their agent to determine adequate coverage, reasonable deductibles at the best premium. Once the insurance proposal is reviewed and accepted, the board must determine the best method of payment. If premiums are paid in one lump sum, the association avoids the extra expense of finance charges. However, if the association does not have the cash flow to make large lump sum payments, most premiums may be spread out over time.
The reserve study should be revised annually to provide an accurate picture of the major assets of the community, their useful life and the replacement cost of each. The study will highlight weak areas and help formulate a plan to avoid deferred maintenance projects. The study will also provide guidelines for funding over the course of ten years. Armed with this information, the board of directors is able to begin the budget preparation.
Most association management software programs will produce running totals of expenses by vendor, by the general ledger codes, for the year, or divided into monthly totals. These reports will show the actual expenses and help gauge your projected expenses for the upcoming year.
A balanced budget is a working document that provides the membership with a sense of confidence in the management and the board of directors. Homeowners need to see how their money is working to increase the value of their home. The budget process should be conducted in a transparent manner. The membership will then better understand how their assessments are —calculated and the effect an unbudgeted expense could have on their checkbook. Once the board of directors and management explain the process and the results, the membership will have confidence in the Board of Directors and be more willing to allow them to manage the business affairs of the association.
The community manager plays a huge role in the preparation of an annual budget. Their duties include gathering the required documentation for review, reaching out to vendors to determine contract increases, contacting utility providers, obtaining bids for reserve study updates, running reports of past expenses, and providing a timeline for the board to be successful. Without the proper tools, the board cannot see a clear picture…which will result in an unclear budget. An association’s successful budget requires everyone working together—manager, board of directors and homeowners.
Donyelle La-Key, AMS, PCAM is the office administrator at Horizon Property Management with more than twenty years of portfolio management experience in the common interest development industry industry. She can be reached at email@example.com.
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