Preparing the annual budget is one of the Association’s most important responsibilities. The Board has the fiduciary role in establishing a well prepared budget that’s main purpose is to determine what the assessments will be for the upcoming year. Preparing a budget often comes with many challenges as the Board may encounter unanticipated expenses and the need to consider providing for reasonable reserves.
Best Practices When Budgeting
Here are a few of the budgeting best practices to consider when preparing the budget:
- Start with reviewing the Association’s governing documents and be familiar with what they call for in calculating the budget. For example, do they say that any excess funds or shortages should be considered when preparing the following year’s budget?
- Obtain bids for services for the upcoming year. This will help in providing the best information to assist in developing the expense line items.
- What other projects does the Board want to consider? Consider picking one or two projects per year.
- What about uncollectible accounts? Consider including a line item for potential bad debts or uncollectible accounts.
- Don’t forget about income taxes. If your Association has any ancillary items such as parking, laundry or may be receiving income for utility incentives or sale of land easements, these are taxable to the Association and you may need to include a line item for income taxes in your budget. You should consult with your tax preparer for income items specific to your Association.
- Layout the budget in the month the expense is expected to occur. This will help to determine if cash flow may present a problem during the year.
- Separate the budget between operating fund and reserve fund. Budget for planned reserve expenditures for the year.
- Exercise care in communicating budgeting news to homeowners.
One of the most important line items of the budget that often gets neglected is reserve funding. The Association should review its governing documents regarding Reserve Funds.
- The Association should start with its reserve study. What does the study list for annual reserve funding? What projects does the study show coming up in the next few years?
- What if the Association does not have a study? It may be too late to hire a firm to have one prepared for this year’s budget but consider including a line item in your budget to have one done next year. In the meantime the Association should develop a plan of the major components of the property and work with outside contractors on determining the replacement costs of those components and how the Association will plan to fund for those major repairs and replacements.
- What if there is a study, but the budget is not being funded per the study? The Association should be putting together a plan on how they plan to fund the projects that the study may be calling for in the upcoming years. If the budget is not being funded per the study the Association may need to consider a loan or special assessment.
When done properly, the Association’s budget is one of the best management tools. It can help the Board throughout the year monitor the Association’s performance and help the Board in making crucial decisions.