What are the best practices for preparing a successful budget?
Budget Best Practices
In September 2012, the California Department of Real Estate (DRE) was sufficiently concerned about the number of Homeowner’s Associations (HOAs) experiencing financial problems that they decided to issue a special consumer warning. That alert read, in part:
“The California Department of Real Estate (DRE) has issued this warning as a result of the growing number of homeowners associations (HOAs) that do not have sufficient funds or reserves to adequately maintain the common areas in the housing developments for which the HOA is responsible.”
DRE went on to explain some of the causes of insufficient funds for the state’s HOAs, including foreclosures, which left an increasing number of homeowners unable to pay their assessment payments, and “inadequate planning” on the part of HOA Boards. They also pointed to the several negative effects of insufficient funds, from unexpected expenses for homeowners to a decline in home values due to inadequately maintained common areas.
The Importance of Accurate Budget Preparation
The financial problems experienced by HOAs are not limited to California. Similar problems in a growing number of states and municipalities have highlighted the importance of adequate budget planning and preparation for every HOA.
Here are the 7 most important steps HOAs need to take to prepare realistic budgets:
1. Create a Careful Business Plan
Your HOA business plan should include all your goals for the coming year. Best practice is to outline annual goals by month; so that you know what all should be included in the budget. The business plan should ideally be reviewed no later than summer time to ensure approval of the plan in a timely manner.
2. Send out Requests for Proposals (RFPs)
You don’t want to estimate vendor costs in your budget. To ensure accuracy, send out RFPs for all your contracted services, including those for pool management, lawncare and landscaping, snow and trash removal, insurance policies, audits and tax preparations.
3. Assess Maintenance and Utility Costs
The best way to accurately assess the coming year’s expenses for maintenance, repair and utilities is to look at what those costs were in the previous year. Add to this any new costs you expect in the coming year, such as anticipated increases in utility costs or new repair items you’re likely to incur due to deteriorating conditions.
4. Analyze Your Reserve Fund
In general, it’s prudent to conduct a thorough reserve fund analysis. Check your state regulations regarding the frequency in which reserve studies should be conducted. Regularly updating your reserve fund analysis ensures that members of the community are contributing enough to cover both expected and non-anticipated fund expenditures for things like paving, roofs, and playground equipment.
5. Plug in Your Numbers
After you’ve received RFPs and assessed likely expenses for maintenance, repairs, utilities and reserve fund needs, enter your figures into either an Excel spreadsheet or a budgeting tool. For added clarity, it’s a good idea to keep notes on your budget assumptions and calculation methods as line item explanations.
6. Calculate Anticipated Income
To arrive at your figure for the amount each homeowner must pay in assessment fees, you need to calculate all other sources of income. Since HOAs practice zero-based budgeting, you should not include monies left over from previous years. You should, however, include late fee income, as well as any other reliable income source. With figures for expenses and other sources of income in hand, you can calculate the amount of your assessment payments.
7. Share Your Budget with Community Members
Once the budget is approved, distribute to the homeowners based on your respective state guidelines. Homeowners have the expectation, and the right, to see the budget. Remember that the heart of a thriving HOA is transparency, cooperation and collaboration.
Preparing an accurate budget for your HOA can seem like an overwhelming task, but you can simplify that task by giving yourself sufficient time to do the necessary work, and by taking it one step at a time. As much as possible, involve all members of the community in the process whenever appropriate. If you budget carefully, taking into account both anticipated and unexpected expenses and accurately assessing sources of income, you can avoid problems and ensure financial stability for your HOA.