It All Begins with a Budget

Ahh, the dreaded community associ­ation budget. It’s hard for anyone to be excited about the responsibility to plan and forecast expenses for an entire year. Let’s not make it worse by failing to recog­nize that it’s a process and not just another task to cross off your to-do list. By planning your attack—you can not only complete the budget on time but also showcase that you’re a master of the association finance universe!

A budget provides the framework for all community operations, planning, and dreams over the next year. Recognize that they build upon each other year after year creating a stairway to a healthy association. They can be your ally by supporting funding for a much-needed enhancement project, an exciting series of social events, or even an outstanding rotation of flowers at the entry. Conversely, a budget can be your worst foe by not permitting staff salary increases, from the hiring of a top-rated contractor, or un­derfunding reserves.

You must recognize that community asso­ciations are a business and should function as one. They are subject not only to Federal and State law but also their own internal governing documents. It is important for an association’s directors to understand and appreciate their fiduciary obligations concerning an association’s finances. The relationship of trust and responsibility for the property of an association’s membership must be managed with appropriate care and loyalty. The directors should seek education and advice from professionals whenever possible. Every time you enter budget sea­son, it’s an opportunity to forge the com­munity’s future. How do you strike the right balance while completing the budget process in a timely manner? Let’s see how the pieces of this puzzle fit together…

6 Months to Budget Deadline – Properly Prepare
While board members are elected to run a business, most do not come with experience. Therefore, the budget legwork is usually performed by others instead of the board. The first step in crafting a budget process for a community is to determine who will be responsible. This is an excellent time to use the strength of owners who may not desire a long-term commitment, but wish to support their community in a meaningful way. By agreeing on who’s in charge sets expecta­tions for not only the current cycle but also for future changes in board members. The first meeting of the budget team should be used for creating a timeline for the process with checkpoints and assigned tasks clearly detailed. A set path keeps you focused!

Most often, the community manager or ac­countant will lead this process along with an assigned liaison board member, or a com­mittee. Decide who is on the team at least six months before the due date. This will ensure they have time to educate and prepare for the process by reading the governing documents, creating a timeline, evaluating current contracts, reviewing audits for recommendations, un­derstanding the reserve study, reviewing current/prior year financials, and investigating past budgets variances.

5 Months to Budget Deadline– Contract for Success
You have your team and timeline in place. Now what? First, review your current con­tracts. These are fixed expenses for which the association is legally obligated to pay. Make a spreadsheet listing all contracts, the terms, the associated costs, and any non-renewal terms to be followed. The board should re­view this list and determine if any contracts need to be updated for the next budget cycle. Your budgeting should include fixed expenses for contracts, not “this is what we want to spend” figures.

While cost is always a factor, taking the time to choose the perfect fit when hiring profes­sionals will ensure that disappointments are rare. Spend time creating a Request for Pro­posal (RFP) for services which represents the desires and needs of the community. Don’t be afraid of asking for too much—it’s easier to remove services than to re-bid the entire contract and add things back. Review the submissions carefully and evaluate all factors with cost being last. By hiring cheaply and budgeting for that “steal of a deal” contrac­tor, you may not have the funds available to correct a mistake. Choose your service part­ners wisely while remembering that there is a learning curve with almost every change of provider which can be an agonizing adjust­ment period for the community.

4.5 Months to Budget Deadline – Review the General Ledger
The general ledger records the financial transactions of the community. Most likely you’ll have this system of codes and descrip­tions already set up to capture the various income and expenses. However, that doesn’t mean it’s correct! If you review the financials and have no clue what would be attributed to a line item, how will anyone else? Time spent reviewing current and past years expenses in detail will ensure you’ve captured everything needed for the next year and avoid surprises.

Remember, budgets build upon one another; if a previous plan was poor, it will clearly show in the financials. If a ledger code isn’t clear, ask your managing agent or accoun­tant to revise it, so you’ll have exactly what is needed moving forward.

4 Months to Budget Deadline – The Draft
Unlike home budgets where you know your income and then figure out how much you can afford to spend on various items, asso­ciation budgets work in the reverse. For this reason, we begin with assigning expenses. The first entries you make to the budget will be mandatory spending. Some are fixed expenses such as contracts, agreements, and other financial commitments. Additional mandatory items include reserve contribu­tions, audit recommendations, taxes, general operations, equipment contracts, and pro­fessional advisors. Do your best to capture EVERYTHING to need to spend money for during the year! Expenses should carefully be reviewed across past financial statements to ensure they are included and adequately funded.

Next, add your discretionary spending. These are the “we’d love to have” items and they vary from large figures such as land­scape enhancements to smaller amounts for social activities and are most often the first to be eliminated in budget concessions. It’s a nice touch to try and add a few frills where finances allow.

Now, let’s figure out if you have the money to spend, and if you don’t, how to obtain it! Income lines determine your ability to pay for the expenses. Start with the income you know will be received and enter those figures—this will include interest, third-par­ty assessments, late fees, parking, laundry, vending, etc. These may not all be easy to determine, but history should reveal a good approximation. This is an excellent time to review the necessity of increasing fees charged for non-assessment items, even if it’s small.

Review the expenses and income to deter­mine what additional income is needed to balance the budget to zero. This number will most likely be very large—don’t panic! You will use this number to calculate the mem­ber assessments. Take the figure of required funding and divide it by how many pay­ments are made by owners over the course of a year. Divide that by the total number of units or pro-rata portions paid. This may involve some tricky calculations if there are service assessments or some other cost-shar­ing agreements in place.

Once you’ve determined the total annual assessment, calculate the amount of each payment made during the fiscal year. Check your math! You don’t want to find out you miscalculated and have a shortfall that follows you all year long! How does this number compare to the previous annual assessment? Smaller figure? Great! Don’t immediately decide to lower the assessments. This is an opportunity to set aside additional funds in reserves. Look at the “want” list and consider if other improvements can be made, or creating an operating reserve for those surprise expenses for which you did not budget.

What if that figure is higher? Determine how much and review the governing documents to understand the limits for an assessment increase. Even if the increase is permissible— will it cause a hardship to your members? If yes, it’s time to review all expense and look for savings to trim them down. Repeat the evaluation process until the income and expenses balance. This is often the most chal­lenging part of the process and tempers may flare. Keep calm and balance on!

3 Months to Budget Deadline – Presenting and Approving
You’ve toiled away to arrive at this moment, savor the success and prepare to present the budget to the owners and/or board. Some governing documents may require owner approval of the budget while others require only board approval.
Remember that it’s impossible to create a budget to satisfy all. Adjust your thinking and don’t expect a standing ovation. Just be proud of what you have accomplished and know that you did your best! Creating visual presentations with charts and bullets for important areas or some other presentation aide should be considered for the unveiling. Prepare and practice! There will likely be adjustments requested, this is normal. Re­member to balance your income and expens­es then recalculate the assessments. Double check the math every time.

2 Months to Budget Deadline – Finalizing
Once approved, the final budget and assess­ment must be shared with owners and added to resale disclosure statements. How you do this can be customized to fit your association and adhere to the governing documents, but we recommend you place a copy on the website for reference and include an expla­nation for any assessment increases or large expenses.

1 Month to Budget Deadline – Finishing Touches
Enter the approved budget into the account­ing system and educate staff on what each line represents so they know how to code the expenses. Ensure all contracts are fully exe­cuted. Send payment reminders to owners and alert them to verify amounts of automat­ic payments.

After Budget Deadline – Prepare Again
The budget is behind you, and this signals the best time to plan for next year! Spend the next six months reviewing the financials to consider the cause of variances, read the audit and comments, observing vendor per­formance, and planning the next step in the future of the association.

Your new fiscal year will be a success—all be­cause it began with a strong budget.

By Bernie Guthrie, CMCA, AMS, PCAM
Bernie is a portfolio manager at FirstService Residential. She began her career in 2002 as an architectural inspector for a large-scale association and used her prowess in management to progress through the successively more responsible roles of site manager, portfolio manager, and division director. As a member of WMCCAI, she stays active as a lecturer, co-chair of the Chapter Events Committee, and member of the Virginia Legislative Action Committee.

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