Key Factors to Consider When Planning Your Association's Budget

Creating an effective budget can be challenging, as it requires careful consideration of community priorities alongside financial inflows and outflows. As a board member in an association, crafting a thorough and responsible budget is a key responsibility you hold.

A well-devised budget is essential for a community to reach its objectives and realize its vision. The fiduciary duty of board members to maintain their community’s financial health is paramount. Without a sound financial base, essential tasks like preventive maintenance, reserve funding, and the upkeep of amenities cannot be effectively managed, nor can community activities be held. Failing in this area could result in a decline in property values and overall quality of life.

Budgeting can become a stressful process, especially when considering potential fee increases. There is often a reluctance to raise assessment fees significantly, even when necessary. It's typical for boards to scrutinize every expense, searching for areas to cut without imposing large fee hikes. Seeking guidance from property management companies or financial management experts is advisable in these situations.

This guide provides insights on completing your next annual association budget effectively, aiming to boost property values and enhance residents' living experiences.

Plan strategically and understand your community’s vision

Gather your board and management team to establish a shared vision for the community’s future. Where possible, include professionals such as auditors, attorneys, and insurance agents. Determine your priorities for the year and gauge your commitment to each. Assess the property in relation to its surroundings, considering whether aesthetic or branding updates could justify increased assessments.

Reviewing and aligning on community goals annually is important for boards. Notably, maintaining financial stability and keeping assessments low are not always compatible. While minimizing assessments is desirable, sustaining financial health is crucial.

Rely on your committees for input and advice

Effective communication and coordination are best managed by an ad hoc planning task force. This group should include the manager, president, treasurer, and finance or budget committee chairs, specifically for budget creation. If your finance committee effectively oversees the budget year-round, a task force might not be necessary, but remains an option.

Budgets should navigate smoothly, avoiding panic. A management company can draft an initial budget, which the treasurer and any relevant committees review and approve.

Review your reserve study and update if needed

Contemporary budgets often focus on three- to five-year plans, ideal for scheduling reserve item replacements and preventive maintenance. Early planning can help avoid challenging decisions later. Reserve studies should be updated regularly to reflect current financial needs and help achieve financial goals and stability.

Create a plan for long-term goals

Consider your board’s vision for the community’s future over the next few years. Gathering community feedback through surveys can offer valuable insights. A five-year plan sets expectations, such as how often amenities should be updated, helping align them with budget considerations.

Plan for any taxes

If you're initiating revenue-generating projects, factor in potential tax liabilities. Projects yielding income might attract taxes unless offset by related expenses. Major reserve expenditures can influence taxes, emphasizing the need for accountant or auditor involvement in budget planning.

Understanding tax obligations is crucial, as different structures (e.g., condominiums vs. co-ops) have varied tax responsibilities. Planning is key to managing potential tax impacts on revenue.

Project your revenues

Assessment fees are your primary revenue source, but evaluate all income streams, including investments. Decide whether to channel investment income towards reserves or the operating budget, planning for the upcoming three to five years.

Recognize that achieving full assessment collection might not be realistic. Review historical data and adjust expectations based on past collection rates to inform budgeting.

Examine historic data

Analyze previous balance sheets and financial statements to inform future projections. Compare actual and budgeted expenditures to identify potential errors or oversights.

Key financial stability indicators include keeping delinquency rates low, maintaining excess operating funds, and ensuring adequate cash reserves. Detailed documentation of financial decisions aids future board members in budgeting.

Keep an eye on trends

Monitor key operational areas for historical costs and benefits, consulting service providers for expected changes. Explore cost-reduction options, such as energy-efficient solutions, to optimize operations.

Implementation of smart technology, like motion sensors, exemplifies how initial investments can lead to long-term savings.

Develop the budget

Craft the budget by analyzing past data, forecasting future needs, and acquiring current cost estimates from vendors. Include categories such as income, administration, services, property protection, utilities, and capital reserves.

Don’t put the budget on auto-pilot

Remain engaged with the budget throughout the year. Rather than annual reviews, regularly evaluate the budget alongside monthly financials to ensure alignment with your community’s long-term objectives.

In summary, remember that budgeting involves planning for the enduring prosperity of your community, not just the upcoming year.