A new year is coming, which means it is time for planning out new budgets. Careful budget planning is incredibly important for a community association, as it determines how much money they will have to collect from residents and what projects and services it will be able to complete.
Proper 2015 Budget Planning
In order to properly plan a budget (and know what fees to charge to residents), community associations should take the following steps:
- Base your budget on the expenses of the past 3-5 years. Only looking at the year previous won’t give a fully accurate representation of what is needed. Not every year’s expenses are the same, and building projections off of what may be anomalous yearly expenses can lead to some poor planning. Looking at several years and seeing what expenses arose during that time, the rate at which costs have increased, and what irregular costs that didn’t occur during those years may have to be paid in 2015.
- Don’t exhaust your reserves. Many HOAs take a cavalier approach to their reserve funds, often dipping into them or keeping them low in order to avoid annoying residents with higher fees. This short-term thinking almost always backfires in the long run. Unexpected expenses and emergency spending are inevitable, and if there aren’t any available reserve funds when they are needed, the association will either have to abandon budgeted projects, go into the red, or levy special assessments. None of these are preferable to setting yearly fees at the level necessary to maintain a healthy reserve fund.
- Review your vendor contracts. If any have or are about to expire, figure out whether or not they can be renewed at the same price, if the price will go up, or if there are less expensive options that can still provide the same level of service you’re already getting.
- Prep a conditional 3-5 year budget. Just as looking at data from the last several years is necessary to create accurate projections, planning out the budgets for several years in advance can allow you to make long term plans and set fees and assessments at fair, gradually increasing levels. Lack of long term planning can lead to unexpected expenses that can break carefully planned yearly budgets.
Year End Statements
To check that your community association is properly planning its budgets, compare the year-end financial statement from 2014 with the projected expenses at the beginning of the year. If the numbers are way off, then it’s a sign that you need to reconsider how the numbers are being calculated.
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