It’s that time of year when board members and financial committee members convene to start the annual budget preparation for their property owners associations. Setting a budget can be an intimidating, time-consuming ordeal. Our goal in this article is to offer some insight and a list of best practices that have facilitated our success.
Following a step-by-step process for budget preparations or hiring a professional management company can prevent many problems from occurring. If an association has a professional management company, it is typically the role of the community manager to prepare a first draft of the budget. In some cases, however, board members, financial committee members or members of both groups work together to prepare the budget for the community manager to review and comment on.
For most property owner associations, the budget year runs with the calendar year. Before an attempt is made to project expenses, it’s important to compile detailed information about the current and prior years’ operating expenses. This will ensure that an accurate analysis can be performed. In addition, governing documents need to be reviewed to determine the responsibilities of the property owners association. Contracts should also be reviewed to assess whether automatic increases are included or if they will need to be renegotiated during the upcoming year.
Involving the vendors who provide services to the association will make the budget preparations run more smoothly. Whether it’s a landscaper or pool cleaner, they will feel more accountable to hold expenses within the budget during the following year if they are involved.
An essential task is to ensure that reserve contributions are sufficient. It is highly recommended that a professional study be conducted to ensure the association is reserving enough funds each year to meet expenses and prepare for the future.
Contacting utility companies to verify if any rate increases have occurred or if there are any on tap for the following year is an easy way to take some of the guesswork out of preparing a budget. Many of the costs required by governmental agencies for obtaining permits and inspections are easy to plan for, since they are usually identified months before the beginning of a calendar year. These costs include routine inspections and permits for elevators, pools and backflow prevention valves.
Budgeting for bad debts is often overlooked. Budgets are typically based on receiving payments from all the members; thus if payments to an association are delinquent, there may not be sufficient cash to pay expenses. Allocating for bad debts will keep the budget balanced when delinquencies exist.
It is recommended to have contingencies included in the budget. Economic variables such as inflationary spikes can exert a profound influence. In a condominium or townhouse association that has a master insurance policy, insurance is often one of the largest expenses. The insurance agent should be consulted on expected rate changes as part of the budget process.
Once the budget has been drafted and adopted by the board of directors, it is submitted to the membership. The approval process may differ on a variety of factors. For more insight into the process, please visit the CAMS website at www.CAMSmgt.com.
Mike Stonestreet is a 26-year veteran of the professional HOA management industry who has achieved one of the highest education-based designations in the field, that of Professional Community Association Manager (PCAM). Community Association Management Services (CAMS) has been a leading association management company since its inception in 1991. CAMS is a trusted provider of management services for more than 265 associations throughout North Carolina, South Carolina and Georgia. To find out how CAMS can benefit your community, call 910-256-2021, email [email protected], or visit www.CAMSmgt.com.
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