Preparing a budget for an HOA may seem daunting. However there are 5 simple tips that can go a long way in making sure your HOA is budgeting correctly:
1. Start by preparing a “business plan.”
Set financial goals or objectives for the HOA to achieve. Establishing short term and long term financial goals that are attainable and span from board-to-board, are essential to the Association when boards turnover. This can be a simple list of goals and/or objectives for the upcoming year and future years ahead. Use this list to plan for potential mid-year problems or anticipated major repairs. This would be a good time to review the reserve study and anticipate those common areas that need to be replaced or repaired.
2. Always factor in uncollectible assessments.
Every association is going to have owners that just don’t pay their Association’s assessments. Budgeting for uncollectible assessments is not only essential but critical to understanding the Association’s potential cash flows. Avoid the simple use of prior bad debt expense as the same amount for the current budget. Put some ‘weight’ behind this line item in the budget. A simple method would be to look at historical collection amounts over a five year period, as well as, factoring in any potential external impacts to homeowners. Remember to include an evaluation of legal and collection costs when you develop an uncollectible amount. These costs can increase significantly when collections become a significant issue.
3. Obtain updated contract costs on all major contracts; don’t just rely on annual renewals.
Landscaping, pool service and maintenance, and association management are typically the largest expenses to an association. Review these contracts annually and make sure to understand the increases and possible changes. Many of these contracts will have an automatic renewal clause. Avoid the ‘autopilot’ approach and negotiate new rates and charges. Remember, the Association’s income is fixed and a good approach would be to align the major expenses on a fixed basis. Renegotiating with your major vendors doesn’t mean a full ‘request for proposal’ process. If the Association is happy with the major vendors, then there is no need to go through the hassle of changing but locking in fees is a prudent approach for both parties.
4. General recurring maintenance costs and utility costs are expense areas that seem to be ignored.
Utility costs are a given and increases annually should be expected, but simply relying on the prior year amounts for the current year budget can be misleading. Research the anticipated annual increases and compare to historical trends within the Association. General maintenance is unavoidable but these occurrences are not consistent from year-to-year. Use the ‘business plan’ that was developed and budget for maintenance costs with a idea of the areas that need the most attention.
5. Review the reserve study and the Association’s current balances in reserve.
Then set the reserve contributions to ensure that you are meeting the needed reserve balances for future major repairs and replacements. The more long term liabilities and obligations you have, the more you should be putting away. For example, many condo associations have much larger obligations regarding upkeep, maintenance and replacement. Failing to follow the reserve study or not budgeting for reserves at all can lead to significant financial problems. Budgeting appropriately and consistently with the reserve study is critical to avoiding that dreaded need for a special assessment.
To learn more and to speak with a member of the LBA Haynes Strand team. Click here for your no-cost consultation!