Jen Seals, CMCA, AMS; Property Management Systems, Inc.
Drafting a proposed budget for your community can be one of the most important, and daunting tasks you face each year. A good budget will help your board make the tough decisions on maintenance needs, owner requests, emergency situations, unpaid assessments and the other many challenges that an HOA faces throughout the year. It is essentially a guideline tool that makes it easier to evaluate and protect Association resources.
No wonder so many managers and board members find the project intimidating!
Thankfully, with the right resources and tools, preparing a draft budget can actually be very simple. Before you get started on the project, make sure you have the following items handy:
- The actual expenses from the fiscal year that is ending. (It may be handy to have two years worth of this information if possible.)
- The actual income from the fiscal year that is ending.
- The proposed income for the upcoming fiscal year. Is there a planned special assessment or dues increase that should be factored in?
- A copy of the current Reserve Study for the community.
- A list of projects that have been proposed for the upcoming year as well as any bids you may have collected for them.
- A list of any planned new expenses. For example, has the HOA decided to begin utilizing a cleaning service for the clubhouse?
- A calculator
Once you have the information and tools you need, I recommend that you open up a spreadsheet and begin entering in all of the usual income and expense categories that have been historically typical for the HOA (e.g. water & sewer expenses, monthly assessment income, insurance premiums). Enter in the historical total for the previous year in each category.
Now is a good time to pause and review the information that you’ve entered. Does anything seem unusual? Is there a large maintenance and repairs expense that was a result of an emergency situation? Was there a yardcare expense this year for improvements that will help to reduce your water expense? Add notes to your worksheet for any variance that you recognize for future reference.
Once you have a good understanding of what has happened with the community’s money this past year, it’s time to start looking towards the future. The first step is to add any items or projects to your list for next year that may not have been included last year. For instance, any planned Reserve Projects that you have on the calendar should be added now. If you know the estimated cost of these projects, enter that amount in the third column of your spreadsheet. Make sure to include a 10% contingency fund in the total for any large projects you have planned.
Once you feel your list is complete, it’s time to estimate the income and expenses anticipated for every category on your list. Some of these calculations will be easier than others. As an example, we were notified by Salt Lake County in 2019 that the cost of water and sewer services would be increased by 5% in 2020. To calculate the budget line for water and sewer services, we simply take the historical cost from the previous year ($10,000.00) and add 5% ($10,000.00 times 1.05 = $10,500.00). If the amount of an increase is not known, this is where the comparison to previous years comes in handy. You can generally see how much the cost of electricity goes up each year by looking at the year over year expenses. It is generally safe to assume for most regular expenses that an annual increase of about 3% should be calculated into your budget.
I know, math is not my favorite subject either. That’s why calculators are so wonderful. Once you’ve entered in all of the estimated numbers in the third column, congratulations. You have a draft budget.
The next step is to discuss this proposal with your board members, management and when appropriate, your staff and volunteers. It’s always good to make sure that you have the information they have before you finalize your budget. Review your notes with them. Does your pool operator anticipate that the chemical controller will need to be replaced next season? Is your communication committee planning to switch to color printing for the newsletters? Maybe some of the board members remember that the landscaping expenses for the past two years included tree work that will not be needed next year, allowing for a reduction in that budget line.
When you feel confident that the numbers are a solid estimate of anticipated income and expenses, the board will need to formally approve it. As soon as the formalities are finished, you have a plan to move forward with that will guide you in decision making for the next 12 months.
One final note before you dive in: Remember that when your budget is finished, it should be available for all member owners to review. Everyone should have an idea of what the plan is to secure the financial stability of their homes and protect the property during the coming year. Whether you send it out by mail or post it on the community website is up to you, just don’t keep all your hard work a secret.