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Budget Planning Ensures a Planned Future
by Bernie J. Grablowsky,
The purpose of most associations is to maintain the common areas and to enforce the documents of the association. At the time an association is formed the Board of Directors approves a budget that is developed based upon estimates of future operations and reserve funding costs.
After the association begins operation, it becomes the responsibility of the board to ensure the adequacy of the fees collected. Board members may come under fire when fees are increased, but most association members want “top-notch” services, so where do you start to balance needs to funds available? Each year an annual budget is prepared to decide the fees for the following year. For this budget to be accurate, the following questions need to be addressed:
- Where are we now?
- Where do we want to go?
- What amount of money do we need to get there?
Where are we now?
- Review the current financial statement and compare this to the budget.
- Calculate the average monthly expenses for each item.
- Compare the reserve study recommendations to actual reserve funds on hand.
- Review projects which are in-progress that may change the association’s financial position by the end of the year.
Where do we want to go?
- Find out how much the fees may be increased according to the association documents, if there is an annual cap.
- Review contracts and contact vendors and suppliers to determine contracted or anticipated rate increases.
- Determine the cost of major projects that should be planned for the next year according to the reserve study.
- Consider any plans for changes in the general operating expenses during the next year.
How much money do we need
to get there?
- A decision needs to be made by the board or the budget committee on how to best “balance to the budget.” There are limits to what projects are possible, and priorities must be established. Stick to the facts to avoid emotional decisions.
- Always leave money for Operating Reserves for unplanned expenses that are bound to occur.
- Consider that you will have some bad debts from members. Although associations can lien, with the fact of property foreclosures and bankruptcies, fees are sometimes uncollectable.
- If funds are insufficient, where can cuts be made, or how can service requirements be changed?
Once a budget is in place, it is up to the board to understand how the budget was developed and to track variances regularly during the year. Decisions made during the year should be in line with decisions made at the time the budget was established. An association is a business that requires planning and discipline. The results of poor financial planning and management can result in lower property values, denials on home loans and the need for future special assessments to make up for deficits. The members demand low fees, but sometimes it is just a “pay now or pay later” question. Make sure realistic decisions are made each year. Fees established should meet the members’ need to “Protect, Maintain & Enhance” property values.
The UPA Management Library contains an ever-growing collection of articles and papers of interest to association boards and management as well as rental property owners.
If you have an idea or a possible submission for inclusion in the Library, please contact Debra Young at email@example.com.
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