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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?
1. Review the current financial statement and compare this to the
budget.
2. Calculate the average monthly expenses for each item.
3. Compare the reserve study recommendations to actual reserve funds
on hand.
4. 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?
1. Find out how much the fees may be increased according to the
association documents, if there is an annual cap.
2. Review contracts and contact vendors and suppliers to determine
contracted or anticipated rate increases.
3. Determine the cost of major projects that should be planned for
the next year according to the reserve study.
4. Consider any plans for changes in the general operating expenses
during the next year.
How much money do we need to get there?
1. 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.
2. Always leave money for Operating Reserves for unplanned expenses
that are bound to occur.
3. 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 uncollectible.
4. 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.
Bernie J. Grablowsky, Ph.D., PCAM
President |
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