A new year has arrived, which means it is time for homeowners association (HOA) boards to start planning the annual budget. This process is complex and requires a great deal of analysis. Nine steps to make budgeting easier are outlined below.
Form a Task Force
Creating a task force dedicated to planning will allow for productive communication between the board and the management company during the planning phase. The force should be staffed by the board president, the treasurer, the community manager and the finance and budget committee heads.
Have a Dedicated Planning Session
This session is held by the task force and ensures everyone agrees about the future of the HOA. The time should be used to set priorities and should also be attended by the insurance agent, attorney and CPA.
The task force should determine what the community goals are for the next three to five years. Surveying homeowners is helpful to see what they want changed or preserved. This data will help build the budgeting plan.
Refresh the Reserve Study
If it has been more than three years since the HOA had a reserve study, it is time to get another one done. The study should include the costs of preventive maintenance and replacement according to the long-term financial plan. Preparing for these expenses can help avoid any special assessments in the future.
Comparing past budgets to the actual costs can prevent expensive miscalculations. The financial stability of an HOA is determined by:
• The number of homeowners in delinquency with their dues. This should not be more than five percent.
• The extra amount of money in the operating fund. This should total 10 to 20 percent of the yearly assessment.
• Reserve cash. This should be an adequate amount to cover any planned expenses.
Anticipate Trends and Changes
The task force should review the cost of the HOA operations and investigate ways to save money. This should include looking at utilities, staff, healthcare and technology and any planned upgrades.
All sources of revenue must be considered. This income may need to be applied to the reserve fund or to offset the cost of operations, depending on what the HOA needs. All expected revenue for the next three to five years should be included in the calculation.
Figure Out Taxes
Reserve expenditures, projects and anything that could produce revenue should be examined for tax effects and discussed with the CPA.
Create the Budget
All of the pertinent data should be analyzed to create an estimate of the HOA and community needs. The long-term budget should include:
• Administrative costs
• Contract and service costs
• Utility costs
• Insurance costs
• Capital reserves
Proper budgeting is the foundation for a secure future. An organized HOA prioritizes the needs of a community to keep it running successfully for the long term.