Winston Churchill once stated that, “Plans are of little importance, but planning is essential.” There are several different facets of a community association that allow it to operate properly and effectively, but none so important as the organization’s financial stability.  Within the next couple of months, managers, Boards, and committees will begin acquiring costs of current contracts and projections for the upcoming year to start the arduous process of creating the operating budget for next year.

So then, with this inevitable prospect looming, what truly is the point in budgeting?  As painstaking as the budget process may be depending on the complexity of the Association, creating a budget to establish order in everyday expenses and obligations is a necessity that individuals, businesses, and government entities alike must endure. The financial success, implementation of preventative maintenance measures and the culmination of years of long-term planning of capital improvement projects, begins and ends with the association’s ability to budget effectively. 

The budget needs to be effective and actionable. Outside of the association’s means of affording the ever-rising costs of day-to-day operational expenses, funded preventative maintenance and large, planned expenditures, ensuring that the financial state of the association is built solidly on a firm foundation, gives security to your homeowners, helps to maintain property values within the community and imparts confidence in prospective buyers.

The time is now.  I cannot stress enough how important it is to not wait till the eleventh hour to begin this process.  Many budgets are drafted somewhat haphazardly like an exercise of fill in the blank.  Consider this-whether you are an experienced manager or fresh out of the gates, establishing the annual budget for your association really involves developing two budgets in one. The “first” budget focuses primarily on reoccurring expenses, such as utility fees, anticipated contract costs, insurance or day-to-day repair and maintenance expenditures—the operational costs. The “second” budget should be in line with the Board’s long-term planning goals, capital replacement and improvement objectives, emergency funds and preventative maintenance needs. 

To help bridge the gap and provide some additional clarity, I have listed several tips on preparing an effective budget for your associations.

Long Term Planning

This concept often goes to the waste side in budget preparation as so many often are looking at the ‘here and now.’ The annual operational budget indeed focuses primarily on the everyday expenditures to the Association, however, pushing ourselves and our Boards to take each year to look beyond will help tremendously in planning for the future.  Long term budget planning should consider expenses 1, 3, or even 5 years out.  These could account for anticipated capital replacement projects as identified in your reserve study or this could be and should be projected preventative maintenance projects that will need to be additionally budgeted for.  This can be a tough pill to swallow.  Owners often want to see “what they’re paying for” immediately, so communication on these plans will be paramount in having community buy-in of future planning. 

Operating Account Balance Awareness

We have all heard the adage of living paycheck to paycheck.  Perhaps some of us have at some point experienced this frustrating reality.  Too many times, associations live in this world.  Boards are dead set on not raising assessments truly to the detriment of the community’s financial well-being.  As a good rule of thumb to consider both when creating the budget but also for evaluation throughout the year, try to ensure that the operating cash account of your association has sufficient funds at any given time to cover at minimum one month worth of expenses—preferably three months.  Emergencies WILL happen.  Responsible financial management will help safeguard the association by having sufficient liquid funds available to cover everyday expenses as well as those that will inevitably arise.  Secondly, stress to the Board the importance of budgeting for an operating reserve account or your “rainy day fund”.  This is an ideal account to have established to take care of those unplanned, unbudgeted expenses, BUT do not exist out of this account to alleviate the need to raise the assessments.

Be Mindful of Expenses

So, with only two to three months’ worth of expenditures available at this time, what can be done? This is the perfect time to begin notating out (yes—feel free to get “old school” here with the pad and pencil) key expense line items from last year that had especially high variances from the previous year’s budgeted amount.  Was there an emergency expense that came up?  Was there preventative maintenance work that was contracted out, but not budgeted for previously?  If so, will this be ongoing?  Were there just simply more expenses than expected or more costly than anticipated?  Either way, now is the best time to carefully analyze these numbers.  Ask the “whys”.  As managers, it is very easy to fall into the repetitiveness of submitting work orders, paying invoices, submitting work orders, paying invoices…Taking the extra time now to dig a bit deeper, ask the questions, look for the trends, and see the writing on the wall could save the association a lot of money and the manager a lot of headaches. 

Remember, these early months are ideal time for preparation.  Take inventory of all your current contracts.  Are the rates remaining the same throughout the year?  Often, the terms will provide some indication on anticipated percentage increases after the initial contract period.  Also, be intentional with the budget preparation.  Many contracts can be budgeted out evenly over the course of 12 months, however, this is not the case with everything.  Managers, your attention to detail will make the difference.  Alleviate the need for unnecessary variances throughout the year by budgeting for when the expenses will be.  For example, if insurance is paid out quarterly, budget it as such. 

Delinquencies and the Tough Choices to Follow

Although the unicorn associations do exist out there, many, if not most, experience delinquencies, and depending on the overall economic climate, perhaps at an increased rate. Stress to the Board and educate the owners that there is no rich uncle paying into the association coffer.  What they have to pay the bills, put away into savings, make repairs, etc., is entirely driven by the assessment fees that are paid by the membership.  Be aggressive on collections—the budget is dependent on it.  Additionally, be realistic.  If there is a known expectation that delinquencies are going to be problematic or perhaps there are several units that are in foreclosure or bankruptcy, budget for this.  Assign to the budget a line item for bad debt expense to account for fees that are assumed will not be collectible.  Many Boards may frown on this, but it is reasonable to budget pragmatically rather than optimistically.

Know the Documents and Schedule

We all find ourselves at times scrambling to get things done.  Some of this, however, is self-inflicted and worst off, is caused by not being familiar with the covenant requirements or state requirements.  Do your association’s covenants require the proposed, draft budget be sent out ahead of adoption?  If so, how many days?  How far in advance does the budget have to be approved prior to the end of the fiscal year?  These are the questions to answer and then identify on your calendar.  It takes some extra time on the planning end but will save you avoidable frustration in the months to come. 

Don’t Ignore Your Residents

Finally, don’t ignore your residents. It is incredibly easy to go on autopilot putting together the budget but be mindful of your owners and residents and how the decisions made affect them.  Budget decisions made are not done so in a vacuum.  Communication and involvement of the owners in your community will help harness and birth ownership of the decisions made, including those that are difficult.  Don’t be afraid to use budget committees and encourage more involvement of your board members—the more knowledge they have of what goes into the budget process, the more apt they are to defend the actions taken and support management’s role. 

Joshua Martinez, CMCA, AMS is a portfolio manager for Property Management Associates. He is a long time member of SEVA-CAI and an active member of the Programs committee.