After 20 years in the community association industry, my experience as a board member, community association manager, and association banker has taught me that a well-constructed budget is the most important tool at the disposal of managers and board members. A poorly constructed association budget will almost certainly lead to problems, financial and otherwise, for a community.
There are seven common mistakes to avoid in the creation and maintenance of a budget to set your community association up for a successful year.
Procrastination. The temptation to delay tasks appears in many aspects of our lives, and the association budgeting process is no exception. It is critical to start the budget process as early as possible to avoid rushing and missing items that should have been addressed or considered. State statutes and your governing documents will dictate some of the dates to complete the budget. If your fiscal year starts on Jan. 1 (as many do), I recommend that you start the budgeting process during the “dog days of August.” If you haven’t started budget planning by Labor Day, you are likely going to run out of time to complete a thorough process.
Winging it. Too often, developing the budget is viewed as a monotonous task that just needs to be checked off every year. Often, managers and board members start the process half-heartedly and want to “keep the maintenance fee where it is” or may have preset notions of a “standard” acceptable amount for an increase. It’s critical that you have a budget plan. Take time to identify key objectives for the upcoming year. What are the goals of the community? What do you want or need to achieve? Refer to your plan regularly throughout the budget process.
Ignoring the past. Unless your association is brand new, there is history to evaluate. Review past financial performance to confirm you have covered all aspects of your community’s operations and responsibilities. Look at the budgeted and actual expenses for the past two or three years. You’ll want to compare the projections to actual expenses and identify trends. Knowing the history will provide you many clues to help predict the needs for the upcoming year.
Focusing on the “shiny objects.”An easy mistake to make when budgeting is to focus your attention on a popular “pet project” that your owners or members are excited about. The harder and more valuable work is to evaluate all the needs of the association. Some expenses are required and can’t be avoided, such as utilities and municipal service requirements. Review prior year expense amounts for “fixed” expenses, and check with utility providers and vendors for anticipated rate increases. Check that you have considered all the necessary and legally obligated expenses of the association when developing your budget each year.
Skimming your contracts.Another easy way to sink your budget before the year even starts is to disregard the details of your contracted service relationships. Most associations have several contracts that cover important recurring services, like landscaping, pool maintenance, and supervision. Review each contract in detail. Is the contract up for renewal? Does the scheduled service level meet the desires of the board and community? Have you accounted for the timing of required payments? What about any variable components of the contract? It’s important to review and understand the contracts that will be in place if you are going to ensure sufficient income to cover all recurring and variable costs associated with your contracted services.
Not worrying about tomorrow. It can be easy to only focus on the expenses that your association is certain to incur in the upcoming year. An often forgotten, or overlooked, aspect of the budget development is accounting for the funding of reserves and capital expense needs. Review your reserve study, and if it’s out of date or you don’t have one, you may still be able to have the study completed or updated in time to inform your budget. Have a strong grasp of the capital items the association is responsible for, anticipated replacement costs for each item, and potential replacement dates. How much needs to be funded to the reserve account to keep you on track to meet these capital needs as they arise? How much funding is needed to cover capital expenses for the upcoming year? While it may be desired to deliver a budget with no increase in dues or assessments, you may be damaging the community in the long term if you ignore the capital expense needs expected in future years.
Cutting corners. Another popular strategy for budget development that can destroy the upcoming year is to ignore necessary maintenance and upkeep needs. There are many items, or assets, that the association is responsible to maintain. A strong and well-funded maintenance program for your capital items can extend the useful life of these items and help contain expenses now and in future years. Consider the age of the items and assets you are maintaining. What routine and periodic maintenance is needed to maximize the useful, functional life of these items? Review prior years’ maintenance expenses and look for trends.
By avoiding these mistakes, you can greatly increase the chances of providing an accurate budget that will allow for a successful year for the association. Don’t be afraid to dig in and do the work needed to really understand your association’s needs and objectives for both today and tomorrow.
Once you have developed your budget, the board and/or members will likely need to sign off. Be sure you understand any statutory or governing document requirements around budget ratification. Once approved, make sure to inform the owners or members of the approved budget. Including an overview of the budget, especially areas of significant change, will provide transparency and help build trust between the homeowners, board, and management.
Director and Regional Sales Manager, CIT
Erin Sweeney is director and regional sales manager at CIT, Community Association Banking. For more information, visit cit.com/CABReserves.
Professional Growth Through Learning
FCAP (Florida Community Association Professionals) is a member-based professional organization dedicated to training, equipping and advocating for Florida community association professionals including managers, service providers and community volunteer leaders.