By: Jeremy Newman, CPA 

Budgets!

Is it that time of year again? Why does it feel like there is so much to do? Are you starting from scratch every time you prepare your association’s budget?

Start early and work continuously throughout the year to take the sting out of budgeting.

Your annual budget process should be a fluid year long continuous collection of decisions, document gathering and projections.  Why wait until your community manager says it is time to start the process?

At our firm, we recommend association boards retain a permanent budget file containing governing documents, prior year and current year budgets (including detailed calculations and supporting documents), current year activity, information, documents, notes, minutes, conversations with vendors, recommendations, cash flow analysis, hopes, fears, surveys, reserves projections and deferred maintenance information.  There are many other things to consider as well!

• How much cash to do you have now?
• How much cash will you have by the beginning of the next year?
• What does your reserve study show?
• Do you have deferred maintenance?
• Are your owners complaining about the condition of common areas?
• Are the common areas and components appealing to current and prospective owners?
• What are the economics of your owners?

As with any governing group, spending aspirations generally far outweigh cash projections.  Are you back to square one, doing the same type of budget as in previous years?   Not an easy task.

As with most things, starting the process early is vital to the success of the project.  At our firm, we recommend that boards, finance committees, managers, maintain a file that is continuously open for documents and information so when you reach “budget season” you are ready.  You have most of the information you need.  What might you keep in the file? Some thoughts –

• Committee and Board meeting minutes.
• Vendor contracts.
• Vendor feedback about price changes, scope changes, recommendations.
• A list of things that changed in the current year when compared to previous years, including what was budgeted for the current year.
• Ideas, thoughts for next year.
• Comments from owners. Maintain a file or list of requests, complaints, and suggestions from your constituents. What do people want and/or expect?
• Use fees records: clubhouse rental, other rentals, move in/out fees, laundry income. Is there scope to increase rates?
• What is the cash position each month?
• Does the association contribute to reserves every month? Is there a fundamental financial challenge making reserves contributions?
• Does the association have any assessments collections issues that are significantly impacting cash flow? Maintain a receivables status log.
• Photos of common areas, structures and projected repair/replacement costs.
• Notes comparing the latest reserve study cash needs and timing of expenditures to actual results. Maintain a separate Excel schedule.
• Which areas or accounts from last year’s budget have seen actual revenues and expenses vary considerably from projections. Why?  What does the item look like going forward?

Revenues

Revenues includes monthly assessments, compliance income such as late fees, violation fees, delinquent account interest income; bank interest income, ancillary income such as rentals, services, per use fees.  Understand the nature of each revenue stream.

Basis of accounting

Make sure you know how revenues are recorded in the monthly financial statements you are reviewing and relying on to help with future revenue projections.  Under the cash basis, what is recorded is what was received.  Under the accrual and modified accrual bases, your revenues are what was billed, not necessarily what was received. Keep an eye on your receivables to see how much is still to be collected.  Is it all collectible?

Are compliance fees collectible or does the Board end up writing off balances or simply being unable to collect? Actual revenues presented on your association’s income statement may not be 100% collectible. If compliance fees are recorded on the accrual basis, when they are billed to owners, are they collectible?  Close analysis of the aged receivables report, owner ledgers and collection efforts are required to determine collectability and conversion to cash. Cash is what you are looking to maximize to be able to afford your expenses wish list.

Expenses

Operating expenses are the day-to-day expenses associations incur to keep operations moving.  Utilities, management fee, legal fees, landscaping, security, pool maintenance, pest control, repairs and maintenance (non-reserve study), administrative expenses.

Did you have any surprise expenses during the current year?   Should you budget for such expenses again for next year?  Ensure your budget permanent file includes sufficient detail of these expenses for you to make good decisions about next year. Perhaps you need to include a contingency percentage or amount in various expense categories for the unexpected.

Cash Flow

Knowing the status of your association’s available cash balances is paramount to understanding how much money you will need for next year.  If cash is low and delinquencies are high and increasing, there will be increased pressure to reduce costs and preserving cash. Understand state and governance restrictions on increasing assessments.  You may need to obtain member approval for a special assessment to fund an operating deficit.

Amounts owed from the operating fund to the reserves fund

When funds borrow from each other, Boards should and are generally required to prepare and document a plan to repay balances. Boards should budget for repayments. Perhaps the operating fund owes the reserves funds for unpaid budgeted assessments contributions but operating cash is so low the operating fund is unlikely to be able to

repay the amount it owes to reserves.  Perhaps it is time to recalibrate.  Discuss treating the unpaid balance as a non-cash transfer between the funds. You should review any state or governing document requirements.

There are so many things to consider when preparing your association’s annual budget.  It is very challenging to complete the process over a few short months. Find a system of retaining documents, ideas, thoughts, suggestions, requests, calculations, information that will help you throughout the year and at budget preparation time.