It’s Never Too Early to Start Planning

It is never too early in the year to start thinking about HOA budget preparation for your association. AAM begins the yearly budget preparation timeline with budget training sessions for Community Managers in August. The Association Board of Directors also plays an important role in the budget process, so we feel it is important to share a few budget questions for your consideration. August is right around the corner, so let’s get ready for budget season!

Please consider the following during your HOA budget preparation:

• How well is the association performing versus the current year’s budget?
• Is operating cash flow for the association trending up or down over recent years?
• Is the current budget meeting the expectations of homeowners?
• Have changes in economic factors impacted the assessment level?
• Are reserve contributions at an appropriate level to ensure long-term financial health?

Before diving into a fresh budget season, it is important to compare the current year’s budgeted income and expenses versus actual financial activity while focusing on HOA budget preparation. AAM provides a month-to-date and year-to-date variance report in the monthly financial package that explains why certain income or expense activities are over or under budget. If additional details are needed, the community manager and accounting department will be happy to provide information for budget decision-making purposes.

Under normal circumstances, the yearly operating income and expenses of the association are fairly predictable. With that being said, there is not a lot of room for error in a zero-based budget. Planning for the worst-case scenario will help ensure adequate cash is available to cover operating expenses. Start the budget process by taking a conservative approach and make adjustments as needed during HOA budget preparation. Balance sheet information is sometimes forgotten during the budget process, so please remember to take a look at cash flow trends for the past few budget seasons. Maintaining a modest operating cushion is acceptable, and it will help the association cover any unexpected expenses that might arise from time to time. If nothing unexpected occurs, then it provides an opportunity to fund community enhancement or make an additional reserve contribution.

Members of the association buy property with certain expectations in mind, and some of them are not shy about sharing feedback when those expectations are not met. As this feedback is gathered each year, there is an opportunity to make adjustments and improvements through the budget process. Associations vary in size, design, lifestyle, amenities, and owner demographics. Some of these variables may change over time, so the budget will also evolve. If new expenses or services are being added to the budget, they should be carefully evaluated. The short and long-term impact should be considered, as well as how the association will cover the expense. Enhancements to the community covered by operating funds also impact long-term reserve planning, especially during HOA budget preparation.

Unfortunately, economic factors such as wages or the general cost of services may increase each year. Increases in minimum wage requirements in some areas of the country have impacted many vendors over the last few years. Each year, the Board should carefully evaluate whether an assessment increase should be approved. In most cases, large assessment increases can be avoided by implementing smaller increases at the appropriate time. This will help avoid unpleasant surprises and special assessments.

Planning for Reserve Funding and Expenditures is essential to the long-term financial health of the association. Associations should have a Reserve Study that identifies major replaceable components. Component details include the remaining useful life of an item at the time of the study, typical life spans, and estimated future replacement costs. The study combines this data into a 30-year schedule of repair and replacement activity. Careful analysis of the yearly reserve contribution recommended in the study is important when considering how much the association should contribute to reserves as part of the annual budget and during overall HOA budget preparation. The Reserve Study should be updated as necessary, with new studies performed every three years or as the governing documents instruct.

The budget is a financial road map to ensure the association successfully navigates through each year of financial activity. The budget also serves as a guide for long-range strategic reserve planning, which are critical aspects of HOA budget preparation. 

If your community is in need of an Annual Budget check out our Services Page.