A homeowners association budget is essential for the success of your community, but HOA budget planning isn’t easy. You need to organize your finances to cover all maintenance costs, capital improvement projects, and other community expenses. A proper community association budget keeps property values high and ensures the well-being of your residents. Here are important things to consider when planning a budget for a community association.
How to Successfully Plan a Budget for a Community Association
Community association budget planning isn’t something that can be accomplished in a short amount of time. It will take a lot of time and effort, but it can be done. If you are eager to start the budgeting process, here are some HOA budget guidelines and best practices to consider.
1. Long-Term Community Goals
Before you start crunching the numbers, it’s important to develop a long-term plan for your community. Even though you are preparing the yearly HOA budget, it’s still important to look ahead. What are your plans for the community in the next 3, 5, or even 10 years? Answering this question will determine the direction of your association as well as your community’s needs in the upcoming years.
Having a business plan that accounts for both short- and long-term community goals can make the budgeting process much easier. It also informs the board on what financial practices to implement in order to meet those community goals.
2. Current Financial Situation
You need to assess your association’s current financial situation in order to plan an HOA budget for the upcoming fiscal year. If your community association is managed well, you will have a lot of data to look at — such as business plans, reserve studies, and monthly financial statements.
Review these old statements to see how you structured and implemented your budget. Were you able to stick to your budget, or were there instances where you spent more than expected? What factors led to becoming over or under budget? These questions will allow you to scrutinize your current budget and find areas of potential improvement.
3. Updated Reserve Study
It’s important to have a reserve study. This helps determine how much money should be put in the reserve fund to finance unexpected repairs and large-scale community projects. Since some repairs give very little warning, it’s crucial to have a healthy reserve fund. HOAs should conduct a reserve study every 2 to 3 years. If you are planning a budget for a community association, make sure to have an updated reserve study.
HOAs should review the reserve study to see if they are allocating enough money for future expenses or upgrades. Were the prior years’ contributions to the reserve fund enough, or do you need to increase it in your upcoming budget? Standard practice is to allow at least 10% of the association’s income to the reserve fund. However, you may need to increase that amount if you have more community projects in the pipeline.
4. Projected Income
Calculate your expected income in the coming year. Will the income from homeowner assessments, fines, and other fees be enough to cover all your expenses? When you plan an HOA budget, you need to make sure that you will have a steady stream of cash flow. You should also make sure that you are able to collect what is owed to the association.
If you expect surplus income, you can choose to either add more projects to your budget or allocate more money to your reserve fund. Conversely, if there won’t be enough income, you need to look for areas where you can cut costs. Will the association decide to cancel planned projects?
HOAs should also keep an eye on their operating fund balance. It should be about the same as one month’s maintenance costs. If you do not meet this standard, find ways to come up with the money. You can consider higher HOA fees, special assessments, or bank loans. Whatever you do, make sure to avoid dipping into your reserves for operating expenses. A depleted reserve fund will only cause headaches in the long run.
5. Rising Costs of Goods and Services
Rising costs of goods and services are also important to consider when planning a budget for a community association. Inflation will affect a lot of your operating expenses — from electricity and other utility bills to maintenance products and supplies. Inflation can also drive up the cost of your insurance. It’s important to consider all these when preparing your HOA budget. If you have vendors with expiring contracts, ask them to send requests for proposals (RFP). You need to adjust your budget based on new service prices.
It might be hard, but try to reduce delinquencies as much as you can. They should never be more than 3 to 5% of your community. Make sure to charge late fees for all missed payments. Anticipated delinquencies should be considered as a bad debt expense when planning a budget for a community association.
7. Making Decisions
There’s no way around it — if you want to create a fiscally responsible association budget, you must make some tough choices. Make sure you have a list of recommendations of ways to cut costs or increase revenue. You may have to make cuts that upset certain community members. Or, you might have to increase HOA dues or levy a special assessment. Whatever you choose, remember that you must be willing to make tough decisions.
Just always keep in mind the HOA’s priorities. If there are too many planned projects, consider cutting them down. Choose 2-3 projects that are high on your list of priorities. Other projects can be reserved for the next year, or when the HOA has enough funds.
8. HOA Management
It can be beneficial to consult with an HOA management company on strategies for your HOA budget. A management team will have experience and expertise when it comes to community association budget planning. They can impart valuable information and strategies that will improve your budget substantially. Talking to experts can also help HOAs gain insight and thus, make better decisions for their community.
9. Community Needs
This should go without saying, but the needs of the residents should be your #1 priority this budget season. You are involved with your association because you want to maintain your financial well-being and the quality of living in your community. Any budget decision you make can greatly affect the lifestyle or finances of your residents, so you must work on behalf of them.
Additional Tips for Community Association Budget Planning
1. Develop a Budget
Having a budget is something that takes careful thought. Merely throwing out arbitrary numbers is not going to help your community association budget. Consult an accountant if you need additional help and structure your budget efficiently for your community association.
2. Follow a Strict Process
Make sure you plan your budget the right way, by following a strict process. Get board approval for all reserve expenditures, and have internal processes in place that eliminate all possibilities of fraud, waste, and abuse.
3. Don’t Forget to Pay Attention to Your Budget
Don’t forget to follow your budget. Many times, arbitrary budgets are made and then they are not followed. Make sure that you are creating the best possible budget that you can realistically follow, and your community will benefit as a result.
Successfully Planning a Budget for a Community Association
A properly planned budget for a community association is a great way to stabilize the financial prospects of an HOA. It will allow you to increase property values and resident satisfaction. Though the budgeting process may be complex and time-consuming, HOA budget guidelines ensure that you are moving in the right direction. Just make sure to keep in mind these important considerations. If you have more questions about how to plan a budget for a community association, don’t hesitate to give us a call.