An HOA budget review can help associations prevent special assessments, track their spending, and plan for the future. Board members must understand what goes into a typical review and how often they must conduct it.
What is an HOA Budget Review?
An HOA budget review is a process in which associations compare their projected budget with actual revenue and expenses. Also known as an HOA budget analysis, this process aims to verify financial health and guide the board’s future decisions.
Reviewing the budget is a common practice in any organization, including HOAs and condominiums. By regularly examining the budget, the board can prevent unexpected shortfalls and maintain financial stability. This, in turn, helps the association avoid special assessments.
How Often Should an HOA Budget Be Reviewed?
Board members must review the HOA budget monthly, quarterly, and annually, each with different levels of detail and objectives.
- Monthly Reviews. For monthly reviews, the board should look at the budget vs. actual report. This will help the board catch any significant spikes in spending or notable collection issues early on.
- Quarterly Reviews. For quarterly reviews, the board should take a broader look at the actual expenses. This can indicate any unexpected repair costs, economic changes, or maintenance problems.
- Annual Reviews. For annual reviews, the board should take a more comprehensive look at the previous year’s performance. This will help estimate upcoming costs and set the tone for the year ahead. Ideally, the annual review must happen 90 to 120 days before the start of the new fiscal year.
What Should an HOA Budget Review Checklist Include?
An HOA budget review checklist should include the following to-do items: monitor variances, inspect cash and bank balances, investigate spikes or red flags, evaluate reserve funds, monitor delinquencies, reallocate funds (if needed), and document findings and actions. Let’s break down each item below.
1. Monitor Variances
Board members must compare the actual income and expenses against the projected budget. Small variances are normal, but medium-to-large variances warrant a closer look. Sudden spikes in costs, for instance, could be attributed to inflation, rising vendor costs, or a maintenance issue.
Don’t just look at line items where spending exceeded the plan. A positive variance is generally considered favorable, but it can also indicate deferred maintenance. Ignoring maintenance and repairs to keep dues artificially low could eventually backfire.
When checking for variances, make sure to focus on both current month and year-to-date totals.
2. Inspect Cash and Bank Balances
Associations must have sufficient funds in the bank to cover their upcoming expenses. When reviewing the budget, the board should verify that its operating cash can cover at least one month of maintenance and other costs.
Additionally, board members must confirm that bank reconciliations balance out. Discrepancies may be due to uncleared checks or deposits in transit, but they can also be a sign of fraud.
3. Investigate Spikes or Red Flags
Expenses can increase over time, but significant or unexplained spikes are a cause for concern. When board members identify any red flags, it is important to investigate them further.
For example, a spike in the association’s water bill could point to a leak. Similarly, large vendor invoices may be due to unfavorable contract terms. Addressing the problem at its root can prevent similar surges in the future.
4. Evaluate Reserve Funds
Every HOA or condominium relies on its reserves to cover major repairs and replacements when components reach the end of their useful life. During an HOA budget review, the board must also verify that its reserve fund is at a healthy level. This can help prevent unsavory surprises.
5. Monitor Delinquencies
An HOA budget review can show whether or not dues are stable. If revenue is lagging behind, it may be because some homeowners aren’t paying their dues. The board should cross-reference this with the Accounts Receivable Aging Report to see who owes past-due fees and which accounts may be referred to collections.
6. Reallocate Funds (If Needed)
Sometimes, the board will have to shift money around to stay in the green. For example, if maintenance needs extra funding due to unexpected costs, the board may take it from the social events fund, forgoing a planned party or cutting back on its entertainment budget. This type of adjustment can help keep the community afloat without turning to special assessments or dues increases.
7. Document Findings and Actions
Every HOA budget review must be properly recorded in the meeting minutes. This includes what was discussed, what was voted on, and what corrective actions were approved. Maintaining a paper trail makes it easier to refer to past decisions, confirm action items, and promote transparency.
What are the Steps in an HOA Budget Approval Process?
The budget approval process follows four simple steps: budget drafting, board review and revision, homeowner notification and feedback, and formal vote and approval. Let’s talk about each step below.
1. Budget Drafting
Together with the HOA board, the treasurer or budget committee drafts the budget according to past financial data, current vendor rates, projected expenses, and economic changes. It is important to be as accurate as possible when projecting amounts.
2. Board Review and Revision
Next, the HOA board reviews the draft, makes necessary adjustments, and approves the proposed budget. This includes approving the monthly dues rates for homeowners.
3. Homeowner Notification and Feedback
Board members must then distribute a copy of the proposed budget to the homeowners. Depending on state laws and the association’s governing documents, this must take place a certain number of days before final approval (typically 30 days). This allows owners to review the budget, ask questions, and provide input.
4. Formal Vote and Approval
Once the final draft is made, the HOA board must hold a proper meeting to vote on and officially adopt the budget. In North Carolina, a proposed budget is automatically approved unless a majority of all property owners vote to reject it (Section 47F-3-103). Owners must be made aware of the monthly dues rate.
Good Financial Sense
An HOA budget review keeps the community on the right financial track throughout the year. Board members must perform it regularly to ensure that both the operating and reserve funds remain at healthy levels. When in doubt, it is a good idea to hire a professional for assistance.
Clark Simson Miller offers HOA financial management services to community associations. Call us today at 865.315.7505 or reach out to us online to request a proposal!
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