Many boards struggle to plan and manage an HOA operating budget. Still, the operating budget plays a critical role in estimating how much money the community expects to earn and spend during the year. Without this budget acting as a financial guide, board members may overspend and end up with a large deficit.

 

What is an HOA Operating Budget?

An HOA operating budget is a financial plan that shows the association’s anticipated income and expenses for a specified period (usually one fiscal year). It estimates how much money will come in and how much the association expects to spend on routine costs.

Income typically comes from homeowner dues and assessments. Some associations earn income from other avenues, such as facility rentals and investments. Expenses usually include landscaping, maintenance, utilities, management fees, insurance, and administrative costs.

Two factors establish the requirements for HOA budgets: state laws and the governing documents. In Washington, for instance, associations must provide owners with a copy of the proposed budget within 30 days after adoption (RCW 64.90.525). Associations must also schedule an owner meeting to consider ratification between 14 and 50 days after providing the budget.

In states where the law is silent or broad, associations must turn to their CC&Rs and bylaws for guidance.

 

What’s the Difference Between an HOA Operating Budget vs Reserve Budget?

An operating budget covers routine costs that the association expects to incur throughout the year, while a reserve budget covers major repairs and replacements.

Operating costs are recurring, meaning they are the typical expenses an association incurs while operating. These include landscaping, routine maintenance, utilities, insurance premiums, and management fees.

Reserve expenditures, on the other hand, occur less frequently. Common examples include roof replacements, road repaving, pool equipment replacements, and other large common area projects. Funding generally comes from reserve contributions, which are included in owner dues.

Keep the operating budget and reserve budget separate. This is not only a legal requirement for most associations, but it also makes financial planning much easier.

 

What Should an HOA Operating Budget Include?

The income and expenses an HOA operating budget should include depend on the community, its needs, and its amenities. That said, they typically include the following:

  • Dues and assessments
  • Other income
  • Management fees
  • Insurance premiums
  • Utilities
  • Routine maintenance and repairs
  • Landscaping costs
  • Professional fees
  • Administrative expenses
  • Taxes
  • Reserve contributions
  • Contingency funds

 

How to Create an HOA Operating Budget

When preparing the annual budget, board members shouldn’t simply carry over last year’s numbers. Expenses may have shifted, economic factors may have affected costs, and revenue may not remain consistent because of high delinquency rates.

Here are the steps for creating an HOA operating budget.

 

1. Review Past Financial Records

First, the HOA board should review historical data, including previous budgets, actual spending, income statements, contracts, and other financial records. While it is never a good idea to simply recycle last year’s budget, it can help the board establish a starting point.

 

2. Review Existing Contracts

Next, board members should check the association’s current vendor contracts. These include management, landscaping, maintenance, and insurance agreements. Some contracts may be scheduled to renew, change, or increase in fees.

 

3. Estimate Upcoming Expenses

HOA operating expenses
List all anticipated expenses for the upcoming year, then use historical data and current contracts to estimate the cost of each line item. These include utilities, maintenance, insurance, administration, professional services, and management fees.

 

4. Account for Planned Changes

Not all expenses will make it into the final budget, and some new ones may be added. Board members should consider new services, discontinued services, amenity changes, staffing needs, and other decisions that could affect expenses.

 

5. Determine the Reserve Contribution

Many associations must fund reserves. To estimate accurately, refer to the reserve study and factor in current financial conditions. This will help the board determine how much each owner must contribute to the reserves.

 

6. Calculate Dues

Based on total expenses and reserve contributions, the HOA board can determine dues. This is the amount each owner must pay to the association (either monthly, quarterly, or annually).

Dues may increase as expenses and needs change. If that happens, board members must clearly explain the reasoning to owners to avoid pushback and gain support. Keeping dues artificially low to appease residents can ultimately harm the HOA.

 

7. Review and Approve the Proposed Budget

Finally, the HOA board should review the complete budget, make any necessary adjustments, and approve it in accordance with state laws and the governing documents. Keep in mind that some states allow owners to object to the budget during ratification. Following adoption, board members must notify owners.

 

Common HOA Budget Planning Mistakes to Avoid

Poor assumptions during budget preparation can create financial problems later in the year. Boards should watch for these common mistakes:

  • Relying too heavily on last year’s budget
  • Underestimating expenses to keep dues artificially low
  • Using unrealistic income estimates
  • Failing to account for price increases and economic changes
  • Leaving out known upcoming costs
  • Treating reserves as operating cash
  • Diminishing flexibility by skipping contingency funds
  • Waiting too long to begin planning the budget

 

How to Monitor an HOA Operating Budget

Budget planning doesn’t stop after approval. The HOA board must also monitor the association’s financial performance throughout the year to see whether actual numbers stay close to the budget.

Here’s how to monitor an HOA operating budget.

 

1. Analyze Variances

HOA budget vs actual
A variance is the difference between a budgeted amount and the actual result. By reviewing variances, directors can identify where income or spending differs from their expectations.

For example, actual HOA utility expenses may exceed the budget because electricity rates are rising. To address this change, the board can cut back on usage, upgrade to energy-efficient hardware, or raise dues.

Understanding the source of the problem can help the board make informed decisions.

 

2. Perform Regular Audits

A financial audit or review can strengthen oversight of the association’s finances. An independent CPA can examine financial data and assess whether reports are accurate. An audit can also identify irregularities and trace their root causes.

 

What Financial Reports Should an HOA Board Review to Check Budget Variances?

For a more accurate analysis, the HOA board should review the HOA budget vs actual report, the balance sheet, the delinquency report, and the general ledger.

  • HOA Budget vs Actual Report. This report compares anticipated income and expenses against actual numbers for the same period. The difference is the variance, allowing the board to identify which line items are over- or underbudget.
  • Balance Sheet. This provides a snapshot of the association’s financial position, showing the assets, liabilities, and equity. It helps the board see available cash, debts, and other balances.
  • Delinquency Report. This report shows the dues, assessments, and other amounts that homeowners owe to the association. Identifying this information helps the board plan for contingencies, as a high delinquency rate signals a revenue shortfall.
  • General Ledger. This ledger contains detailed records of the association’s financial transactions. Board members can use it to trace specific expenses and understand what contributed to the variance.

 

Do HOAs Need Professional Help for Better Budgeting?

While boards can certainly prepare the budget themselves, hiring professional help can make HOA budget management much easier. It is not required, but it can be beneficial.

An HOA management company can assist with budget planning, execution, financial reporting, and ongoing monitoring throughout the year. Managers can gather historical data, review contracts, request vendor proposals, and estimate recurring costs. Their experience can also identify operating expenses that some boards may overlook.

An experienced manager can also track income and expenses against the adopted budget. They can flag overspending and give directors the information they need to make key decisions. They can also implement internal controls to protect finances.

Many volunteer directors also struggle to read financial reports. An HOA management company can help interpret these reports and other financial records, such as bank statements, reserve studies, and audits.

 

Assistance for Volunteer Boards

An HOA operating budget may seem simple enough to prepare, but there’s a lot more that goes into it than meets the eye. Careful planning requires keen attention to detail, as well as time and expertise. Self-managed boards can make smarter financial decisions by hiring professional services.

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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