For a board of directors to be successful, they need to understand the weaknesses and strengths of the association. Board members also need to understand the history of the association and what needs to be accomplished.Homeowner’s associations need to take responsibility for their assets and operations. They must also make sure they’re in compliance with local ordinances, federal law, state law and governing documents.
Homeowner’s associations that have a January through December budget year have a limited amount of time to create a budget for the coming year. Once the budget is created, it must be approved before the year-end mailing event.
A homeowner’s association must have a budget committee, and the committee can be comprised of members of the community association, HOA board members or a combination of both. For many, it’s a mystery as to how the budget committee actually works. The good news is that it’s not too difficult to understand.
The Roles of the Accountants and Treasurers
The board treasurer chairs the budget committee. As the chair of the budget committee, the treasurer is obligated to make sure everyone stays on track while the budget is being created. Another job that the treasurer is trusted with is presenting the budget to board members for approval.
If a homeowner’s association decides to work with an accountant, the accountant can offer the board consulting services. However, when it comes to deciding the budget, the account doesn’t play a specific role. Depending on the association in question, the creation of the budget could be entrusted to a management company.
Once the management company has devised the budget, the budget committee meets with the management company and reviews the budgets. During this meeting, adjustments might be made to the budget.
Who is supposed to be on the Budget Committee?
It’s not uncommon for owners to serve on the budget committee, but if they do decide to serve on the committee, they should only represent a cross-section of the whole community.
Many of the members who might decide to serve have expertise constructing very specific areas of the budget, and these skills are very useful to the whole community. As a general guideline, the committee shouldn’t be allowed to grow large enough to become unwieldy because this can cause a wide range of management problems.
What Does The Committee Do?
It’s important to understand that the budget is comprised of three major components, and the role of the treasurer is to make sure that every committee member comprehends the components.
The components are:
The Funds Needs for Daily Community Operations
Funds must be set aside for the daily operation of the community. For example, funds are needed for general maintenance, insurance, management, grounds maintenance, water and electricity. These expenses can be estimated based on personal experience, or they can be contractual in nature.
When examining items found in the operating budget, it’s important to consider the community expectations. For example, do members wish to hire a landscaper who blows, mows leaves the property?
It might be assumed that this is the type of landscaper that should be hired, but in reality, members might prefer to hire a landscaper that provides a greater level of service.
The Funds Needed to Maintain a Sufficient Level of Reserves
Another major component of the budget consists of funds needed to keep reserves high. The reserves are important because they provide money for the repair of streets, roofs, pools and other community assets. Without sufficient reserves, it’s impossible to keep assets in good repair or provide money for replacement.
The Funds Required for Enhancements or Additions to Existing Property
This component of the budget is directly tied to what community members want and would be willing to pay money for. For this component, the HOA board has the power to solicit owners and gather approval for adjustments. An HOA accounting company can help with this task.
Once the budget committee has acquired all of the knowledge available to them, they’ll estimate the total amount of expenses for the coming year. Next, the total sum of the expenses will be compared to the total potential revenues from the homeowner’s association.
The committee is responsible for finding ways to reduce expenses while keeping the quality of service as high as possible. If these strategies aren’t capable of properly balancing the budget, then some tough decisions must be made.
When the committee fails to balance the budget, they might have to levy a special assessment or recommend increasing assessments. To learn more about HOA accounting, you can check below.