The governing documents of your community define the property to be maintained by the association, and specifies maintenance and service responsibilities and requirements. These maintenance and service items will appear in the expenses section of your community’s budget.
Like most budgets, the two main components of a budget are simply revenue and expenses. However, what these two items consist of with regards to a community association such as an HOA can be finite, and it's important to understand what each includes. Scroll over the below images to get a better idea of each individual component.
Most board of directors are responsible for establishing, approving, and monitoring the community’s budget. Although they have the power to establish a budget, most will delegate preparation authority to their manager. When the board of directors for any community association reviews a proposed budget, they should consider the following:
> Legal requirements of state statutes and governing documents > Owners needs and desires (balancing mandatory and discretionary items) > Committee and owner feedback > Reconcile revenue and expenses > Financial forecasts and analysis of past financial activity prepared by the manager
The community treasurer is responsible for ensuring the draft budget is prepared and approved. usually initial preparation of the budget is done by a manager, and treasurers work with them to get the budget approved. The treasurer may review the draft budget with a finance committee if available. If the association has a finance committee, it is important that the treasurer consult all committee chairpersons and invite owner input to ensure their support. Their participation and support would be especially important where a vote of owners is required or recommended for:
> Increase in assessments > Special assessments > Major improvements > Funding replacement reserves
The manager is typically responsible for preparing the draft budget, reviewing the draft budget with the board, revising it after any changes are made, and providing a summary of the budget to the owners after board approval (unless stated otherwise in your governing documents or state statute).
Some states and some community governing documents require that the budget be passed by a vote of the owners. The preceding discussion explains when and why owners should be involved in reviewing the proposed budget - even when the board is responsible for its adoption.
Each line item in a budget represents a different account or category of revenue or expense. There are two types of expenditures in a community budget:
When preparing your draft budget, list your line items in as much detail as possible to help you assign costs. For example, utility line items may include: water irrigation, water-sewer, electricity, streetlights, natural gas, garbage, telephone, cable TV, etc.
One of the best financial management tools for both the manager and the board members is the Statement of Revenue and Expenses, that, among other data compares actual expenditures and revenue sources to budgeted amounts in each category. Thoughtful and deliberate calculation of each budget line item is important. When you compare actual figures with budgeted figures, you can:
Traditional |
Zero Based |
|
Meaning |
It’s computed by keeping the starting point at zero |
It’s computed by keeping the previous year’s budget as base |
Preparation |
Simple | Complex |
Emphasis |
Expenditure of previous year | Each item is considered as per the new economic appraisal |
Approach |
Based on historical information | Based on estimated information |
Cost Effective |
Doesn’t encourage cost effectiveness |
The purpose is ensuring cost effectiveness |
Prefers |
All departments | Only profit centers |
Effectiveness |
Effectiveness depends on the individuals who did the previous year’s budgeting |
Effectiveness depends on the current top management of the company |
Linked To |
Assumptions of the previous year | Estimations of which department can bring more profits |
Clarity |
Almost none | High |
Orientation |
Orientation revolves around accounting |
Orientation sits around project/ decision unit |
Whether it's for personal use or for your entire community association, financial planning is a complicated but vitally important process. If your association is interested in finding out more about how RealManage can help your community plan for the future, please reach out to us today!
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