Finances

Budget Prep 101

Imagine this…It is July, the height of the DC Metropolitan humid summer weather and you have a big vacation coming up. You have just recently made it through pool season, thankfully without a hitch one might add, and all your spring projects are complete. You take a sigh and pause to relax…your email pings…WAIT…NOT SO FAST! Status of Draft Budget reads the subject line. Your board treasurer is anxious to discuss the draft budget for the upcoming year…IT’S JULY — better known as the start of budget season! No rest for the weary…time to regroup and think numbers….

So where does one start? Remember the old adage, the 7 P’s? Proper Planning and Preparation Prevents Poor Performance…that’s a good place to start and practicing the 7 P’s is essential to a good solid budget presentation and will help manage the stress one may feel when faced with preparing multiple budgets for multiple clients. Budgets are perhaps the most important deliverable we as managers are responsible for, so getting it right is critical.

Before even opening up that spreadsheet or other budget creation tool, you will need to do some document gathering. Good organization and document retention throughout the year is going to make this process easy. Here is a checklist of what you will need:

  • Governing Documents – review to determine if there are requirements and restrictions for budget deliverables, increases, announcements and publication to the membership. Oftentimes a homeowners association will have a maximum annual assessment increase while a condo may have no limit. Does the budget have to be voted on by the membership or just the board of directors? Does a Notice of Assessment and payment coupons have to be published within so many days? The Governing Documents are instrumental in your budget preparation process and managing your time for all those important deliverables.
  • Policy Resolutions – are there mandatory inspections that are required to be done this upcoming year that are performed at the cost of the association. What is the association’s late fee? Are there other sources of revenue generators that are governed by policy that will need to be accounted for in your budget?
  • Year End Financial Statements – the focus is on the balance sheet and your cash and reserve statement. It is important when preparing your budget that you know the actual reserve cash balance, your assessment receivable balance and perhaps most importantly your Members Equity balance.
  • Cumulative General Ledger – pull a general ledger report that reflects all of the general ledger codes/account numbers used by your association so you can populate the budget with the year end figures. This is also a great time to look for any coding errors and complete any necessary reclasses.
  • Prior Year’s Audit – even if in draft format, this is an essential document and a key component in budget preparation. Pay close attention to the recommendations made by the auditors as budget season may be the appropriate time to follow through. Having handy the year-end audited actual figures will be helpful in formulating your budget recommendations.
  • Contracts – look for renewal and increase language built into annual service contracts as you will need to account for these in the budget. Are there any revisions to the scope of work that will be made in the upcoming year that will impact the annual fee? Make sure to consider any increases in fuel or dump fees for trash contracts.
  • Reserve Study – review the funding recommendations and determine if there are any variances in the recommended year end balance, estimated earned interest and recommended funding that require offsetting in the budget. Don’t forget to consider reserve projects that may have been completed ahead of schedule or over the estimated budget.
  • Delinquency List – run a report reflecting your current and prior owner balances and consider necessary write offs or collection expenses you may incur. This is also a good time to bring forward recommendations to the Board for write offs, especially small balances or prior owner balances that have gone uncollected during the year.

Next up is research and perhaps the most time-consuming part of budget preparation. Set some time aside to make phone calls or research projected increases in utility costs (gas, water, electric) and contact the association’s insurance agent to determine what the insurance premium renewals may look like given the market, industry trends and recent loss history.

A thorough review of the association’s delinquent accounts and collections is in order and putting in a call to the collections attorney to determine if the board should anticipate any substantial write offs will help you develop your budget for bad debt.

Which, side note: not all community associations budget for bad debt, and well, that is just BAD! Remember 2008? Budget for bad debt…I will stop there as that could be a whole other article in itself.

Take time to examine a 3 to 5-year history and look for trends in spending. It is important that you be familiar with the causes of large fluctuations in income and expenses and properly account for them in future years. Perhaps two years ago the board decided to undertake a large landscape project understanding they would go over budget, that line item may not need to continue to be funded at that same level now. Considering the state of the economy and how it may impact your income and expenses is very important and those who have been in the game long enough to experience some of the economic downturns understand this more than others.

Okay, so you have your documents, you have done your research, what could be left? How about consulting with your client and their committees? What are the community’s goals, desires, planned and anticipated projects? How can you as the community manager develop the Landscape Committee or Social Committee Budget without their input? Did you know that the Communication Committee is planning to go paperless next year, dramatically reducing their budget? Or did you know that the board president has been considering a capital improvement project and adding a new amenity that somehow needs funded? Your Annual Planning Calendar or Five-Year Plan may offer some assistance in forecasting budget figures but involving the Board and the Committees in the process will not only save you multiple revisions down the road but will foster “buy in” into any proposed increases.

Now, many of us dread budget season, some of us love it. We likely all of have tips and tricks that help get us through the process. Let me share a couple of my favorite with you:

  • Create a folder – sounds simple enough, but drop all your work, even your chicken scratch math into a folder to refer to later. Especially if you are a portfolio manager responsible for 7 or more budgets, you are going to need something to refresh your memory when the Board Treasurer starts inquiring about how you developed your recommendations. I tend to keep records of all the research and responses I received, the math reflecting any variance in reserves, reclasses I accounted for and much more.
  • Jump ahead – come October or November you will be busy not only with budgets but likely Annual Meetings. So, take the time now to do things like draft Notices of Assessments or prepare payment coupons.
  • Anticipate questions – to help save some time, try to think like your board of directors or your Budget and Finance Committee. If you were them reviewing this budget, what questions might you have? Prepare a cover letter as part of your budget presentation that outlines your recommendations, reasonings and any significant changes to the budget from last year.
  • Narrative – over the years I have seen very simple narratives and those that are extremely detailed. Somewhere in the middle is likely just right – but every budget should include one that explains at the time of budget preparation generally what was anticipated to be coded to an account. If a contract or service is out to bid at the time of budget preparation or will be during the budget cycle, I like to mention it in the narrative – again for future reference and understanding how or why figures were developed.

Applying the 7 P’s, gathering your documents in advance, and using some of my tips I am confident you will find budget season to be less overwhelming. With proper document retention, good organization, and some time management you will be off to the races in no time and able to tackle that budget (or budgets!) and still take your vacation. Breathe…you got this!


By Victoria Garner, CMCA, AMS, PCAM

Victoria is the executive vice president at Cardinal Management Group, Inc. in Woodbridge, Virginia. She has been involved in community management for nearly two decades and a member of the Cardinal team for thirteen years. Victoria serves on the WMCCAI Quorum editorial committee and Virginia Legislative Committees.

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