It’s Never Too Early to Start Planning
It is never too early in the year to start thinking about the annual budget for your association. AAM kicks off the yearly budget preparation timeline with budget training sessions for Community Managers in August. The Association Board of Directors also plays an important role in the budget process so we feel it is important to share a few budget questions for consideration. August is right around the corner so let's get ready for budget season!
Please consider the following during the upcoming budget season:
- How well is the association performing versus the current year budget?
- Is operating cash flow for the association trending up or down over recent years?
- Is the current budget meeting expectations of homeowners?
- Has the assessment level been impacted by changes in economic factors?
- Are reserve contributions at an appropriate level to ensure long term financial health?
Before diving into a fresh budget season, it is important to compare current year budgeted income and expenses versus actual financial activity. AAM provides a month-to-date and year-to-date variance report in the monthly financial package that explains why certain income or expense activity is over or under budget. If additional details are needed, the community manager and accounting department will be happy to provide information for budget decision making purposes.
Under normal circumstances, the yearly operating income and expenses of the association are fairly predictable. With that being said, there is not a lot of room for error in a zero based budget. Planning for the worst case scenario will help ensure adequate cash is available to cover operating expenses. Start the budget process by taking a conservative approach and make adjustments as needed. Balance sheet information is sometimes forgotten during the budget process, so please remember to take a look at cash flow trends for the past few budget seasons. Maintaining a modest operating cushion is acceptable and it will help the association cover any unexpected expenses that might happen from time to time. If nothing unexpected occurs, then it provides an opportunity to fund community enhancement or make an additional reserves contribution.
Members of the association buy property with a certain expectation in mind and some of them are not shy about sharing feedback when those expectations are not being met. As this feedback is gathered each year, there is an opportunity to make adjustments and improvements through the budget process. Associations vary in size, design, lifestyle, amenities, and owner demographics. Some of these variables may change over time, so the budget will also evolve. If new expenses or services are being added to the budget, it should be carefully evaluated. The short and long term impact should be considered as well as how the association will cover the expense. Enhancements to the community covered by operating funds also impact long term reserve planning.
Unfortunately, economic factors such as wages or the general cost of services may increase each year. Increases in minimum wage requirements in some areas of the country have impacted many vendors over the last few years. Each year, the Board should carefully evaluate whether an assessment increase should be approved. In most cases, large assessment increases can be avoided by implementing smaller increases at the appropriate time. This will help avoid unpleasant surprises and special assessments.
Planning for Reserve Funding and Expenditures is essential to the long term financial health of the association. Associations should have a Reserve Study that identifies major replaceable components. Component details include the remaining useful life of an item at time of the study, typical life spans, and estimated future replacement costs. The study combines this data into 30-year schedule of repair and replacement activity. Careful analysis of the yearly reserve contribution recommended in the study is important when considering how much the association should contribute to reserves as part of the annual budget. The Reserve Study should be updated as necessary, with new studies performed every three years or as instructed by the governing documents.
The budget is a financial road map to ensure the association successfully navigates through each year of financial activity. The budget also serves as a guide for long range strategic reserve planning. As mentioned above, budget season is not far away. AAM looks forward to working with you to build a budget that brings financial peace of mind to each association.