The arrival of Fall means it’s budget season! Often, board members dread the annual budget process, as it can be stressful performing cost savings and negotiating contracts. At Vesta, we’re always looking for ways to help communities, and we’ve gathered a few helpful tips from our experienced industry leaders to share with you.
1. Contingencies
A contingency is an allowance for unexpected expenses. For most communities, this is generally repair costs for damage to common property that is not covered by insurance. Another contingency to make sure your budget has an allowance for is “bad debt”. Almost no association can collect 100 percent of their assessments. To plan for this, look at historical data from the most recent prior financial statements to determine the proper allowance for bad debt.
2. Capital Projects
Countless boards focus their budget season on only the operating budget – landscaping, utilities, insurance, professional services, maintenance of common property, the regular income from assessments, etc. But, it is also important for your board’s budget to include any anticipated capital expenditures for the year.
A capital project, or expenditure, is any money spent on creating or fixing fixed assets, such as land, buildings or equipment. For example, will your board use reserve funds or a bank loan to replace the furniture in the clubhouse? What about to build a new swimming pool? Or dog park? These kinds of projects need to be reflected in your budget.
No association can afford to do every project at once, so it’s important to prioritize. The board needs to first distinguish which projects are needed and which projects are wanted. Of course, safety takes priority.
3. Send out Requests for Proposal
You never want to estimate any vendor costs in your board’s budget. To make your budget as accurate as possible, it’s important to send out Requests for Proposal, or RFPs, for all your contracted services; such as landscaping, trash removal, insurance policies, and pool management.
Budget season is ideal for reviewing Vendor contracts and negotiating rates and services for your budget. Vendors may raise their rates if they are contractually able to or if the contract is expiring. Obtain pricing from other vendors in each service industry to see which prices and quality of service fit your budget. This is a good time to ask for updated insurance information from each vendor.
4. Prepare for Mid-Year Problems
Things will happen outside of the budget season, requiring action for which the budget did not prepare. For example, an insurance renewal premium jumps by 75 percent or more. Disasters, like hurricanes, can occur causing additional damage to common property that wasn’t anticipated. What is the board supposed to do?
The board needs to make sure that the Association can cover the deductible in the event of a claim or multiple claims. If a disaster strikes, you’ll want to be ready and prepared instead of facing a special assessment. Review the Association’s insurance to ensure the best coverage at the lowest price.
Lastly, your board will want to evaluate your incoming assessments. Balancing a budget is challenging as it is, but a high percentage of delinquents makes it almost impossible to achieve. By implementing a strong collection policy, you will be able to more successfully count on your incoming cash and put your budget into action! But, if you have a tight cash flow, consider raising assessments. Special assessments are for emergencies only – not day to day expenses.
5. Plan Long Term
While it is called an annual budget, you will want to make sure to consider expenses beyond the coming year as every community should have at least a 1, 3, and 5-year plan. By doing this, your board can anticipate projects that cannot be funded from your current reserve. You should also look for year to year trends on items, such as utility rates, to better anticipate them down the road.
Every Association should have funded reserves for long-term maintenance and replacements. If your board doesn’t have a reserve or hasn’t been fully funding them, it’s never too late to start this budget season!
6. Examine Past Expenses
If you take a closer look at each item on your HOA’s budget that needed repairs in the past three years you might start to see a pattern. This pattern of expenses will not help you avoid spending entirely, but it could help you to prevent unnecessary spending through preventative maintenance. If you have spent a lot of money in the past on repairs to say, the community pool, then think about what might have caused that damage in the first place. Did you have an inspection every month? Did you treat it as often as needed, or just as needed? You can avoid the cost of all new equipment by making sure that you are spending the money to keep it functioning properly in the first place.
There are many ways to implement preventative maintenance strategies, such as encouraging homeowners to report any damage they may see around the neighborhood and having someone regularly check those communications. Scheduling regular inspections and service is also key for the success of this strategy; if problems are detected around the neighborhood, the board should decide on how to proceed with simple repairs before they become more complex and costly.
Saving money in your HOA can really be as simple as staying on top of minor issues and working with your residents to find and repair them.
