Community Association Budgets:  The Art of Guesstimating

Posted by Meigan Montoya on September 29, 2017

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It’s that time of year again! Budget season is in full swing in the Community Association industry.

No one likes building a budget, let alone one as complicated as a community budget. The many moving parts of community budget planning will always seem daunting and painful, but it’s still something you’re really going to want to get the jump on sooner rather than later.

This article will be an easy explanation of why you need to get your budget started ASAP, but if you're looking for a comprehensive resource to use throughout your whole budget planning process, our CAM Budget Survival Guide is just what you need.

Not Your Average Checkbook Balancing

A year ago, I didn’t even know budget season was a thing! For your average person, “budget” just means what you can and can’t spend. When I was a kid, “budgeting my money” meant balancing a pretend checkbook to account for all twelve of the dollars I had to my name. Once I had a full-time job, budgeting meant not blowing all of my money on burgers and Amazon. Right now I’ve got a “wedding budget,” and I use a budgeting app to do all of the work for me. 

And still none of these budgets even come close to what a community budget is supposed to be.

Here’s the difference–a personal budget of any kind relies on three things:

  1. A known influx of money (typically any forms of income you have).
  2. A mostly-known expense amount (whatever your bills are monthly, plus varying personal expenses).
  3. A mostly-unknown, mostly- set of potential expenses (emergencies like a car accident, property damage, or sudden illness, and impulse purchases like that new iPhone you really want but don't necessarily need); most people set up savings accounts or “rainy day funds” to passively prepare for these potential expenses.

The Chicken or the Egg?

For community association budgets, passive preparedness isn’t an option. And budgeting in this capacity feels very chicken-or-egg to me. Because while a community budget has three similar parts to that of a personal budget, they must be much more accurately predicted, and all of those parts implicitly depend on each other, so knowing an exact amount for any single part is a science in and of itself. A community budget is made up and determined like this:

  1. Income – the money the community collects in assessments

    A community association’s income should stay relatively predictable on a year-to-year basis. This is because a community has at least one set variable in this situation: their number of properties. A community that starts with 50 doors will always have 50 doors, and those doors will always be paying their monthly assessments, regardless of who owns the property.

    What changes from year to year is how much those assessments will cost (this is informed y the budgeted expenses). This amount shouldn’t vary too much with each passing year—it shouldn’t be $50/mo in year one, and then $500/mo in year two. But it should be enough to accommodate changes made to existing or new budgeted expense line items.

    You also need to ensure that there is an effective collections process in place in your communities. If even one property neglects to pay their monthly assessments, your expected income is shot, throwing off the rest of your budget.

  2. Expenses – the costs of everyday community operation

    The expenses are the densest portion of your budget, and very rarely will this number reflect the amount actually spent on the line item, but the idea is to get as close as possible in your “guesstimate,” or educated guess. Calculating the expenses can be done in a few ways:
     
    1. Many established communities operate on a Historical Trend budget. This involves using previous annual budgets and their respective actual annual spending to draft a more precise budget.

      So if the budget for 2017 listed $10,000 in budgeted lawncare expenses, but the total spend was actually $8,000, and you don’t anticipate changing the contractor or the services, it’s reasonable to set the 2018 lawncare budget to match the actual expense. Just be sure to account for things like cost of inflation or price changes from various vendors, also.

      In Historical trend, it's best to compare 2-3 years of history to ensure you have an actual trend. If last year was a particularly hard winter and the community spent $20,000 over budget to cover storm prep, you don't necessarily want to raise your budgeted amount by that much every year thereafter.
       
    2. Another method is Zero-Based budgeting, and can be used for new communities, communities under new management, or communities in which there was previous financial mismanagement (effectively negating any previous budget information). With a Zero-Based budget, every line item will start at $0, and the amount that is given to each must be built from scratch and justified.

      One method to accomplish this is using RFPs (Request for Proposal) for all incoming vendors (and to justify that your existing contracts are in line with the greater industry). If you will not have the contract before the budget is approved, get at least three quotes from area vendors, and use the average for your budget number.
       
    3. Many communities will often combine these two methods into a Hybrid calculation method. Some line items have a well-established history and determining the best budget for those will be fairly easy. Other line items will need to begin at zero, such as new board initiatives, or services that will experience change.

  3. Reserves – For annual budget purposes, this is the amount in a given year that your community needs to save to meet your target funding percentage. Bottom line: make sure your reserves are being funded.

    This is where things get tricky. The most basic takeaway for the purposes of structuring your annual budget is this: keep your reserves funded. There should already be an established percentage of funding required for any given reserve. This portion of the annual budget (which is different from the actual reserve) is designed to predict how much money from the budget should be allocated to funding the actual reserve. But the actual reserve is more than just what is contributed from the annual budget.

A community must be able to expect the unexpected, and furthermore, accurately collect money to handle that unexpected expense without resorting to issuing special assessments to their homeowners. Creating a budget is a chore, but it is arguably the most important task you will undertake, so be sure to give it the attention it needs. 

Free eBook | CAM Budget Survival Guide

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