Budgeting is an essential process for any organization, and homeowner associations (HOAs) are no exception. A well-planned budget can help an HOA to achieve its goals, meet its financial obligations, and ensure that the community is well-maintained. In this blog post, we will discuss the basics of budgeting for HOAs and things to consider as you plan for your HOA’s budget.
What is an HOA Budget?
An HOA budget is a financial plan that outlines the community’s expected income and expenses for a specific period, usually a year. The budget is a crucial tool for the HOA’s board of directors to ensure that the community’s finances are managed responsibly and transparently. The budget helps the board to make informed decisions about spending, set priorities, and plan for the future. Most governing documents contain a requirement that HOA Board members create an annual budget and present it to the community under strict timelines each year.
Things to Consider as You Plan for Your HOA’s Budget
- Historical Data: Historical data is essential in preparing an accurate budget. The HOA should review its financial statements from the previous year and look for trends in income and expenses. This information will help the board to identify areas where spending can be reduced and anticipate future expenses.
Assessments: Assessments are the primary source of income for HOAs. The board should consider how much money will be collected in assessments and the collection rate. The collection rate is the percentage of assessments that are collected on time. A high collection rate is essential for the HOA to meet its financial obligations.The board should also consider whether the assessment amount needs to be increased or decreased. If the assessment amount needs to be increased, the board should ensure that the increase is reasonable and necessary. The board should also communicate the reasons for the increase to residents and provide adequate notice. - Reserves: Reserves are funds set aside for major repairs and replacements, such as the roof, exterior painting, and road resurfacing. The board should ensure that the reserve fund is adequately funded to cover future expenses. The board should conduct a reserve study periodically to determine the amount of money needed to fund the reserve account.
- Expenses: Expenses are the costs associated with running the community, such as landscaping, pool maintenance, and utilities. The board should review expenses from the previous year and identify areas where spending can be reduced. The board should also anticipate future expenses and plan accordingly.
The board should prioritize expenses based on the community’s needs and available resources. The board should ensure that essential expenses are covered before considering discretionary spending. - Vendor Contracts: Vendor contracts are agreements between the HOA and vendors who provide services to the community, such as landscaping, pool maintenance, and security. The board should review vendor contracts and negotiate favorable terms and pricing. The board should ensure that vendor contracts are renewed on time and that the vendors are meeting their obligations.
- Capital Improvements: Capital improvements are significant projects that enhance the community’s physical assets, such as building a new clubhouse or adding a playground. The board should consider capital improvements and their costs when preparing the budget. The board should also ensure that the capital improvements are necessary and will benefit the community.
- Unexpected Expenses: Unexpected expenses are costs that are not anticipated when preparing the budget, such as emergency repairs or legal fees. The board should include a contingency fund in the budget to cover unexpected expenses. The contingency fund should be a percentage of the total budget and should be adjusted based on the community’s size and complexity.
Conclusion
Budgeting is a critical process for any organization, and HOAs are no exception. An accurate and well-planned budget will ensure your community association’s financial health and longevity.