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Tips on Easier HOA Budget Preparation

There is a practical way to make budget preparation easier, not harder. As the time approaches for the Board of Directors to begin preparing to complete their budgets for the upcoming year, we are offering some helpful tips for budget consideration.

1. Review the Governing Documents and State Law Requirements. Know the critical timelines for approving budgets and distributing the annual assessment notice. This requires reviewing your association’s governing documents and state requirements for budget distribution. Some of these requirements include mailing or delivering Board approved budgets 30 days following the approval date. Following ratification by the community, the annual notice for the regular assessment is typically required to be distributed at least 30 days prior to the due date or new year.

2. What to Consider. After verifying the critical timelines, consider the following items to help in the budget preparation process:

  • Review the Reserve Study. Review the reserve study to determine the amount of funds to set aside for replacement and unforeseen contingencies. There is typically no magical percentage rate that the reserve funds needs to meet. This is based upon the types and number of amenities within the association.

  • Determine Cash Flow Needed. Always plan for adequate cash flow to cover the upkeep of the common areas and upcoming projects.

  • Determine Funding Levels Needed. By comparing the reserve fund recommendation with the actual funding of the reserves and cash flow needed for the upcoming year, it allows the Board to determine whether or not an assessment increase is necessary. This may require the use of a cost of living index to determine forecasted increases.

  • Evaluate Non-Discretionary Expenditures. These are set costs that cannot be alleviated. Determine the amount of contractual requirements for lawncare, management, insurance, and professional fees such as taxes, and audits.

  • Determine Discretionary Expenditures. These are optional costs that may or may not be incorporated. Compare the previous year discretionary expenses and upcoming projects needed to pinpoint assets that may need to be replaced or upgraded in the coming year.

  • Identify Delinquency Trends. Observe the historical trends of homeowners who do not pay and require liens placed against their property. Because this is way to forecast the amount of cash flow the association will have for determining discretionary spending.

  • Determine the Common Expense. Add the total aggregate amount of the projected expenses and divide the total among homeowners to determine whether an assessment increase will be necessary to cover costs.

  • Add a Narrative Explanation. To assist the Board in explaining to the homeowners how the expense was calculated, include a narrative explaining how each line item was determined.

It is optional for the Board to meet as a work meeting in which there is no agenda but to draft the budget figures, or the budget may be hammered out at a Board meeting where a final vote is taken. In some cases, the management firm may provide an initial preparation that will serve as a starting point for the Board.

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