Creating an effective budget is critical to your association’s success, but it can be a daunting task! You and your fellow board members need to consider several key factors as you work on building a budget. Read on to learn more about how to create a budget that works, starting with identifying your long- and short-term goals. The budget you build today will impact your community for years to come, so you want to get it right.
Any good budget is going to include the following components:

  • Operating Costs: Include staff salaries, vendor services, professional fees, insurance, utilities, maintenance, office expenses, and miscellaneous expenses, including collecting unpaid dues and fees. A good property management company can leverage purchasing power to negotiate better vendor contracts.

  • Reserve Fund/Study: Reserves are essential for covering future large expenses, like replacing community components. Reserve funds grow over time, guided by a reserve study which analyzes the life of major components and future replacement costs.

  • Revenue: While revenue primarily comes from regular assessments, you might be able to find additional revenue from fees, leased spaces, newsletter advertising, recreational memberships, and interest from investments. Do not consider special assessments as part of revenue when planning your budget.

Now that you know what information you need to consider when creating your budget, follow these steps to success.

Key #1: Develop a long-term financial plan

 Your budget affects much more than the current fiscal year. Choices you make now, especially when it comes to maintenance and reserves, have long-term impact. By looking at the long game, you will be able to

  • Enhance property values within your community.

  • Proactively address residents’ concerns, expectations and understanding of their community’s financials.

  • Minimize financial surprises that may lead to special assessments.

  • Maintain and improve your community cost-effectively over time.

Key #2: Get a property management partner that can get you the best values.

A good property management company will be able to leverage its purchasing power to
negotiate business terms with vendors on your behalf. From landscaping to insurance, a great management company will have a network of trusted vendors they can recommend when you’re going through the vendor selection process.

Key #3: Plan to implement regular assessment increases.

No board wants to be the one that raises assessment fees. But smaller increases on a regular basis are critical to managing rising costs, especially for insurance. Spreading increases over the length of ownership is much easier for your homeowners to absorb into their own household budgets. It also minimizes the need for high, unpopular special assessments.

Key #4: Start planning six months in advance.

It takes time to gather the information you need, including planned fee increases from your vendors. The earlier you collect that data, documents and other insights, the easier it will be to build your final budget. In those early months, it’s important to

  • Identify goals and objectives. Ideally, the budgeting process should begin with a goal-setting meeting. The objective of the meeting is to determine what expenses must be covered by the association for the budget’s allotted timeframe.

  • Create a budgeting schedule. Your governing documents likely outline when budgets must be shared with association members and when approvals must be secured. Simply work backwards from the start of your upcoming fiscal year.

  • Review governing documents. Your association’s governing documents will offer detailed guidance on assessment payments and increases, reserve contribution amounts, whether the budget must be presented to and/or ratified by homeowners, etc.

  • Examine previous budgets, looking for past trouble spots. This exercise is helpful in spotting line items that are consistently over or under budget. And while you review them, think about line items that could be eliminated or added.

  • Review financial statements. These documents should be provided to you by your property management company and include your association’s income statement, the statement of cash flows and balance sheet.

  • Investigate legal requirements. Laws vary from state to state. As a result of the building collapse in Surfside, Florida passed laws specifying inspection and reserve fund requirements for condominiums. Work with your association counsel to ensure your board complies with all applicable laws, which can change often.

  • Conduct a community survey. Asking homeowners what matters to them will help with buy in down the road and make everyone feel like part of the process.  

The right professional property management partner will be able to help you collect this information efficiently and quickly.

Key #5: Form a finance committee that includes association members who aren’t on the board.

Budgeting should include input from your community beyond the board. Forming a finance committee that includes other residents will make them feel more involved in the budgeting process and invested in the outcome. They will be able to offer a diversity of opinions and viewpoints that may provide unexpected insights to inform the budget creation.

Key #6: Your reserve study is your roadmap to success.

Funding reserves consistently is essential for any community association's long-term financial stability. However, boards may struggle to predict which components will need replacement, when that will happen, and the associated costs. A reserve study, conducted by experts, will help your board determine the useful life of major components like elevators, pool motors and more. It’s a good idea to conduct reserve studies no less than every three years.
“Just because your reserve study says you need to replaster your pool in 2026, doesn’t mean you have to. Check with your pool vendor and have him give you an opinion as to whether it really needs to be replastered in 2026 or if you can push it to 2027,” said Tina McWilliams, senior community manager at FirstService Residential.
In the wake of the Surfside tragedy, Florida passed Senate Bill 4-D. It aims to improve building safety and maintenance standards for Florida condo communities. All Florida condominiums that are three stories or taller must now undergo regular milestone inspections, structural inspections and have reserve funds to pay for replacement by the end of a component’s useful life. Unlike in the past, condo associations cannot waive funding a reserve for certain structural components including roofing, load bearing walls, the foundation, fireproofing and more.  Treat your reserve study as a living document that can change as needed, depending on use or wear and tear on various components.
Once you have a plan, your reserve fund offers a fair solution – everyone using the community's amenities contributes to their upkeep, preventing current residents from shouldering the entire cost burden of future replacements. Without adequate reserves, unexpected expenses lead to special assessments, creating financial hardship for homeowners. Reserves protect property values and give residents peace of mind knowing funds are in place for future needs.

Key #7: Keep reserve items and operating budget items separate.

In general, less expensive items and maintenance are part of your operating budget; the reserve is for saving for larger financial needs. Your professional property management team can help you determine which items belong where, so you don’t short your maintenance budget. Preventive and proactive maintenance, properly funded, can help extend the life of some components, giving you more time to build the necessary reserve fund. Failure to maintain components could cause them to need replacement earlier than planned, possibly leading to a special assessment and unhappy homeowners.

Key #8: Communicate with residents every step of the way.

After your operating budget has been drafted, hold a town hall to discuss it. Ideally, the finance committee or multiple board members should present, emphasizing community involvement in the budget's development. Include subject matter experts (insurance agents, reserve specialists) to lend credibility and answer resident questions. Visual aids like pie charts clearly illustrate the budget breakdown. Utilize diverse communication channels beyond just letters or emails to ensure your message reaches everyone. Being proactive and transparent builds the trust needed to secure budget approval.

Maintain empathy in your communication process. Engage with residents where they live, metaphorically, not just literally. “Some of the more successful budget meetings were where board members made community investments relatable by breaking them down using realistic examples,” explains Maureen Connolly, Client Accounting Business Partner at FirstService Residential.  I’ve heard board members say, ‘Think about utility bills, for example. If they are rising for you, they are rising for us and the rest of our community too.’ It’s about articulating financials by putting them into layman’s terms, rather than using technical terms.”

While all these best practices are key to successful association budgeting, the most important element is to work with an experienced property management company that truly understands their importance and will make your job as a board member easier. To learn more about how a professional management company can help simplify budgeting and other complex management tasks, contact FirstService Residential today.

Friday April 26, 2024