How to Prepare an Annual HOA Budget
Think of your budget as your roadmap for the year. If you don’t have some type of guide to follow, it won’t take long before you’re either lost in the middle of nowhere or wind up in a wreck. We want to try to help you avoid this as best we can. You should have two main goals for preparing your association’s budget:
- You’re appropriately anticipating expenses for the upcoming year to ensure the association has the funds needed to cover these obligations.
- A properly prepared budget should result in revenue matching total expenses, or a bottom line of zero.
The goal shouldn’t necessarily be to keep association dues as low as possible. It should be to provide a realistic budget for the board that accurately represents the income and expenses necessary to operate the business of your HOA.
Best Practices for Preparing Your HOA Budget
When preparing your budget, it’s important to start in reverse order. Start with expenses instead of income so that you can calculate what the association dues need to be based on the projected expenses throughout the year. This is a preferred strategy because when you start by estimating the association’s expenses throughout the year, including an appropriate reserve contribution (you should look at your reserve study, if you have one), you can then back into the dues and amount needed to fund these expenses to arrive at that zero net income.
Another strategy, if the association wants to very minimally increase the dues or can only increase dues by X-amount or X-percent per year based on the governing documents, would be to enter the dues amount and adjust expenses as needed to arrive at the zero-dollar net income.
Expenses to Consider for Your Annual Budget
Let’s walk through the preferred strategy, first taking a look at expenses. Start by including contracted fees that are locked in for the upcoming year, like:
- Lawn and snow contracts
It could be helpful to use the current-year income statement as the guide. Are there any additional maintenance needs for the year? Use bid amounts or other estimates to project these expenses.
Include Reserve Study Expenses & Periodic Expenses
Remember that reserve expenses are not budgeted on the operating statement. Are there any one-time or periodic expenses that should be considered? Maybe an update to your reserve study, FHA renewal, an audit or review fees, window or carpet cleaning. Things that aren’t done monthly or even every year, but every two or three years that would come out of the operating account.
Contact Vendors in Advance
It’s important to make sure that you contact your vendors in advance so that you know if you should be expecting an increase in services for the next year. As we all know, costs of living are not going down. It’s important to keep that in mind, so you’re prepared each year. This is vital so that your homeowners are not surprised by a huge increase in dues all of the sudden. Or worse, a special assessment that’s needed due to inaccurate budgeting over the years. It’s also wise to review projected reserve projects that might be coming up in the next year. Evaluate how accurate your current reserve balance is, and how much you should budget each month as a reserve contribution going forward.
Take Other Income Categories into Account
After you’ve estimated all your expenses, now it’s time to estimate revenue or income categories other than association dues. Things like late fee income, move-in or move-out fees, income from a guest or party room. Once these additional income items are calculated, simply look at the bottom line of your budget and then plug this amount into your association dues line. If there is an increase in dues needed, ask yourself if it’s reasonable. If yes, congratulations. Your work is done, and you just completed your next year’s budget.
If not, are there maybe some expense categories that can be reduced? Again, just make sure you’re doing your due diligence in trying to be as accurate as possible when cutting expense items.When it’s all said and done, your HOA’s budget should be realistic and balanced with a net income of zero. For other HOA budgeting tips, contact us today.