HOW to balance the budget

HOW to balance the budget

Associain budgets are usually prepared on a “break-even” basis; that is, income equals expenses on an annual basis. What happens when this does not occur and expenses exceed the projected income? There are two main ways to balance the budget – increase income or decrease expenses. A third method is the use of accumulated equity/operating fund balance.

The budget process is an important event in the financial life of an association. At budget time, there is the chance to re-evaluate the obligations, needs and expectations of the association in relationship to its membership. It is also a time to look at cost reducing techniques and determine which are right for your Association.

Evaluate Expectations

What does the membership “expect” from an association? This is distinguished from what the association is obligated to do (according to laws, governing documents, local regulations, etc.) and what the association needs to do to properly manage the affairs of the community. Go through each line item of the budget and determine what expectations are involved and reevaluate their response to those expectations. Sometimes, the board assumes that the membership has expectations that they do not have. Hold town meetings, run a survey in the newsletter or on the website, put a suggestion box in the common areas asking for input. Often it is found that one or two vocal members of the community set the expectations for the entire group. The board may be paying for products and services not based upon the majority of the members’ desires.And, once the board gets an understanding of the expectations, consider whether the expectations are reasonable and how these fit into the budget.


Pool Heat
What is a good pool temperature? How many months should the pool be heated each year? If the membership has high expectations; however, they seldom use the pool in the fringe months, can the heat be turned off for more days of the year?

Decorative Landscape
There is new color planted each month at the front gate. Is this necessary? Would new decorative plants four times a year, with greenery the rest of the year, be acceptable?

The security company makes three pass-throughs a night in the complex. It has been this way for many years since there was a problem with certain owners. Is it still necessary?  Would two drive-throughs be enough?


Review the Largest Expense Items

Spend the time on expense items that can provide the largest savings. Look to the financial statements and determine which categories are the biggest money drains. Then, think of options regarding those categories. Try and determine if all cost savings options have been considered.

For example ~

Consider a utility audit by the local utility company or by a professional utility auditor. Ensure that the association is paying the proper rates on services and that the equipment is working properly.  Evaluate the option of more effective products.

Discuss the current coverages with the association’s agent. Determine whether it would be practicable to increase deductibles.

Review all large contracts annually. Where appropriate, go out for bid. Be sure, however, to compare quality and types of services provided and not just price.

Employee vs. Independent Contractor
Consider whether there are cost savings in choosing an independent contractor over an employee or vice versa. When doing the cost analysis be sure and include all employee costs – payroll taxes, vacation, insurance, workers compensation, education & training, incentives, employee benefits and costs for part-time help when employee is not at work.

Get the Community Involved

Besides just asking the member’s opinion (as noted above), ask for their assistance in reducing costs. Include requests in the budget mailer. Put a section in the newsletter or on the website each month with cost cutting suggestions. Remind the members that any savings may assist in offsetting future assessment increases. When possible, work with local governmental agencies to implement rebate programs and cost reduction aids. In one community, the local water company gave out free low flow shower heads and bags to put in the toilet bowl tanks. The city in that same area had a low flow toilet rebate program. In this instance, the association paid all water bills and by engaging the members in these programs the water expense reduced significantly.

There are many areas that the membership can assist. They can pick up after their dogs and pick up other trash so outside contractors do not have to be hired to do so, they can organize a community clean up day where volunteers clean out flower beds and plant new flowers, they can be encouraged to keep air conditioning at minimum usage when they are in the clubhouse, or be sure and turn off the Jacuzzi when they are done.

Be Conservative/Be Realistic

Don’t budget based upon the amount needed to balance the budget, neglecting the realities of the projected expense. Be realistic and conservative in the budget process.

Use Operating Fund Accumulated Balance Cautiously and Judiciously

If you have to use prior year’s Operating Fund balance to balance the budget, make sure that you leave enough for future contingencies and cash flow shortfalls. We recommend that there be 1-3 month’s of operating expenses in the Operating Fund at all times. And, acknowledge that this is a one-time or short-term solution. The Board should then work diligently to have a budget in future years that is able to balance based on the current year’s income.

In summary, approach the budget process with a cost-savings attitude. Be fiscally aware of which items are reasonable to reduce and which are not. Look to the member’s expectations. Expenses involving expectations are easier to adjust than those involving needs or obligations. For large dollar categories, consider bids, professional evaluations and various options in services and products. In all cases, ensure that the best interests of the association are being taken into consideration. Most importantly, do not randomly or unilaterally reduce costs without justification just to balance the budget. Be fiscally responsible.