What are some Budget Do's and Don'ts

Don’t automatically assume the validity of every expense. Just because an item was on the budget (or always has been on the budget) don’t assume that it still needs to be there - or needs to be there at a predetermined amount. Question all line items. Does it really fit into the Association’s obligations, needs or expectations? For example, does the pool really need to be heated all year, does the Association really need to change the plants at the front gate every six weeks, or does the Association have the most efficient lighting system in the complex? Take some time each budget year to challenge all previously conceived assumptions

DON'T take last year's numbers and increase them by the cost of living index.
For that matter, don't increase them by any set percentage. That may be used as a rule of thumb, but there is no reasonable basis to expect that every item is going to increase at the same percentage.

DO examine each expense item individually (at least those of a substantial dollar amount). Be sure and understand what your expectations are of that particular expense in the upcoming year...and how that will affect the dollars to be spent. For example, should the Association increase or decrease the number of hours the paid security staff will work, will the Association trim more or less trees next year, or will the Association keep the pool open more or less, etc?

DON'T start by determining the assessment income. That is, do not decide first what the assessment amount will be for the next year. Start with expenses first. Go through the expenses line item by line item being realistic as to increases and decreases, changes in services, and additions and deletions of budget items. Then total these amounts to determine what assessment amount is required to meet these expenses. If the assessment amount appears unreasonable, then go back and determine what expenses you are willing to change to adjust the assessment amount. By starting with expenses, it allows the Association to focus on the real priorities and may cause the Association to reevaluate the appropriateness of your assessment amount for the Association’s style of living.

DO consider how detailed the budget should be. The budget is a management tool so it should be as detailed as the board feels it needs to be in order to assist in projecting next year’s assessment and to use as tool to monitor the expenses in the upcoming year. Often, the basic contract amount for such items as pool or landscape are broken out from “extras”, as the extras may be more negotiable in the budget process depending on the financial circumstances of the association.  A word of caution – don’t have the budget become too cumbersome and detailed. The budget is a tool, a projection, an estimate of future expenses. It is not absolute. Facts and circumstances may change for some of the items. Thus, trying to list each and every expense is futile and a waste of both the board and association manager’s time. Be reasonable. Do not expect exactness in the budget process. Be conservative, allow for contingencies and unexpected events, but do not think that you are expected to be able to look into a crystal ball and see into the future.

DO research. For each item that you can get a firm amount, do so. Call your accountant, landscaper, management company, janitor, etc. and ask what they project their fee will be next year, or get a signed contract. For other items, try and get information on projected increases. This works for some utilities and insurance. Often, they know in advance what increases are expected. Budget for bad debts based upon your current outstanding receivables and past history of write-offs. Review your reserve study, get a new one if needed, and determine a reasonable amount to set aside for future major repairs and replacements.

DO involve your membership. Talk with members. What would they like to see improved during the next year? This is where communication becomes important. Do they want the pool heated earlier in the year? Are there trees that need trimmed? Does the clubhouse need to be refurbished? Would people prefer not to have the annual party or new flower beds, in exchange for additional security patrol?

DO realize that each association is unique. Each budget is unique. The budget process helps the association define its needs and wants and goals for the future. Take time to put together a budget that is useful and reasonable, for the board, for the manager, and for the members.