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Even though an HOA is a non-profit venture, the board of directors must get a proper budget done to outline all the income they are expecting alongside the expenses. It's not just about putting a bunch of figures down either. It's about understanding what's on the financial agenda for the year ahead and ensuring that everything is accounted for.
You want to plan for all those maintenance needs, special projects, assessments, events, etc. No one is saying the actual figures will be exactly what you expected. There are typically variances when these things play out, but the budget helps to get the HOA in the right frame of mind and operations for the financial year ahead.
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Your budget committee needs to get it right. Take advantage of our free budget template here to make it happen!
What's the Right Way to Approach Annual Planning?
Every year, the HOA board has to make the right considerations for everything that's expected to take place. If you were to read about budgeting and other related articles, you would see that it's not the kind of thing that can be rushed. Here's an approach the HOA management team can use to do it the right way.
Optionally form a Committee to Take Care of the Annual Budget
Board members in general have a lot to consider, which is why one of the recommended approaches is to have a dedicated committee that works on the budget. Of course, it will be presented to the rest of the board for comments and amendments but the whole team doesn't have to work on it.
The committee can do the groundwork in each budget planning session and present what they've come up with later.
Start Working on the HOA Annual Budget as Soon as Possible
With all the considerations that need to be made and the changes that can come before the final budget is approved, budget committee heads will want to get the ball rolling on the preparations as soon as possible.
What if we told you that many HOAs start working on their yearly budget for the following year at the end of the summer of the current year? By the time the annual meeting rolls around, you want to have the final budget ready.
Try to Give the HOA Budget Planning Its Own Time Slices
This is one of the reasons for establishing a committee and getting started on things so quickly as there are so many variables to consider. If you have a strategic plan that's meant to span 5 years, for example, any financial element of it needs to be in the budget each year.
Even if there isn't a team established to specifically handle the budgeting side of things, ensure that there is time dedicated to this. Don't try to do it across general meetings in which other things are being discussed.
Think About Figures Second and Needs First
You may think that this sounds like a weird approach since a budget is a bunch of figures. However, if you think about figures first, you're bound to forget some essential elements.
Allow the figures to come from what you need to get done. Remember the example using the 5-year plan just now? Stuff like that are good example. What do you need to do and how much is it going to cost? That's how you think of your expenses.
With that, you then start to think about where you will be getting the funding to handle all the necessities. All this will form the foundation for the expected cash flows which will come together to form your budget.
Make Sure Not to Budget Expenses Sparingly
This is a mistake that even for-profit businesses make. While lowballing expected income is not the worst thing in the world, it can be a serious problem to do so with your anticipated expenses. First, remember that inflation is a thing. Therefore, you will want to expect things to increase. Perhaps you can use a set percentage for calculations as you factor in these increases.
Lower expense numbers look and feel good, but keeping things realistic is just as important. Therefore, even if you feel like you're overestimating the expenses a bit, that's a much better approach than realizing later that you should have allocated more.
Kick Things off with the Repairs and Replacements
Realistically, finances don't allow businesses to do everything they want to do in a given financial year. Even for the businesses that get close to it, prioritization is key during the budget period of things. In other words, there will need to be considerations made for what are the most important things to get done.
Remember that people join an HOA for the different amenities and benefits that they can get. Therefore, even if you can't do everything, the owners need to feel taken care of at a minimum. This is why you want to ensure that you are prioritizing an allocation for repairs and replacements.
Sure, you won't know exactly what this is going to cost considering you can't see the future to know what kinds of requests will come in. However, having a pool of funds allocated to that makes it easier to handle when things come up later.
Take Care of the Reserve Fund
Unexpected expenses can come up all the time, and you won't always be able to get the money to tackle them from one of the other income sources. So, what do you do? Wait until the next round of HOA fees is collected?
That's not an option when something needs to be taken care of as a matter of emergency. Your reserve fund, as you know, is essential in these scenarios. Always ensure that your budget sees more being allocated than the previous year being saved in this pool. In fact, up to 20% of the annual budget should go there.
Set Aside Time to Assess Your Vendors and Insurance Policies
One of the good things about budget planning is that it allows you to think about the different relationships and contracts that the HOA has in place and the extent to which they need to be carried forward.
Don't just go through the motions and put in the same thing in one year that you did in previous ones. Reassess the vendors and insurance policies you have in place to ensure you need them before you proceed.
Insurance Deductibles Are a Must
On the insurance note, you'll want to get some calculations done to ensure that your deductibles are covered. This is not the money that you want to be spending on other things by accident and it should not come from your reserve fund either.
Landscaping Costs Can be Massive
Landscaping can be a pain because it is so unexpectedly expensive. However, it serves an essential purpose. This segment is not just about ensuring that funds are allocated to your landscaping costs. It's also about contemplating ways that you can save on what you have to pay.
The Major Groupings in a Homeowners Association Budget
Income
This is self-explanatory, but should be the first thing that goes into your budget. Remember the narrative about not underestimating your expenses? Well, that rule does not apply to income. While you don't want to go overboard by making all your income sources seem lower than they really should be, you want to go the sparing route here.
Take the time to think about all possible sources of income. This could be from dues, rentals of amenities, etc. Sometimes you won't be able to anticipate everything you'll collect, so focus on what you know.
Expenses
Expenses are next and will usually be divided into a few categories. The first is the administrative expenses, which include legal fees, management fees, office supplies, reserve studies, etc.
Maintenance expenses are next on the agenda and will speak to landscaping costs, cleaning services, plumbing costs, maintenance supplies, and more.
Your utilities are next, and as the categorization implies, this is where you start to talk about trash collection, electricity, water, sewage, gas, etc.
Reserve Contributions
Finally, you'll want to map out what your reserve contributions are expected to look like. In other words, this is where you begin to think about how much will be set aside for reserve funding.
Our HOA budget template will help you to keep everything tight.
Do You Have HOA Software in Your Budget?
If you didn't have HOA software in your budget before, DoorLoop can give you an excellent reason to do so, thanks to our amazing solution. Take advantage of:
- A free website with a tenant portal
- Automated payments of rent, amenities, fines, maintenance, etc.
- Comprehensive accounting features with shareable AR/AP reports
- QuickBooks and bank account sync
- Unlimited management users
- ARC and maintenance request handling
- Communication via text, phone, email, and portal messages.
The Bottom Line
Budget planning is no easy feat. However, with the insights we provided above, you should be able to get it done without unnecessary challenges getting in the way. Remember to download our free HOA budget template to take some of the groundwork out of the equation.
Additionally, why not see how our HOA software can help you? Schedule a free demo today!
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