If you’re on the board of your community’s Homeowners’ Association, you’ve probably been confronted with the dreaded budget meeting. Managing an HOA budget comes with a wide range of challenges, concerns, and pitfalls. From the get-go, it can be difficult to determine exactly what your HOA should be paying for and how it’s financially responsible for its members and residents.
On top of that, many HOA board members may not have any financial background whatsoever. That leaves you exposed to mismanaged finances or misdirected funds, which can lead to unhappy residents and other issues for your community.
Your budget determines much of what you’re able to accomplish each year as an HOA board, which makes it absolutely vital that you get it right. A great budget can maximize the use of funds effectively and efficiently, accomplishing everything you want without spending too much. A poor budget results in poor execution, overspending, and unhappy residents.
So how can you ensure that your HOA budget is managed effectively? The key is understanding some of the best ways to approach budgeting, plus how you can improve your personal budgeting know-how as well as that of the entire HOA board. Let’s take a quick look at how you can manage your HOA’s funds better.
The Budgeting Process
When it’s time for your HOA board to put together a budget, it can help to have a defined process and understand how your budget fits into that process. Here’s a basic rundown of the steps of budgeting and how you can help them work to your benefit.
This step takes place before the budget planning ever takes place. Begin taking in information about your community, its spending, and its needs. Look at past budgets that have worked, as well as those that haven’t. Gather data and do your research. You’ll be rewarded later.
This is the part of the process when you actually begin to put together your budget. We’ll get into this portion in more detail later, but in general, you want to work closely with other board members and the community to craft a budget that works for everyone.
Once you have a budget drafted, you’ll need to get approval. That may result in a few rounds of changes based on the approval process. Overall, approval is vital to getting your budget moving into the execution stage.
This is when your budget first enters the real world. Once the budget has been created, approved, and finalized, the new year will begin and you’ll begin spending and allocating funds based on that.
Your work isn’t done yet. It’s absolutely vital that you monitor your budget successes and failures along the way, ensuring that you have data to improve on it as you go and implement new strategies into next year’s budget.
When Should You Start Planning Next Year’s Budget?
Many HOA boards wonder when they should begin planning their budget for the next year. While there’s no hard-and-fast date that’s right for everyone, we say that the earlier you can start, the better. This allows for planning as well as time to fix issues that arise. Plus, it keeps everyone’s holiday season from being overwhelmed by stress as December budget deadlines draw closer and closer.
In general, HOA boards should aim to have their budgets completed no later than 30-60 days before the end of the year. If it can be close to finalized before that window, all the better.
Using an Accountant—Pros and Cons
Many HOA boards decide to employ the services of an accountant to create their budget. While this can be effective, it can also be costly. Meanwhile, this third party may not have a complete understanding or a vested interest in your community.
You should do what’s right for your HOA. But our advice is that, if you don’t have a substantial budget, you should use an accountant on a consultancy basis, bringing them in to advise on specific or difficult issues that might come up.
Plan for the Unexpected
Remember that every spending plan must be built around the unpredictable costs that come up around the year. Each financial plan should have a portion of its funds dedicated to unexpected costs that arise over the course of managing an HOA. These might include surprise inspections, infrequent maintenance, and sudden repairs. These aren’t annual costs that can be predicted to the dollar, so be sure to be liberal in how much you allocate to these reserve funds.
Putting It All Together
The key to a successful budget is collaboration. Using the expertise and judgment of your entire board is vital, as is drawing on any specific finance experience board members may have. Meanwhile, keep these principles we’ve discussed in mind:
- Follow a defined budgeting process, including careful monitoring of your financial practices;
- Have your budget finalized at least 30 days before the end of the year;
- Consider hiring an accountant as a consultant for difficult budgetary issues;
- Plan for unexpected costs;
If you can keep these principles in mind and work together with your fellow board members, you’ll be able to create an effective and realistic budget for your community’s coming year.