INDUSTRY JOURNAL Vol . 8
management fees , for the remaining months . For other expenses you can make reasoned judgments about the coming three months .
You now have a pretty good idea of how close to the target you ’ ve been in the recent past . Analyse those expenditures that deviate substantially from the budget and try to understand the difference . Was the estimate just plain wrong , no one ’ s fault ? This is the most common reason but the one most feared . Boards like to blame the manager and the manager argues that they are not clairvoyant . Forget this exercise in futility . It will not solve anything . Fix it in the new budget .
Income should be based on levies only . It is futile to try to budget for interest income and late fees . Most budgets show both interest income and late fees , but to what purpose ? It may make some board member believe they have more money coming in than they really do , and this will give the board member a false sense of security . In addition , some management companies take the approach that the late fees belong to the management company because they are compensation for their extra work and do not impact the entire association . It doesn ’ t matter what your position is – putting this potential income in the budget is not useful .
Begin the budget process by accumulating expenses in four categories : Administrative , Utilities , General Maintenance , and Capital Reserve . Not everyone will agree with these categories and the manager should respond to the preferences of a board . Not everyone will agree with the subcategories either , but the key to success will be not to leave anything out .
Some boards want a budget with major categories such as grounds maintenance , which would include lawn service . Other boards want many subcategories such as lawn cutting , lawn edging , blowing clippings , shrub edging , shrub trimming and so forth – you get the idea . The key point is that the budget format must satisfy the board . The manager , however , had best break down the categories into as much detail as possible , and save the detail so that they can substantiate for the board where they got their numbers from .
At all times , as the next step takes place , the manager must take into consideration the factors described previously : the results of a capital reserve study , the needs and goals of the development , and the age of the buildings . If the entire community is complaining about no mulch around the beds and trees , and that the grass is filling up the beds and circles around the trees , for heaven ’ s sake , budget to mulch the community . The fact that five years ago the mulch had some ugly ‘ creepy-crawlies ’ with it is no excuse for not adding mulch . Just attack the problem of keeping the insects out but add the mulch . Certainly , budget for it .
If an association does not have a capital reserve study done by a professional company that specialises in community capital reserve studies , either it is a relatively new community , less than five years old , or the manager and / or the board are not doing their jobs properly . How can you run a major corporation , and that is what a community is , without a plan ? The answer is you can ’ t ! It ’ s just that simple . Assuming you have a study done , refer to it and see what it recommends for the budget year you are working on . It may just suggest the accumulation of certain funds or it may call for certain work to be done . In any event , add this to the budget .
The fun begins when you start allocating funds to each of the accounts you have established . Have a cogent reason for each amount you decide to put in the budget , making the same kind of evaluations as discussed above , especially anticipated increases . That ’ s where the arguments will be . The board rightfully has the obligation to be comfortable with each projected expense and challenge anything it is not clear on or disagrees with . After presenting their rationale , the manager backs off and adopts whatever the board decides . The manager ’ s ego cannot be dented because the board disagrees with their conclusion . This is tough when the manager is convinced the board is acting foolishly , but the manager does not always know the political issues the board may be dealing with .
Now for the capital reserve expense
Some boards like to break down capital reserve into subcategories . For example , roofs , road replacement , balcony replacement and perhaps others . This is not a bad idea but can cause a problem . It smacks of ‘ fund accounting ’, where once the money has been allocated to a specific category , roofs for instance , the money can ’ t be moved into road repairs . If the roads break up , the association would not be able to fix them . If the association decides to break its capital reserve into categories , make certain the minutes reflect that it is not the board ’ s intention to be bound by the allocation . This may well prevent some resident angst .
Just about every finance director involved with community associations will recommend an accrual system for setting up and maintaining the association ’ s books of account . This is very difficult for most board members when they try to make head or tail of their monthly financial report from the management company .
Try to explain to the board member that the total income shown for the month is not the income that really came in but just the projected income , and ... you see the point .
There are certain items of expense that are frequently not identified in a budget and they should be . Categorising costs under ‘ miscellaneous ’ is a big mistake . The one biggest problem concerning budgets occurs when a resident who is already upset about some perceived unfair event sees ‘ miscellaneous ’ in the budget . The automatic assumption is that someone is getting the money for their personal gain and simply calling it ‘ miscellaneous ’.
There are several items that should not be put in ‘ miscellaneous ’ and must not be forgotten . Some examples of these items are : membership of ARC , bereavement fund for cards or flowers for residents who have suffered a loss , congratulations fund for residents who have had some special event take place , like a
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