A Board Member’s Guide to HOA Budget Planning

Preparing a budget for the new fiscal year can seem like a daunting task. Especially if you are a volunteer board member trying to find the time and the patience to put together your HOA budget. If you are struggling to get started with preparing your HOA budget, check out the tips in this article below!

Budget planning for an HOA isn’t entirely different from planning for your household. Revenue and costs are estimated, and decisions are made about where funds are deposited.

The tricky part is that an HOA budget works with other people’s money. Those other people are your friends and neighbors. Every corner cut is one you will regret. So let’s look at the proper steps an HOA board needs to take to ensure they are making the most responsible budget possible.

Getting Started

Budget planning is a process, no matter how large or small your HOA. Some HOAs choose to have the board treasurer and association manager (or other small group) handle the task. Others prefer to create a committee including non-board members of the HOA.

There are benefits to both methods. Having the budget process in the hands of the people most informed about HOA finances is reasonable. It makes the process smooth and easy (especially for those members who do not have to attend).

Budget by committee is always going to be messier. But getting input from paying members helps the board understand priorities and get ahead of issues that may come up later.

Once you’ve determined who will be involved, make sure that budget planning is done separately from other meetings or agendas. A new budget should be created each year.

Setting Goals

Are there things you know your HOA wants to achieve over the next year? How about over the next five years? This is another place where member input is valuable. If there are large projects everyone is excited about or repairs that need to be done make sure the budget reflects those goals.

Know Your Numbers

Before doing anything else, you need to know the current financial situation of your HOA. You can’t plan for the future without understanding the present.

Know how much is in the operating and reserve accounts and compare it to prior years.

Past budgets are valuable tools. Understanding how your finances compare to years past, and how budgets did or did not accurately reflect expenses or revenue helps you begin your new budget.

Pay close attention to any areas that past budgets have repeatedly over- or under-estimated. Common problem areas are maintenance and repairs.

Estimate and Anticipate

For most of your operating expenses, you can estimate future costs based on either past costs or new proposals.

Go through your vendor contracts and make sure you know if there are going to be price increases. You may decide that you want to get new proposals to be sure you’re operating efficiently.

Try your best to anticipate changes caused by inflation or other factors outside of your control.  Talk to your service providers, your local utility, and your insurance company and see if they can provide estimates for the coming year.

You might not be able to get hard and fast numbers for every single expense. You also don’t know what miscellaneous expenses, like minor repairs, may arise. Make an effort to get as much information, from reliable sources, as you can.

No matter who is handling preparation of the budget, the community should have a chance to offer input. Once they have, determine which expenses are necessary and which have room to change. For example, if your insurance premiums are going to go up significantly, you may need to cut back on expensive landscaping.

Everyone will want the HOA to do things their way. The board’s job is to make a budget that is in the best interests of the entire community. There will usually be some shuffling of priorities as the community changes and new issues arise.

Unlike other types of budgets, your HOA isn’t about making money. Overestimating expenses may leave you with a tidy nest egg at the end of the year for your home budget, but for an HOA it just causes homeowner fees to be higher than necessary.

It isn’t easy to balance necessary expenses and homeowners’ resistance to fee increases. A good-faith effort to do so is vital. A poorly created budget is the first step toward an HOA in chaos.

Your community needs to be able to trust that the budget is prepared with care and with their needs in mind.

Leave No Stone Unturned

Do not make the mistake of leaving out expenses that aren’t obvious to the community. Salaries, office supplies, fees for professional bookkeepers and lawyers, and other behind-the-scenes expenses can get lost in the shuffle.

Use past budgets and the expertise of your treasurer and community manager to make sure your budget planning committee has all the information it needs.

Revenue Planning

Your revenue planning includes homeowners’ fees and interest on all HOA accounts. Simply totaling up all of your homeowner dues seems simple, but make sure to review last year’s financials and find out if you have issues with members paying their fees.

Sometimes an HOA budget falls out of balance not because of poorly projected expenses, but because of unreasonably projected revenue.

Reserve Planning

Make sure you have a recent reserve study on hand as you plan your HOA budget. A healthy HOA will have at least 70% of its reserve funded. The goal is to stay on top of your HOA’s future projects and reserve expenses in order to prevent special assessments and frustrated homeowners.

Find out how much of your reserve is already funded and get updated estimates for the cost of planned projects. Then determine how much money needs to be allocated to the reserve fund in your new budget.

If you’re adding a new project to your long-term goals, make sure its funding is added to reserve expenses.

Crunch Your Numbers

Once you have all the information you can get, it’s time to make your budget. You can use HOA budget planning software, get professional help, or use a spreadsheet.

Don’t panic if fees are higher than you want on the first pass. Look for places to cut expenses. Get proposals from alternative vendors, see if a rival insurance company can lower your rates, and recheck your estimates for items like maintenance and repairs.

Show Your Work

You’ll need to present your budget to your community. Be prepared to answer questions and have a thick skin. Don’t take disagreements personally. Nobody wants to feel like they’re paying for more than they’re getting.

The board explains the costs and estimates contained in the budget. Everything should be absolutely transparent. A financially healthy HOA knows exactly what its money has paid for in the past, and what it intends to pay for in the future.

The goal of the budget planning process is to create a financial roadmap for your HOA’s coming year. It won’t be perfect. Some expenses will be higher than expected, some will be lower.

The HOA board is responsible for the financial health of the HOA. A carefully planned budget using diligently gathered information is a big part of that responsibility.

A well-planned budget can help establish trust between the HOA board and members. It’s an essential process and when handled with care can benefit the financial and interpersonal health of the community. Talk to us if you want to learn more about how Homey’s financial planning software can make your budget planning process much easier.