By: Tom Skweres, CMCA – ACM Community Management
Budgeting should not be confused with accounting. Accounting is the process of systematically collecting, analyzing and reporting financial information to the Board. The systems of accounting are necessary to assure funds are adequately protected and necessary records maintained to appropriately reflect the financial condition of the association. A good, workable accounting system and financial procedures, assure realistic information for the budget process.
A budget is the numerical expression of the association’s strategic plan for the next year and following years. It is the only instrument that gives reality to objectives, strategies, priorities and goals.
A budget represents the Board’s plans for maintaining and improving the physical assets of the association now and in the future. The budget is a managerial, planning and communication tool for the Board and management. It is a vision for the Board to base activities and decisions on. When prepared properly, it provides funds for what is needed and where. It is a system of record keeping that provides the Board with the information they need to make sound, realistic and justifiable decisions. The goal of the budget is to maximize income while reducing the costs of maintenance and operations to their most efficient level without adversely affecting the operation of the community, its structure and components or the comfort and sense of well-being of the residents.
Budgeting is actually a year round, on-going process. It is not done just once a year and then forgotten or not reviewed. It should be examined every month when the Board gets their monthly financial statement package.
A budget must be realistic. If you know that your community cannot afford high assessments to replace the roof of all buildings in one year, why budget to do that work? Needs and wants are two different things.
Budgeting not only uses past history of the association, but it takes into account the reserve study that every association should have. This planning tool for the future guides the current Board, and future Boards, in being the best they can be. Budgeting also uses rational, justifiable forecasting on the basis of present industry trends and probable conditions or events that may occur.
A budget should also contain reserve contributions that make up an unallocated pool of funds to be used for capital projects, those done infrequently, or unforeseen and emergency expenses.
The real test of a budget is its accuracy at the end of the budget year. Poor budgeting hurts the credibility of everyone involved in the budget process. If you avoid some of the common mistakes of budgeting, such as underestimating costs, the aging of the association structure(s) or components, no contingency planning or a short-term budget vision, you are serving your owners well.