Because there are many revisions the Treasurer will have to make before submitting the final budget for approval, it's best to start now. Boards make this fatal mistake every year and it is the reason why they always go over budget or become very cheap.
When doing a family budget the first thing you need to know is how much income you expect for the year. From a household point of view, it's the right way to prepare it. So, it isn't to surprising to see boards determine the amount of the dues before the budget is even talked about. For a community a budget cannot be prepared in this manner and have it be accurate.
An HOA has expenses and those expenses must and will be paid. If the repairs aren't made they open themselves up to liability from owners, vendor employees, and visitors. If the pool needs repairs and not doing them causes the pool to be closed is an example of a normal operating cost that is covered with the dues paid. The ownership tends to get restless when they paid dues which included the cost of maintaining a functioning pool.
Always start with the normal operating expenses first. To start with take the current years financials and look over all the invoices paid year to date. Check to make sure they are coded properly. If not make the appropriate adjustments by subtracting the amount out the wrong accounts Actual YTD and adding into the correct accounts Actual YTD. At the same time make another list for any costs that were incurred due to vandals, storm damage, or any one time charges (replacing dead plants from the winter freeze or descaling pool tiles). These are not yearly costs and aren't part of normal maintenance. Now subtract out those one time charges out of the Actual YTD spend thus far for the year to get regular operating expenses. Now compare the YTD budgeted amount to the actual spend and see if your over or under budget. You can add or subtract the variance amount to or from the total amount budgeted for the year to get a preliminary figure for your draft.
Now take the previous two or three budgets and take the amount budgeted and the actual spent and figure the % of increase or decrease. This tells you how much short or over your estimates have been for each line item. Taking the total budgeted and actual expenses will only tell you the average under or over estimating. To be accurate you have to calculate each line item. Now take the % of increase or decrease and add it to the budgeted amount for each expense. It should be very close to the actual spent.
Now determine the % of increase or decrease for each line budgeted from 2009 to 2010 then 2010 to 2011. Now increase the amount budgeted in 2011, by the % calculated from '09 to '10 and '10 to '11. This should be very close to the amount caclulated using the actual spent in step one. Using the increase or decrease across the board and saying your done will net the same results as in previous years. You can try and fool yourself that a board will or can cut costs but I'm here to tell you they don't. They spend what they are going to spend no matter what.
STEP ONE (after projects are removed)
% of over / under budget
pool chemicals 2009 2009 % 2010 2010 % 2011 2011 %
5,000 8,000 60% 6,000 7,000 16.6 8,000 11,000 37.5
My drafted amount is 5,000 x 1.60 x 1.166 x 1.375= $12,826.00
STEP TWO
% the budgeted amount + or - from yr to yr
2009 - 2010 2010 - 2011
20% 33.3%
$8000 * 1.20 * 1.333 = $12,796.80
Use the figure in step one for one draft and use the figure in step two for a second draft. This should give you an accurate budget that will be usable provided expenses are coded properly.
Then determine how much of the expenses will be reimbursed by owners for legal expenses, etc and add a line for each under income. Now take the total amount past due at year end & add a line for that amount on the budget. Take the total budgeted expenses and subtract the known income then divide by 12 to get the monthly income and divide again by the number of homes in the community to get the monthly dues needed to have a healthy budget.
Determining the dues before the expenses causes short falls and deferred repairs and replacements. Because an HOA will spend what it needs to spend no matter what. Being cheap makes the community look cheap. Higher dues can have a positive effect by keeping those who cannot afford them out. This means less foreclosures resulting in lowered legal and collections expenses.
Do not forget to add a line for contributions and bad debts expenses. Bad debts are for those debts the board may forgive an owner to get an account current or for those dues that have been uncollectable. When they are paid they can be moved from this expense and posted to cash.
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