COMMUNITY ASSOCIATION BUDGETING DeLeon & Stang, CPAs and Advisors Allen P. DeLeon, CPA Janet Gorden, CPA firstname.lastname@example.org LUNCH-N-LEARN
Speaker biography – Allen P. DeLeon, CPA Partner with DeLeon & Stang, CPAs and Advisors Over 25 years community association auditing experience Member of the Community Association Institute (CAI) Chair of the Maryland Association of CPAs
Speaker biography – Janet Gorden, CPA Senior auditor with DeLeon & Stang Over ___ years community association auditing experience Member of the Community Association Institute (CAI)
Agenda Introduction Overview of community association budgeting Operating fund budgeting Replacement reserve fund budgeting Cash flow projections Capital budgets Board approval and other issues
OVERVIEW OF COMMUNITYASSOCIATION BUDGETING Why are budgets necessary? Most by-laws require annual budgets The most important financial document created by the Board of Directors If done properly, it sets the plan for the assessments charged to each member
OVERVIEW OF COMMUNITYASSOCIATION BUDGETING (continued) Budget are a useful tool to monitor financial progress during the year: Shows how actual expenses compare with budgeted plan and prior year actual Compute $ and % variances Can be used to forecast expected profit or loss Establishes a guide to be used to determine the level of expenses to be incurred.
OPERATING FUND BUDGETS Operating fund budget is used to plan expected operating expenses for the year. It should cover all expected expenses by line item (utilities, pool, landscaping etc..). Use prior and current year actual expenses as a guideline. Anticipate large or unexpected expenses such as: Snow removal Unexpected repairs
OPERATING FUND BUDGETS (continued) Need to budget for bad debts Look at aging, identify homeowners that are more than a year delinquent in assessments and not paying— record current year assessments for those individuals as bad debt budget line item, so money is removed from pool from which board has to spend.
OPERATING FUND BUDGETING (continued) Use of an operating contingency reserve fund for large expenses or projects. Allows for communities to “reserve” or put away money each year as part of their operating budget for these projects or an unexpected maintenance project without having to borrow from the reserve fund. Typical contingencies: Extra large snow fall removal Insurance deductible Large landscaping project Painting projects Unusual legal expenses
OPERATING FUND BUDGET (Continued) Build up your contingency fund - you do not have to fully fund in one year We recommend a contingency fund of 8-10% of annual operating assessments. Budget operating fund expenses on the accrual basis.
REPLACEMENT RESERVE FUND BUDGETING Start with your replacement reserve study Are replacement reserve studies really necessary? Check your by-laws, state of county laws VA law requires studies and supersedes by-laws? Provides a plan and a goal for major repairs and replacements
REPLACEMENT RESERVE FUND BUDGETING (continued) Establishes a basis for reserve assessments. Study should make recommendations as to the cost each year for each component in the study. Separate cash and investment accounts should be established. Avoid lending money to or from the operating fund
CASH FLOW BUDGETING & PROJECTIONS Begin with cash balance at December 31st of prior year. Project cash assessment receipts by month. Factor uncollectible assessments Project cash disbursements by month for each major line item End with cash balance at end of each month; beginning of next month Used to project cash deficit months
CAPITAL EXPENDITURES BUDGETS Used to budget acquisition of capital assets, not funded by the replacement reserve fund. Balance sheet budget. Effects cash flow but not P&L, except for depreciation expense. Examples are: Furniture and computers Equipment
OTHER BUDGET ISSUES Monthly financial reporting We recommend comparing budget to actual expenses for both the current and prior years Provide the board with written an explanation of major variances each month
ADVICE TO BOARDS Be active in the budget development Ask questions about how budgets are established or budgets which vary significantly from prior year budgets or actual results. Make sure bad debts are considered. Ask questions about contingencies and consider establishing a contingency reserve, or funding the existing contingency reserve.
DISCUSSION – YOUR BUDGET CHALLENGES? What budget challenges or experiences have you had? Where are your largest budget variances? How do you deal with boards that won’t adequately budget for expenses? Measure your budgeting skills by how accurately you budget!