SFPMA’s Condo and HOA Guide for Budget Planning and RFP’s

Guide for Budget Planning

Board membership can be a lot of fun socializing with neighbors and contributing ideas on how to improve the communities. But it also involves serious work with budgets, required by Florida Statutes (FS) and, generally, by the association’s by-laws for many the fun is over when its time to prepare the annual budget.

Budgets are typically approved on an annual basis during the months of October or November, but many smart boards start the budgeting process late in the summer months.

Some associations’ fiscal year does run with the annual calendar, so they should prepare their budget 4-5 months before the start of a new fiscal year. Regardless of when your fiscal year begins and ends, board members should begin the budget process by identifying operational needs and estimating expenses for the coming year.

“Who Is Responsible for Preparing the Budget?
The requirements for the preparation of the annual budget for condominium associations are set forth in Section 718.112 (2) (f) FS; and for homeowners’ associations, in Section 720.303 (6) FS.
Generally, the community association manager (CAM) is charged with the responsibility for preparing the preliminary draft of the budget and presenting it to the budget or finance committee for its review and approval. The budget committee, as appointed by the Board of Directors, and, ultimately, the Board itself, is responsible for the adoption of the association’s annual budget.”

A budget also helps to:

* Create proper reserve funds. Measure performance throughout the year.

* Determine the amount of fees to be assessed to each unit owner for the upcoming fiscal year.

Will homeowners be paying a little more, a little less, or about the same as last year? A well thought out budget supplies the answer.

-Association Budgeting Rules in Florida

Whether you serve on a condominium association or an HOA, Florida Statutes have a slew of legal requirements that affect the way budgets are presented and what they must contain. Longtime board members may be familiar with the state’s budgeting requirements under Statutes 718 and 720. If you’re a new board member, it helps to know what’s involved before diving in. Here’s a brief overview.

* All associations, whether a condominium or HOA, are required to prepare an annual budget.

* The budget must show the estimated revenues and expenses for the budget year.

* An estimated deficit or surplus for the end of the current year must be reported.

“Working Capital
As a generally accepted guideline, a community association should maintain its operating fund balance (“working capital”) at a minimum of two months’ maintenance assessments. If this guideline is not met, the Board should consider including a line item in the budget to increase working capital. However, if the working capital shortfall is significant, or if there is an accumulated deficit, a special assessment may be the more conservative alternative. The amount of the budget line item or special assessment should be determined after considering the current year’s expected results of operations.
If the current working capital is sufficient and the current year’s operations are projected to have an excess of revenues over expenses (“operating surplus”), the Board can take advantage of this situation by including line items for special projects or improvements in next year’s budget. Alternatively, that surplus can be applied as a credit to the following year’s assessments to the owners. There are generally income tax considerations in applying this credit and therefore, the Board should consult with the Association’s income tax advisor.”

-Preparing a Budget for your Condominium or HOA

The budgeting process really involves preparing two components: an operating and a reserve schedule. The objective is to determine what homeowners will be charged for maintaining the common areas.

* Operating budget ensures that all operational costs and expenses are identified. They assist in approximating expenses for the upcoming fiscal year.

* Reserve schedule determines the amounts needed to be set aside for capital expenditures and deferred maintenance.

Florida Statute regulations may be complex, but that doesn’t mean preparing a budget has to be complicated or overwhelming. In fact, once you understand the basics of calculating expenses, the process becomes clear-cut.

-Budgeting Tips & Considerations

Unlike a personal household budget where you figure out what you can spend based on your income, a condominium or HOA budget must begin by estimating costs first, which will then determine the amount an owner will be charged.

-Operating Component

1-Compile the current year’s year-to-date expenses. They will serve as the basis for the new budget year.

2-Analyze these expenses carefully and factor out any that are non- recurring, such as plumbing or storm-related emergencies.

3-Review your current contracts for escalation clauses and/or scheduled increases.

4-Request estimated costs for non-contractual expenses like general repairs and maintenance, utilities, and certain administrative expenses.

“Reserve Schedule

Reserve funds are used for two expenses: capital expenditures for common area components, such as roof replacement, pavement resurfacing, and elevator upgrades; and deferred maintenance that generally refers to interior and exterior painting. The funds for these big-ticket items are generally collected over years, not just in the year they’re expected to occur.

The condominium or HOA board may also have certain projects it wants to do that are not covered by reserves. This can include things like pool re-tiling, termite treatments, landscape improvements, and costs to maintain tennis, racquetball, or pickleball courts.

The projection of these fees must be as accurate as possible. Remember, condominiums and HOAs are not-for-profits so it’s important that they do not have a surplus; of course, you don’t want a deficit, either.

Budgeting is a big job, but if you break it down in these easy steps should take the stress away. Preparing an accurate budget keeps your condominium or HOA thriving financially now and in the years to come.”

“Reserves
Chapters 718 and 720 of the Florida Statutes both require the funding of reserves in the association’s annual budget (with specific waiver provisions for condominium and homeowners’ associations). The use of reserve funds is restricted for capital expenditures and deferred maintenance. A capital expenditure is the use of funds for the replacement or major repair of a common area component. Examples of capital expenditures are roof replacement, pavement resurfacing and elevator upgrades. The term “deferred maintenance” generally refers to interior and exterior painting. Reserves are included in the association’s budget so that funds are available for the eventual replacement of common area components and deferred maintenance. The alternative to funding reserves is the use of available operating funds or, more likely, the adoption of a special assessment. Sound financial management dictates that, concurrent with the adoption of a special assessment, a detailed budget should be established. Include a provision for bad debts commensurate with that of maintenance assessments.

-Financial stability including accounting, collections, and accounts payable services are the core to a Condo and homeowners association’s strength and future success.

Boards and their Property Management company work hand in hand providing a checks and balances system. where payables for buildings services are entered by the community manager, processed by the Payables/Accounting dept, reviewed by senior management. These are put in place for protections for all owners of the community.

Having a Management Company to aid Board Members is important. unlike self managed community associations, no one person or Board member has total control with the financial responsibility for

*Online payables processing
*Electronic signatures
*Accounts receivable collection process
*Effective internal controls
*Financial statement preparation
*Annual Budget preparation

This way the Management Company and Boards can work together on everything from The Communities:

“Here are some other guidelines to consider when preparing the Association’s budget:

*For contractual expenses, read the related contracts to identify any increases that are anticipated in the following year.

*Contact your insurance agent as early as possible to determine insurance premiums. If financing insurance, try to obtain favorable rates.

*Request estimated costs for non-contractual expenses such as general repairs and maintenance, certain administrative expenses, trash removal, and utilities.

*Include a reasonable amount for bad debt expense.

*Avoid a “Contingency” line item if possible.

*Look at revenue trends for fee-for-service charges to unit owners such as work orders, laundry, parking, etc. Be sure to consider possible increases.

*If loan repayments will be required, include the entire payment amount (i.e., principal and interest) in the budget.

There are other concepts to keep in mind in preparing the annual budget: Be realistic. It is generally difficult to keep maintenance assessments at last year’s levels. The role of an association’s treasurer or president is to run the association’s business. It is not to win a popularity contest. That role should be treated with as much, if not more, respect than the association’s officers’ own businesses.

The budgeting process doesn’t end with the adoption of the annual budget. Careful and routine monitoring of budget-to-actual results of operations is a vital part of the effective management of a community association.

Defination of budget Terms:

-Balance Sheet

One of the reports included in the Financial Reports presented to the Board of Directors is the Balance Sheet. The Balance Sheet is a statement of the book value of all of the assets and liabilities (including equity) of the association. It provides a “snapshot” of the association’s financial standing as of the end of that particular month.

-Collection Status Report

By far one of the most popular and most important reports is the aging report or the Collection Status Report. This report provides the Board with a listing of the owners that are past due. There are many variations of this report, however, the sample shown is the most concise. This report provides a glimpse of the names of those owners that are past due, the total amount past due, and at what stage in the collection process the account is in.

-Check Register and/or Accounting Software

A Check Register its a monthly report. This report is a list of all of the checks written by the association during a given period, typically each month. Among other information, it lists, the check number, the vendor’s name, the invoice number, brief description of the payment, and the check mount.

-Profit & Loss Report

The second page of the Financial Report summarizes the revenues, costs and expenses incurred during a specific period of time. The Income and Expense Report follows a general format that begins with an entry for Income and subtracts from Income the costs of running thebusiness, including operating expenses, insurance, contracted vendors, and repairs. The bottom line, literally and figuratively, is net income or loss.

Because we know Associations depend on their budget, our P&L reflects the Actual Expenses vs. the Budget Amount. This comparison is done for the current month as well as year-to-date. You are also provided with the variance (if any) between the actual expense and the budgeted amount.

-Monthly Ledger

The Monthly General Ledger is the main accounting record of a business which uses double-entry bookkeeping and is a summary of all of the transactions that occur in the company. It is built up by posting transactions recorded in the general journal. The Balance Sheet and the Income and Expense Report are both derived from the general ledger. The general ledger is where posting to the accounts occurs. Posting is the process of recording amounts as credits and debits in the pages of the general ledger. Because each bookkeeping entry debits one account and credits another account in an equal amount, the double-entry bookkeeping system will ensure that the general ledger will always be in balance.

In the end Board and Management Companies should upload these reports to the Secure Association website where Owners can view the financial records each year. This avoids Questioning and sometimes fighting by owners in the association regarding fees being paid with the new budgets.