Proper budgeting can be an art. When carefully planned and well-executed, a homeowners association (HOA) budget can serve to improve the lives of everyone in the HOA community. A reasonable HOA budget helps ensure that the association has a bright future. It creates more resources for improvements, maintenance, and amenities for residents.
However, an improper HOA budget can have the opposite effect. If done poorly, an HOA budget can potentially disrupt new projects, force cutbacks, or even bankrupt the association in extreme cases. An improper HOA budget opens the door to long-term financial problems that may take years to undo.
As an HOA manager, there are aspects of your clients’ finances that are beyond your control. In most cases, this includes budgets. You may be responsible for carrying out the budget, but your clients’ board members will be the ones who create it.
That said, many association boards turn to their management companies for budgetary advice. If asked to consult on a budget proposal, you can provide your client with sound financial guidance. Whenever possible, steer your client away from making costly mistakes in their HOA budget.
When it’s time to create a new budget, here are five HOA financial mistakes to avoid:
An HOA budget is very detailed, and it may feel overwhelming. For many, this leads to a temptation to cut corners. Instead of itemizing expenses by category, some individuals may provide a broad overview of costs.
Failing to itemize may seem harmless but can lead to costly headaches later on. For example, let’s say you create a budget with a category for “maintenance.” A smart HOA budget will include an itemized list of specific expenses in this category, such as plumbing, electrical repairs, roofing, landscaping, and so on. Each of these itemized expenses is then allocated a specific amount within the budget. Categorizing expenses allows HOA managers to disperse funds with greater accuracy to cover particular costs.
Without itemization, a budget can quickly become imbalanced. For example, the HOA may accidentally overspend on landscaping using roof maintenance funds. If this happens, money will need to be moved from another part of the budget, like the reserve fund, to cover roofing. In extreme cases, cutting corners and failing to itemize can disrupt an entire HOA budget.
Another costly financial mistake occurs when HOAs fail to provide “cushions” within their budgets. Often, people focus on keeping expenses low when they create a budget. Although nothing is wrong with this practice, it can create costly mistakes if the budget has no margin for unexpected costs.
Whenever possible, advise your HOA clients to leave room for unplanned expenses in their budget. These cushions can help prevent future overspending, debt, and other issues. Give each budget category a little extra money, just in case. After all, it’s always better to end the fiscal year with a budget surplus than overdrawn accounts.
HOAs need to carry liability insurance as well as insurance against property damage. Unfortunately, some associations skimp on coverage and only purchase the bare minimum required by law. Budgeting for cheap insurance plans can create costly financial problems later.
An HOA without adequate insurance coverage may find itself hit with high deductibles — or, worse, won’t be fully covered for damages in the event of a disaster or emergency. Insurance may seem unnecessary, but it’s far better to be prepared. Always include insurance premiums and other fees in the HOA’s budget to avoid this costly financial mistake.
It’s also a good idea to re-evaluate the association’s current insurance plans annually. If fees have risen significantly, the HOA may be able to switch to a new provider and save money without sacrificing coverage. Regardless, the association budget should always include proper insurance.
Using out-of-date software is another costly financial mistake. Maintaining an HOA budget means keeping track of a high volume of financial data. HOA managers and accountants need to record every transaction, receipt, bill, and invoice, while also tracking income deposits and fees. If the software you’re using to process this data isn’t nimble enough to keep up with the HOA’s needs, your client will miss out.
To avoid this mistake, HOAs should switch to multitenant, cloud-based accounting software like CINC Systems. CINC offer specialized accounting tools uniquely crafted for the needs of an HOA, including:
Additionally, because CINC Systems is a true multitenant cloud-based platform, your HOA’s financial data is stored online across remote servers. Cloud-based data storage offers greater security and largely eliminates the need to keep paper files. By switching to the latest association accounting software, HOAs can eliminate costly budgeting mistakes.
Finally, don’t make the mistake of putting operational costs on autopilot. Don’t assume utility bills, landscaping services, security, and other ongoing expenses will remain the same year-to-year (or even month-to-month).
Unfortunately, some associations may “copy and paste” these costs from the previous year when they’re doing a new budget. While some operational costs may not change significantly, even a small raise can negatively impact the budget. Always refer to vendor contracts and read the fine print carefully, primarily if your client’s association uses an automatic bill pay service for these transactions.
With a little extra time and effort, you can help your HOA clients avoid costly financial mistakes when planning their annual budgets. To see how CINC Systems can assist with budgeting and other financial services, try a free demo.