Budgets are a crucial part of every homeowners’ association (HOA). Budgets enable the HOA to provide services for residents, maintain common areas, and create a safe, desirable community for homeowners. However, a poorly managed budget can lead to disaster. That’s why it’s crucial to avoid common HOA budgeting mistakes.
If you’re getting ready to help your clients prepare their annual budget, here are some common HOA board budgeting mistakes to avoid. By identifying these pitfalls in advance, you can do your part to make sure that your clients create a successful HOA budget.
Mistake #1. Poor Bookkeeping Habits
One of the most common budgeting mistakes is poor bookkeeping habits. Because HOA finances can be complicated, it’s easy to get overwhelmed trying to keep track of all the data. Some HOA managers and boards fail to balance the general ledger accurately. Others may lack an organized system for filing receipts, invoices, and other relevant paperwork.
To avoid this common budgeting mistake, use HOA accounting software like CINC Systems to perform bookkeeping duties online. CINC’s powerful association accounting software offers users the ability to consolidate accounts onto one platform. Use one login to work seamlessly across accounts, and monitor financial transactions in real-time.
CINC makes it easier than ever to create a reliable bookkeeping system for your associations’ clients.
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Mistake #2. Overlooking Basic Costs
Another common mistake that HOAs make when budgeting is to overlook necessary costs. Everyday expenses, including insurance, utilities, and garbage disposal, can be easy to forget when budgeting, especially if they’re inexpensive or if the HOA uses an automatic bill-pay system.
Even small operating costs can quickly add up and wreak havoc on an HOA’s budget. That’s why it’s vital to review the HOA’s bills with a fine-tooth comb and every expenditure when creating a budget.
Mistake #3. Disregarding Previous Financial Reports
Budgeting is about the future, yet you can’t create a healthy budget without considering the past. Disregarding financial reports from previous years is a common HOA budgeting mistake. By reflecting on the HOA’s economic history, the board can avoid repeating the same mistakes.
Previous reports also provide essential data about the HOA’s current financial status, including account balances and outstanding debts. It’s vital to understand this information for successful HOA budgeting.
Mistake #4. Ignoring Inflation And Changing Tax Rates
When budgeting, some HOAs exclude external economic factors like inflation and fluctuating tax rates. For example, the HOA may set aside a specific amount of money to pay for new construction without realizing that the material costs may rise. States and cities may also levy new taxes or require more permitting fees.
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Mistake #5. Neglecting the Reserve Fund
Neglecting to maintain the HOA’s reserve fund is another severe budgeting mistake. The association’s reserve fund is a particular account set aside for emergencies and other unplanned expenses, funded by a fixed percentage of membership dues.
While the reserve fund may go untouched for months or years at a time, it’s crucial to monitor this account and maintain a precise minimum balance whenever possible. When creating a budget, HOAs need to determine how much to set aside for the reserve fund each year to keep this safety net intact for the community.
Mistake #6. Failing to Review Vendor Contracts
Some HOAs also fail to review vendor contracts for ongoing services like landscaping, security, and garbage disposal. Whenever these contracts come up for renewal, HOAs must carefully assess any changes to the service’s cost. Failing to negotiate with the vendor can harm the HOA’s finances.
When both parties agree to a new contract, the HOA’s budget needs to be updated to reflect the adjusted service fees. For vendor contracts that may change after the budgeting season has passed, consider budgeting for a small cushion to cover additional service costs in advance.
Mistake #7. Ignoring Foreclosures
HOA’s generate their income by collecting dues, fees, and assessments from homeowners. During the creation of a budget, board members will estimate this income based on the number of homeowners in the HOA. Unfortunately, many associations make the mistake of ignoring foreclosures when they figure this number.
No one can predict foreclosures; however, associations can assess the overall economic climate in their region. For example, if unemployment is rising in your city, foreclosures will be more likely to occur. Some properties may also have liens against them, indicating that a foreclosure is on the way. When budgeting, try to account for theoretical foreclosures and a subsequent reduction in income.
Mistake #8. Failing To Review Debts
Another budgeting mistake occurs when HOAs fail to review outstanding debts or unpaid invoices. Next year’s budget needs to include any money the HOA owes to another party; otherwise, this may result in a budget shortfall.
Ensure your HOA clients acknowledge all debts and accrued interest in the new budget by examining previous financial reports, bank statements, and other business documents.
Mistake #9. Disorganized Collection Protocols
Finally, one of the worst common budgeting mistakes an HOA can make is a disorganized protocol for collecting fees. Make sure your HOA immediately deposits collected fees into the correct account.
Additionally, HOA managers need to keep track of which residents have paid their fees and which ones still owe. If there are members who owe extra fees or penalties, you’ll need a streamlined protocol for collections.
Consider switching to a cloud-based association management platform like CINC Systems. CINC’s dynamic association management software platform empowers HOAs to collect fees and process payments online with increased accuracy and efficiency and minimized manual work.
CINC supports all types of accounts receivables, including checks, ACH, credit cards, and bill pay service — delivered daily in a single consolidated receivables file.
Try A Free CINC Systems Demo Today
By avoiding these common HOA budgeting mistakes, you can help your clients remain in high financial standing for years to come. CINC Systems is here to help you get the most from HOA management. Try a free demo of our HOA management system today by clicking here.