What Is the Purpose of a Budget for HOAs?
A homeowners association (HOA) budget serves many purposes. To be an effective HOA manager, it’s important to understand how a budget serves your clients. Although an HOA budget is created by the association board and approved by its members, you’ll still play a vital role in this aspect of financial planning. Therefore, it helps to learn the purpose of an HOA budget.
Knowing the purpose of an HOA budget can help you do your job more efficiently and ensure that your association clients remain in good financial health. An HOA’s budget can affect the choices you make as an HOA manager on the association’s behalf. Additionally, although you’re not responsible for setting the budget, you may be called upon to advise the board as they assess the HOA’s annual finances.
Budgeting is a vital aspect of financial management. By understanding how a budget serves your clients’ HOAs, you’ll be able to implement strong financial best practices. Here are some of the reasons why it’s important for an HOA to have a budget.
Build and Maintain a Reserve Fund
One of the purposes of HOA budgeting is to build and maintain the association’s reserve fund. An HOA reserve fund is essentially a savings account for the association. As opposed to the general operating fund, which is used to cover ongoing monthly expenses, the reserve fund is set aside for unanticipated costs and emergencies. For example, if there is damage to a communal property due to bad weather, the money to cover repairs will be drawn from the reserve fund.
In general, between 25% and 40% of resident fees are deposited into the HOA’s reserve fund. However, this number may be adjusted if the reserve fund becomes depleted unexpectedly or if the HOA experiences other financial issues concerning the fund. With a budget, the association’s board can assess the reserve fund’s status and determine how much money needs to be set aside for it.
Pay for Maintenance and Upkeep
Budgeting also helps the HOA determine how to manage its money with regard to regular maintenance and upkeep costs. These costs are covered by the general operating fund and may consist of services like landscaping, waste disposal, security, utility bills, and general repairs to common areas.
When budgeting for an HOA, encourage your clients to set aside funds for each specific operating cost. Then, you can use HOA accounting software like CINC Systems to monitor spending in these areas and determine whether the association is staying on track. If the HOA is consistently overspending, the budget can be adjusted accordingly. This is one of the most important purposes of an HOA budget.
Make Informed Decisions
An HOA budget measures the financial pulse of your clients’ associations. By using this data, you can assist your clients by making more informed decisions about the HOA’s management. When it comes to financial management for HOAs, knowledge really is power!
For example, examining the HOA’s budget can help you when hiring new vendors. If the HOA only has a certain amount of money set aside for a construction project, you can use the information to help you evaluate bids from contractors. Budget knowledge also informs decisions about contract renegotiation.
By generating financial reports with your association accounting software, you can also share detailed budgeting information with your clients’ board and their residents. This will help the community whenever there’s a vote for a new project proposal or another issue that may impact the finances of the association. Budgets allow decisions to be made with greater accuracy and transparency.
Hold Members Responsible
Another purpose of an HOA budget is to hold board members responsible for their spending. Although no one likes to think about board members committing financial fraud or making mistakes that damage the association, these situations are an unfortunate reality for many HOAs. As an HOA manager, part of your job is protecting your clients from financial mismanagement.
With an HOA budget, you’ll know exactly how much money is meant to be spent each month, which accounts are being used, and where the money goes. Then, using automatic bank reconciliation to monitor your clients’ accounts in your HOA management software, you can watch for any unusual spending. If something in the budget seems “off,” you can examine this and spot any potential fraud or misuse.
Set Financial Goals
Budgets also help HOAs establish financial goals for the future. As a record of the association’s financial history, budgets provide very valuable information for fiscal planning. You and your clients can examine budgets from previous years to see how the HOA’s expenses and income have changed over time.
Then, the HOA’s board can make better decisions about the association’s financial goals. The next year’s budget can be adjusted to reflect these goals. For example, if the association wants to increase its reserve fund, the budget can be changed to direct more income into this account.
Calculate Resident Fees
Finally, an HOA budget helps managers and board members calculate resident fees. Looking at the budget can tell you where the HOA may have overspent or under-earned, and fees can be increased accordingly. If needed, the HOA can also issue special assessments (one time fees) to cover specific costs.
Just remember to check the association’s Covenants, Conditions & Restrictions (CC&Rs) and its bylaws to ensure that any changes to resident fees follow the appropriate protocol.
Build an HOA Budget with CINC Systems
Now that you understand the purpose of a budget for HOAs, it’s time to find the best association accounting software to help you assist your clients. With CINC Systems cloud-based accounting software, you’ll gain powerful tools for all aspects of financial management for HOAs. CINC Systems can streamline your business and help you provide even better service to your clients.
If you’re not already using cloud-based accounting software for HOA budgeting, try CINC Systems and see the difference. Click here to request a free software demo.
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