CAI-NJ July 2022

MANAGEMENT TRENDS Budget Process 101 By Michelle Williams, CMCA, AMS Taylor Management Company, AAMC, AMO W e all look forward to budget season, especial ly during unpredictable times, NOT. However, being as prepared as possible will make the

process easier. A budget involves coordinating and plan ning the revenue and expenses to run your community in a fiscally responsible way. In a perfect world, a community’s income would equal its expenses. Break it down by looking at each fund account. They may vary from each community but include all or most of the fol lowing: the operating account, replacement reserve, deferred maintenance, capital improvement, and contingency. Operating Fund: There are a few methods to consider when planning the operating budget: historical, zero-based, or a combina tion. When the previous year’s documents are available, historical is the most popular approach. Zero-based takes a “from scratch” approach to examine what line items are needed and to justify each expense. Utilizing both methods can be used when analyzing utility costs. Consider the component, the measure of usage, the estimated amount of usage, and the estimated cost of usage. Replacement Reserve: Th replacement reserve account is traditionally the largest dollar amount in the total budget. The reserve account is a type of savings account and a guide to planning for the replacement of capital items when they have reached the end of their useful life. A professional reserve specialist will create a reserve study to use as the guide for replacing community assets. The reserve study is critical to thoughtfully planning the budget. The board has a fiduciary responsibility to owners to maintain a healthy reserve account. The amount is based on the community’s documents. Baseline stays above zero, full funding or trying for 100% of total replacement costs, threshold funding sets a number to stay above, and statu tory funding based on local statutes. There are two areas

“Allow residents to share their ideas with the board when planning the budget.”

of a reserve account that need to be studied: the physical property, which requires maintenance, and the financial area, which includes the balance, income, and expenses. A solid reserve study along with a list of projects the board would like to take on in the following year will assist in preparing budgets. There are several obligations to consider when planning the budget, one of them being insurance. Have a conversa tion with your insurance agent about ways to reduce costs, alter deductibles, and review the community’s coverage. Have a strong risk management plan in place, find ways to improve your processes and lower risk factors. Review the largest contracts such as landscaping, trash removal, pool maintenance, and security. Talk to contractors to see what they are predicting for the following year. Is there room for adjustments? Look at the community’ legal documents for the levels of requirements. If a community is in an area affected by hurricanes, torna dos, or snow, keep in mind that these are unpredictable and that it may be necessary to have a contingency plan in place. Resident expectations may be one of the most challeng ing tasks to tackle. Allow residents to share their ideas with the board when planning the budget. Having resident input is important to understanding their expectations. Keeping track of financials year-round makes for an eas ier budget process. Start early, review contracts, list man datory and discretionary items, and have the reserve study available to increase the chances of a smooth process. n

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