Monday, March 15, 2010

What needs to be in your Association’s Annual Operating Budget?

Every association must prepare an Annual Operating Budget which is a listing of the estimated revenues or income and expenses of the association for the upcoming budget or fiscal year. The budget must be set forth in detail and must show the amounts budgeted for all accounts and expense classifications including estimated monthly and annual expenses of the association that are to be collected from unit owners as assessments.

Each entry included in the association’s budget is referred to as a line item. Examples of items generally addressed in the budget include costs relating to the following:

• Administration and operation of the association;

• Management fees;

• Maintenance of association property;

• Rent for recreational and other commonly used facilities;

• Taxes upon association property;

• Taxes upon leased areas;

• Insurance premiums;

• Security provisions;

• Other expenses (accounting, legal, bulk cable, etc.);

• Operating capital;

• Reserves;

• Fees payable to the Division

The association’s annual budget should be a good faith estimate of how much the association will take in and spend during its operation over the course of the association’s fiscal year. This includes a good faith estimate of each owner’s maintenance assessments due to the association. In today’s economic climate, the association’s operating budget should contain a line item estimating the dollar amount of delinquent assessments that it may experience during the budget year. This entry is generally referred to as anticipated bad debt. To estimate this amount, the association may review the present percentage of delinquent accounts, round upward or downward depending upon the future economic forecast and then multiply the resulting percentage by the total annual budget amount. If your association does not include a line item for bad debt in your budget, you may not have enough money to pay your bills without levying a special assessment.

This week we will also be discussing reserves and financial reporting requirements so stay tuned.

1 comment:

  1. Another suggestion for calculating bad debt, especially for HOAs:

    Take the amount of the maintenance assessment multiplied by the frequency of the assessment multiplied by the number of cases in legal status. For example, if the Association has a monthly assessment of $100 and they currently have 10 cases in legal status then the bad debt projection would be $12,000. Using the formulat above: $100 x 12 x 10 = 12,000.