4 Ways to Improve Your HOA Budget

By Lance Stendal Best Practices Comments Off on 4 Ways to Improve Your HOA Budget

It’s budget season for most homeowner associations with a year-end fiscal year. Clearly a budget is a fiscal tool, but did you know it can also be a communication and planning tool?

It’s a way for the Association to communicate its priorities as determined by where you are choosing to spend your money. The problem we too often see is that a budget is mostly a bunch of numbers, with no explanation as to what those numbers even represent or how they were derived. Without any explanation the budget is bereft of any meaning.

Here are four things you can do to turn your budget into a communication and planning tool.

1. Expenses on the Top, Income on the Bottom

I know, this is not how it appears on an income statement. But who says a budget has to match the income statement? We put the expenses at the top because that is what drives the assessment, not the other way around. If you start with the assessment you are saying our only priority is the amount of the assessment, but that is not why the homeowner association has a Board of Directors, or why there is an association in the first place. Their mission is to protect and enhance the association, which means you are identifying the needs of the homeowner association and making sure those needs are being adequately met.

I like to put everything into the budget I can think of that is needed and present that to the Board. They see what amount of assessment it will take to get there and then they can have a conversation about whether that assessment level is satisfactory – if not, now they can have an honest discussion about what services they are not going to provide. Those services that are not as important as others they may decide to remove, but now its a conscious act by the Board.

Expenses at the top and income at the bottom is a subtle distinction, I know, but we think it’s important as it puts you into a different mindset that your expenses determine the assessment, not the other way around.

2. Keep Track of Spending History in Your Budget

Like layers of sedimentary rock, our budgets are built on the foundation of prior budgets. We keep track of all of the prior years’ activity in the budget spreadsheet so we can develop a history of typical spending for certain categories. We then apply three and five year averages which we will use in some budget categories to determine the budget. Some categories we may not know exactly what we will be doing, but we do know it will be something. That history gives us some context for forecasting next year’s budget.

3. Use Zero Based Budgeting

Some categories should be constructed from zero each year and all expenses justified for their existence as you construct your budget. By employing this you avoid the practice of anchoring your expectations based on what was done in prior years. Some categories that is true, but a good chunk of categories you should be starting from zero and justifying every expense in that category.

Most homeowner associations have a general catch-all category for repairs, usually broken out into different areas such as maintenance, grounds, etc. In our budgets we will then have a separate category in each of those areas to capture spending on special projects that are not necessarily completed every year. For example, we have a category, 6542-Repairs, that we use to keep track of all of the routine repair items that come up (e.g. reattach a shutter, replace a piece of siding that blew off, etc.) and another category, 6590-Misc Maintenance, that we use for tracking projects that are not funded by reserves (e.g. next year, we plan to Sandjack settled sidewalks). Then, when we create our budget, we use historical budgeting on the routine expense category and we use zero based budget on the project category with a detailed list of the projects we are specifically budgeting.

Most people don’t realize that this also applies to most consumable budget categories (e.g. natural gas, electricity, water, etc.). We maintain a history of consumption of that product to identify the average consumption and then use rates from the supplier to calculate the budget, we won’t simply use last year’s expense and mark it up for inflation. For example, heating fuel we will adjust that annual consumption based on the number of heating degree days as compared to normal – so if last year’s heating season was warmer, with heating degree days we will know if it was warmer by 5% or 15% and will adjust our consumption accordingly to return it to an average year so we can budget on an average year.

4. Provide Line Item Detail

I live in a single-family homeowner association managed by one of my competitors and I hate when I receive the budget because it has no meaning – it’s just a bunch of numbers with no explanation for those numbers. Why is the grounds budget $50,000 next year? What is included in that? What estimates did you apply? Is that based on the current contract with an adjustment for future increase? Did you simply take last year’s number and mark it up by 2% to account for inflation? Or, did you just make up the number? When you think about it, making up the number really is the same thing as taking last year’s number and marking it up by 2%!

Tell me how you got to that number, as it stands, I have no idea.

Then, later in the year when you are significantly over/under in that budget category you can’t even really answer why – was it poor planning? Was it something unexpected? Did we do something that we hadn’t really budgeted for and torpedoed our budget? There really is no way to know because you don’t know how that budget number was originally derived.

Good Budgets Take Time

That’s why many managers don’t bother and just put out crap. I have never understood why anyone on a Board would accept that, let alone the homeowners because the budget drives everything else – the amount of the assessment, the priorities, the expectations for your community!

I’m going to provide a quick example of how all this ties together. Below is what we use in our budget for trash, this is the Line Item Detail that we provide, which clearly communicates how we arrived at our number:

Trash and recycling service provided by Waste Management at present rate of $7.32/unit (increase from $6.39 previously) for trash hauling plus $5/month administrative fee.  Trash is charged 9.75% State Tax and 9% Hennepin County Tax.  There are also Fuel/Environmental fees added and is determined by current fuel pricing; presently 24.6%. 2017 budget is based on current rates and fuel fee will average 27%. Recycling is handled by the City.

And here is the formula that we use in Excel to calculate the trash bill, which emphasizes the fact that we are using zero based budgeting:


Take a look for yourself in this side-by-side comparison of two different budgets.

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