COMMUNITY ASSOCIATION BUDGETING

1. COMMUNITY ASSOCIATION BUDGETING DeLeon & Stang, CPAs and Advisors Allen P. DeLeon, CPA Janet Gorden, CPA allen@deleonandstang.com LUNCH-N-LEARN

2. Speaker biography – Allen P. DeLeon, CPA • Partner with DeLeon & Stang, CPAs and Advisors • Over 25 years community association auditing experience • Member of the Community Association Institute (CAI) • Chair of the Maryland Association of CPAs

3. Speaker biography – Janet Gorden, CPA • Senior auditor with DeLeon & Stang • Over ___ years community association auditing experience • Member of the Community Association Institute (CAI)

4. Agenda • Introduction • Overview of community association budgeting • Operating fund budgeting • Replacement reserve fund budgeting • Cash flow projections • Capital budgets • Board approval and other issues

5. OVERVIEW OF COMMUNITY ASSOCIATION BUDGETING • Why are budgets necessary? • Most by-laws require annual budgets • The most important financial document created by the Board of Directors • If done properly, it sets the plan for the assessments charged to each member

6. OVERVIEW OF COMMUNITY ASSOCIATION BUDGETING (continued) • Budget are a useful tool to monitor financial progress during the year: • Shows how actual expenses compare with budgeted plan and prior year actual • Compute $ and % variances • Can be used to forecast expected profit or loss • Establishes a guide to be used to determine the level of expenses to be incurred.

7. OPERATING FUND BUDGETS • Operating fund budget is used to plan expected operating expenses for the year. • It should cover all expected expenses by line item (utilities, pool, landscaping etc..). • Use prior and current year actual expenses as a guideline. • Anticipate large or unexpected expenses such as: • Snow removal • Unexpected repairs

8. OPERATING FUND BUDGETS (continued) • Need to budget for bad debts • Look at aging, identify homeowners that are more than a year delinquent in assessments and not paying— • record current year assessments for those individuals as bad debt budget line item, so money is removed from pool from which board has to spend.

9. OPERATING FUND BUDGETING (continued) • Use of an operating contingency reserve fund for large expenses or projects.  Allows for communities to “reserve” or put away money each year as part of their operating budget for these projects or an unexpected maintenance project without having to borrow from the reserve fund. • Typical contingencies: • Extra large snow fall removal • Insurance deductible • Large landscaping project • Painting projects • Unusual legal expenses

10. OPERATING FUND BUDGET (Continued) • Build up your contingency fund - you do not have to fully fund in one year • We recommend a contingency fund of 8-10% of annual operating assessments. • Budget operating fund expenses on the accrual basis.

11. REPLACEMENT RESERVE FUND BUDGETING • Start with your replacement reserve study • Are replacement reserve studies really necessary? • Check your by-laws, state of county laws • VA law requires studies and supersedes by-laws? • Provides a plan and a goal for major repairs and replacements

12. REPLACEMENT RESERVE FUND BUDGETING (continued) • Establishes a basis for reserve assessments. • Study should make recommendations as to the cost each year for each component in the study. • Separate cash and investment accounts should be established. • Avoid lending money to or from the operating fund

13. CASH FLOW BUDGETING & PROJECTIONS • Begin with cash balance at December 31st of prior year. • Project cash assessment receipts by month. • Factor uncollectible assessments • Project cash disbursements by month for each major line item • End with cash balance at end of each month; beginning of next month • Used to project cash deficit months

14. CAPITAL EXPENDITURES BUDGETS • Used to budget acquisition of capital assets, not funded by the replacement reserve fund. • Balance sheet budget. Effects cash flow but not P&L, except for depreciation expense. • Examples are: • Furniture and computers • Equipment

15. OTHER BUDGET ISSUES • Monthly financial reporting • We recommend comparing budget to actual expenses for both the current and prior years • Provide the board with written an explanation of major variances each month

16. ADVICE TO BOARDS • Be active in the budget development • Ask questions about how budgets are established or budgets which vary significantly from prior year budgets or actual results. • Make sure bad debts are considered. • Ask questions about contingencies and consider establishing a contingency reserve, or funding the existing contingency reserve.

17. DISCUSSION – YOUR BUDGET CHALLENGES? • What budget challenges or experiences have you had? • Where are your largest budget variances? • How do you deal with boards that won’t adequately budget for expenses? • Measure your budgeting skills by how accurately you budget!

18. QUESTIONS