by David Twiggs, AICP, CMCA       

                                                                        

WHAT SEPARATES THE professionally run, and prospering community that slowly declines in value and sags in sales? Three things: a balanced budget, an updated reserve study, and a strategic plan for the future. Simple to say - not so easy to do. Proper financial planning requires a long-term commitment from board members, and sometimes the payoff doesn't come until years later. Signs that you're on the right track can include anything from steady increases in assessments (as opposed to wild spikes) to having enough funds to keep all your facilities up-to-date and in working order.

When preparing for your financial future, be open to suggestions, but remind residents that this community - their community - is unique. I've heard board members say, "My friend lives in an association, and they always do such-and-such." While it can be useful to use other policies or practices as models, they'll almost always require a little tweaking to suit your needs. With that in mind, the following general guidelines can help any association get on the path to financial stability.

THE BUSINESS OF BUDGETS

A good budget is a planning tool. Whether aggressive or conservative, it must outline your expectations of fiscal performance for the year, in these categories:

Assessments. Be realistic about your revenue estimates. If you normally collect only 90 percent of your assessment billing, don't budget to spend 100 percent. If you haven't already, start keeping track of collection rates, which could be anywhere from 85 to 100 percent, depending on the size of your community and the efficiency of its operations. Be sure to consider the entire picture - what could or will change since last year's budget?

Are you adding fitness facilities or hiring new tennis instructors, for example? Review major changes or decisions that may affect your bottom line.

Interest rates and sales-related fees. Are sales up in your community? An unanticipated drop in transfer-fee revenues can have serious implications for your budget. Also consider interest rates. During the good years, many large communities were pulling in hundreds of thousands of dollars in investment interest - but not anymore. Pay close attention to financial trends.

Utilities and insurance. Rates for insurance and utilities can fluctuate. Be prepared for higher insurance premiums after natural disasters, for example.

 

Maintenance and service contracts. Choose your standard of service for the coming year. If the association is low on funds, maybe you can do without planting those crape myrtles. Committing to a long-term maintenance plan and establishing maintenance priorities can help cut down on arbitrary and potentially futile expenses.

Discretionary items. Discretionary items are non-revenue-producing activities, which could include anything from pool parties to Fourth of July fireworks. In terms of your budget, these are your lowest priority, but that doesn't mean they're not important. On the contrary, they're part of what makes a community a home, so don't neglect them.

Priorities. After you've pulled together your budget needs, it's time to prioritize. For most associations, this means setting aside adequate funds to fix things the first time around rather than doing token maintenance or patch jobs here and there to appease different factions of the community. Be firm but fair. It's better for the organization as a whole to pick one problem - resurfacing the parking lot, for example - and fix it completely, even if another problem has to wait.

 

 

WITH RESERVE
Faced with revenue pressures, many boards pass on commissioning a reserve study - but it's probably the one thing that would help them the most. A well-done and regularly updated reserve study provides useful and vital information for a board trying to maintain the quality of its facilities; it should outline the capital repair and replacement needs for buildings, paved areas, furnishings, amenities, and other major assets. Building up reserve funds can seem like a burden, but it's a basic requirement for healthy growth.

On its own, a reserve study simply reflects the amount of money you must commit over time to maintain your association's current capital assets. But part of the value of a reserve study is that it can be used to reaffirm an association's strategic plan. This type of planning goes beyond "How can we keep our facilities at their present level?" and into the more intangible "Will our facilities be relevant and adequate to attract potential homebuyers and still fit our needs in the future?" For example, let's say a lot of young families start moving to your community. Do you have pedestrian walkways to accommodate strollers and baby carriages? Will you have places for children to play?

The idea behind any strategic plan is to address major trends and needs coming down the pike. If you plan ahead, you should be able to avoid having to make reactionary decisions. Consider shifting values, new technologies, and emerging demographics to come up with a strategic plan that will maintain and enhance your community's value.

STEADY AS YOU GO
Once you have the elements of good financial management in place - a budget, reserve study, and strategic plan - maintain a balance among them. Keep developing and analyzing long-term revenue streams, and extrapolating and updating operational costs. Regularly integrate new capital spending with your reserve spending schedule. Remember that all these processes are interrelated; failure in one area weakens another.

Assuming responsibility for the finances of any association can be an intimidating job. But when you become a board member, enhancing the quality of life for you and your fellow owners becomes your business. With careful planning, you can meet their long-term needs. This new year, resolve to prepare for prosperity. cg

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