Why Long-Range Financial Planning is Crucial for Condo Association Budgets
Each year year, fall rolls around and condominium associations across the country are buckling down, crunching numbers, and setting their annual budgets.
Careful financial planning is arguably the most integral responsibility that boards are tasked with. However, with so many elements to keep in mind, it can be challenging for a board to feel confident in their budgeting decisions.
Where you start matters
Condo association budget preparation is a game of numbers and, as in all financial scenarios, where you start with those numbers really does matter. Too often, board members and managers create their annual budgets and save their reserve fund contribution as the very last item of consideration. With this process, they take what is left and allocate it to that year’s reserve funds.
By using this “whatever is left in the tank approach,” boards leave the funding of their long-range projects up to chance.
RISE AMG seeks to shift the mindset of this traditional approach to a more sustainable one: putting reserve funds first.
What is a Reserve Fund
Reserve funds differ from operating funds, which are the day-to-day expenses needed to keep the association functioning throughout the year. Operating funds are used for things like utilities, trash removal, insurance, and any minor repairs.
Reserve funds are used in planning for future expenses, i.e. those unexpected repairs that pop up such as broken elevators or major repairs due to storm damage (see: hurricane season preparedness article), and long-range maintenance projects like roof replacements or interior/exterior repainting.
The funds for these big-ticket items and unexpected repairs are generally collected over a number of years, not just in the year that they’re expected to occur. That is exactly why it is so important to start planning for those projects now. Getting your reserve funds to the level that you need them to be is an ongoing process which involves gathering data on your property, making assessments, and thinking critically about your next best steps,
The Rise Approach
RISE AMG places an emphasis on our comprehensive reserve studies. Through these studies, we assess the property’s size, age, maintenance schedule, and overall condition to forecast the funds needed to cover future maintenance expenses.
Reserve studies are opportunities for condominium associations to protect themselves against a future financial hardship. Conducting a reserve study can help board members and condo owners better understand what major repairs will need to be made over the next few years.
With the results of reserve studies, boards will have a better idea of what funds are necessary for that year, and at least 5 years to come. At that point, boards can compare that to what they currently have in reserve in order to make an educated decision in what amount to put aside for that year’s fund.
The funding of a project fifteen years down the road is significantly impacted by the budgeting decisions you make for next year. This is why it is so important to start with your reserve fund allocation, making sure that you are saving the necessary amount to forego future disasters.
Budgeting is a big job for even the most seasoned association board. Boards that adopt the long-range financial planning process are much more likely to create a comprehensive annual budget that offers real protection for the future.