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Budgets in Cash Basis HOA

Started by KrisK3 • 9 replies • 250 views

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KrisK3 (Indiana)
Posts: 5
Posted:
I'm sorry if this has already been talked about - the Search function refused to work in two different browsers.

I'm on a newly formed Financial Committee. To say that our current HOA board is financially clueless is a big understatement (we haven't had an official Treasurer in over 2 years) so we're trying to help right the ship. We're doing a budget vs. actual comparison for this past year (2023) to help with forming the budget for 2025.

My thought is that a budget would include all expenditures for a calendar year - including invoices received for December work even if they were paid in January or February the next year. The Board is trying to tell me that the budget vs actual should only include checks that were written through the end of December (the 'cash' outflow).

Is this common? Seems like if you leave out all the December invoices received late in the year and then paid in January of the next year, you'll end up with a budget comparison that's bogus. If you knew you had some big expenditures in December (or even November) you could just simply put off paying them and make it look like you came in way under budget. THEN you start the next year already way behind. (And I know for a fact that this is what our ex-President is trying to do. "look how good I did and how bad they're doing" king of thing.)

How is this normally done?

Thanks for your help/suggestions!!
AidylP1 (California)
Posts: 108
Posted:
In a cash basis system, invoices or expenses show up when paid, not when received.
KrisK3 (Indiana)
Posts: 5
Posted:
I understand how the P&L basics work - I'm trying to figure out a good way for the budget to work. I know in the past we had roof replacements done in December and the bill was paid in February. the incoming President made a big deal about how she was 'screwed' by having to take all that money of her new budget and how far back it set her when the previous year's budget had plenty there for her to use.

We're also being told by our bookkeeper that if she moves money from Reserves it counts as Income so she only wants to pay a Reserve item from the Reserve account - even when we don't have 100% reserves in place. that means every time she does this our reserves account is dropped way below it should be if the project ends up being more expensive than planned 9which they always are.)

This is the kind of thing the committee is trying to clean up.

So, basically, we need to guess at what expenses might not get paid until January (including possible very big items) and simply plan a much bigger budget for the next year to compensate?
KrisK3 (Indiana)
Posts: 5
Posted:
I understand how the P&L basics work - I'm trying to figure out a good way for the budget to work. I know in the past we had roof replacements done in December and the bill was paid in February. the incoming President made a big deal about how she was 'screwed' by having to take all that money of her new budget and how far back it set her when the previous year's budget had plenty there for her to use.

We're also being told by our bookkeeper that if she moves money from Reserves it counts as Income so she only wants to pay a Reserve item from the Reserve account - even when we don't have 100% reserves in place. that means every time she does this our reserves account is dropped way below it should be if the project ends up being more expensive than planned 9which they always are.)

This is the kind of thing the committee is trying to clean up.

So, basically, we need to guess at what expenses might not get paid until January (including possible very big items) and simply plan a much bigger budget for the next year to compensate?
JohnC46 (South Carolina)
Posts: 14,265
Posted:
Kris

Aidy offered good advice. Also remember that a Budget is, at best, a good guess for the coming year, That said, the budget should be based on actual incurred expenses, not a guess. My post might sound contradictory but let me explain.

We can assume a given cost could/may increase. As an example, utility cost. We can look back over past actuals and see a trend such as it had an average increase of 5% per year so we can budget for it. Now another example. Let us say there is a cost that happens every two years. Well the smart move is to budget 50% of the cost each year. Some might say budget it for the year we will incur the cost but that is being short sited. This thinking can show a positive cash flow for the year by nothing budgeted for it but a negative cash flow in the year it has to be paid for.

The average person in their personal life, uses a Cash Flow method. While it can work for them it is not the best way to operate an association/corporation.
MichaelS56 (Minnesota)
Posts: 859
Posted:
As others have said, setting up a budget for a HOA, you need to two different budgets. One for the day-to-day running of the HOA called Operating budget and another for the Replacement Reserve for expenses such as your roofs etc.
TimB4 (Tennessee)
Posts: 21,062
Posted:
Kris,

You are correct, a budget should include the known expenses along with an amount for unknown expenses (typically based on historical data). Things like attorney fees, snow removal and pruning of trees would be examples of unknown expenses.

I attached two budgets. Attachment one was for the board so they could determine assessment increase.
Attachment two is one that was presented to the membership.

Hope this helps.

If you have questions, you can email me [email protected]
📎 Attachments (2):

⏸ Downloads temporarily unavailable

📝1224501136171.doc(39 KB)
📝1224501148654.doc(37 KB)
KrisK3 (Indiana)
Posts: 5
Posted:
Thanks! This gave me a lot to think about and I appreciate the examples. Our HOA is currently putting absolutely nothing back for Reserves so there's really nothing much to tap if a larger item comes up. Very very scary since we have some very large replacement items coming up. Sigh.
TimB4 (Tennessee)
Posts: 21,062
Posted:
Kris,

Does the Association have a reserve study?

KrisK3 (Indiana)
Posts: 5
Posted:
Yep. they got one in 2018 and just finished a new one this year. The HOA had never really had a 'Reserves Budget' previously and just got by with luck more than anything. The President/Treasurer at the time of the 2018 RSI raised fees $100 per month and stated it would go specifically into reserves to give us a bit of a jump start. He was ousted in 2022 by the person who just left and she proceeded to spend that money rather than saving it or putting any more money into it. The current RSI projections show us needing $2.7 MILLION dollars over the next 5 years (across 66 units). The exiting President made sure that everyone was told that there would be no raise in fees or a Special Assessment in 2024 and the current Board is sticking with that. I've been at meetings where the RSI was presented and it appeared that it was so overwhelming to them that they just have (somewhat) decided to ignore it. "Oh, the RSI is just a suggestion and somehow we'll figure out a way to not have to do those things . . . .".The exiting President (she just sold her unit) also got us into a couple fairly bad 3-year contracts with no way out except Breach of Contract. They are 'buddies' of hers so she got them a sweetheart deal.

3 of our 5 Board members are up for re-election later this year and I'm sure none will run again. Not sure the remaining two won't quit as well. We've had trouble getting people to serve on the Board so that's making everything ten times worse. Are we completely screwed? Yes we are!

(Just as an FYI, we don't actually live in the complex anymore and are slowly trying to renovate our unit to sell. I got involved and actually suggested a Financial Committee to help the HOA when it became incredibly obvious that the Board was clueless about anything financial. I didn't realize how bad things were and am thinking I got this going way to late. sigh.)

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