Analyzing Association Expenditures

The thread on management company costs raises an interesting issue about how one can compare association expenses from association to association and from year to year in the same association.

It seems to me that it makes sense to divide expenses into two main categories: overhead and operating.

Overhead would include those expenses necessary for the continued operation of an association itself. Overhead expenses might include liability insurance, management fees, legal fees, collection fees, taxes, annual association meeting expenses, board meeting expenses, corporate registration expenses, etc.

Operating expenses would include those expenses that provide a direct, visible, tangible benefit to association members. Operating expenses might include landscaping, water, social activities, newsletters/web sites, recreational facilities maintenance, common area/facility maintenance, concierge, rule/covenant enforcement etc.--basically, those things that the association was created to do in the first place.

Some line item expenses may need to be allocated to both categories. And, yes, there is overlap. Insurance for a swimming pool would be an operating expense, but D&O would be overhead. But let's not split hairs right now.

Based on that division, it could be possible to analyze the two category of expenses across associations (but within similar types). Indeed, property managers have easy access to such information and may already made such an analysis.

A more useful analysis that the association board and homeowners might look at is what is happening to each category of expenses over time, say the past 3-5 years. If overhead expenses as a proportion of total expenses is increasing, that may be reason for concern. Alternately, if operating expenses are increasing disproportionately, it may suggest it is time to look at contracts and the level of activities.

As a result of such an analysis it might be possible to establish "targets" or guidelines for each category of expenditures in future budgeting.

For instance the board could establish a policy that would specify a target that overhead expenses ought not exceed (say) 20 percent of total expenditures. Such a policy would provide guidance to officers and the management company in preparing a budget. If the target were exceeded, it would require careful analysis and explanation.

The point here is to create an analytical tool that tracks changes over time.

One thing that would be needed is to develop standards of reporting. As an example, a certain well known breast cancer fund raiser claims that 71% of the money goes direct to charity. But they exclude from the pot all the money paid to participate in the event.

The thing is that you mentioned putting management into overhead because it "yields no tangible benefit." While I realize that many feel this way, if you have good management they yield a very high tangible benefit. The simple fact is that without inspections your overall neighborhood look will tend to drop. Most people don't see the benefit, but it is there.

The other thing is that the ratio would vary greatly depending on other amenities. For instance, it would take huge amounts of money before our management contract stop representing over a third of our expenses. We don't have a pool, or clubhouse.

Kirk, This is what I mean about splitting hairs. If professional management provides a tangible benefit, then go ahead and put it under operating expenses, not overhead expenses. The point here is not to debate how expenses are classified. If your association has a pool and other amenities, it makes a great deal of sense to classify management as an operating expense. The key for analysis is to make some sort of reasonable classification system and implement it consistently over time, so changes can be tracked.

George -- I appreciate your comments. We're in agreement on most of it, and apart (a little) on some of it. I believe interdependent ratios and percentages (as in pie charts) should be completely thrown out the window. You believe they have huge limitations but that they could, at least be useful for provoking questions. And I agree that anything that generates questioning is a good thing, even if it's only for that reason alone. We should question everything much more often that we actually do.

George - back to your original question:
I think that the board should be looking at the cost(s) for each expenditure.

If an MC is charging too much in proportion to what it is actually doing, that needs to be caught by the Board. Another thread talked about his MC charging $45 an hour for staff to pick up trash around the complex. That is not cost effective.

MaryA1, I can't get copies of what PM does not produce. What I got is what PM says she provides the board. Thus my question as to what other, better organized HOAs/Boards expect from PM.

SusanW, all members got a copy of the proposed budget at the 10/7 meeting. It passed but the Minutes from that meeting will not get "approved" until next meeting.

I've been asking for a Balance Sheet since July but I think PM does not understand this accounting concept. I'll keep trying.

Thanks Mary. Yes, I know PM does not necessarily prepare financial statements, however, PM should be well versed on this topic 'cause she/he attends meetings of the board.