Issue link: https://hub.associaonline.com/i/864939
Best Practice #3 Review current finances and finalize the budget. After completing the reserve portion of the budget, it's time to create your operating budget. We recommend that you perform a review of the current financial condition of the community so that your board is aligned on financial priorities in advance. Start with your most recent financial package. STEP 1: REVIEW THE BALANCE SHEET. The balance sheet is a snapshot of the association's financial condition. It includes: • Assets: What you own The assets generally include cash, accounts receivable (money owed to you) and prepaid expenses. • Liabilities: What you owe Liabilities include accrued payables, prepaid assessments, and, under special circumstances, loans for reconstruction. • Fund Balances (a.k.a. Equity): What's left over As a mutual benefit nonprofit corporation, most of the community's fund balance or equity will be in the form of reserve balances. You may have a small amount of net income or net loss from the operating fund. STEP 2: REVIEW THE INCOME STATEMENT. Compare your actual financial activity to the budgeted activity for the current year and make note of any discrepancies. This will tell you whether the budget you're working with today is an adequate starting point. In most instances, your community manager will prepare a draft budget for the board to consider. As you review this draft, the following definitions will be helpful: • Mandatory Expense: Expenses needed to fulfill budget requirements as outlined in the governing documents, state statutes, or municipal laws. • Discretionary Expense: Expenses that may be required to meet the expectations of the members but are not mandatory. • Historical Trend Budget Method: Each budget item is developed by looking back in time to gain historical perspective and basing the estimate on these figures. • Zero Based Budget Method: Starting with zero, identify each cost component of the item and calculate the requirement based upon current needs. Once you have finalized the expenses required to operate the community you will reconcile the budget and calculate the assessments for the coming year. Quick 2-step Guide for Reviewing Current Finances