Responsibly managing a corporation's funds is a crucial part of a board member’s fiduciary duty; however, the task can be too overwhelming for one person to handle. While a board treasurer takes the lead on preparing an annual budget hand-in-hand with management, it’s the responsibility of the entire board to keep it balanced. A budgetary shortfall can put a financial burden on the condo and lead to increased dues, special assessments, and overall discontent in the community. Luckily, there are steps board members can take to maintain a healthy budget and secure a stable future for the condo. Here are some best practices to consider for budgeting success.
Refer to Your Community’s Governing Documents
Every action taken by the board must be within its legal authority and responsibility. That means consulting your community’s governing documents before any major undertaking. Your governing documents will include specific requirements for the preparation and distribution of the budget. They will also detail the services and maintenance requirements the condo must provide, which should be factored into the budget.
Create a summary document of the specific requirements from your governing documents to serve as a quick reference when completing the budget.
Look to the Past and Towards the Future
Review past financial statements and create an itemized spreadsheet that compares budgeted expenses to actual expenses for each year for the past three years. Maintain this worksheet annually going forth to make future budget development easier and more accurate. Identify the categories where underspending or overspending occurred, why it happened, and if and when special assessments were levied.
It’s also important to do in-depth research on future expenses to guarantee your budget doesn’t fall short of projected costs. Specifically, make sure to:
- Review existing contracts for renewal dates. Contracts with a CPI (Consumer Price Index) clause might result in higher costs.
- Contact existing contractors and confirm upcoming costs with a formal Request for Proposal (RFP).
- Solicit competitive bids via RFP from other potential vendors.
- Review insurance policies and request updated insurance information from vendors to certify compliance.
- Contact the utility companies and ask if they’ve set a price rate schedule for the upcoming year.
By doing these things, you might save your condo a little money, ensuring you’re prepared for whatever changes a fluctuating economy might bring.
Review Your Reserve Fund Analysis
It’s imperative to review and replenish your reserve fund each year. A reserve fund is money set aside by a condo for additions to major components the condo is obligated to maintain and future replacements and repairs that don't occur annually. Ideally, maintain a 20% reserve fund to cover unforeseen expensive repairs.
This will help your condo take care of needed repair and replacement projects before they turn into larger, more expensive projects.
Understanding Budgeting, Financial Management, and Reserves
As a board member, you’ll spend a fair amount of time projecting and monitoring the financial condition of the organization. You don't need to have a financial background to be effective in these tasks. It's simply a matter of knowing what information is most important for you to review. Watch our video, “Video 4: Budgeting, Financial Management, & Reserves,” to learn the steps to achieving financial management proficiency.