3 Key Components of an Association Budget

Preparing an association budget can be tough. From tallying up your operational costs to forecasting your income, there can be several moving parts. Before diving into too deep, it’s essential to understand the basic components of an association budget. In this post, we discuss the three most important parts: income, operational costs, and a reserve fund/study. With this solid foundation of knowledge, you’ll be ready to jump in and start planning for success.

What are the key components of an association budget?

An association budget typically consists of three parts: income, operational costs, and a reserve contribution.

1. Income

What are association dues/assessments?

For many communities, dues paid by unit owners are the primary source of income. These are fees that are paid regularly and cover the community’s operating expenses.

2. Operational Costs

This is a large category that includes day-to-day expenses such as:

• Staff salaries: Payroll and benefits can be a huge percent of an association's operating expense. These costs could be included with a management contract, or direct costs paid for association employees.
• Vendor services: This includes costs from your contracted vendors and may include landscaping, pest control, window cleaning, pool cleaning, and more. 
• Insurance: Be sure to verify that you have the proper protection for both property and liability insurance. Exact coverage varies by state.
• Utilities: Rates can fluctuate, so we suggest using the previous year’s average consumption to budget for utilities. Work with your utility company to prepare for rate increases, or include a 3-5% increase in your budget.
• Maintenance: This covers ongoing care of common areas. Consider developing a maintenance schedule to cover how often maintenance should be performed to keep the component in top shape.
• Bad debt: If your community struggles with a delinquency rate greater than 5%, you may want to account for that in your budget. 

3. Reserve Fund and Study

What is a reserve fund?

The reserve fund is a savings account that is designed to grow over time through regular funding from a percentage of community dues. These are used for replacing common area components, such as a roof replacement, rather than daily operating expenses. 

What is a reserve study?

The reserve fund’s contribution amount is determined by a reserve study, which is a detailed study of the community’s major common area components. The reserve study typically consists of a physical analysis of the areas that the association is responsible for maintaining and repairing, and includes the projected cost of repairs or replacement. A reserve study should also contain a financial portion that analyzes the community’s anticipated expenditures over a thirty-year period of time, and a reserve funding plan for the Board of Directors to consider. These studies are typically conducted or updated annually by independent reserve analysts. 

Interested in effective budgeting strategies from an industry veteran? Check out our blog, “6 Easy Condominium & HOA Budgeting Tricks From An Industry Veteran.”

Partner with BuildingLink

Trusted by condos, co-ops, HOA’s and multifamily properties around the globe, BuildingLink helps property managers deliver superior resident experiences while streamlining maintenance and operations. We offer tools that will simplify your record-keeping and administration, communications, maintenance, and front desk operations. 

When you’re ready for smarter property management, book your BuildingLink demo today.