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We recommend having at least two budget groups: discretionary and non-discretionary spending. This helps in identifying how much money you are going to spend at a minimum and then how much you have for your association's wish list.
Non-discretionary budget items include utilities and insurance. You might be able to reduce costs but you are going to spend on these items no matter what.
Discretionary spending is everything else. You can negotiate levels of service and even decide if your association needs to spend money on a particular item.
Lastly, don't overdo the miscellaneous/contingency amount. Yes, sometimes things will come up but a large contingency provides an opportunity to hide spending and could increase the risk of fraud, waste and abuse.
Budgeting is planning. In order to have an effective budget, you first need to prioritize your association's needs for the upcoming year. Is it time to speak with a lawyer about updating the governing documents? Do you feel it is time for an audit?
What you should not do is take last year's budget and simply increase it by some percentage. This method leads to budget black holes where transactions could be hidden without ever being questioned - until its too late. Always have an idea of why you want a budget item and why you believe the amount is adequate.
Start out with your ultimate wish list. What would you have your association spend money on if you had an unlimited budget? Set a priority to each item and then start pruning those low priority items. You may find that your past budgets had lots of unnecessary expenses or that important things were not getting done due to a lack of funds. The budget helps you identify and explain how the board wants to work so don't assume that the past should set the plan for the future.
While the actual purpose of the budget is to determine the assessments for your association, its real power comes from using it to manage your spending.
This is true if you are self-managed or have a management company in control of day-to-day activity. Your budget is the plan for how you want the association to work and knowing how your spending is matching up will help identify potential fraud, waste and abuse.
Don't be afraid to question the expenses, especially where the amount seems odd for the time of year. Large landscaping bills in winter could indicate problems such as cracked pipes or incorrectly coded expenses. You will only know if you ask why things are not meeting your expectations.
And it isn't just areas where spending seems high - also consider areas where the spending is less than you expect. Is it possible that a vendor hasn't submitted an invoice which might surprise you later? Is work not being completed timely? Your oversight is critical to keeping your association's funds working effectively.
Budgeting itself won't prevent and detect fraud. Fraud detection and prevention requires those responsible to stay on top of what is happening and question if the right step is taken at the right time and by the right party. The budget can point you to a potential problem, but only your questions can uncover it.
Budgeting and analysis is a continuous process. That next budget cycle always starts much sooner than you expect and with it a new opportunity to create a new plan for the future. Don't become complacent or fall into the same old patterns of not challenging your budgeting process. Each new year brings new challenges and opportunities and your budget process will help your association meet those needs while reducing risk and opportunity for fraud, waste and abuse.