Understanding Operating Costs What Every Board Should Know

In your own household, you have money coming in and money going out. You have things you want to save up for—say, a new cool high-def, flat screen television or the latest iPad. Yet you owe your car company and your creditors. To keep it all straight and get a handle on your spending and what you need to save for, financial experts recommend creating a budget.

Running an association is no different. There is money coming in from resident fees and money going out to pay such items as the landscaper or the maintenance crew. But what about if the roof springs a leak, the insurance rates go up, or the cost of electricity skyrockets? How does an association keep track of it all? The same way an everyday Joe would—they draft and stick to a budget.

An Integral Part

There is one major difference with our own personal budgeting and an association’s budgeting. Unlike our individual budgeting process, there are two kinds of budgets for an association—an operating budget and a capital budget. Capital budgets apply to long-term, big-ticket items like new roofs or an HVAC overhaul.

By contrast, the operating budget covers recurring monthly expenses such as payroll and salaries, taxes, utilities, insurance and maintenance items. In creating and managing an operating budget, co-op and condo boards must try to predict expenses, balance cash inflow and outflow, and be aggressive in collecting arrears and late fees from delinquent residents.

Budgets are an integral part of an association’s financial plan. They help to set goals for achieving an income and monitor how much is being spent. But who is responsible for creating the budget? “Typically the budget is created by someone in the accounting department of the management company, in most cases the chief financial officer if they have one,” says Stuart Mayer, a partner at the accounting firm of Mayer & Meinberg in Syosset. “Once the first draft is complete it is presented to the board for review. In certain circumstances, they ask the outside CPA to review the budget. This usually happens if the management company does not have a CFO or other qualified individual to prepare the budget. Also, if the property is self-managed more than likely they would look to the CPA to assist with the budget preparation.”


Related Articles

Capital Reserve Funds

How Much Do You Really Need?

Underfunded Reserves

The Dangers of Running Short

Tapping Reserves in a Time of Financial Crisis

An Option to (Carefully!) Consider