The 3 Bs Budgeting, (Bad?) Economy, Banking Best Practices

The 3 BsBudgeting, (Bad?) Economy, Banking Best PracticesFoundation BankSeptember 26, 2012Catherine Kuhn, CPA- Cagianut & Company, CPA

Topics TodayBudgeting:ProcessDevelopmentFinancial Controls/Follow upEconomy (Bad) - Effect on BudgetingBanking Best Practices Cash control

Handouts-SlidesPowerpoint -- www.hoacpa.com FAQs:Bad Debts, ContingenciesCash Verification- Bank StatementsCedcore/Association Services: Reserve Disclosure

Articles:WSCAI Journal-- August, 2012 wscai.orgReserve Law- Whats Changed (Jim Talaga)30,000 foot fly over!- 30 minutes

Budget BasicsWhat is a budget?Financial plan for a community association. Estimate of a communitys revenue and expenses for a specified period of time.A ratified budget is permission from the membership

Zero-Based BudgetsAssumes $0.00 as a starting point for all line itemsJustifies each line itemObtains information from other associations, municipalities, or others in absence of historical dataAdjusts for inflation, published increases, or contract amounts

Historical Trend BudgetsUses the prior expenses of the Association to predict the expenses for the future

Older Associations have more history, resulting in increasingly accurate budgets

Takes into account seasonal, annual, and multi-annual variations in expensesAdjusts for inflation, published increases, or contract amounts

7JulianneHistorically based budgets work well for established communities with good history.For line items like utilities, history plus estimated increases work well.The reality is that a manager or the budget committee will probably use a combination of the two methods to develop the budget.

Annual vs. Monthly budgetsAnnual - Enter an annual total and it is distributed evenly throughout the months.

Monthly Enter budget amounts into each individual month and the New Budget total is calculated from these amounts.

JulianneThe monthly distribution method is preferred as it provides more meaningful financial statements.Ex. Water, largest water bills in the Summer (July Oct). If budget is allocated evenly across the months the actuals vs. budget midyear does not provide accurate ytd information.

Board Members: Are the primary drivers of the budget process

Must stay in compliance with the governing documents (timelines, ratification, approvals, etc.)

Review the draft budget, and consider the information contained within the draft budget

Are ultimately responsible!9Julianne

Budget ProcessDraft BudgetBoard review & AdoptionMailing, Meeting & RatificationFinancial controlsGather RequirementsDraft Budget!

TimingStart by now! (usually sooner) For 12/31 YE

Check governing docs for required timing

Budget DevelopmentPrimary Drivers:The Reserve StudyCurrent cash positionLast years budget performanceNext years increasesTrends from prior years budget performance

Reserve Study

Required for CondominiumsNew for 2012: required for HOAs with significant assets (75% of gross budget)January 1, 2012 New rules (See Legislative Update handout)Reporting and disclosure standards (See Association Services/Cedcore)- This is ANNUAL BUDGET DISCLOSUREComponent requirementsDefinitionsClarifications on borrowing from Reserves

Google Washington Condominium Act or Washington HOA Act

Reserve Study Annual reserve contributions for the operating budget come directly from the reserve study.

JulianneFor the budget presentation I am going to assume you have a current reserve study.Make sure your reserve study is updated by July so you have current information for budget development and the board has time to review the recommended funding plan and reserve projects prior to drafting the budget.The reserve study is a key financial planning tool but it is also a working document that needs to be updated annually.As you complete maintenance it changes the estimated useful life of a component, you get new information on costing when you bid a project.As you get information and as things change update your plan.The annual reserve budget line items come directly from your current reserve study. It details which projects are due for major maintenance and the estimated expense.

Budget Development Start with the current yearBegin by pulling your YTD actual expenses for the current year.Review planned projects for the remainder of the year. Estimate the remaining income and expenses for the current year.Consider whether there will be a surplus or deficit- factor into the budget

Julianne

Budget Development Start with historyStart a draft with the income & expense historyUpdate the reserve allocation from the current study Request and incorporate planned utility increasesUnderstand contractual increases in existing service contractsInquire and include any proposed increases from current vendors for next year

Julianne

Supplement with Current InfoResearch costs, allocate dollars for any new budget requirementsSolicit bid estimates for planned projects identified by the boardInclude committee budget requests receivedIncorporate any prior year surplus / deficit Include contingency dollars for the unexpected

JulianneGetting to Zero !Increase Assessments ratably each yearAre there increase limits in the documents?5%, 10%, CPI

Whats the risk?Good Business Judgment Rule Rely on experts.

JulianneExpenses increase each year and so should assessments.Strong argument can be made for predictable increases of 5-6% each year Preferable to no increases some years and then having to pass a larger increasesSome GDs may actually limit annual increases

2nd B -Budget Considerations in a Bad EconomyAKA: Things not According to Plan

CathyIe Murphys LawShow of hands who has perfect budgets to actuals?

BAD DEBTS!Budget for bad debts (See FAQ)You MAY ultimately collect some/all, but you cant plan on itAssume the worst, then be pleasantly surprisedCathyShow of hands- how many now currently budgeting for BD?

Bad Debt Estimation Methods?Percent of Assessments?Specific Identification of troubled accounts (% of total)Include ALL related costs, even if this can be billed to owner

Cathy

Special Assessment? Need to focus on the long term to avoid thesePersonal budgeting- SAs likely not in these budgets!Paying for past mistakes not popular with current owners leads to Delinquent SAsCathy

Robbing Peter to Pay Paul: Borrowing from ReservesIf borrowing occurs, be sure to budget for payback (Condo Act: 2 yr period)If payback unrealistic New Reserve Study that is realistic (then, stick with it!)Is NOT funding a BUDGETED reserve allocation the same as borrowing??

CathyWe have associations that are so far in the hole they need to start over with a new RS

Budgeting for Operating Deficits:Shortfall in Year 1 does not go away in Year 2 budget to repay the short fall or it compoundsPrior Year Operating Deficit Repayment line item

CathyNeed to make sure the next years budget covers both the cash short fall repayment, AND, the fact that expenses were over budget so assess need to go up substantially

Excess Operating Funds? (carryover)Do NOT decrease/refund assessments (in MOST cases)Build Up Operating Cash Position (next slide) (Goal is to 3 months of average expenses)Separate line item in Budget Prior Year CarryOverOffset line item is Contingencies (see next topic)

CathyWe VERY rarely see assmts refunded to owners legal issues who receives the refund, etc

Operating Cash PositionDetermine the Associations cash position as of the end of the fiscal yearOperating cash position = short term operating fund assets (cash + receivables) minus short term operating fund liabilities (prepaid assessments + unpaid bills)Short term = 90 days or less.Reserve cash is not included in cash position calculations

CathyIe Working Capital for accountants in the audience

Contingencies (AKA Murphys Law):How many associations have perfect budgets?3-5% of Overall Budget?5- 10% of Variable Costs?Depends on Association!If unused, builds up the operating cash position to to 3 months expenses

CathyJust an estimate so putting in something is better than nothingAlternatively, build a little cushion into all expense line items

Financial Controls & Budget follow-upBudget comparison is a strong internal controlMonthly budgets need to be meaningful

28Cathy(Julianne already got into this but bears repeating be sure to make meaningful monthly budgets on the big ticket items)In an auditbudget is very powerful audit tool; boards should use it that way too

Financial Controls & Budget follow-upDont change the budget mid year!Budget is only an estimate and a toolBOD may need to spend more in one category and less in another as situation warrantsException Supplemental Budget such as SACathyChanging budget loses the integrity of initial budget- shifting sand

Board Responsibility:Read the financial statements! Balance SheetIncome Statement with Budget ComparisonsBank statements and reconciliations ENTIRE BoardCheck RegisterAccounts Receivable DelinquenciesAsk Questions!Cathy

Compare the Reserve Study to the BudgetBudgeted allocations being made?Borrowing from Reserves?Look for a Due to/From Reserves on the Balance Sheet s/b disclosed if not apparent from the financials

CathyWe see lots of variance in this area:Bgt doesnt agree to RSAllocations dont agree to bdgtOp and res expenses mixed upBorrowing not approved/documented/disclosed to mbshpMost mgt companies disclose the Due to Reserves on the face of the mgmt report now

3rd B- Banking ControlsCash Verification very importantSee FAQ handout

Insist on bank statements at least quarterly for ALL bank accounts (This includes CDs)

Entire board should receive bank statements and reconciliations

Reserves Financial Controls:Two Board members authorize all disbursementsBank Statements and Reconciliations Board ReviewVarious banking institutions - $250K FDIC Unlimited checking coverage ending 12/31/12Low risk investments protect principal

CathySometimes not possible to have reserve checks as only checks are out of the op account key is good documentation of board authorization of ANY check/transfer out of the Res cash accountCathyTransfers out s/b for exact amounts approved, not general amountsWe believe more than the Treas should see the bank statements/recons

SummaryBudgeting:ProcessDevelopmentFinancial Controls/Follow upEconomy (Bad) - Effect on BudgetingBanking Best Practices Cash control

Cagianut & Company Budget FAQs

Cathy

PPT Presentation:www.hoacpa.com

Questions ?

Thank you!Cathy Kuhn Cathy@hoacpa.com