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 PREPARING
BUDGETS
Each year, boards are required to prepare a
pro forma budget for
conducting the operations of their associations.
Civil Code 1363(b)
As
nonprofit organizations, associations must budget so that revenues do not exceed expenses,
i.e., total income minus expenses should equal $0.
There are two
techniques for preparing budgets: (i) zero base budgeting and (ii) incremental
budgeting.
1. Zero Base Budgeting.
This approach starts each year's budget from a zero base, i.e., at the beginning
of the budgeting process, all budget line items have a value of $0.
a. Advantages. Since each line
item starts at zero, the budget committee must justify each item in the
budget. This should bring to light and wastage and
obsolete operations.
b. Disadvantages. This
approach can be very time consuming.
2. Incremental Budgeting. In
incremental budgeting, the current year's budget serves as a basis for next
year's budget and is simply adjusted. The most common methods of adjustment are:
(i) CPI adjustments and (ii) variance projections.
a. CPI Adjustment. The easiest
and least effective method is to simply take the Consumer Price Index (the
measure of inflation published by the government) and apply it to all line
items. The disadvantage is that not all items in a budget are affected by
the CPI. This results in some line items being over budgeted
and others being under-budgeted.
b. Variance Adjustments. This
is the method used by most associations. Since most line items in an
association's budget are necessary rather than discretionary (utilities,
insurance, maintenance, etc.), the budget committee starts with
the current year's budget and looks at variances projected through the
end of the fiscal year. This gives the committee an estimate of actual
expenses for the year for each line item so it can adjust expenses up
or down, as needed.
Dues Increases. If the board plans to
increase dues for the following year, it must publish the budget 30 to 90 days
in advance of the new fiscal year.
Civil Code
1365(a)4 Failure to meet this requirement nullifies the increase and requires
membership approval of the dues increase.
Civil Code
1366(a)
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Sincerely
yours,
Adrian
J. Adams, Esq.
Adams Kessler PLC |
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