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Dealing with D&O
Enforcing House Rules
Pool Closing
Snow - How to plan for the inevitable
What is a Management Company?
What Your Manager Should Know
Self-Management: Risky Scheme?
Why Bother to Budget?
Review Your Record Keeping
What Are You Getting for Your Management Dollars?
Article: Why Bother to Budget?
By: Alvin Wasserman
From Habitat Magazine
Alvin Wasserman is director of Fairfield Property Services in Commack, N.Y.
How many individuals and families prepare a budget? If people do budget, indications are they are not successful given the rise in consumer debt and low saving rates. All too often people see what they want and buy it: instant gratification. This undisciplined approach to finances is rather childlike. In one way, it is enjoyable to be like a child until you have to face the consequences of your actions as an adult. For many individuals, the connection between earnings and spending is a loose one at best. Then why do boards place such a great emphasis on budgets? Are not boards an extension of the individuals that comprise them?
Boards and managing agents are responsible for owners' money and are accountable to them. Boards place emphasis on budgets because they have a sense of responsibility to the community for their actions.
A budget is a framework that defines the financial parameters in which an organization operates. A board votes to approve a budget and by so doing, defines the financial parameters for a set period. Authorized expenditures fall within the budget framework. Expenditures outside the framework require board action before going forward.
Boards have a fiduciary responsibility to owners. The fulfillment of their fiduciary responsibility manifests in the preparation of a budget, and managing the affairs of the community within those parameters. A budget consists of several components: income and expenses from operations, debt service, and capital expenditures. Ideally, for a non-profit corporation the budget should have a positive cash flow after operating expenses and debt service have been met. Capital expenses are paid out of a reserve fund, by special assessment, or by borrowing, that in turn increases debt service. It is preferable for boards to establish and maintain a reserve fund for contingencies and future capital expenditures. A healthy reserve fund, built up over time, keeps debt low or non-existent and minimizes the need to tax owners with assessments. Once established, a reserve fund provides financial peace of mind for the community.
In any case, operating expenses should be met by operating income, not by drawing down savings or assessing the owners. An operating deficit will not go away by itself, it must be consciously addressed or it will grow with inflation. If a board lets a deficit grow, the funds needed to bridge the gap will increase over time. To ignore a deficit would be irresponsible.
Every organization has limited funds. A budget serves as a tool to live within one's means, to live carefully. Since so many individuals live their financial lives impulsively, it is important for a board to keep a close watch on expenditures. It is very easy to justify spending; someone always comes up with a good cause. If expenditures are not watched closely, the board will eventually have to answer to the owners. What did you do with our money? Why are our fees going up?
Living within a budget requires putting finances under observation. It requires facing circumstances as they are and not dreaming. It is one part of living a disciplined life. It requires restraint when the desire for something is presented. At times, it calls upon creativity and fluidity to make things work. This is why we bother to budget.
What you you think?
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