Financial Best Practices and Guidelines for Creating a Budget

Implementing effective financial practices can greatly enhance your HOA’s financial health and stability. The primary goal is to ensure the association remains financially secure while meeting the needs and expectations of its members.

Each HOA is unique, so these best practices may need to be tailored to suit the specific needs of your community. Always consult financial professionals and legal experts who specialize in HOA management to ensure compliance with local laws and regulations.

With sound financial management, your association will be well‑prepared to address both current needs and future challenges, promoting long‑term success and resident satisfaction.

Financial Best Practices

1. Implement a robust budgeting process. A well-structured budget is essential for effective financial management in homeowners associations (HOAs). Here’s a simplified approach:
   1. Start Early – Begin 3–4 months before the fiscal year ends for ample data gathering and analysis.
   2. Review Historical Data – Analyze the past 2–3 years to spot income/expense trends.
   3. Involve Key Stakeholders – Form a budget committee (board, manager, financially savvy owners).
   4. Use Zero-Based Budgeting – Justify each expense from zero to cut waste.
   5. Plan for Contingencies – Set aside 5–10% for surprises and assume 3–5% increases in recurring costs.
   6. Balance Short- and Long-Term Needs – Fund today’s needs and the reserve account.
   7. Seek Professional Review & Communicate – Have a CPA review it, then explain major changes to homeowners to build trust.
2. Maintain Adequate Reserves. A well-funded reserve is vital for long-term financial health. Key steps:
   1. Conduct Regular Reserve Studies – Hire a professional every 3–5 years (more often for older communities) to assess:
      1. Inventory of common-area components
      2. Current condition & remaining useful life
      3. Projected replacement/repair costs
      4. Recommended funding plan
   2. Set Clear Funding Goals – Aim for at least 70% funded (you hold 70% of what immediate replacements would cost).
   3. Make Consistent Contributions & Keep Reserves Separate – Budget per the study and keep funds in a separate account.
   4. Invest Wisely – Use low-risk vehicles such as:
      1. High-yield savings accounts
      2. Certificates of Deposit (CDs)
      3. Treasury securities

      Consult a financial advisor to comply with state laws.

   5. Review and Adjust Regularly – Reassess annually and tweak contributions as conditions change.
   6. Plan for Special Assessments as a Last Resort – Define when/how you’ll levy them and communicate transparently.
3. Establish Strong Financial Controls and Procedures. Robust controls prevent fraud, ensure accuracy, and maintain trust.
   1. Segregation of Duties – Split tasks to reduce risk:
      1. One person deposits checks
      2. Another reconciles bank statements
      3. A third approves expenditures

      Require dual signatures for transactions above $1,000.

   2. Regular Bank Reconciliations – Do them monthly, by someone who doesn’t handle deposits or checks. Investigate discrepancies immediately.
   3. Approval & Document Retention Policy – Create a process that may include:
      1. Purchase orders for large expenses
      2. Pre-approved limits for routine maintenance
      3. Board approval for significant costs

      Keep financial records securely for at least seven years (with backups).

   4. Regular Financial Reviews – Have board members (not handling daily finances) review quarterly. Consider an annual CPA audit if required or prudent.
4. Implement Effective Collections Procedures. Timely assessment collection protects cash flow.
   1. Clear Collection Policy – Put due dates, grace periods, late fees, and delinquency steps in writing. Follow state law and apply uniformly.
   2. Early Intervention – Send reminders immediately when accounts lapse—older debts are harder to collect.
   3. Online Payments & Payment Plans – Offer convenience and flexibility for temporary hardships while keeping money flowing.
   4. Use of Collection Agencies – For serious delinquencies, use FDCPA-compliant agencies; be ready to file liens if necessary.
   5. Maintain Confidentiality – Report overall delinquency rates without naming individuals.

Do’s and Don’ts for Drafting a Community Association Budget

Following these guidelines helps create budgets that promote financial stability and trust among residents.

Tara Drake, LCAM, CMCA, AMS

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With over 15 years of leadership in community association management, Tara Drake excels in strategic planning, operational efficiency, and fostering strong board and resident relationships. Known for her collaborative approach and commitment to open communication, she helps communities thrive through trust, transparency, and teamwork.

• Tara Drake, LCAM, CMCA, AMS

  https://copperdoorco.com/author/taradrake/

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