Financial Planning Services

When you ask most managers their strengths, they will typically respond with their people skills, management skills, and real estate experience. Very few will ever mention that they enjoy numbers, the accounting side, the financial statements, or the budgeting process. After all, that’s what they have an accounting department for, right?

Financial Management Consultation

The world of corporate finance deals with many of the same issues we do on a daily basis when it comes to budgeting, forecasting, planning, financing, and investing, however there are very few bridges of knowledge that cross over the gap between the association world and the rest of the corporate world. Bridge building is now underway in the areas of Reserve Forecasting, Projected Pro-Forma Budgeting and Assessment Planning.

Every community association has three functions—to serve as a business, a governance structure and a community. Community associations are generally non-profit corporations, functioning in many ways as businesses with revenues (association dues, rentals of clubhouses, revenues from golf, restaurant, etc.) and expenses.

As a business, the Board needs a business plan for the maintenance of the assets of the association. Which assets or parts thereof (i.e. partial pavement replacements, phasing roofing replacements) will require repair or replacement, when will they need replacement, and at what cost are the most important questions one must ask in determining a forecast of future capital projects. When managing the contributions (assessments) of hundreds of homeowners, it is essential to provide as accurate a forecast as possible. Professional Reserve Study providers have the extra expertise from conducting hundreds of assignments each year to apply engineering success stories from other associations and determine the most reasonable reserve budget that is consistent with Board objectives. The benefit to homeowners is that present and future owners are treated fairly and equitably. As an example, special assessments are typically conducted because those who lived in the community previously did not pay their fair share and as a result, current owners have to pay extra.

Financial Planning is the continuous “blueprint” for the future. Board members frequently turn over. Without a plan, future Board members may not understand the logic or reasons that prior decisions were made. Also, the Financial Plan provider will help the future Boards with periodic updates of the original plan to keep the association current and on track.

Reserve Forecasting

In order to forecast reserves you must start with the reserve study. If you don’t have one, get one—and get a good one. Call us for a referral. If you have one, great! Use it!

The other important component is the Reserve Investment Policy, adopted by the Board of Directors. Find it, dust it off and follow it. Or call us and discuss how, what, when, and where your reserves are to be invested, draft it, and then adopt it.

The Reserve Investment Analysis will then include the following components:

• Five Year Forecast
• Reserve Contributions and Expenditures per the study are incorporated
• Net Reserves are forecasted at the end of each fiscal year
• Tax Planning Options are evaluated
• Estimated Net Interest Income is forecasted
• Reserve Investments (per the policy) are included

Now you have the basic building blocks for the Capital Reserve Budget and a tool to begin some true financial planning.

Projected Pro-forma Budgeting

Budgeting is old hat to most managers. You know how to do it, you’ve been to a gazillion seminars on the topic and you can’t wait for it to be adopted so you can get back to the real part of the job.

There is a difference between an annual budget and a financial plan. First we focus on a multi-year forecast. It is a best practice in the industry. It should also include reasonable operating contingencies (as it is a better way to budget for some slight overruns rather than padding the pool expense or bumping up supplies). It also incorporates the Capital Reserve Budget from the Reserve Investment Forecast discussed above and allows for the revenue planning part to begin.

Assessment Forecasting

Assessment is the 10 letter word in our industry and yet it is the lifeblood of our associations. Assessments should go up every year. Repeat after me. Assessments should go up every year. It is only a matter of how much and how fast. Our population is changing and a growing number of our homeowners are on fixed incomes. Steady, regular increases are not only appropriate but should be expected to properly maintain our homes and market values.

Assessments are categorized in three areas: Operating, Reserve and Special. Operating assessments pay for the Operating Budget. Reserve assessments pay for the Capital Reserve Budget. Special assessments are just that, special, as needed, and in many cases, require evaluation every few years.

Reserve Balances are included from the Reserve Investment Forecast. Hopefully they are "Just in time" for the capital expenditures. If not, the association may need to consider a special assessment, a loan (see below) or both. The Projected Pro-forma Budget provides the best guess on total expenses so income and assessments can then be forecasted to meet short and long term needs. Again steady, regular increases are always recommended. Another best practice is establishing a Delinquency reserve. Again, the world of corporate finance knows it will not collect all of its projected income and creates a reserve annually. Associations can easily estimate a reserve by looking at historical write-offs and related expenses to build this in to the financial planning process.

Financing Fun

Yes, the world has changed and bankers have finally figured out the association lending niche. Getting a loan is still not necessarily fun, however it is a lot easier than it used to be. The loan repayments are projected based on interest only or principal and interest payments. Yes the loan payment really needs to be in the budget (unless that pool expense is really padded really well). Contributions to reserves are analyzed and optimized when a new loan payment does not match the current budget year. Reserve contributions still need to be made at the recommended level per the reserve study. The reserve contribution and loan repayment are independent financial variables and it is not good practice to take the loan payment from the reserve contribution. (However it will depend on the purpose of the loan and the recommended allocation of future reserve contributions). Most banks also require some type of Loan Covenant for Debt Service Coverage Ratio or Cash Flow Coverage. Basically, the bank and your board want to make sure there is enough cash to pay the operating expenses, the loan, and fund future reserves. Loan repayments must be in the budget and the financial plan puts them there when they are needed.

Trusted Industry Experts

Financial Management Consultation is where we need to get to next. Not just data, but information. Not just numbers, but evaluation. Not just years, but trends. Not just today, but for tomorrow and next year and the next year. Bridge building is hard work, but just look at the results!

Lastly, having a long term financial plan is simply good business sense.

For more information, call our Trusted Industry Experts at (847) 304-5940 or email service@communityadvantage.com.