Avoid Expensive Surprises by Understanding Budgets

Karen King & Associates Inc. Condo News Avoid Expensive Surprises by Understanding Budgets

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Avoid Expensive Surprises by Understanding Budgets

Posted By Karen King

Is your condo’s budget being handled properly? Is there a discussion process? Does your condo manager have a clear vision of what your board wants for the condominium?

A proper budget process is critical to avoid special assessments or levies and have a financially healthy condominium.

There are multiple approaches to creating a budget. The two most common types are the zero-based budget and the incremental budget.

Zero-Based Budgeting

Zero-based budgeting requires all expenses to be justified for each new period. It starts from a zero base and every function within an organization is analyzed for its needs and costs.

The key advantage to zero-based budgeting is alternatives analysis. It requires that the board and manager identify alternative ways to perform each activity (such as keeping it in-house or outsourcing it), as well as the effects of each item. The process makes managers consider other ways to run the condominium. It also curtails budget inflation. Since one must tie expenditures to activities, it becomes less likely that the budget can be artificially inflated. Communication is extensive and all parties get a clear view of the future vision for the condominium corporation. In short, many of the advantages of zero-based budgeting focus on a strong, introspective look at the condominium corporation and exactly how the board is allocating its resources in order to achieve that vision.

The main downside of zero-base budgeting is the exceptionally high level of effort required to investigate and document all condominium activities. It calls for an enormous amount of analysis, meetings, and reports, all of which requires additional staff to manage the process.

Incremental budgeting

Incremental budgeting is an easy way to update a budget model, taking what has happened in the past and rolling it forward to create the next budget period. Though this approach results in simplified budget updates, it does not provoke a detailed examination of corporation’s efficiencies and expenditures, and so does not assist in the creation of a lean and efficient enterprise.

Incremental budgeting is easy to implement and allows corporations to plan multiple years into the future. It does allow for a good estimate of unpredictable expenses, such as how much plumbing repairs and maintenance (“R&M”) a building requires. It is difficult to determine where costs have been incurred and how these costs contribute to value creation. If you are tired of line items running over with little explanation or accountability, chances are your manager is using this model exclusively.

How Should You Budget?

So what method is best for your condominium? That requires an analysis of where and how your condominium corporation spends their money. We use our specialized optimization model, designed by MBA graduates, to ensure your corporation is efficiently budgeted. Please call us if you are interested in finding out more.

(Image courtesy of GotCredit)

Written by Karen King

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