Seven Common Budgeting Mistakes and How to Avoid Them

By Bill Henley

Each year, a cooperative’s board of directors must decide on a budget for the coming year in order to pay the bills in a timely manner, fund reserves and maintain the asset. This is a principal responsibility of the board of directors as outlined in the corporate bylaws.

Budgeting is challenging for all boards, regardless of the cooperative’s age, location, and needs. Here are a few considerations for your cooperative “budgeteers.”

1. The Annual Optimist

No one likes to increase monthly carrying charges for the membership. Often there is a tendency to make optimistic assumptions concerning what the coming year holds. You may want to assume that things will run smoothly without change and without special problems or needs. It never works out that way. A tree dies. A galvanized pipe breaks. A key employer in the area closes and lays off workers. The city increases property taxes. There is a fire, and you have a $10,000 deductible. Truly, you cannot predict the future. It is okay to base your budget on prior experience, but beware of assuming everything will run without incident. When you demand that a proposed increase be skimped to save a dollar, you may be skimping the cooperative and not the budget.

2. Investing to Manage Expenses

What are you currently earning in interest on your reserve accounts? Unless you have an investment secret that you need to share with all of us, most likely your interest income has been a fraction of what it used to be. Perhaps the best way to increase the return on your reserve funds would be to use reserves to update a specific facet of your operations to reduce an expense. A terrific example is replacing those old toilets with low-consumption toilets that reduce the water bills. It costs nothing to have an analysis done to see what the return on investment may be. Many cooperatives still have old HVAC systems that use the obsolete R-22 refrigerant. The cost of R-22 has sky rocketed. Your reserve funds may net you better operations by planning replacement of old equipment. Any savings can be invested back into your reserve accounts.

3. The Annual Pessimist

The only thing worse than trying to enter the fiscal year too optimistically is the damage done by that board member (or members) who are never satisfied with anyone or anything. “How dare you suggest that the rates be increased when nothing is done right in the first place? We pay too much for this or that. Staff is incompetent. No one monitors what is paid.”

You know this person. He wants to complain about everything, regardless of reality, aging of the asset, the challenges involved in the daily operations of the cooperative, especially in a constant, negative environment. Should you manage the property efficiently? Of course.

Should you expect champagne conditions on a beer budget? Perhaps not. Work to control costs but do it with a positive attitude that does not create friction. future. If you do this year’s budget without measuring it against long-term needs, you are passing on a problem to future board members. They may be faced with a 10 percent increase due to the failure this year to increase rates by 3 percent. Your cooperative should never just be a place where people live solely for the “low rents.” Your cooperative should facilitate community living, too. Budget carrying charges/ maintenance fees properly; do not budget just for a “low rent” philosophy. You may end up with only “low rent” residents who do not understand cooperative living.

5. Current Events

On a national, state and local basis, things change and things happen that affect the economy of individuals, businesses and governments. Does your board of directors pay attention to these events and trends? You will find you are not immune to these changes. For example, after September 11, 2001, insurance rates sky-rocketed. Today, unemployment is at record low levels nationally and in many states. You are competing for professional staff and services. So how will you adjust your budget to anticipate higher personnel costs, higher health and employee benefit expenses? New HUD mandates on property upkeep? New demands for security and security systems in a social time where crime is down, violence is up and everyone is suing property owners if the victim suffers injury. As a board member and trustee, you need to keep up with current events and not assume immunity from the impact of these events.

6. Reserves

Reserves, reserves, reserves! Board members, do you know what your reserve balances are?

Do you know how much is set aside monthly for your reserve accounts? Do you know where they are invested? Are they fully FDIC insured? Do you know the trend in reserve funding over the past years and the forecast for the coming 5-10 years? Reserves and proper funding of the reserve accounts, both for capital replacements (RR) and for the general operating reserve (GOR) are the difference-maker for your cooperative. They provide you with operational and budgeting strength if well-funded and planned for the future.

7. The Big Picture

A board of directors, as stewards of the corporation, acting in the best interests of the cooperative as a whole, should view the budget process in the overall, big picture and less as a microscopic examination of each and every individual expense. Whatever one tries to pin down to an exact value will mean absolutely nothing as soon as the new budget year begins.

Have a long-range plan. Commit to that plan and do not allow the skimpers to take over the budget process. Each year, NAHC has training in budgeting. Do you attend that class? Do you need to go back and not only attend it but pay attention to what is presented?

In conclusion, as a steward of the cooperative corporation, avoid the common mistakes and attitudes mentioned earlier. Be a positive participant in your cooperative’s operation. See if one or two of the “budget mistakes” noted in this article are familiar to your board of directors. Focus on those to strengthen your budget and in the end, your cooperative.

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Seven Common Budgeting Mistakes and How to Avoid Them

By Bill Henley

Each year, a cooperative’s board of directors must decide on a budget for the coming year in order to pay the bills in a timely manner, fund reserves and maintain the asset. This is a principal responsibility of the board of directors as outlined in the corporate bylaws.

Budgeting is challenging for all boards, regardless of the cooperative’s age, location, and needs. Here are a few considerations for your cooperative “budgeteers.”

1. The Annual Optimist

No one likes to increase monthly carrying charges for the membership. Often there is a tendency to make optimistic assumptions concerning what the coming year holds. You may want to assume that things will run smoothly without change and without special problems or needs. It never works out that way. A tree dies. A galvanized pipe breaks. A key employer in the area closes and lays off workers. The city increases property taxes. There is a fire, and you have a $10,000 deductible. Truly, you cannot predict the future. It is okay to base your budget on prior experience, but beware of assuming everything will run without incident. When you demand that a proposed increase be skimped to save a dollar, you may be skimping the cooperative and not the budget.

2. Investing to Manage Expenses

What are you currently earning in interest on your reserve accounts? Unless you have an investment secret that you need to share with all of us, most likely your interest income has been a fraction of what it used to be. Perhaps the best way to increase the return on your reserve funds would be to use reserves to update a specific facet of your operations to reduce an expense. A terrific example is replacing those old toilets with low-consumption toilets that reduce the water bills. It costs nothing to have an analysis done to see what the return on investment may be. Many cooperatives still have old HVAC systems that use the obsolete R-22 refrigerant. The cost of R-22 has sky rocketed. Your reserve funds may net you better operations by planning replacement of old equipment. Any savings can be invested back into your reserve accounts.

3. The Annual Pessimist

The only thing worse than trying to enter the fiscal year too optimistically is the damage done by that board member (or members) who are never satisfied with anyone or anything. “How dare you suggest that the rates be increased when nothing is done right in the first place? We pay too much for this or that. Staff is incompetent. No one monitors what is paid.”

You know this person. He wants to complain about everything, regardless of reality, aging of the asset, the challenges involved in the daily operations of the cooperative, especially in a constant, negative environment. Should you manage the property efficiently? Of course.

Should you expect champagne conditions on a beer budget? Perhaps not. Work to control costs but do it with a positive attitude that does not create friction. future. If you do this year’s budget without measuring it against long-term needs, you are passing on a problem to future board members. They may be faced with a 10 percent increase due to the failure this year to increase rates by 3 percent. Your cooperative should never just be a place where people live solely for the “low rents.” Your cooperative should facilitate community living, too. Budget carrying charges/ maintenance fees properly; do not budget just for a “low rent” philosophy. You may end up with only “low rent” residents who do not understand cooperative living.

5. Current Events

On a national, state and local basis, things change and things happen that affect the economy of individuals, businesses and governments. Does your board of directors pay attention to these events and trends? You will find you are not immune to these changes. For example, after September 11, 2001, insurance rates sky-rocketed. Today, unemployment is at record low levels nationally and in many states. You are competing for professional staff and services. So how will you adjust your budget to anticipate higher personnel costs, higher health and employee benefit expenses? New HUD mandates on property upkeep? New demands for security and security systems in a social time where crime is down, violence is up and everyone is suing property owners if the victim suffers injury. As a board member and trustee, you need to keep up with current events and not assume immunity from the impact of these events.

6. Reserves

Reserves, reserves, reserves! Board members, do you know what your reserve balances are?

Do you know how much is set aside monthly for your reserve accounts? Do you know where they are invested? Are they fully FDIC insured? Do you know the trend in reserve funding over the past years and the forecast for the coming 5-10 years? Reserves and proper funding of the reserve accounts, both for capital replacements (RR) and for the general operating reserve (GOR) are the difference-maker for your cooperative. They provide you with operational and budgeting strength if well-funded and planned for the future.

7. The Big Picture

A board of directors, as stewards of the corporation, acting in the best interests of the cooperative as a whole, should view the budget process in the overall, big picture and less as a microscopic examination of each and every individual expense. Whatever one tries to pin down to an exact value will mean absolutely nothing as soon as the new budget year begins.

Have a long-range plan. Commit to that plan and do not allow the skimpers to take over the budget process. Each year, NAHC has training in budgeting. Do you attend that class? Do you need to go back and not only attend it but pay attention to what is presented?

In conclusion, as a steward of the cooperative corporation, avoid the common mistakes and attitudes mentioned earlier. Be a positive participant in your cooperative’s operation. See if one or two of the “budget mistakes” noted in this article are familiar to your board of directors. Focus on those to strengthen your budget and in the end, your cooperative.

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