The Financial Statement Audit as a Useful Tool in the Budget Process by Samuel Schneider, CPA

When preparing the Association’s operating budget, there are several useful tools at the Board’s disposal.  One of those tools is the annual financial statement audit.  During the budget process, an important step is to project out the remaining months of the year to estimate whether the Association will be in a surplus or deficit position for the current year.  The audited financial statements include budget vs actual information that can be a quick and valuable reference to obtain data in order to analyze trends in the Association’s income statement line items.  This holds true for projecting the remainder of the current year, as well as arriving at the following year’s budget numbers.

Understanding the Association’s cumulative surplus/deficit (operating fund balance) situation coming into a given year is crucial when preparing the annual operating budget.  Aside from the various income and expense line items, cumulative surplus/deficits need to be taken into consideration as a way to better assess cash flow needs.  The audited financial statements give you a clear picture of where the Association stands coming into the current year.  By taking the audited operating fund balance and adding/subtracting the current year projected surplus/deficit, there is a better estimate of the Association’s position coming into the next year.  Why is this so important?

Now the Board is at the point where contracts and prior year trends have been reviewed, projections have been estimated, and there is a balanced budget.  Does that mean the job is complete?  Not necessarily.  Now that the prior year audited financial statements have been utilized and there is an understanding of the operating fund balance, there are some additional items to consider.  In an operating fund deficit situation, often times an Association may not be funding its capital reserves or other funds on a monthly basis.  This can be detrimental in the longer term when the big ticket items in the community start requiring major repairs and replacements.   Although there is a balanced budget, the past deficits and reduced cash flow have not been accounted for.  These past deficits will eventually need to be addressed and are often done so in the form of increased maintenance fees and/or special assessments as ways to increase cash flow and fund the capital reserves more timely.  By not having a clear understanding the Association’s position coming into the new year, these considerations may fall by the wayside.

Perhaps the Association has a strong operating fund surplus coming into the next year.  Although there may be a balanced budget, this surplus may provide new opportunities.  Perhaps there is a landscaping beautification project that the Board has wanted to do for some time.  By adding that expense into the budget with a corresponding Prior Year Surplus income line item, this would allow for these surplus funds to be utilized productively.  Perhaps an analysis of the capital reserve fund notes that additional funding is required.  Adding an additional contribution expense to the budget with a corresponding Prior Year Surplus income line item could accomplish this.  Both of these potential scenarios are possibilities with a firm understanding of the Association’s operating fund balance coming into the new year.

It is important to keep in mind however, that just because an operating fund surplus exists, that it should not be utilized immediately.  Industry standards suggest that Boards maintain a level of 2-3 months of operating expenses in the operating fund balance.  Amounts above this recommended standard are what should be considered for possible utilization as discussed previously.

The annual financial statement audit is a useful and valuable tool for a community association during the budget process and can assist the Board in carrying out its fiduciary responsibility.