m-206 financial management slides

Course Introduction

Welcome! Introductions Ice Breaker Housekeeping Agenda Course Materials PMDP courses

Course Introduction

Housekeeping Ground Rules– Be on time– Listen to and show respect for the

opinions of others – Avolid side-conversations– Cell Phones off

Breaks Lunch Facilities

Course Introduction

Course-Agenda Course Introduction Module 1: Budget Development Module 2: Understanding Financial

Reporting Course Summary

Course Introduction

Professional Management Development Program (PMDP)M-100: The Essentials of Community Association ManagementM-201: Facilities ManagementM-202: Association CommunicationM-203: Community LeadershipM-204: Community GovernanceM-205: Risk Management M-206: Financial ManagementM-206: Financial Management

Course Introduction

Course Materials Pre-session Assignments Participant Guide–2 Modules:

• Financial Management• Bidding and Contracts

–Activities Course Evaluation & Exam forms

Course IntroductionImportance of Course A budget is a financial plan for

managing community association. Budget establishes:–What services community provides–When they will be done–How they will be done

Introduction to Module 1: Budget Development

Budget Development

Focus Developing a

community association budget

Budget DevelopmentModule 1 Objectives:1. Identify the elements of Duty of Care.2. Identify and explain the elements associated with Duty of

Loyalty.3. Identify a budget line item and its level of service based on

the association’s obligations, its needs, and owner expectations.

4. Develop budget line items using zero-base budgeting and a comparison to historical trends.

5. Apply zero-base budgeting to calculate current replacement costs.

Budget Development

Module 1 Objectives, cont.:6.Determine whether current replacement costs

are adequately funded.7.Apply zero-base budgeting to calculate the cost

of performing a service in-house versus outsourcing a position.

8.Reconcile budget revenues and expenses.9.Obtain approval for an association’s operating

and replacement fund budgets.

Budget Development

Optional Pre-Reading

Three chapters from M-100 available to review basic concepts:

Chapter 5: Budgets and Reserves Chapter 6: Section on Assessment Chapter 7: Report Funding &

Financial Statements

Lesson 1: Fiduciary Duties

Fiduciary Duties

Lesson 1 Objectives: Identify the elements of

Duty of Care

Identify and explain the elements associated with Duty of Loyalty

Fiduciary Duties

Board members are bound by state law to:Act within their authorityExercise due careAct in good faith Act with ordinary care that they believe to be in the best interests of the association

Fiduciary Duties

Fiduciary duties include: Duty of Care

Duty of Loyalty

Fiduciary Duties

The three main functions of the Board of Directors is:1.Policy making body2.Approval body3.Oversight body

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Fiduciary Duties

The Duty of Care:Requires a director to act in a reasonable and informed manner when participating in the Board’s decisions and its oversight of the day to day management of the community.



Fiduciary Duties

Elements of Duty of Care: Attend board meetings regularly

Serve on a committee

Exercise independent judgment

Act in the best interest of the corporation and its members

Obtain adequate information

Rely on experts

Delegate authority to act

Duty of Care

Act

Serve

Delegate Authority

Independent JudgmentAttend

Obtain information

Rely on Experts

Fiduciary Duties

The Duty of Loyalty requires the Director to exercise power in good faith and in the best interest of the community rather than the Director’s own interest or the interest of another person or entity.


Fiduciary Duties

Duty of Loyalty relates to: Conflict of Interest

Corporate Opportunity

Confidentiality




Lesson 2: Developing Line Items

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Developing Line Items

Lesson 2 Objective: Identify a budget line

item and its level of service based on the association’s obligations, its needs, and owner expectations


No two community associations: Are identical Face exactly the same situation

from one year to the next


Assess and weigh the set of factors that determine:Whether an item is included in an association budget.And if so, the level of service to provide.



Distinguish between: Association Obligation Association Need Owners Expectation



Two types of budget line items:1-Mandatory: Requirements the

community is obligated to meet.

2-Discretionary: Items are based on owner, board, andcommittee desires, but the association is not obligated to fund.


When to identify the level of service?When a variation in the level of service is possible. A change in obligation, need or expectation occurs.


Need for Contingency Planning Budget for contingencies Accumulate operating contingency

funds Surpluses Separate budget line items

Rule of thumb for level of accumulated funds—2-5 % = minimum

10-15% = very good


Activity #1: Level of Service for an Association Budget Line Item

Purpose: To practice identifying a level of service by balancing obligation, need, and expectation.

Lesson 3: Historical Trend & Zero-base

Budgeting

Historical Trend & Zero-base Budgeting

Lesson 3 Objective: Develop budget line items using

zero-base budgeting and a comparison to historical trends.


What is the difference? Historical = estimates line items

based on past trends Zero-base = starts from zero and

justifies every amount added to line item


Historical trend–Estimates line items based on

past trends–Easier to use by itself

Historical Trend Budgeting Process:

What When WhyHow



Zero-base–Verifies the need for a budget

line item–Starts with zero and justifies

every cost source added to the line item–Meets owner expectations

Zero-Base Budgeting Process What When Why How


Zero base budgeting ensures: The association is charged only for their utilities No “fluff” in large dollar line items like landscape Pet projects are not

being funded On-site employees aren’t being paid more than

the worth of the services



Zero-Base Budgeting Process Steps1. Identify each cost component for the line item2. Determine the basis for estimating each cost

component3. Calculate the zero-base estimate of the

expense 4. Compare the zero-base item with the historical

trend for the item5. Investigate and resolve any significant

discrepancies 6. Adjust the estimated expense for any

anticipated increase in prices 7. Recommend a budget line item

Information you need: Basis for estimating individual

budget line items Association assets Asset lifetimes


Basis for estimating individual line items include:Rate Quantity TimeNumber of Entities



CostAreas

Description

R Rate: Expected rate and the unit of measurement to which it applies

Q Quantity: The expected quantity of the cost component

T Time: Time period

N Number: Number of entities

Formula Zero-base Estimate = R x Q x T x N

Sources of Information for Budget DevelopmentManagement CompanyUtility CompaniesLocal contractors and consultants Reserve study, engineersState agenciesCommunity Associations InstituteTrade associations


Sources of Information on Association AssetsInventory and analysis sheetsManufacturer’s information warranty statementsOriginal as-built drawingsNew product information


Sources of Information on Assets LifetimesPublications from CAIOther trade associationsLocal contractorsConsultantsState agenciesReserve study professionals, engineersIRS Certified Public Accountants



Activity #2a: Develop a Utility Line Item—Example

Purpose: To apply the procedure for

developing budget line items To identify the sources of

association costs for water usage


Basic Instructions for Small-Group Work:Choose a leaderChoose a timekeeperChoose a recorder


Activity #2b: Develop a Utility Line Item— Group Work

Purpose: Develop a zero-base line item Compare a zero-base line item to the

historical trend to see if there is a potential for efficiency and savings

Lesson 4: Replacement Reserves

Replacement Reserves

Lesson 4 Objectives: Apply zero-base budgeting to

calculate current replacement costs.

Determine whether current replacement costs are adequately funded.


Why fund replacement reserves? The association needs a plan Regular periodic assessments are

most equitable Loans usually cause a unit owner

to pay for the asset twice


Two Parts of a Reserve Study1.The information about the

physical status and repair/replacement cost of the major common-area components the association is obligated to maintain.

2.Analysis of association’s reserves, income, and expenses.


Reserve Specialist (RS): CAI established the Reserve

Specialist designation to help identify qualified reserve study providers.

The Reserve Specialist Code of Ethics is online and in the Resource Section of this guide.


The four primary funding strategies:–Baseline funding–Full funding –Threshold funding–Statutory funding


The concept of basic investment principles:The board of directors, supported with the advice of the community association manager, has a fiduciary responsibility to all unit owners to make sure reserve funds are invested properly.


Investment Concepts Safety Liquidity Yield Laddering


“Suitable” investments instruments for association reserves:

Certificates of deposit (CDs)

Money market deposit accounts (savings, checking)

Money market funds U.S. treasuries and U.S.

treasury “strips” (zero coupons).


Activity #3a: Develop a Replacement Line Item—Example

Purpose: To review a roof replacement

example together as a class before working on your own in groups.


Activity #3b: Develop a Replacement Line Item—Group Work

Purpose: To practice: Calculating the current

replacement cost for an item using zero-base budgeting.

Determining whether the current replacement cost for an item is adequately funded or not.

Lesson 5: Personnel Cost

Personnel Cost

Lesson 5 Objective Apply zero-base budgeting to

calculate the cost of performing a service in-house versus outsourcing a position.

Personnel Cost

Personnel Line Items A fourth use of zero-base

budgeting is to compare the cost of performing a service in-house with outsourcing.

Personnel Cost

Use Zero-based budgeting to inform employee: Total cost of position to community associationTotal compensation versus take-home pay

Personnel Cost

Base compensation = gross pay

Take-home pay = gross pay - taxes - benefits

Wages = pay for nonexempt (hourly) employees

Salary = pay for exempt (salaried) employees

Personnel Cost

Benefits Determined by the employer. Employer may require matching

contributions from employee. Benefits vary by employer and locale. Usually a percent of gross pay or of

the cost of the benefit.

Personnel Cost

Workers’ compensation insuranceRate varies by employee classification.States establish the requirement and the amount of coverage necessary.In most states, commercial insurers provide the actual coverage.

Personnel Cost

Payroll taxes Set by the taxing body Employer must pay its share and

withhold and forward employee’s share State and local governments vary in

terms of requiring payroll deductions—and the types of deductions required

State income tax Federal income tax FICA (social security)

Lesson 6: Reconciling Revenues & Expenses

Reconciling Revenues & Expenses

Lesson 6 Objectives:• Reconcile budget revenues and

expenses.• Obtain approval for an association’s

operating and replacement fund budgets.


Factors that Affect Assessment Governing Documents Statutes in some states Inflation Amount and complexity of

service Age of assets Political situations Local situations


Strategies for reconciling revenues and expensesIdentify additional sources of revenue.Scale down individual discretionary budget line items.“Sell” an increase in the assessment to the board of directors.Motivate and prepare the board to “sell” an increase in the assessment to the owners.


Basic Instructions for Small-Group Work:Choose a leaderChoose a timekeeperChoose a recorder


Activity #4: Reconcile Budget Revenues and Expenses

Purpose: To practice reconciling budget

revenues and expenses.


Whether or not a method of reconciling revenues and expenses is appropriate depends on the specific set of circumstances.

Ignoring facts and overestimating revenues or underestimating expenses will not change the real world which must be dealt with.


Activity #5: Develop Strategies for Obtaining Budget Approval

Purpose: To strategize ways to obtain budget approval in difficult situations.

Module Summary

Module 1 Focus:Development of a community

association budget from identification of budget items and their level of service through budget approval.

Module Summary

Module 1 Objectives: Identify the elements of Duty of Care Identify and explain the elements associated with Duty of

Loyalty Identify a budget line item and its level of service based

on the association’s obligations, its needs, and owner expectations.

Develop budget line items using zero-base budgeting and a comparison to historical trends.

Apply zero-base budgeting to calculate current replacement costs.

Module Summary

Module 1 Objectives, cont.: Determine whether current replacement costs

are adequately funded. Apply zero-base budgeting to calculate the

cost of performing a service in-house versus outsourcing a position.

Reconcile budget revenues and expenses. Obtain approval for an association’s operating

and replacement fund budgets.

Discussion and Questions?

Why is it important for a community to budget for unexpected conditions or losses?

What’s the difference between historical trend budgeting and zero-base budgeting?

Why is it important for an association to fund reserves?

Additional Resources from CAI

CAI offers many excellent resources about financial management. For information on these products, call CAI for a bookstore catalog at (888) 224-4321 or visit the bookstore online at www.caionline.org/bookstore.cfm

m-206 financial management slides

Documents

budget revenues

budget line items

duty of careduty

community governancem

community leadershipm

financial management

financial plan

day management