Why do associations need to budget each year?
What is the importance of the budget and tracking it throughout the year?

As an association management company we ensure that all of our clients run the business of their associations based on a previously established budget – basically a “best guess” of income and expenses.

Keeping the budget simple and straightforward is important so that every board member can easily monitor their association’s financial health.

Revenue or income is the lifeblood of an association’s activities. None of the goals or objectives of a board or an association can be achieved without sufficient revenue.

Expenses/Members = Dues

Annual membership dues are typically the main revenue source and are established based on two variables (i) the cost of activities and initiatives the association has planned for the year (or years) and (ii) the number of members projected for the year.

This means that typically the last step in the budget preparation process is to set the membership fees for the coming year so that income is the same as, or higher than, the expected expenses.

Another approach however is to set a target membership dues rate and build the budget backward from that. Either way there is no denying the direct relationship between the two.

Reserve Funds Are Important

We work with our clients to help them create a reserve fund by budgeting to have surpluses—revenue larger than expenses—in order to create reserve funds to deal with planned and unplanned future expenses. A goal of having 50 – 100% of a year’s budgeted revenue in reserve is prudent. Creating this cushion may take several years if you are starting from zero dollars.

Types of expenses that reserve funds are used for include:
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  • Legal expenses
  • Unexpected events such as cancellation of an annual event for circumstances beyond the control of the association
  • Long term projects with large up-front costs that will benefit existing members and attract new ones

As important as revenue is for the budget, the expenses are really what drive the budget.

For the most part operational expenses for your association’s activities are similar from year to year. This means that it’s a reasonable exercise to look at the previous two years’ activities as the basis for making an informed prediction of the coming year’s expenses. Measure it and Manage It

Monitoring the budget throughout the year is important and the frequency of review should be established in a policy statement.

Volunteer leaders need to be aware of the larger expenses and monitor them closely. These are the items that can have a major impact on how well you do in achieving the goals and mission of the association.

Our association clients receive monthly or quarterly financial reports, which go to the treasurer. The full board reviews them at board meetings, typically on a quarterly basis.

Cash is King

The creation of a monthly cash flow for revenue and expenses is a useful tool for boards to see how the year is progressing. Your treasurer or executive director can make realistic assumptions on when revenue will be received and when expenses are made throughout the year based on past experience.

Tracking the cash flow is a great way for boards to see a snap shot at a point in the year and compare it to projections and to ensure that the association never runs out of operating cash and becomes unable to temporarily meet it’s short-term financial obligations. Even for financially healthy operations this can be a significant risk and is worth managing closely.

Simple Works Best

One of the main objectives in the budget process is to keep it as simple and straightforward as possible. If it isn’t simple, most board members will have a challenge following and monitoring it throughout the year.

Recently I attended a budget review meeting for a new client that was very hard to follow. Each committee had its own separate budget that all fed into the association’s budget. It had over five different worksheets with similar line items on each sheet. It was incredibly hard to follow and it took their board an entire day to review, adjust and prepare a budget for the next fiscal year.

Not all board members have experience in accounting so the simpler and more straightforward you can make the budget process the better.

Finally, it is important to remember that the budget is your best estimate of how the year will unfold. There are times where events come up that are out of your control and you either go over budget or have a surplus. Regular monitoring and adjusting will help to minimize the impact of “the unexpected”.