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Budgeting for Bad Debt

As each year winds down, board members are gearing up for budget season.  Creating your association’s budget is a detailed and stressful process.  Annual budgets have to include all projected expenditures and reserves, so the board can determine how much to assess the owners.  In a perfect world, all owners would pay their assessments on time, so all contractors and bills are paid and all maintenance is done on time.  Of course, there is a good chance that all associations will deal with owners that fall delinquent on their assessments at some point.  Whether you have a large amount of delinquencies in your community, only one or two, or none at all, every board should consider and account for a line item in their annual budget for “Bad Debt Expense.”

Budgeting for bad debt is a difficult task, and there is no magic number to set aside.  The best way to determine an amount to set aside is to review past budgets, the status of current delinquencies, and the association’s current receivables.  While the board cannot predict an exact number for the upcoming year, it can make an educated estimate based on a review of the financials.  By budgeting for bad debt expenses, the board is ensuring that the association’s financials are in good shape and that the association is able to pay the projected expenses in the budget for the upcoming year.  As a result, every association should budget for bad debt.