Forecasting expenses
Build next year's cost line from what actually happened, not from a habit.
Forecasting expenses means predicting next year's costs from real information, not just repeating last year's total. Start with what you actually spent last year, not what you budgeted. Then layer in what you already know is changing, like a vendor contract's built-in increase, before deciding whether a fast or a thorough method fits your board's timeline.
Start with what actually happened
A forecast that starts from last year's budgeted figure carries forward every planning mistake baked into that number. Start instead from what the association actually spent. If the utility line was budgeted at a certain amount but actual spending came in higher, that gap, not the budgeted figure, is the more honest starting point for this year's number.
This applies to every recurring line: utilities, landscaping, maintenance contracts, insurance premiums. Once the board has the real number, it can layer in specific reasons to expect a change. Comparing actual spending against budget, line by line, is its own skill; see Historical spending analysis for how to do it.
Two ways to build the number
A board has two broad ways to turn last year's numbers into this year's budget. Incremental budgeting takes the prior period's budget or actual spending as a base and adjusts it by increments: faster to prepare, easier to delegate to whoever is running the numbers, and quick to show the effect of a single change. Zero-based budgeting builds each line from zero and requires every dollar to be justified again.
"the budgeting process starts from a base of zero, with no reference being made to the prior period's budget or actual performance"
Source: Comparing budgeting techniques (Incremental v ZBB), ACCA
Zero-based is slower to prepare and more likely to catch spending that no longer makes sense; incremental is faster but carries forward anything nobody re-examined. Most boards default to incremental without ever deciding to. Making that choice on purpose, at the start of budget season, is covered in Zero-based budgeting and Prior-year budgeting.
Layer in what you already know is changing
Some cost changes are knowable before the fiscal year even starts. A landscaping or maintenance contract due for renewal may carry a built-in escalation clause tied to an inflation index, meaning the price rises automatically whether the board budgets for it or not. Reading a contract's renewal terms before assuming last year's number repeats forward catches the increase before it becomes a mid-year surprise. The same logic applies to utility usage and insurance premiums: the question is never just "what did we pay," it is "what do we already know is different this time."
Which contracts carry escalation clauses, and what those clauses say, varies contract by contract. Read each renewal before budgeting it flat. Two lessons in this Course go deeper on specific lines: Contract increases and Utility forecasting.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
The utility budget line has been the same figure for three years, copied forward each time. Actual utility spending last year came in higher. What should the board check first?
The landscaping contract renews this spring and includes a clause tying the annual increase to an inflation index. The board budgets the same dollar figure as last year. What did the board miss?
A board has three weeks before the budget vote and a treasurer with limited time. Which forecasting approach fits, and why?
Sources
- Comparing budgeting techniques (Incremental v ZBB), Association of Chartered Certified Accountants (ACCA)
Budgeting
Once your forecast is anchored to actual spending, the next step is turning known cost drivers into specific line items. Start with Inflation.
What a vendor contract's renewal or escalation clause actually allows varies by agreement, and how often reserve or insurance figures must be reforecast varies by state law. Read the specific contract or statute before treating any forecast as settled.