Post-Crisis HOA Cash Management: 3 Tips for Your Association
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“What if residents stop paying assessments and deficiencies skyrocket?”
“How will we be able to afford necessary repairs and utility payments?”
“What about our staff and vendors?”
"Most importantly, how will we know and respond to potential cash flow issues proactively instead of reactively?"
The good news is you don’t need to panic. As is the case with most things, knowledge goes a long way in overcoming financial stumbling blocks. In addition, your board should have access to tools and strategic guidance to help you make decisions that keep your community’s best interest in mind. By partnering closely with your manager and management company and using their tools and resources to plan for the future, you can weather the storm and protect your association in the process.
Start by answering these 3 questions:
1. Where do our HOA collections stand?To get a good picture of your HOA financials (and consequently, a good picture of your association’s financial health), start by looking at your rate of collections.
Andrew Schlegel, executive vice president of high-rise and mixed use at FirstService Residential said, “Pay attention to how much cash you’re collecting and if there have been any significant drop-offs in collections. Keeping a close eye on cash balances will help you identify any negative collections trends.” He added, “You can also keep an eye on new collection activities. For example, is there an increase in the typical amount of late fees? Are you issuing more than the usual number of intent to lien letters?"
A good best practice is to monitor cash collections twice a month (ideally on the 15th and 30th of every month). By consistently reviewing your collections rate, you’ll have a better picture of what’s going on with your association financials as a whole.
Work with your community management company and manager to ensure you are getting timely collections reports and recommendations. For example, FirstService Residential provides a cash collection reporting tool to managers, so that they can review the information with boards. The manager will then walk each board through the latest financials using a color-coded report. This process and tool arms boards with facts about their community’s collections so that they can make informed decisions.
Aligning with your board and management company and making wise decisions for your future is key to a healthy, happy association. Download a free guide, 8 Steps for Going Out to Bid, to learn how your board can make a long-term, low-regret decision on a management company.
2. What’s the status of our operating funds?Your operating cash level is a vital financial metric. HOAs are obligated to assess their membership for operating costs, plus reserve contributions. Your operating funds cover necessary payments like utilities, maintenance, insurance, accounting and management. You want to be able to pay expenses promptly and not have to spend a lot of effort trying to juggle payments. You should also be able to weather any potential cash collection shortfalls.
How much should you have in your operating funds? For HOAs and high-rises, a good best practice is to have at least one additional month of operating cash, but this can vary depending on other factors, such as the size of your community. Partner with your association manager and management company to ensure that you are getting accurate, timely and insightful information regarding your operating funds.
3. How can we improve our budget now and prepare for the future?While it’s easy to think about the “what-ifs,” the most important thing you can do during and after a crisis is look ahead and consider improvements to make now. We don’t know what’s ahead, so it’s important to prepare your financials for when an inevitable crisis or emergency occurs.
Schlegel said, “The one piece of financial advice I give associations during or just after a crisis? Be conservative with your expenses. Pull back on non-essential projects and make simple or temporary changes to help avoid unnecessary costs.”
Some money-saving measures you may want to consider include turning down heating and cooling and turning off lights in amenities that aren’t being used as frequently. You may also want to temporarily postpone non-essential landscape projects and non-essential equipment maintenance (such as gym equipment that isn’t being used as often).
As Schlegel said, making minor changes and being conservative with expenses during the aftermath of a crisis can help balance a shaky budget and protect you from financial issues down the road.