Understanding Community Financials & How to Strengthen Them
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As an association board member, creating a sound budget is crucial to ensure your community remains desirable. Without it, preventative maintenance and reserves cannot be adequately funded, nor can amenities or resident activities be hosted for the community members. As a result, this will reflect on the community’s monthly financial statements, and both property values and your community’s quality of life will decline.
What is an HOA financial statement?
An HOA financial statement is an official record detailing the community association's financial activities. This is one of the main ways to determine a community’s financial health.
Specific items that must be included in your community financials depend on state regulations and community bylaws. Still, the general financial documents that should be included regardless of association size or location are:
- A balance sheet showing account balances
- A statement of income
- Receivables, including all money due to the association from sources like collections and credits from vendors or homeowner fees.
- Bank statements
- A general ledger showing all account activity
- Reserve fund balances
These documents are usually available to homeowners and can be requested from the association management team.
What should I look for in HOA financials?
The Balance SheetThe first section you should seek out in your community financials is the balance sheet. Balance sheets are the best tool for gaining basic insight into the community’s financial health.
“The balance sheet provides a clear, easy-to-understand picture of the association’s current Year to Date financials. It’s a summary of the rest of the financial statement, which also includes the association’s income and loss, bank balances, including assets and liabilities,” stated Srinath Perera, Executive Vice President of Finance at FirstService Residential.
When reading the balance sheet, you will notice it has two sides that must “balance.” One side details the association's assets, while the other lists the association’s liabilities and equity.
- Assets can include cash, accounts receivable, reserve accounts, investments, and fixed assets, like property and heavy equipment.
- In contrast, liabilities include taxes, utility bills, loan payments, pre-paid assessment fees, and wages.
- Equity is the association's net worth, which is what’s left after all the liabilities are paid.
Getting to grips with the financials of your community can seem overwhelming but understanding a balance sheet is key when it comes to keeping an eye on cash flow. All too often, people view equity and assume that this equates to available funds; however, you may have assets in accounts receivable which are not yet liquid. To ensure you're never faced with unexpected expenses due to misjudging finances, familiarizing yourself with reading balance sheets is essential.
Reserve FundsFunding your reserves is crucial for the financial health of your association, yet for many associations, it’s one of the most poorly addressed budget items. In fact, 70% of association-governed communities are underfunded by 70% or more.
Rather than seeing contributions to a reserve fund as an extra expense, they are actually providing long-term savings. Without reserves, homeowners may be forced to seek alternative sources of funding when repairs or capital improvements become necessary – such as seeking a loan or levying special assessments – ultimately becoming a greater burden to homeowners down the line.
Although some states specify how much of your annual fee must go toward your reserve fund, you shouldn’t depend on this figure to determine your actual needs. The amount you budget for your reserve fund should be based on your most current reserve study, according to Srinath. “You need to understand the reserve studies and how to incorporate them in your yearly budgeting,” she says. And since the study should be updated at least every two to three years, you may also need to budget for that if you haven’t.
Fixing Your HOA Community’s Financials
Plan for the UnexpectedThe first step in ensuring your community’s financials remain healthy is creating a well-planned annual budget that will account for both expected and unexpected occurrences. This could range from insurance premium hikes to an elevator malfunction that requires emergency repairs. All of this should be accounted for in your annual budget to ensure your monthly financials stay on track.
Prioritize Community GoalsIt is important for your board and association management teams to come together in order to ensure that everyone has a unified vision of the future objectives of your homeowners. To further strengthen this collaboration, consider inviting an auditor, attorney, or insurance agent if possible. Assemble key priorities for the coming year while also assessing any improvements necessary which could provide desirable returns on investment- even with increased assessment costs taken into account.
“It’s important for the board to review and align on their goals for the community every year,” Srinath Perera said. “Board members should be aware that although keeping assessments low may satisfy short-term objectives, it doesn't serve the association's long-term goals, financial health, and homeowner value. The most important factor here is preserving the association's financial well-being.”
You don’t have to be an accountant to create a solid foundation for your community’s financials. For more information on how to build your association's financial stability, contact us.