So what’s the most important aspect of your community? Is it aesthetics? Sense of belonging? Neighbors knowing neighbors? Desirability to home buyers?
No doubt about it, all of those things matter. But you won’t achieve too many of them if your community isn’t financially sound. As for getting there – well, it could be a matter of following ten simple steps. In that spirit, here are 10 suggestions on ways to keep your community on firm financial footing.
1. Budget wisely.
You probably suspected that this list would begin with the budget. That is also where your financial health begins. It’s important that your budget be realistic...that way you can meet the daily obligations of your community (and be prepared for the unexpected, too).
2. Maintain capital.
So let’s say your budget has everything planned out for the year. Cash flow is still an issue, and that means there may be times when you need to dip into working capital to better assist your community during a time of need. You can accumulate capital by collecting a contribution at closings and resales, which helps level out those valleys of cash flow. A good rule to follow is: keep your working capital fund at least half a month’s expenditures.
3. Create your “deferred maintenance” fund.
For those periodic (but not consistent) large expenditures like painting, a special assessment is hard for residents to swallow. If you pursue a “deferred maintenance” fund, it means you collect for these types of expenditures gradually, and save over time from any budget surplus.
4. Plan for capital replacements.
Here’s another way to avoid those dreaded special assessments: Annually fund a Reserve account so that you can gradually save for those kinds of improvements that fall under the category of “capital replacements.” This typically means structural elements that enhance the value of your community. To plan for them, have a qualified engineer submit a report identifying these elements, and then fund appropriately towards the report. Another upside? Lenders are more likely to fund mortgages to resale purchasers when the association is meeting capital improvement requirements.
5. Write an investment policy.
Growing a community’s funds can happen through investment. But the last thing you want is to expose those funds to possible risk (and there’s always risk) without a clear-cut plan. So commit to an investment plan – and put it in writing. Take into account insurance limitations (like FDIC and FSLIC) and the timing of your investments (like when the funds can be withdrawn) when crafting your policy.
6. Follow the Rule of Four.
Management needs access to four essential reports: the current period’s expenditures, a detailed account of actual versus budgeted income and expenses for the period, a full accounting of receivables that are overdue (from 30 days and beyond), and a complete balance sheet. These should be reported with concrete financial controls in place.
So nobody wants to be the bad guy, right? But if you create a clearly defined collection policy, then you can let the policy be the villain. Establish a set of rules that institute penalties and interest assessments when necessary, and then enforce those rules with fairness. Also, encourage your owners to pay assessments through direct debit to ensure timely payments.
8. Take a look at your insurance.
Your insurance coverage is a pretty significant line item on your books. Have an insurance professional review it to make sure you’re not over-paying or under-insured for any aspect of your community.
9. Talk to your auditor.
Your auditor isn’t like that relative that you only see during certain occasions. Think of them as a friend who you are in regular contact with. They should be kept apprised of any potential issues that could affect you financially – and that pretty much includes every issue. Meeting once a year is good, but more is better. If you have surplus resolution, make sure it’s appropriately executed and documented. Also, your auditor will present a letter to you and the Board following the annual audit – just make sure you’ve given this document a thorough read and responded to everything it asks for.
10. Stay plugged in.
Hey, we know you have a lot on your plate, but you can do this. Stay involved with the CAI (that’s the Community Associations Institute) and take advantage of the resources your membership provides you to keep abreast of changing trends in the industry. As a Board member, you can play a pivotal role in keeping your community on the forefront of issues affecting associations – and that’s a key part of keeping your community financially healthy.
We know financials can be complicated. Our experts can help ease the process and get your association on its way to long-term financial stability. Contact FirstService Residential
With the right resources and information, you can ensure the longevity and financial well-being of your association.