How Can We Improve Our Association’s Financial Stability?
Whether you’re in a New York high-rise, an active adult community in Phoenix or a gated community in Dallas, none of that happens without stable finances, including a balanced budget and a well-funded reserve. A lack of financial health is detrimental to the property values in your community and the lifestyle of your residents. Your board will not be able to address maintenance needs, make capital improvements or plan exciting programming if your financial bases are not covered first.
Keeping your association’s finances healthy requires care and exercising good judgment. Follow our tips to help you avoid putting your budget and community at risk.
1. Start with a solid budget.Your budget is the backbone of your community’s financial well-being. Once each budget is assembled, stay on top of it to make the next year easier as well. The right tracking software and expertise will help.
“When you talk about overall financial fitness, I think a key thing is budgeting properly. When you’re looking at the overall financial stability, you want to make sure your association board isn’t just taking numbers from the previous year and increasing them by two percent,” explained Frank Peditto, senior vice president for lifestyle operations at FirstService Residential. “Associations must go through a real process, looking line by line, going over contracts and seeing what’s in there. They need to make sure they’re putting money away in your association’s reserves. Make sure that the reserve study is updated at LEAST every five years and that your association is funding reserves in accordance with the survey. I’ve seen communities use reserve funds to run the property because of budget shortfalls. Then when it comes time for a major expenditure, they don’t have the money.”
Do you have adequate working capital? Peditto recommends that, depending on the size of the community, you need to have one to two months operating expenses on hand as free and clear cash.
The best planned communities look five and even 10 years forward when they budget and fund their reserve account. “What major expenses are coming up? Stucco? Roofing? Hallway renovations? The more sophisticated communities realize that doing the current year budget isn’t enough – what about 5 years from now?” Peditto said. “They make sure that their reserves are funded properly over time, every single year. It’s important to schedule repairs and replacements far enough ahead to allow for reserves to be ready to pay for them.”
2. Communicate clearly and consistently to residents.Rachel McClean, a controller at FirstService Residential, talks about a 135-unit condominium in Charlotte, North Carolina -- one with a very wealthy, high-end clientele. “Years ago, they found out that the façade on the high-rise was coming off and there was water intrusion. They sued their developer for the defect, but only received $1.6 million toward a repair project that was going to cost $8 million,” she said. That meant levying a special assessment, which no board wants to do.
But McClean said that the association, in this circumstance, really stood out because of their communication to residents. “They had banks come in and talk to the homeowners. Every expense was broken down for residents to see. They focused on extraordinary levels of transparency, and used a monthly newsletter and an annual budget packet to do so,” McLean explained. “This could have gone badly, but that transparency really helped the situation.”
3. Seek out additional savings.You know how much money’s going out. You know what should be coming in. Now, take a look at how to stretch those dollars further.
• Some states have deregulated utilities. Buying from brokers, rather than a utility company, can help you save.
• Look for local, state or federal grants that may help you make certain improvements or upgrades, especially those related to energy conservation.
• If your association is partnered with a property management company, ask them about their relationships with
○ Vendors to help your association save money or get better value and service for your money.
4. Implement Internal ControlsYou can protect yourself against costly financial misappropriation simply by separating duties with different individuals. For instance, make sure the person who records receipts isn’t the same person who makes deposits.
“Good internal controls are key,” Peditto said. “The opportunity for theft begins when people are able to circumvent controls or when they are not in place to begin with. Internal controls help eliminate theft and fraud, especially related to bank accounts. Make sure that no one outside the appropriate team has access to the bank accounts.”
5. Triple-check insurance coverage.Property or casualty coverage isn’t enough. An uninsured incident can sink your association, so be sure to have proper insurance coverages that protect you against lawsuits, including an umbrella policy, if appropriate. Make sure you have directors and officers (D&O) liability coverage to protect board members, as well as any required worker’s compensation coverage.
Insurance requirements vary by state, so it’s important to consult an agent or broker who is experienced with communities like yours and is familiar with legal requirements. Board members can be liable for under-insuring the community’s assets, so be honest and thorough in detailing the features and amenities of your community. Have your insurance policies reviewed annually and make sure to tell your broker about any improvements to the property or other changes that may require additional coverage.
6. Invest your reserve funds carefully.Investing your reserve funds effectively can create a robust avenue for financial growth. Avoid risky investments such as corporate bonds, municipal bonds or stocks.
“Most associations tend to be very conservative in their investments. We do recommend they take advantage of our investment and cash management solutions provided by FirstService Financial or another financial advisor,” Peditto explained. “FirstService Financial has strong relationships with banks and financial institutions that can yield a higher rate of interest while still protecting your reserve fund principal.”
7. Audit, audit, auditYour association accountant can analyze your documents and records to help you gain a clearer financial picture. If you’re a smaller association, consider hiring your accountant to conduct a “review” – it’s a more cost-effective alternative to a full-blown audit.
Why audit? No one is perfect, and work may need to be double-checked. “Audits protect both the board and the management company. Some boards don’t understand how to keep the cash accounts separate – reserves should be separate from operating funds, for example,” Peditto said. “The audit is important because it’s an outside review that verifies everything is as it should be. It prevents anyone from making accusations against the board or management company. It is important for associations to follow the guidelines set out in their governing documents, most of which require an annual audit.”
The financial well-being of your association goes far beyond your budget. Clear communication, budgeting, cost-saving strategies, consistent internal controls, careful investing, proper insurance coverage and consistent auditing will help ensure the long-term financial stability of your community.
There are many other ways that your association can protect its finances, beyond what’s listed above. For more information about how to build and maintain financial stability for your community, fill out the form to download our comprehensive financial planning guide.