What is a balance sheet? What kind of information is on one?
In the simplest terms, a balance sheet is a financial report that summarizes an association’s assets, liabilities and owner or shareholder equity. Assets are what the property owns, and liabilities are what it owes. It is a snapshot of a community association’s financial position at any moment. The balance sheet, along with the income statement and the cash flow statement, are the core of a community association’s financial statements. The two sides of a balance sheet – assets and liabilities – must balance each other out.
What are assets versus liabilities?
Assets are the things your community association owns. They can be current assets, which will be converted to cash within one year, including accounts receivables for assessment payments. Fixed assets are longer-term and include items such as property, equipment, buildings, vehicles and furniture.
Liabilities are the things your community owes, both currently and long term. Current liabilities are things like bills from suppliers or utility companies. Long-term liabilities are things like loans and mortgages that can take years to pay off.
What is a statement of revenues and expenses?
Obviously, the biggest influx of revenues comes from the common charges, dues, maintenance or regular assessments that pay for the association’s expenses. The largest expenses that associations face depends on the type of property. Usually, these include things like maintenance, payroll, insurance and utilities.
What is a fixed asset?
A fixed asset is a piece of property that is owned by a community association and is used to help produce income. Fixed assets are expected to last more than one year before they are converted into cash or used up. Buildings, equipment that is not leased, furniture and property are fixed assets. Office supplies are not fixed assets; a golf cart used to get around a community is. Fixed assets will depreciate each year and have their own section on balance sheets, which may be called “Property, Plant and Equipment.”
What is a reserve study?
Your common area elements and physical components, like your community pool or a HVAC system, will eventually need to be replaced or have parts of them replaced. To plan and save for those costly replacements, your association needs to conduct a reserve study. A reserve study is conducted by a firm that sends experts to evaluate the physical components of your property. The most accurate reserve studies are conducted by licensed engineers who understand the industry. The analysis will consider the current state of your reserve funds and will recommend appropriate funding levels to make sure you can cover capital expenditures for the next 30 years. Even though a reserve study plans 30 years into the future, your association needs to have it updated every few years to account for things like storm damage, capital improvements, new assets, and changes in interest rates and property values.
Why is a reserve study important for my community?
Without a reserve study that helps your community plan and save for anticipated repairs, your association will likely have to levy special assessments to your homeowners to pay for the things that you need. Reserve studies help maintain strong property values. By identifying and budgeting for future capital projects, these evaluations can help board members fulfill their fiduciary duty of protecting the association’s assets.
Your reserve study should also be the core of your preventative maintenance plan. Because the study details the expected life span of major items and when the association will be financially able to replace them, it’s important that you have a preventative maintenance plan in place that follows the timeline of the reserve study to get the most life out of your equipment and assets.