Financial Statements 101 – the What, Why and How
Under the Nevada Revised Statutes (116.31083), community association boards are required by law to meet not less than once every 100 days to review monthly financial statements, according to Tom Reed, vice president of client accounting at FirstService Residential.
A good financial statement contains a variety of elements that will reveal critical information about the financial health of your association. It’s imperative that your board understand what goes into your financial statements, why they are needed and how they are prepared.
- What goes into a financial statement?
- Balance sheet
- Statement of revenue and expenses
- Bank reconciliations
- Bank statements
- Check history report
- General ledger reports
- Why are financial statements needed?
Reed said that the financial statement reveals different aspects of the financial health of the association, so it’s in the best interest of the board to want to see this information. “You cannot deliver on the commitment to achieve the most value of the assessments paid by the membership if you are not fully aware of the financial activity, which is highlighted in financial statement,” Reed said.
Financial statements are also part of the qualification process if the association wants to obtain a loan, for construction defect or a renovation project, for example. It’s also important to show savvy potential buyers that the association is on sound financial footing. It may even affect their purchase decision. Financial statements are part of the escrow package and homeowners are legally entitled to them.
- How are financial statements prepared?
Reed said it is important to remember that Nevada law requires that associations be audited or reviewed on an annual basis depending on the size of the association’s budget. “Most of our associations in Nevada are subject to an annual audit or review,” he said. “For the audit or review, the association must hire a CPA to review the financials and fulfill the statutory requirements. Even if you hire a bookkeeper or outsource your books to an accounting firm, more than likely, your financials must be audited or reviewed by an outside CPA to meet the statute.”
A professional community association management company may also work with a third-party accounting firm to manage your association’s financials and bookkeeping. Reed said that, having worked in both kinds of management companies, he thinks that it is more efficient and effective to have both the operations and financial components of community management in the same company. “It’s just easier to coordinate what needs to be done and help associations remain financially healthy when everyone is under the same roof,” he said.
As a board member, your primary responsibility to your association is to keep it in good financial shape. Financial statements, properly crafted and regularly reviewed, are an important gauge of how well your board is accomplishing that task. It’s important to know what goes into them, why you need them and how they are generated.
A professional community association management company will have the right tools to easily provide the financial statements you need, as well as the knowledge to explain them to you if needed. For more information about how working with a community association management company can help your community navigate financial matters safely, contact FirstService Residential, Nevada’s community association management leader.
Click HERE to Download our Financials 101 – Understanding Financial Reports Infographic!
This infographic contains helpful key terms and definitions to assist you in understanding how to properly read your associations financial documents.