Five Steps You Can Take to Maintain Your HOA’s Financial Fitness
The principles to fiscal fitness and physical fitness aren’t that different: Don’t overindulge. Make smart choices. Keeping your community association’s finances healthy requires care and exercising good judgment. Follow our tips to help you do that.
Set a budget – and stick to it.
“To me, when you talk about overall financial fitness, I think another key thing is budgeting properly. When you’re looking at the overall financial stability, you want to make sure that they aren’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. “We go through a real process, looking line by line, going over contracts and understanding each expense. You have to make sure you’re putting money away in your reserves. Make sure that the reserve study is updated at LEAST every five years and that you’re funding reserves in accordance with the survey. I’ve seen communities use money allocated for 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.”
Take a look at your operating cash account. 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.”
Verify your internal controls.
Separating duties like recording receipts and making deposits will help protect your association from financial misappropriation. The best property management company can help you guard against malfeasance.
“Good internal controls are key. Not all of our accounting is done in our corporate office. Some properties have accounting being done on site, and that’s when it’s most important to have those internal controls in place,” 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, read only access.”
Conduct regular audits.
It’s important that you hire a Certified Public Accountant to analyze your documents and records, no matter how your day to day bookkeeping and accounting are handled. A CPA will make sure that all accounts are being managed appropriately and items are entered correctly. A less intensive process, called a review, can be carried out by an accountant and may be appropriate for smaller associations.
“I worked with a community that was still under developer control. The developer didn’t want to pay for an audit, and one hadn’t been done in a while, so we immediately undertook one,” Peditto said. “Audits protect both the board and the management company. Some boards don’t understand how we keep all the cash accounts separate – reserves are separate from operating funds, for example. We don’t comingle funds; we do bank reconciliations every month. The audit is important because it’s an outside review that verifies everything is as it should be. It prevents anyone making accusations against the board or management company. We follow the guidelines set out in the documents for the association, most of which require an annual audit.”
Set forth a policy that dictates how your reserve funds can be invested. A good investment preserves the safety and liquidity of the funds. It is important to recognize that investment options may be limited by both your documents and applicable law.
“We don’t provide any specific investment recommendations to associations. We tell them that their investment strategy should be to maintain the principal,” Peditto explained. “Some large communities will hire a brokerage firm. Most tend to be very conservative in their investments. We do recommend that they take advantage of the services of FirstService Financial, our cash management experts. They have banking relationships which can sometimes yield a higher rate of interest while still protecting the principal.”
Make sure you are properly insured.
Insurance coverage is critical to the financial health of your association. You need to make sure that you have the proper amounts of property or casualty coverage, liability insurance, directors and officers liability insurance to protect individual board members in the event of a lawsuit and fidelity insurance which covers claims related to theft. A good insurance broker will know both your property and the laws and requirements in your area, such as whether or not you need to have flood insurance. Insurance isn’t a one-and-done purchase, either. 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.
“I once worked with a community that was underinsured, and we discovered that when we took over the management of the property,” Peditto said. “I don’t think some boards understand the exposure that they have if they don’t have the right insurance coverage.” Peditto recommends that communities undertake regular insurance audits to make sure that they are completely covered. FirstService Financial offers insurance brokerage services, in addition to banking.
There you have it – five ways to help ensure you’re keeping your community association financially fit. Remember, this is just a start. An excellent property management company will be your partner in developing further strategies for both the long- and short-term. To find out more, contact FirstService Residential, North America’s leading residential property management company.