Understanding Community Financials & Strengthening Them

Analyzing the financial standing of a homeowner’s association (HOA) is crucial for understanding whether the association is managing its fees effectively and planning its budget wisely. Maintaining a solid budget is essential for an HOA board member to ensure the community remains appealing. Without a well-planned budget, funds for preventative maintenance, reserves, and community events may fall short, leading to declining property values and quality of life.

Understanding HOA Financial Statements

An HOA financial statement is an official document that outlines the financial activities of a community association, providing vital insights into its financial health. While the specific components of community financials can vary based on state laws and community rules, some general documents should be included:

- A balance sheet detailing account balances

- A statement of income

- Receivables, covering money owed to the association from sources such as collections and vendor credits

- Bank statements

- A general ledger listing all account transactions

- Reserve fund balances

These documents are typically accessible to homeowners upon request from the association management team.

The Balance Sheet

When reviewing community financials, the balance sheet is the primary section to examine. It offers a snapshot of the community's financial health, summarizing the association’s income, losses, and both assets and liabilities.

A balance sheet consists of two sides that must equal or "balance." One side lists the association's assets, such as cash, accounts receivable, reserve accounts, investments, and fixed assets like property. The other side details liabilities and equity, including obligations like taxes, utility bills, loans, and wages. Equity represents the association's net worth after liabilities are deducted.

Understanding a balance sheet is vital for keeping track of cash flow. Misunderstandings can arise when assets like accounts receivable are assumed to be immediate funds, highlighting the importance of learning to read balance sheets to avoid unexpected financial issues.

Reserve Funds

Effectively managing reserve funds is essential for the financial stability of an association. However, many associations neglect this critical component, with 70% being underfunded by 70% or more. Reserve contributions should be seen as long-term savings rather than additional expenses. Without adequate reserves, homeowners might have to resort to loans or special assessments for necessary repairs and improvements, placing a heavier burden on them.

While some states mandate a specific portion of annual fees for reserve funds, assessing actual needs based on the most recent reserve study is advisable. Regular updates to the reserve study, ideally every two to three years, should also be budgeted for to ensure the association's financial health.

Plan for the Unexpected

To maintain healthy community financials, develop a thorough annual budget covering both anticipated costs and unforeseen events, such as insurance hikes or urgent repairs. A comprehensive budget helps ensure that monthly financial statements remain steady and accurate.

Prioritize Community Goals

It's crucial for board members and management teams to unify around the community's future goals. Engage an auditor, attorney, or insurance agent to assist, if needed. Identify key priorities and evaluate improvements that might offer positive returns, even if this involves higher assessment costs.

While maintaining low assessments may appeal in the short term, the long-term financial health of the association and homeowner value are paramount. Preserving the association's financial well-being is the top priority when aligning community goals.

Building a solid foundation for a community’s financial stability doesn't require being an accountant. For more guidance on establishing your association’s financial health, reach out for assistance.