Six tips for maintaining your community’s financial health.
My community just elected new officers for 2014. I’m still the HOA president, but we have a new treasurer this year. I was proud to show the new treasurer that our neighborhood is in excellent financial health, due to some careful budgeting and long-term financial planning.
Learn from my experience…and mistakes
Since I’m a CPA with expertise in community associations, I can see what clients and other HOAs are doing, and share that with my fellow officers. In part 1 of this article, I provided some more general advice about thriving (or surviving) on a community association board of directors. Part 2 will focus more on finance and budgeting. Here are six top tips that I give to my HOA and community association clients, and follow as president of my community:
- Create a new budget every year. Use last year only as a guide, since it may reflect a very different set of circumstances. As part of your planning process, review each budget line item and discuss potential variances. Document the reasons behind each budget decision, including why you think expenses will go up or down. This will help future Board members understand your budget rationale.
- Stick to your budget. As a board member, maintaining the budget is part of your fiduciary responsibility. Start projecting your year-end position around mid-year so you can adjust spending if needed. Although it’s tempting to act like our government and overspend, don’t do it. It’s very difficult to catch up, and may cause legal problems for the Board.
- Honor thy reserve fund. This isn’t a slush fund. The reserve account is your savings account for future major repairs. Fund it regularly, and don’t shift money back to cover community operations. A reserve study will help you understand the timing and amount of those future repairs. If your reserve study is more than three years old, it may be time to commission a new one.
- Maintain adequate operating cash. It may take a few months to collect dues, but everyone wants to start spending budget dollars immediately. As a general rule, maintain 10% of your total budget as operating cash. As they say, cash is king. You don’t want to run out.
- Understand your accounting method. There are two types – cash and accrual. Cash basis is easier to understand and manage since you’re focusing on money as it is collected and spent. Accrual basis accounts for money before payments are received or made, which can be a little confusing since revenue and expenses won’t necessarily match your cash balance.
- Review the financials each month. Your treasurer should review the balance sheet and income statement with your property manager or management company, then make a report at the monthly board meeting. This process is also a great way to maintain open lines of communication between board members and managers, and it minimizes the chance of year-end surprises.
Nothing gets less expensive
While we all try to cut costs wherever possible, expenses tend increase year after year. A dues increase is one of the toughest decisions you may have to make as a board member. Don’t sacrifice quality of life or quality of the facilities to maintain your budget. At some future point you’ll still have to raise the dues, but by then the neglected maintenance can cause expenses to skyrocket. Make a good case and your neighbors will (begrudgingly) go along.
The CPAs at Bach, James, Mansour & Company provide tax and auditing services for a number of homeowner and community associations, so I’m not a typical board member. Please contact is if you would like assistance reviewing or managing your HOA or community association budget or finances.