Five tips for quickly assessing the financial health of your community.
Congratulations, and thank you for stepping up to serve your community on the board of directors! As an HOA or community association board member, you get to run a business and make key decisions that will impact your community now and in the future. While you may feel a little overwhelmed at the moment, serving on your community association board can be a very rewarding experience, and a great way to meet neighbors.
An ounce of prevention…
Before your term begins, take a little time to familiarize yourself with how the board operates. This article will help you get up to speed on your community’s financials while assessing its overall financial health. You want to do this now, so the previous board members will be around to explain the financials and correct any mistakes. Here are five things you should do:
- Review the most recent monthly financial package. This should include financial statements (income statement and balance sheet), bank statements, and bank reconciliations. Since this is probably your first review, focus on looking for differences between actual and budgeted amounts, and differences between bank account balances and reconciled balances on the bank reconciliations. Any major difference requires an explanation.
- Meet with the current treasurer and property manager. You want to review and understand any major budget differences or financial issues. If the pool operating costs were twice the budget this year, is that reflected in next year’s budget? Were any major projects delayed due to lack of funds? Make sure differences are documented for future budgeting exercises.
- Confirm strong receivables and quick payments. You may not be able to see the list of delinquent residents until you’re sworn in, but you should be able to see the delinquency rate. Anything more than a 5-7% delinquency rate requires some explanation, as it’s tough to pay bills without money. And, speaking of paying bills, a stack of unpaid invoices may mean that there’s not enough money to cover the current budget – a big red flag.
- Review all major contracts. Normally a few contracts, like landscaping, pool management, and property management, make up a large percentage of the HOA’s annual budget. The contracts should be current, meaning effective this year and reflecting current duties and fees. Red flags here include expired or outdated contracts, or contracts missing altogether.
- Confirm the reserve account balance matches the reserve study. A community’s reserve fund is a long-term savings account for pre-planned major repair and replacement projects, like tennis court resurfacing, playground replacement, or building repainting. The cost and timing of those repairs is determined by a professional reserve study. The reserve account balance should match the amount specified in the study. Ask for a reason if it doesn’t. If there is no reserve account or reserve study, this will require immediate attention.
Are you covered?
As you’re getting up to speed and gaining a level of confidence about your role as well as the association’s financial health, you’ll also want to check out board member liability insurance coverage, also known as D&O coverage. This protects you legally and financially against claims that may arise from decisions you make as a board member.
While this isn’t a board financial tip, a lawsuit by some disgruntled neighbors could impact your personal finances unless you have full insurance coverage! There is normally some D&O coverage in the community’s business liability policy, but the most comprehensive D&O policies tend to be separate. Confirm full coverage with no gaps, involving an insurance broker with HOA experience if necessary. Don’t take any chances here.
When in doubt, bring in an expert.
Understanding your community’s financial health is the first step to ensuring your success on the board. What you learn now will impact your first decisions as a new board member. If you’re unsure of your community’s financial health or your ability to assess it, there is a lot of help available to you.
In addition to the treasurer and property manager, there are CPAs with community association experience (I have 15+ years) who can help you review the financials and gain that level of comfort you need. Whether the CPA conducts an informal review, a formal audit, or a more specific (and less expensive) agreed-upon procedures engagement, you’ll receive unbiased feedback about your community’s financial health, and where needed, a list of improvements that you can make during your first year on the board.
By Neal Bach, CPA