Take the HOA finance 101 quiz!
One of the key challenges of being a board member is understanding how HOA and community association financials work. Between budgets, income statements, balance sheets, bank reconciliations, reserves, and other documents, you’re presented with an almost overwhelming amount of information each month. Unless you’re a CPA with HOA experience like me, this can be daunting for even those with a decent amount of financial experience.
Below are some of the most important financial details that you should be aware of as a board member (or property manager). Please take the “quiz” to see how much you already know as well as what you’ll need to learn more about from your treasurer or property manager.
- What is your association’s accounting method, cash or accrual?
There’s actually no wrong answer here. Many associations use cash or modified cash basis, while others use accrual basis. The rules vary for recognizing income and expenses, so understanding your basis is important for planning purposes.
- What is your delinquency rate?
This has nothing to do with truancy, but rather the percentage of member dues currently outstanding. It’s tough to pay for things without money, so a good target is for 93-95% of on-time payments – less than a 7% delinquency rate.
- What are the reasons for your top 3 budget variances?
The difference between a budgeted and actual expense is the variance. Larger variances should be explained for the current (and future) board. For example, paying a pool management invoice early or late could cause a pretty large variance on a monthly budget statement.
- Is your reserve account fully funded according to your reserve study?
You can click here to read more about reserves, but the only correct answer is yes. This is your savings account for major future repair and replacement expenses, like pools, playgrounds, and buildings. The reserve study is an engineering report that tells you how much to save.
- For what year did your HOA file its last tax return?
With very few exceptions, the answer should be 2016. If not, please call me. Community associations need to file tax returns every year.
- What financial document reconciles your bank statements with your balance sheet?
Due mostly to timing issues, there is normally a difference between bank account statement balances and the corresponding balances listed on the balance sheet. The bank reconciliation statement lists the specific differences, like expense checks not yet cashed.
- Do your covenants require an audit?
Based on my experience working with community associations, I would say that about 40% of covenants require some sort of regular financial review. Audits and other procedures help identify potential issues and risks, but they can also confirm that the board and property manager are doing a great job managing the community.
- How much liability insurance coverage does the association and board have?
This is where an HOA insurance expert can help, but you need to make sure that the association and board are adequately covered in any situation, including crime and cyber risk. This includes specific board member coverage, known as D&O, for decisions you make as board members.
Did you pass the HOA finance 101 quiz?
Whether or not you know the answers to all of these questions, you still get an A for effort. If you don’t know an answer, or have more questions about any of these topics, please contact your treasurer, property manager, or property management company as applicable. If you still need more information, or want to feel more confident about your community’s financial health, please contact me to schedule a meeting.
Neal Bach, CPA