As an HOA board member or property manager, staying on top of the HOA budget and other financial issues is a top responsibility. With the coronavirus pandemic potentially impacting the timeliness of HOA assessment payments and increasing costs, such as the disinfecting of common areas, it is now even more important to be a smart money manager.
Here are 10 top tips specifically for property managers and board members to help you manage HOA finances in these unusual times… or any time:
- Stick to your budget – You’ve carefully reviewed past expenses and future commitments to come up with a sound budget. Now, it’s your fiduciary duty to stick to it. If you run into additional expenses, make sure to document the variance, not only for current year recordkeeping and budget adjustments, but also for future planning.
- Apply the same collection rules to everyone – Your HOA should have a written collection policy along with steps to follow for delinquency issues. It’s important to apply policies equally to all HOA members. In these unusual times, you may feel the need to adjust the rules. Consult your HOA attorney for advice before doing so.
- Use reserve funds for proper purposes – Reserve funds are set aside to meet the future repair and replacement needs of common property and amenities. It is imperative that these funds be used strictly for those purposes and not for normal operating expenses.
- Review HOA financials monthly – At least one board member, usually the treasurer, should review the HOA financial statements monthly and present a summary at the board meeting. While the chance of fraud is slim, a monthly review will reveal mistakes and potential budgeting issues that can be fixed before they become bigger problems.
- Maintain enough operating cash – The operating account should have enough cash to handle operating expenses. A general rule of thumb is to maintain 10-20% of your budget in operating cash. Also, spread out major expenses so the account doesn’t take a large hit in one month. If the pandemic is having a negative impact on your operating cash account, you can review vendor contracts and other costs for potential savings.
- Make sure HOA bank and savings accounts are FDIC (Federal Deposit Insurance Corporation) insured – The FDIC insures account balances up to $250,000 per depositor per bank. Don’t put HOA funds at risk in non-insured investments.
- As expenses increase, raise dues – It’s better to implement smaller dues increases each year, or execute a tiered increase over time, than to run short of cash or have to implement a heavy one-time assessment to cover increased HOA costs. Don’t kick the can down the road.
- Maintain adequate insurance coverage – Consult an HOA-experienced insurance expert and ensure your HOA has optimal directors and officers (D&O), liability, theft and fraud coverage.
- Schedule a reserve study every 3-5 years – This study determines the amount of financial reserves required over time. An engineering firm will review the useful life and replacement costs of common areas and amenities. Since prices change, it’s important to keep the study up to date so your reserve fund is adequately funded.
- Conduct an audit every 2-3 years – Simply put, an audit (or audit alternative like an agreed-upon procedures engagement) is an independent and objective examination of the HOA’s financial health. Sure, it may uncover potential issues or even fraud, but it normally confirms the sound financial procedures utilized by the board and property management company.
Remember, an HOA is a business
It’s important for the board and property manager to think like business owners – especially when it comes to HOA finances. If you have any questions about HOA budgeting, reserve fund studies, or audits, feel free to contact me. You can also review our white paper, A Guide for Effective HOA and Community Association Financial Management, for more tips.
~ Neal Bach, CPA