Understanding the Homeowners Association's Financials

 

Understanding the homeowners association’s financials is like having a crystal ball into its operational health. For board of directors members whose fiduciary duty includes reviewing and signing off on the association’s financials or questioning any unclear items, this skill is indispensable. Financial statements reveal insights into the association’s management practices, overall performance, and potential risks. Regulatory frameworks, like the U.S. Generally Accepted Accounting Principles (GAAP) and California’s Davis-Stirling Act, have set strict financial reporting standards to ensure compliance, transparency, accuracy, and accountability within the sector.

Understanding Davis-Stirling Financial Requirements

 

According to Section 5300 of the Davis-Stirling Common Interest Development Act, homeowners associations in California are required to prepare an annual budget. This budget should detail the estimated revenues and expenses of the association, including funding for the association’s reserve accounts, which are used for major repairs and replacements of common area components. If necessary, the budget may include provisions for special assessments (fees charged to homeowners) to cover unexpected expenses or to fund reserves adequately. The budget should be used as a baseline for the association to manage and approve expenses and to track revenues and delinquencies throughout the year.

Section 5500 of the Davis-Stirling Act requires the board of directors to prepare and/or review certain financial reports monthly. An association’s monthly financial package should include the following:

Balance sheet

Income statement (compared to the current year’s budget)

Reconciliations of all accounts

Latest bank statements for all accounts

Delinquent assessment receivable reports (aging accounts receivable)

Outstanding bills payable (aging accounts payable)

Check register

Monthly general ledger

The complexity of these financial statements may present a challenge. This article’s objective is to offer guidance on how to effectively interpret and cross-reference the data used to generate the reports.

1. Regular Review

Reviewing financial statements monthly is essential. It fulfills both Davis-Stirling requirements and allows the board of directors to detect potential future issues.

2. Budget vs. Actual Analysis

Compare actual financial performance against budgeted amounts to identify overspending or unforeseen expenses. Ensure that all expenditures, even those within budget, undergo proper authorization. For example, if the association’s landscaping budget was set at $750 per month but actual costs totaled $900, verify approval records for any ad-hoc services or consult the community manager to clarify additional charges.

3. Cash Flow Management

Cash flow should be monitored closely to ensure that the HOA maintains sufficient funds for its obligations. Address potential cash flow issues proactively. Assess the balance in the association’s bank account compared to monthly expenses. Make sure there is enough money to cover operational costs and anticipate lump-sum expenses (such as insurance premiums or annual pest treatments), and ensure that the association’s account has the funds to cover these costs.

4. Reserve Fund Management

Regularly evaluate the association’s reserve fund status compared to the reserve study report. Neglecting reserves to avoid dues increases can result in unwelcome special assessments. Engage in candid discussions with members to compare reserve expenditures in relation to single-family home ownership and assess the reasonableness of dues accordingly. After regular review, the board should budget dues accordingly and consider whether a special assessment may be needed.

 

5. Expense Analysis

Meticulously review all financial outflows to be sure they are justified and essential for the community’s upkeep and operations, determining alignment with the association’s strategic objectives and budgetary constraints. This includes actively seeking opportunities to trim costs without compromising the quality of services provided to residents, such as through negotiating more favorable terms with service providers and exploring maintenance optimization and taking advantage of government incentives aimed at promoting energy efficiency, water conservation, and other sustainable practices.

6. Compliance

Maintain strict adherence to financial practices that are in full compliance with the FASB GAAP (Financial Accounting Standards Board Generally Accepted Accounting Principles), Davis-Stirling regulations, and the association’s governing documents. Failure to comply with these regulations can lead to legal disputes or fines. By ensuring accurate budgeting, timely reserve contributions, and transparent financial reporting, HOAs can demonstrate fiscal responsibility and uphold legal compliance, thereby protecting the interests of homeowners and the integrity of the community.

Seek Help When Needed

Board members should possess a foundational knowledge of financial statements, encompassing the balance sheet, income statement, and cash flow statement. Consultation with financial professionals or accountants should be pursued when necessary.

By embracing a vigilant and proactive stance toward financial oversight, the board of directors can protect the association’s financial interests and ensure its sustained viability. While comprehending financial statements may initially appear daunting, proficiency can be attained through dedication and a commitment to learning. The financial well-being of the HOA rests squarely in the hands of its board of directors.

Avenues

Author: Carolina Ramos

Article originally published by ECHO – Executive Council of Homeowners