Running an HOA is like running a small (or large, depending on your neighborhood) business. You collect dues, then provide amenities and services to the owners. Sounds pretty simple, right? But considering that many managers and board members are volunteers, each with varying financial experience, it’s important to carry out some simple checks often to ensure the financial health of your HOA.
These six tips will help evaluate or enhance your current HOA financials.
1. Know Your HOA’s Accounting System
There are three possible accounting methods commonly used by HOAs. It’s important to know the differences between the three in case you may find the need to switch systems when it makes better financial sense.
Frequent reviews of your accounting system will allow for better responses and strategies to employ for your organization’s financial health.
Cash accounting is the simplest form and may work best if you have a smaller HOA or COA. You essentially record income when you receive it, and expenses when you pay them. Simply put, you make your records when money changes hands.
With accrual accounting, on the other hand, you record expenses when you incur them, and revenues as you earn them, no matter when money exchanges hands. It’s inherently more complicated, but can provide a more accurate view of your overall finances.
Modified accrual accounting is a combination of the first two where you report revenues as you earn them (not when the actual money is exchanged), and expenses when you actually disperse the money, regardless of when it was incurred.
2. Record Everything
Be vigilant about recording revenues and expenditures in the appropriate places. Mistakes in these areas are easy to make and can be a real headache for your bottom line.
Use dynamic accounting tools to create greater transparency for your treasurer and your board – monthly reports are a good idea so it’s clear where the money is going which helps protect everyone.
3. Budget Under Specific Categories
The more specific you can be with categories in your budget, the better. Your general expenses could include things like professional fees, landscaping, maintenance, and any other categories you need. Whatever the category, make sure it makes sense to future board members since boards turnover often and there isn’t always the opportunity to clarify things with former board members.
Categorize any income you may have, too. Dues will play a large part in income, but don’t forget things you may collect like admin fees or application fees.
4. Deduct From Proper Accounts
It’s important to know the difference between a reserve fund and operating fund. HOAs should have both and know what income and expenses belong in each.
Your reserve fund should cover major repairs and maintenance in the future or unexpected expenses that pop up.
The operating fund should cover regular maintenance and expenses that occur often.
5. Analyze Your HOA’s Budget Often
Your fiduciary duty should include frequent analysis of income and expenses. By reading your current budget monthly, you can often catch things that seem out of whack. Things like water bills and landscaping will be seasonal but you won’t catch small differences if you aren’t looking frequently.
If something seems odd, don’t hesitate to ask an advisor or board member. Many HOA treasurers and managers are volunteers with little experience in reading these types of financial statements. Getting help is a responsible thing to do. And analyzing monthly and annually helps you stay ahead of any problems.
6. Understand State Law
Be sure you are aware of and are following your state’s laws on financial records and taxes. They definitely vary state to state but may require you to keep certain documents and materials handy like the budget, receipts, and tax returns.
Some states require a certain accounting style (cash, accrual, or modified accrual from above) and may require annual audits based on yearly income of the association. A quick Google search can confirm your state’s laws.
Accounting can be a difficult subject that requires some background knowledge to get right. But, with these simple tips, you are well on your way to fulfilling your fiduciary duty for your Homeowners Association. Remember to check your budget often, remain transparent, and ask for help if you need it.