If you use a community management company or in-house accounting subcommittee, finances are a new territory for you. If you use these services, it’s still important to understand HOA financial management. It is even more important to learn how to improve it. What information should you track? How should you track it? Can you make sense of the numbers?
Aside from inquiring about financial management, take IKO Community Management’s tips for better financial management:
Do an annual audit. Most CC&Rs require an annual financial audit. Even if the documents don’t specify an audit, HOA board members need to perform one. This is especially helpful if your association has a large cash flow.
According to Spectrum Association Management, a property management company in Texas and Arizona, “Depending on the size, scope, and complexity of your association, there will be a type of report best suited for your HOA. Review the scope of each of the...different reports, as well as contact your HOA management company.”
An audit is the most all-inclusive of these three reports. This option captures the scope of your homeowners association in its entirety. It does so by targeting verification and substantiation procedures and inventories with debtors and creditors through a third party. This third party is usually a certified public accountant (CPA).
An audit also includes a CPA’s search for other mistakes. The CPA looks at meeting minutes and vendor contracts to check the financial health of your homeowners association.
Consider shifting the accounting method. Most associations use either cash or accrual accounting methods. In a cash accounting method, income and expenses are recorded as they're received and paid, respectively. It’s best to think about long-term expenses and be realistic about what you can afford if you use a cash method.
In an accrual method, expenses are recorded as they’re incurred, even if the association hasn’t made payments yet. Income is recorded as it’s earned, even if you haven’t received it yet.
Add and deduct funds from the proper accounts. According to HOA Leader, mischaracterized expenses or income skews your HOA finances. Use the money from reserve fund contributions for common area projects and large, unavoidable expenses. Don’t take from the operating fund.
The operating fund is for regular maintenance, vendor contracts, and similar expenses. If you take from the operating fund otherwise, it can unnecessarily enlarge assessments.
Ensure bank account security. It’s of grave importance to assure that no one can penetrate your HOA bank account without credentials. This includes not authorizing large purchases by a property management company without discussion and/or approval. Protecting the finances of your association takes effort from board members and residents.
Shop locally. The most secret tip that IKO has is to shop local. From vendors to community event menus to decorations, local shopping finds valuable resources. This method also builds positive business relationships and results in higher quality work. It also has the potential for loyalty discounts and rewards programs - two major keys to balance slim HOA finances.
Most HOA board members have full-time jobs and/or parenting responsibilities. This means that managing HOA finances understandably falls low on the to-do list. To keep the homeowner's association from financial ruin, hire outside help like IKO. We'll help take care of audits and other financial management duties.
Download IKO Community Management’s Guide To HOA Financial Management by clicking below: