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The Basics of Good HOA Accounting

Posted by IKO Community Management on February 18, 2016 at 3:00 AM

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Budgeting can be a hard concept for a lot of people to understand, and that’s OK. If you get the hang of saving and spending money, your bank account will definitely thank you in the long run. Personal budgeting can help with lowering debt, saving for a large expense, avoiding overdrafts, and paying bills on time. The great news is that the same ideas about good personal accounting go for your homeowners association, too. To break down the basics of good HOA accounting, here’s IKO Community Management’s guide to the concepts your board should know:

Be aware of the operating budget. Like we mentioned before, budgeting is absolutely necessary. To begin, your HOA board should take a look at the previous three-year history of their budget to determine past spending habits. Looking at these trends can help your HOA board make future changes in the way they spend your monthly HOA fee. It’ll also help the board members prioritize the community’s needs and how they can afford to meet those needs yearly.

Do the math. Determining the cost of each community member’s monthly HOA fee is simple:

1. Add the total operating costs to the annual reserve contribution.

2. Take that solution and divide it by the percentage of ownership in your neighborhood.

3. That final number should be the monthly HOA fee.

If that number is close to the previous year’s number, then your budgeting skills are top-notch.

Contribute to a reserve fund. Having and contributing to a savings account is a smart money move for your personal finances, and it’s the same for your HOA budget. It’s called a “reserve fund,” and it can help pay for expenses like roofs, painting, sidewalk paving and other neighborhood maintenance and restoration. If your HOA board is unsure of how much money should be in the reserve fund or how much each community member should contribute, consider conducting a reserve study or hiring a management company for assistance.

Plan a long-term budget. It’s good to live in the moment, but when it comes to your finances, it’s best to play it safe and plan ahead. Like a reserve fund, a long-term plan is a smart financial move. Start by gathering all of the necessary documents, such as the reserve study, financial and income statements, and previous year’s budgets. Next, apply the inflation factor and insurance, discuss major upcoming expenses, and plan for potentially radical changes in housing rates.

Follow the HOA law. Break out the HOA handbook to make sure your HOA’s budget remains in accordance with HOA law. This law will most likely mention submitting an annual budget report and policy statement within a certain period of time (usually 30 to 90 days) before the next fiscal year. Each community is different, so double-check the handbook.

Don’t forget about taxes. Every HOA board has tax reporting and filing requirements to adhere to. The HOA accountant should be aware of the important dates for standard deadlines of employment, federal income and state tax returns. The latter two tax returns will usually be on the same date.

HOA boards should remember that good community accounting is a marathon, not a sprint. Though you can ask for immediate assistance from a management company, it can take time to get your board’s finances completely in order. Begin by following our easy tips and tricks: be aware of the existing budget, do the math, create a reserve fund, plan ahead, follow the law and file taxes.

From all of us at IKO Community Management, happy budgeting!

Download IKO's Guide to Running a Community Association

Topics: HOA Board