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How To Tell If Your HOA Needs Financial Management Improvement

Posted by IKO Community Management on December 13, 2018 at 9:00 AM

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Many HOA boards have streamlined processes due to the annual round robin of volunteers and elected members. This means that it can take a huge mistake to identify improvement points. Many HOA boards hope that it doesn’t hit where it hurts: Financial management.

Here’s how to tell if your homeowners association needs to improve their finances before it’s too late.

The HOA doesn’t understand basic accounting terminology. If the homeowners association doesn’t understand financial terms, it’s a sign for improvement. Start by using IKO Community Management's quick cheat sheet: 

  • Assets. Known as “the positives of a business” to Spectrum Association Management, an HOA management company in Texas and Arizona.

    “It’s the cash in a business’s bank accounts and...its investments, including the checking/operating account, reserve account, and any investments such as certificates of deposit.”

  • Balance sheet. According to Investopedia, an online financial resource, it’s “a financial statement that summarizes...assets, liabilities, and shareholders' equity at a specific [point].”

    This statement gives the HOA board a clearer idea of what the association owes and owns.

  • Equity. A financial concept that represents the monetary value of a homeowners association. On a balance sheet, it could be represented as retained earnings and losses or as a current year income or loss.

    As part of the concept, positive and negative equity exist. If the homeowners association collects more cash, savings, and other funds than it has to pay, it's positive equity. If the homeowners association owes more money than it’s collecting, it's negative equity.

  • Fine. A sum of money exacted from a resident as a penalty by the authority of the homeowners association.

  • Liabilities. This is the money that the HOA owes, including funds that are due to others like paid bills for contracted services. It also includes funds that are paid but not yet owed. This could be prepaid assessments and other expenses.

  • Reserve funds. A savings account that’s set aside by the association to meet future costs of upkeep. This account also covers any unexpected costs that may arise around the community.

  • Standard costing. A measurement where a unit cost is multiplied by estimates for the coming year. This primarily assists community managers in the control of costs, according to Spectrum.

The board doesn’t seek out additional savings. Many HOA board members consider fundraising through community events as the best way to earn additional savings from residents. Yet, you don’t have to tap into residents’ bank accounts to earn more.

Stretch your financial management further by considering long-term investments. This includes using energy-efficient lighting and appliances in common areas or buying utilities from a broker instead of a company (depending on the state). This could also include requesting local and federal grants or building relationships with insurance brokers and banks to save on fees and get better interest rates.

Someone is stealing. This is the most obvious financial red flag. According to the Educational Community of Homeowners (ECHO), it takes up to 18 months to detect a fraud case within an HOA. The illegal schemes are usually found via a tip or by accident, and it takes years to recover the losses. If you suspect someone is stealing from your HOA, check these hot spots first, as listed by ECHO:

  • Falsified bank statements or balance sheets

  • Payments made to vendors that don’t exist

  • Exorbitant “consulting” fees paid to people who either don’t exist or have no credentials to consult (except for on a fraudulent plan)

  • Payments for excessive or unnecessary repairs or amenities, such as buying more patio furniture than could ever fit near the pool

To prevent embezzlement, require two signatures on all checks to ensure multiple reviews of payments. Also, create safeguards for cash receipts and use a lockbox for assessment collection. This prevents unnecessary human handling and error of HOA finances.

If you're looking to improve your HOA finances, download IKO Community Management's Guide To HOA Financial Management. Click on the button below to get started:

Download The HOA Guide To Financial Management

Topics: HOA Board