The Quick Guide on What to Look for in HOA Financial Statements
As a member of the board, your ability to understand your community’s financial situation is critical. Without a proper understanding of your HOA financials, you run the risk of managing an inaccurate operating budget that could prove detrimental to your community.
Instead, we want to help you stay up to date on all things financials, including balance sheets, income statements, and more. Here is a guide to the basics of the HOA financial statements and what to look for.
The Balance Sheet
The first statement to look at is the balance sheet. The balance sheet gives a snapshot of the HOA’s assets and liabilities, including how much money is in the bank, how much dues are uncollected, and the book value of any other assets that the HOA owns.
This is the most important place to begin as it sets the stage for most other financial documents. Here are some things to monitor on the balance sheet.
HOA Bank Accounts
Usually, HOAs have at least two bank accounts. The first is the operating bank account and it is used for the day-to-day transactions of the HOA.
The second type of bank account is the reserve account which acts like a savings account for HOA funds that will be spent on large repair or replacement projects such as replacing a condominium’s aging roof.
The accounts receivable represents HOA dues that have not yet been collected for homeowners. It is prudent for the board to monitor the outstanding dues from homeowners on a monthly basis, and if any homeowner starts to become significantly behind on the payment of dues, that the HOA sends a “late letter” to that resident informing them of the outstanding balance.
Most HOAs assess a late fee to homeowners that pay after the due date. The amount of late fees and the collections procedure for the HOA should be documented in a fine policy and be approved by the board. Several states such as California and Florida have regulations regarding the timing and the amount of late fees and collections.
If the HOA has significant amenities such as a pool, tennis courts, or a community center, the book value of these fixed assets is sometimes shown on the balance sheet. If these assets are not shown on the balance sheet for your community, do not be concerned.
HOAs are set up as non-profit companies and in most states, HOA common area is considered to have negotiable economic value because there is no way to separate the amenity from the HOA.
The liabilities include assessments that homeowners prepaid. These are considered a liability because the HOA is holding this money in trust for the payment of future dues. HOAs occasionally have additional liabilities such as loans for capital projects. If there is a large loan on the balance sheet, this could be a red flag and the Board should seek additional guidance from an HOA professional.
The last item on the balance sheet is the equity account which shows the retained earnings, which are the results of prior years, and the net income, which is the result of the current year's operations. The net income comes directly from the income statement.
The income statement, also known as the Profit and Loss Statement (P&L), is the financial statement that boards are most familiar with. This document shows the amount of assessments (revenue) and the expenses of the HOA.
Assessments are usually paid monthly, quarterly, bi-annually, or annually. The revenue line on the P&L should be the sum of the number of units in the HOA multiplied by the assessment amount. Your HOA may have other sources of revenue such as utility reimbursement, key charges, late fees, and interest income, which are all shown under the revenue category.
How is the HOA spending its money and how does this amount change over time? Tracking expenses over the last several years will give insight into the spending trends and should be the basis of the current annual operating budget.
Expenses for the current year should be compared to the budget to see if specific costs are running higher or lower than the budget predicted. Future expenditures may be adjusted if there is a significant variance. Since expenses tend to increase over time, it becomes a balancing act for the board in order to keep expenses in line with current dues
The most useful income statements for the HOA compare the budgeted amounts next to the actual results.
Annual Operating Budget
This is the financial roadmap that is assembled prior to the current operating year and it shows how the actual financial results track against the budget. For HOAs, predicting the annual revenue is easy because the assessment is determined at the start of the year.
The important thing to estimate for the year is the total expense. If the community has significant deferred maintenance items that must be performed, the board must plan how to pay for these repairs. Hopefully, the HOA has built up a reserve fund.
These funds would be used to address these large repairs. If there was not enough money to cover the repairs in the reserve fund, then the HOA would have to raise the assessment or pass a special assessment in order to pay for these repairs. With a complete picture of revenue less expenses, the board can identify any excess funds that are available for the rainy day fund.
Additional HOA Financial Documents
The balance sheet and the income statement are the two biggest elements of HOA financial statements. However, the bank reconciliation, expense register, and account receivable report lend detail so any single transaction should be able to be traced through the financial statement.
The financial statements must agree to the bank statements when closing out the month's end. If any financial entry during the month was incorrect, the reconciliation process will identify these errors.
Once every transaction on the bank statement is confirmed in the HOA books and there is no variance, the bank reconciliation is complete, and the month-end is considered closed. Accounting software does the reconciliation process more or less automatically and the result is shown on the reconciliation report which should be included in the monthly board packet.
The expense register shows additional detail on the expenses of the HOA that is summarized on the income statement. Boards can look to the expense register to see who was paid and look to the memo section to see exactly what the payment was for.
The accounts receivable is a report of all the outstanding assessments and other charges that homeowners have not yet paid and includes an aging table that indicates how long past the due date each charge is.
Boards reviewing this report can determine actions to take based on the amount and how past due a particular resident is. Late notices should be sent out to homeowners once their account becomes more than 30 days late. When homeowners become seriously delinquent with their payments, the board might want to send them to an attorney or collection service to recover the past due assessments.
The procedure for placing an account for collections varies state by state, so it is best to consult an HOA management company or the HOA attorney for instructions on how to comply with state law.
Simplify Your HOA Financial Statements
The above reports are the main elements of a monthly board packet. Depending on the specific needs of the HOA, there could be additional reports that are helpful to the operation of the HOA. For instance, a report detailing the monthly usage of the community pool could be used to determine if the cost to extend the seasonal closing date for the pool is justified by the number of residents using the amenity.
Do you need more assistance managing these critical financial records for your community? Our team at HOA Management Solutions is here to help. Reach out to us today to get started!