Here are 10 tips to help you stay on top of the financial complexities of your HOA
Managing a Homeowner’s Association (HOA) can be a challenging and rewarding experience whether you’re a property manager or volunteer. While most of us don’t think about the HOA beyond writing a check each month, for those of you running an HOA there are several financial factors to consider.
Understand your accounting methods
There are two main types of accounting methods—cash and accrual. With a cash accounting method, you record income as you receive it and expenses as you pay for them. With an accrual method, you record expenses when you incur them even if you haven’t made the payments yet, and you record income when you’ve earned it even if you haven’t received the money yet. There are pros and cons to both methods. Cash-based accounting is simpler, but an accrual-based method is more accurate.
Be proactive when it comes to planning for expenses. You will have some slow months, and then some months will have more significant spending. Don’t get caught at the end of the year without enough funds. Make sure you are looking ahead and saving enough for those larger projects. This is particularly important if you are using cash accounting, which is just like using a checkbook where you track money as it comes in and out. Look into specific accounts that can help you maximize your reserves. Check out our HOA banking services, including HOA Money Market, HOA CDs, HOA CDARS CDs, and Money Market Sweep. Find out the account that works best for your specific situation.
Hire reliable vendors
HOA’s are dependent upon a number of vendors, such as landscapers, painters, electricians, plumbers, builders, maintenance people, and more. Nothing can throw your budget out of whack faster than hiring a vendor who botches the job or doesn’t deliver. Make sure you take your time properly vetting vendors to ensure you get someone competent and reliable.
Understand your state law
HOA’s are subject to state laws which may require you use certain accounting methods or produce regular reports on your financial activity. Make sure you understand your state requirements so you adhere to the laws and don’t have to redo any work or face costly lawsuits.
Create clear tracking categories for expenses
Make sure you have a detailed ledger account that includes categories such as professional fees, landscaping, maintenance, etc. If you have a specific project you need to track for legal reasons, you can create subcategories to help you monitor those expenses as well, so you can easily produce them if you need to.
Categorize all income
Dues aren’t the only source of income for many HOA’s. Extra revenue can come in many forms and may include assessment income, administrative fees, application fees for architectural reviews, etc. Irregular or inconsistent income sources are easy to miss, but that can cause big problems in your financial ledgers. Make sure you are tracking where every incoming dollar comes from to get an accurate accounting picture.
The HOA volunteers, including your treasurer, may be constantly changing. This can make it difficult to keep your policies and practices uniform. But when it comes to your finances, consistency is key. Make sure that the way you are tracking and categorizing expenses (especially if they don’t occur every year) remains consistent over time to avoid miscalculations and skewed accounting. It can help to have a document drawn up that clearly outlines the accounting practices so that each treasurer can follow the same guidelines. Talk to your financial advisor for advice on what to include in this document.
Monitor with short and long-term reports
Don’t just guess at your financial situation. Use reports to help you get a quick, concise look at the budget and accounting history. Be sure to review both short-and long-term accounting reports for the most comprehensive assessment. Use a year-long spreadsheet to track income and expenses over time and monitor trends and long-term growth. Monthly reports can help you catch and remedy any issues quickly before they become a significant problem.
When creating a budget for your HOA, it’s almost inevitable that you will sometimes over- or under-budget for specific line items. That’s okay. Budgeting is a process. In many cases these will balance each other out, or you may be able to cut back on other expenses to make up any differences. Review your history, and if you are regularly budgeting too much or too little, make adjustments going forward. Don’t forget to budget for contingencies because unexpected costs will pop up from time to time.
Don’t do it alone
Managing an HOA can be complicated. Beyond managing the financial aspects, you have to handle events, board meetings, and deal with property owners’ issues, applications, requests, and complaints. Don’t take on all that responsibility alone. Consider hiring an accountant and/or financial advisor to help guide you through the financial complexities. Your local bank can also be a great resource. Consider partnering with a bank that specializes in HOA management to help advise and support you during this process.
Managing an HOA means juggling some significant financial practices. You don’t need to be an accounting expert to stay on top of your HOA, but a little financial know how will go a long way. And don’t go it alone. There are plenty of resources available for HOA managers to help stay on top of the finances.