Deciphering Your HOA's Finances Crunching the Numbers

It was comedian Jackie Mason who said," I have enough money to last me the rest of my life—unless I buy something." Mason was making a joke, but if your homeowners association isn't adept at managing its books, it might also be an unpleasantly accurate description of your community's finances.

"The best advice to keep financials in shape is not unlike good advice for keeping your body in shape," says Daniel Brown, a certified public accountant with the accounting firm of Rosenberg, Rich, Baker, Berman & Co., in Bridgewater. "It takes a commitment to do so, the effort to implement healthy practices, consistent check-ups, and strict adherence to professional advice." In short, it takes a formal system of checks and balances to back up a good old-fashioned, financial chestnut: Don't spend more than you earn—and put something away for a rainy day.

Crunching The Numbers

It might be a bit harder to follow simple advice these days. Financial statements, tax returns and audits are a bit heavier than simple checkbook management and something that many non-financial professionals and board members have trouble interpreting. Yet they are the very things that can tell you whether a homeowners association (HOA) is on track or not. Is the landscaping budget too high? Must operating costs be increased? Might some pattern of behavior even indicate that fraud has occurred? Even the most basic financial statements and tax returns begin to form a profile about the community—a profile that should serve as a working document that delivers some historic perspective, current status and indicator of future potential.

Decoding the Documents

Among the documents that aid a board and its financial advisors in steering their community through the sometimes-choppy waters of fiscal management are a few vital standouts that must be decoded and understood fully in order to—as Fairlawn-based CPA Karen Sackstein, says—"Paint a portrait of the financial position, provide a summary of the prior year's events, and show how income and expenses have been budgeted."

Some of those vital documents are the balance sheet, which outlines what a community has in the bank versus what it owes in one easy-to-digest form; the income statement, which covers all the HOA's bills and expenses for the year; the statement of cash flows, which reports cash receipts, payments, and the net change in cash resulting from the operating, financing, and investing activities of the association. Along with these repositories of important information are the monthly management reports, which include accounts receivable, cash disbursements showing bills were paid, accounts payable, the year-to-date budget, bank reconciliation, and copies of bank statements. Finishing off the pile is the audit, an annual report of the association's financial state.

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2 Comments

  • Nothing new - just reminders of what a board member should know.
  • Great article, thanks for sharing this information! I do have a question. I'm president of our HOA and I'd like to better understand the relationship between the P&L and the balance sheet. In particular, our assessment to fund capital reserves shows up as income on the P&L. On the balance sheet the reserves are shown under equity. What is the correlation between these two statements? Also, if we have a net loss on the P&L is that loss funded out of equity, i.e. reserves? We are on a cash accounting system. Thanks for your time and advice! David