20/20 Vision on Your HOA’s 2020 Financials
Making sure you have a clear picture of next year’s budget
By Neal Bach, CPA
BJM – Bach, James, Mansour & Company, PC
Whether you are a property manager, a management company principal, a new or a seasoned community board member – a clear 20/20 vision of your Homeowner Association’s 2020 budget begins today. It may seem a little early for this discussion, but it is better to understand your community’s financial health now, so you have plenty of time to address potential weaknesses and be better prepared for the unexpected. As a CPA with nearly 30 years of experience helping maintain the financial health of community associations, here are some tips that managers and boards can use to help ensure financial success:
- Review the budget as a group. Even if the community association budget was just approved at your annual meeting, you still want to review the numbers together as a board and make sure that everyone is 100% prepared to take responsibility for the finances. During your review, look for any significant, unexplained variances between 2019 actual revenue/expenses and the 2020 budget. Then document those variances and get an explanation for them. During this time, you should also confirm that expenses are evenly distributed, not front-loaded. Everyone wants to get their projects underway, but you do not want to run out of money in the process. You’ll be a hit at the next cocktail party when you mention you’re maintaining positive cash flow.
- Review vendor contracts. Take a look at major vendor contracts, such as landscaping, pool maintenance, and property management. All of these contracts should be in writing and signed, with the contract fees matching budget expenses. If not, you’ll need to update the existing contracts, execute new ones, or find new vendors. This is also an excellent time to confirm that there are no conflicts of interest.
- Double-check the reserve fund. Your community association should have a funding goal that is based on a recent, professional reserve study (conducted within the past three to five years). The reserve account should be fully funded per the reserve study. If the account is not adequately funded, you’ll need to pull money from other areas of the budget to catch up. Also remember that the reserve fund is for specific, major repairs. It is not a slush fund!
- Be aware of and understand any potential financial pitfalls. Check with your property manager or your attorney about any potential trends or legal issues that could cause revenue or expenses to differ from initial expectations. Delinquent homeowners are good pitfall example.
- Schedule an audit. If you have any doubts or concerns about your community’s financial health, now is an excellent time to schedule an audit or similar financial procedure. A CPA will dive into the financial details and highlight any real or potential issues. Check your covenants, as they may require a regular audit.
- Review the community’s insurance coverage. Consider bringing in a third-party agent who has community association experience. You will want to confirm that the community and board are fully covered under the current insurance policy or policies. Make sure that there are no gaps in your coverage that would create liability for the community or board members. Consider a separate D&O policy for board members.
- Confirm that your community has filed its annual tax returns. It may seem obvious, but as a CPA, I continue to see examples of communities (mostly self-managed) that have not filed tax returns. If you fail to file association annual tax returns, your community may lose its tax-exempt status.
- Make your financial reviews a habit. 2020 is right around the corner, so this is a great time to instill some new, healthy financial habits. The community association board should review its budget and other financial statements at every monthly board meeting. The treasurer and property manager can review the details beforehand and present their findings or any highlights during the meeting.
Gain 20/20 Financial Vision in 2020
When it comes to your HOA financials, anything less than 20/20 clarity should be concerning. This is your fiduciary responsibility, an obligation that you agreed to when you signed on as a community association board member or property manager. You are responsible for a real business. If you have any questions about the financial health of your community, please feel free to reach out and contact me. I would be happy to answer your questions.