Pretty much every community association starts out financially sound. The common areas, amenities and building are shiny and new, and the developer maintains everything. Then the developer turns over the community to the residents, time passes, board members come and go, and the community starts to age. The real challenge is to maintain that financial health consistently over time.
As a CPA, I’ve been helping maintain the financial health of community association for nearly 20 years. Based on my experience, here are 10 things you can do to ensure that your community association is financially successful today, and into the future:
- Have a strong board and property manager. Remember that your community is a business. The board of directors and property management are the business leadership team, so members of that team should have some level of business experience. At least one board member, hopefully the treasurer, should have some financial experience.
- Know and enforce the rules. Before you can enforce the rules, you need to know what they are. Read your community association covenants, bylaws, and other documents in detail, so you understand how specifically the business of the association should be conducted. Then enforce the rules the same for everyone. The collection policy is a good example, as a few slow/no payers can have a major financial impact, and subjectively applying the rules sets a bad precedent.
- Make, and stick to, an annual budget. Just like every other business, associations need to have goals and a plan in order to be successful. The financial aspect of your plan is the annual budget – projected association revenue and expenses, segmented into logical categories. While last year’s budget can be a starting point, create a new budget each year. Then stick to it, documenting any variances during the year.
- Utilize a reserve study and fund. The reserve account, mandated in many covenants, is the association’s long-term savings account for major repairs and replacements, like the pool deck, tennis courts, and clubhouse roof. A professional engineering study will help determine the funding required over time to pay for these initiatives. Fund the reserve account as prescribed.
- Regularly review financial results. The treasurer (with property manager assistance) should review key financial reports each month, like the balance sheet, income statement, and bank reconciliation. The treasurer should provide a brief monthly board update, noting (and documenting) key variances vs. budget. Prioritize and focus on the major line items and variances. A $0.05 pool maintenance overage isn’t important.
- File tax returns. After years of talking about this, I still get calls almost every month from board members asking if community associations need to file tax returns. Yes, you do – both federal and state returns for associations located in Georgia.
- Update contracts. At least for larger contracts like landscaping, pool management, and property management, you should have a signed contract on file that reflects the fees currently being paid. If not, it’s time to re-bid (maybe), re-negotiate, and update contracts. The next board will thank you for it.
- Have adequate insurance coverage. This includes general liability, directors & officers (D&O), and fidelity. The best time to confirm adequate coverage is now, not after there’s a major issue or theft, and the association (and board) gets sued. I don’t sell insurance, but I’ve seen enough policies to know that many have gaps in coverage, and all are worth reviewing every few years. If you’re not sure about your association’s coverage, see #10 below.
- Audit the financials every 2 years. Many covenants require annual, or at least regular, audits or other financial reviews. Audits, or more focused (and cost-effective) examinations like agreed-upon procedures engagements, verify the association’s financial health, identify risks, and minimize the chances of major mistakes, theft, and fraud. I’m biased, but this is a great way for the property management company to prove it utilizes sound financial procedures and the board to get peace of mind… and peace from resident complaints…
- Seek professional help. No, not that kind, although you may wonder sometimes why you became a board member or property manager. If your community is not currently professionally managed, have a property management company give you a presentation so you know what’s available. Don’t be afraid to ask for help from other professionals and subject matter experts with homeowner association experience, like CPAs, lawyers, and insurance brokers. That’s a sign of a great leader!
Neal Bach, CPA