5 Tips to Ensure the Financial Health of your HOA

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March 2, 2021

Every HOA is unique — especially when it comes to the community's financial health. The security of knowing your HOA is in an excellent financial state gives homeowners and potential homeowners a sense of safety and comfort. As we continue to experience the hardships of Covid-19, HOAs must strive to gain financial security so that their communities can prosper.

What’s the purpose of being financially healthy?

The purpose of maintaining a financially healthy HOA is to preserve the financial quality of living and the community's well-being. If Covid-19 taught us one thing, it was to prepare and always be financially prepared for the unknown. When evaluating the financial state of your HOA, your community's best interest should be at heart. Your resident's needs are the #1 priority and sole purpose for maintaining financial stability.

5 Essential Tips to Ensure Financial Health For Your HOA

1. Ensure upkeep on common areas of management such as landscaping and amenities.

Under the purview of the HOA, one of the best ways to ensure your HOA's financial health is with the upkeep of common areas. Living in an HOA is more than maintaining the property itself. It takes a multitude of time and thought to correctly preserve an HOAs landscape and amenities' appearance and functionality. The more an HOA is maintained, the more likely homeowners are willing to pay their dues — especially when they're aware that funds are put towards common areas that they share.

As a way to ensure your common areas are maintained, we suggest scheduling regular maintenance for both landscaping, shared lawn spaces, and amenities. Keep in mind that homeowners will want to know where their money is utilized. In this situation, be sure to provide a clear and transparent budget to inform your community about any changes that their dues may include.

2. Assess your HOA’s accounts receivable and financial processes.

There's nothing scarier than knowing that your HOA is not financially maintained. Are your tenants paying on time (or at all)? What type of accounting methods is your HOA using? Is your HOA performing regular audits? All these questions are essential to maintaining the financial health of your HOA.

Accounting methods:

There are three types of accounting methods that an HOA can utilize: cash, modified accrual, and accrual.

Cash - Here is where an HOA will record payment receipts during the time they received them instead of when they earned them.
Accrual - When using the accrual method, an HOA will record revenue as they earn it, regardless of when they received the money. For example, an HOA will report expenses as they incur them with no attention when they disburse cash.
Modified accrual - This method of accounting follows the same pattern as the accrual method. Here is where revenue is reported when an HOA earns it vs. when they receive it. Typically, an HOA will only report expenses when they are paid as opposed to incurred.

Plan a sound budget:

Review projections
Recap on financial trends and adjust budgets accordingly
Review wages and inflation rates as needed

Audits:

Be sure to check your HOAs governing documents before performing any financial audit.
As a board, discuss who, how, and when the audit will be conducted. If possible, hire a professional that may specialize or be well versed in performing an HOA audit.

Evaluate expenses:

Evaluate your HOA's expenditure — this will help identify open financial opportunities to cut back on, such as vendor contracts, property maintenance, utilities, or legal costs.
Due to the impact of COVID-19, we recommend conducting a thorough review of all annual vendor contracts that could reveal immediate savings in cost. Consider all maintenance and service contracts that have been set up for yearly renewal, along with evaluating discount opportunities.
HOAs may also consider benchmarking or comparing what other communities of similar size and type may spend on several services. The benefit of benchmarking is to help advise the community where they stand in comparison to their peers.
To ensure your accounts receivable processes are up-to-date, we suggest creating clear guidelines regarding the assessment of dues. Most importantly, be sure your HOA is current with its reporting efforts. Remaining up-to-date will help ensure that the HOA has clear records of all payments, along with when the payments were made.

3. Assess current reserve fund balances and plan for future assessments.

An HOA reserve fund is a portion of collected HOA dues set aside for major financial expenditures. Examples include extensive landscaping, construction work, gym maintenance and repairs, playground installation, or any significant expenses that would significantly impact an HOA budget.

A few questions to consider discussing with your Board of directors may include:

Does your HOA have sufficient funds to compensate for large ticket items that may arise?
Does your HOA have a reserve plan, and how do they plan to execute that plan?
Is your community keeping track of their reserve plan?

By keeping a healthy reserve, your HOA will be able to mitigate problems and maintain the financial health of the HOA well balanced if (and when) critical maintenance issues may arise.

4. Employ an accountant to enact your HOA’s accounting best practices.

Regardless of the financial state of your HOA, we recommend keeping a professional level of maintenance by employing a professional accountant. This will help ensure your HOA's financial health and provide the level of attention that it deserves. When hiring an accountant, be sure they are well-versed with your HOA's accounting software and processes. An HOA may employ a third-party accountant who is familiar with financial transactions and intricacies as an alternative option. A third-party accountant can also advise about any economic weaknesses that may be present in your HOA's financial account and budget.

An HOA professional accountant may offer services such as:

Evaluate reports
Assist with reserve fund planning
Advising difficult financial decisions
Advice on areas of opportunity to save money
Assist with making sure all financial records are up-to-date and accurate

5. Familiarize your HOA community and Board of directors with all HOA laws and regulations.

Anyone associated with managing the finances of an HOA should be well-versed in local and state laws, especially as it relates to any HOA accounting practices. Conducting an annual training with your community and Board of directors will ensure a sound financial foundation.

Training may include topics such as:

Providing members with an up-to-date copy of the Declaration of Covenants, Conditions & Restrictions (CC&Rs)
Discussing new and upcoming changes to your state’s laws
A Q&A session that allows all members to ask questions
Advising a legal counsel

During this time of COVID-19, your Board of directors must continuously communicate with their community about any crucial changes to their state laws and guidelines.