Your Guide to HOA Finance, Budgeting, and Accounting
Kindly allow us to share a basic refresher on some financial terms related to accounting, financing, and budgeting. You may encounter these concepts in your role as an HOA leader.
Basic Accounting Terminology
- Assets anything that the business owns that has monetary value, including cash.
- Liabilities are the monies that a business owes.
- Equity represents the monetary value of the business.
Positive versus Negative Equity
- Positive equity: when an HOA has more savings, cash, and funds to collect than money to pay.
- Negative equity: When an HOA owes more money than it has and can take in.
The goal of accounting is for the balance sheet to reflect a positive equity and balance.
When looking at a balance sheet, first make sure that the assets are equal to the liabilities and equity. If they are, the finances are balanced.
Budgets
Budget: an estimate of income and expenditure for a set period of time.
Boards use budgets to determine what the cost of service are under reasonably ideal conditions. Keeping these records makes it possible to figure out whether costs are out of line and, if so, where. Budgets vary from year to year depending on reserve studies and planned community projects or activities.
Having a budget allows an HOA to more closely control its financial operations. Use your budget as baseline to determine owner assessments and to help minimize unexpected expenses.
At Spectrum, we aim to get proposed budgets approved by September.
HOA Reserve Studies
- Reserve funds: the associations’ savings account where the HOA saves money for more costly replacement and repairs.
- Reserve study: a budget planning tool which identifies the status of the reserve
The financial health of your HOA can be determined by calculating the strength of that fund through a reserve study. A reserve study verifies the strength of all those common areas which fall under the responsibility of the HOA. Items such as roofs, courtyards, building foundation, elevators, air conditioning, or swimming pools would all be part of this study. The results should provide an estimate for any future repairs or maintenance.
A reserve study will also predict an amount that the fund should have on hand to address these findings.
Community associations should conduct a reserve study every few years.
Fidelity Bonds
Fidelity bond coverage provides protection for loss of money (i.e., reserves or operating expenses, additional securities, and property) that would occur as a result of fraudulent or dishonest acts by people in charge of handling the association’s money.
A fidelity bond should provide coverage for theft or forgery by any employee of the insured and should also include the HOA management company and their employees among the additional named insured.
Your HOA management company should be straightforward and accessible when communicating over financial matters with your HOA’s board of directors and homeowners at large.
