Financials 101

If meetings are the backbone of a community, the place that all decisions of the board are made (as required by Oregon statute), then financials are the muscles that help hold those decisions in place.  It is critical that each and every board member read and understand the financials provided every month.  Without the review and an understanding of the association’s fiscal state, how can the board determine if the business of the association can proceed normally?

Each month, the management company (or the association’s treasurer, if the community is self-managed) should produce a financial report for the previous month.  While each management company may provide different items in its package, a basic financial report (at minimum) must include these reports:

Balance Sheet.  This report provides a snapshot of the current financial health of the association.  It shows how much cash the association has as of the end of the current period and is generally broken down into different asset accounts (such as checking/operating and money market/reserves) and also shows the current liabilities, which are also broken down into separate accounts (such as reserves and retained earnings).  If the association has a loan, this should also be reflected on the balance sheet.

Budget Comparison/Income and Expense.  This report may have different names but ultimately it should show current income and expenses versus budgeted income and expenses as well as yearly income and expenses versus budgeted amounts.  Boards should scrutinize this closely to see where the actual expenditures are exceeding the budgeted amount and determine why this is occurring.  The reason for the variances could be quite reasonable (for example, water usage tends to be greater in the summer due to irrigation requirements) or it could be the frequency of the payments (maybe two monthly insurance bills were paid in the same month) or it could be that the board simply didn’t budget enough for that expense in the current fiscal year.  More important than the number itself is obtaining an understanding of why the variance occurred so as to help determine what, if any, action needs to be taken.

Income Received.  Again, this report has many different names, but whatever it’s called it should be a listing of owners, their payment amounts and dates the payments are received.  If there is other income received (let’s say from a coin-op washer and dryer in the basement of the building), that should also show up on this report as a receivable.  About the only income you wouldn’t expect to see on this report is interest from a financial institution.  (Note:  this report generally has confidential information on it and as such should not be shared with any non-board-member owners.)

Expenses Incurred.  This report may be called “Check Register” or may have any number of other names, but it is a listing of all of the checks written in the month, including the number, the payee, the amount paid, and the expense account they were paid to.  Many management companies also try to provide a note with some additional description (for example, an invoice paid to the landscaper for monthly contract maintenance may have the month paid noted).  The checks should be sequentially numbered and any voided checks should also show up on this report.

Delinquencies.  This should include the name and amount owed for all owners with a past due balance as of the end of the period.  Usually this includes a breakdown of current, 30 days, and 60-90 days.  This report is sometimes also called “Aged Receivables” or “Receivables” and is also confidential and must not be shared with any owners who are not board members.

Bank Statements and Reconciliations.  The board should receive a copy of the bank statements and the reconciliations for each bank account.  While the balances shown on the balance sheet may not match the bank account ending balances, they should match the ending balances shown on the reconciliation.  (The reconciliation - and the balance sheet - takes into consideration checks that have been written but not yet cashed.)

It is not required to be provided, but I believe managed associations deserve to have their managers review the financials and provide some sort of recap.  I find that going through the financials in order to write up my report helps me notice trends and potential issues before they become full-scale problems (such as chronic overspending in a budgeted line item) as well as helps me to correct any minor errors in the financials (an invoice for insurance accidentally coded to building maintenance, for example).

So now that you know what should be in your financial package each month, what do you do if you’ve looked it over and still have questions?  Ask them!  Too many board members are unnecessarily bashful about asking questions either because they feel they should know the answer already or maybe they assume another board member will ask the same questions.  As a manager, though, I want my boards to ask me if they have questions.  If you don’t understand the financials, you should ask to sit down with the manager and go through them (if you are self-managed, you should ask to sit down with the treasurer).  A good manager will take the time to help you understand your financial report and its implications.  It’s not a nuisance or an inconvenience to us, even though of course we are busy people, because part of our job is to help you do your fiduciary duty, and how can you do that if you don’t understand the HOA’s finances?

(If you are unsure what fiduciary duty means, here is a link to the Wikipedia article:

Board members are entrusted with making responsible decisions on behalf of the owners that elected them.  A proper understanding of the association’s finances is critical to being able to do so.  Board members must each take the time to review and understand them as well as seek assistance when needed.  There is no shame in asking questions.