Any homeowners association will need money on hand to cover daily operations and all community expenses. The account where that money is kept is your HOA cash fund.
What are HOA Cash Funds?
This fund or account contains the money that your HOA keeps available for the community’s expenses. Similar to all budgets and accounts, most of the funds for this one come from regular HOA assessments or dues. The board then decides and directs where the money will be used.
There are two main types of cash funds: the HOA’s operating fund and the reserve fund. The former supports current and routine expenses, while the latter is kept for major repairs and replacements in the future.
As best practice, your association should not treat these accounts as a large pool of money. They should be use for their own, specific purpose, and the HOA cash flow from each of the accounts should reflect this.
HOA Operating Funds
You can think of the operating funds as your HOA’s short-term cash account. This is where you keep the money that would pay for normal HOA expenses, which ensures the association continues to run. Some such expenses would include vendor costs and insurance.
When keeping operating funds, you should ensure that it’s easy to access, since you’ll be using it throughout the year.
Having a healthy operating fund provides your HOA board with the means and flexibility to pay for expenses and bills on time. It can also handle short-term cash gaps that may happen due to late assessments or unexpectes increases in service or supply prices.
How Operating Cash Moves
Your HOA’s operating funds are active money, which means they move based on the HOA’s regular billing schedule. HOA dues come with a regular schedule, usually monthly, quarterly, or even annually, depending on the HOA governing documents.
When HOA assessments are collected, most of them are placed into your operating funds. Then, this moves out of that account as the association pays for operational expenses. These payments may happen at different times but at regular intervals.
It is important for HOA boards to review the cash flow of your operating funds regularly. If you see patterns in which you keep running short or low on balances, it may indicate that your HOA fees are too low or that collections are weak. When this happens, your board will need to revisit the budget and your financial strategies.
How Much Operating Cash Should an HOA Keep?
While the set amount will vary per type of HOA, a common rule of thumb is to have three to six months of funds available for routine expenses. Having this range or buffer provides your HOA with a cushion for short-term cost gaps or emergency needs.
To find the right amount for your community, you will need to consider its size and the costs needed to run it. A small community with fewer common areas usually needs less money to operate than larger developments.
Your HOA board will need to base this target on the community’s annual budget. The target should also move if expenses change.
HOA Cash Reserves
The other type of funds your HOA should have is the HOA cash reserve fund. It’s still sourced from regular HOA assessments, but it’s used for major repairs and replacements in the long term. They’re connected to larger costs for common elements that get damaged over time.
The goal of putting money into your reserves is to spread out the costs over time. This prevents residents from being forced and burdened with a large special assessment for major repair works. Instead, if you have a reserve fund that builds over time, you will have enough money to cover these repairs.
The goal of reserves is to spread future costs over time. Owners pay into the fund while they benefit from the common property. When a major repair is needed, the HOA has money ready instead of relying only on a special assessment.
How Reserve Cash Moves
The cash flow of your reserve funds are different from the operating account. Similar to the operational funds, the money comes from regular assessments, in which a part of it is added as a planned contribution to the reserve. That amount should be mentioned in the annual budget, following recommendations from a reserve study.
The funds in that account usually stay for a long period. As time passes, more and more contributions accumulate in the reserve account, which saves enough for large-scale projects and repairs.
To keep the HOA financially sound and prepared, your reserve cash should only leave that account when reserve expenses arrive.
How Much Should HOA Cash Reserves Have?
The amount of money in reserve funds will depend on the findings and recommendations of your reserve study. Once you’ve determined that, HOA boards need to keep it well funded.
A reserve study inspects and examines major common components handled by the HOA. It then estimates its usable lifespan and the timing when repairs or replacements for it will be needed. Based on these, it will also recommend the amount of contributions you should put into the fund regularly.
A common practice is to keep the reserves at least 70% funded to anticipate future needs. Having your reserves at this level helps lower the risk of having to levy special assessments.
How Much Cash Should HOA Board Have?
There is no single target amount for HOA boards when it comes to how much cash funds are needed. Everything depends on many different factors.
What HOA boards need to ensure is that the association has enough money to operate and cover short-term needs, all while keeping a well-funded reserve.
Managing HOA Cash Funds Responsibly
A responsible board treats cash as assigned money. Every dollar is meant to be spent for the good of the community, and it should have a purpose.
Given this, the board needs to be strict on spending the HOA’s cash funds. They should ensure operating cash funds are used for everyday expenses, while reserves are for long-term needs.
Part of doing so means the board will have to review financial reports regularly. Doing so can help them determine the current financial status of your HOA.
The Proper Way of Handling Money
An HOA should keep two distinct cash funds: an operating account for daily expenses and a reserve account for future repairs. When the board manages both accounts separately, the association can protect HOA cash flow, reduce financial surprises, and lower the risk of special assessments.
CWD Group offers HOA management services to community associations in Oregon and Washington. Call us today at 503-488-2008 or contact us online!
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- Oregon HOA Reserve Requirements: Studies And Planning
