As part of the HOA board, you have a duty to ensure your associations finances are in order. To do that properly, you need to know how to read HOA financial statements properly. This helps the board understand the accurate situation of your community’s finances, letting you create informed decisions.
What are HOA Financial Statements?
Financial statements are money- or asset-related reports that reflect the HOA’s financial position and fund movement for specific periods of time. These should be prepared at certain intervals, whether monthly, quarterly, or annually, depeinding you the association’s governing documents.
A typical financial statement packet usually includes the following reports:
- Balance Sheet
- Income Statement
- Budget Comparison Report
- Bank Reconciliation
- Reserve Fund Statement
- Accounts Receivable and Payable
Board members use these reports to figure out proper spending and plan future costs. They’re also used to decide how much is set aside for reserves and the prices for regular assessments.
How to Understand HOA Financial Statements
Before diving deeper into the financial details, board members should first check the reporting period and accounting method. They should also show what type of accounting method the HOA uses, whether it’s cash basis, accrual basis, or modified accrual accounting.
Cash basis reports record income when the HOA receives money and expenses when it pays bills. Meanwhile, accrual basis reports show income when it is earned and expenses when they are incurred. For HOAs, accrual reporting often gives a clearer picture because figures like unpaid or prepaid assessments, as well as unpaid bills, often appear on reports.
How to Read an HOA Balance Sheet
The balance sheet shows what the HOA owns and owes at one point in time. It also shows the remaining fund balance after liabilities are accounted for.
When reading the balance sheet, you need to familiarize yourself with two figures:
- Assets: These are the resources that your HOA owns or expects to collect, usually from regular assessments. For most associations, key assets would include the operating and reserve cash funds and investments. It may also include assessments receivable and prepaid expenses.
- Liabilities: On the other hand, liabilities are the things the association owes or has yet to earn. These include vendor bills, loans, accrued expenses, prepaid owner assessments, and deferred revenue.
Based on these two, you get the fund balance, which is the difference between assets and liabilities.
Key Takeaway
When reading and interpreting an HOA balance sheet, you will mainly have to focus on the differences between assets and liabilities. For most HOAs, the most important items would be cash, receivables, payables, and loans.
How to Read an HOA Income Statement
Also called the statement of revenue and expenses, the income statement reflects the HOA’s financial activity for a period. It helps the board see whether the association collected enough income to cover operating expenses.
For most associations, that income usually comes from regular assessments. It may also come from special assessments (if successfully levied), late fees, interest income, and charges for association services, among others.
Meanwhile, the expenses show how much money the HOA spent during the same period. When reviewing the income statement, board members should check for unusual increases or missing expenses. They should also look out for errors such as duplicate payments or charges posted to the wrong account.
Finally, the net income refers to the income that went over the cost of expenses during the period. Meanwhile, a net loss is the opposite, where expenses exceed income.
Key Takeaway
When you read HOA financial statements, use the income statement to see whether current operations are sustainable.
How to Review HOA Financial Statements Against the Budget
The budget comparison report is one of the easier statements to understand for newer board members. When you read this report, you can find the figures for your actual income and expenses right beside the approved budget. It shows whether or not the association’s annual budget is on track.
One key figure to learn from this report is variance. This is the difference between the budgeted amount and the actual amount in your budget comparison report. A positive variance means the HOA spent less than planned for or collected more than what was estimated. A negative variance means the opposite.
When you find variances, your board should figure out if it’s temporary or whether immediate action is needed.
Key Takeaway
When you review HOA financial statements, the budget comparison report tells you whether the board is following the financial plan.
How to Understand HOA Financial Reports for Cash
Cash reports outline whether the money listed in your HOA’s financial statements matches bank records. Cash reports explain whether the money shown on the financial statements matches the bank.
There are a couple of cash reports you will need to know about: bank reconciliation and cash flow.
- Bank Reconciliation: This statement compares your association’s accounting records with the bank statement. It includes all outstanding checks, deposits, bank fees, interest, and timing differences. This report usually needs to be done monthly and should be reviewed by someone who doesn’t write or sign the HOA’s checks.
- Cash Flow Statement: This cash report reflects how the funds are moved in and out of the account during a certain period. It shows whether the cash is being used where it’s intended.
Key Takeaway
HOA board members should always check whether the reported cash matches the bank and whether the HOA has enough money for near-term obligations.
How to Read HOA Reserve Fund Statements
An equally important account your HOA should always have is the reserve fund. A reserve fund statement reflects the contributions your HOA made to that account. It also includes any interest earnings it may have, as well as withdrawals that may have occurred.
When monitoring your reserve fund statement, it should show that it follows what was planned or recommended by the reserve study. It should also reflect whether the association is saving enough for future replacements and major repairs at a responsible pace.
Key Takeaway
When reading your association’s financial reports, reserve statements show whether the association is preparing enough for long-term repair needs.
How to Read HOA Receivables and Payables Reports
Your HOA’s accounts receivable and payables show the amount of money that’s still missing when you have yet to pay bills. These reports helps the board see a broader picture for proper cash flow.
The accounts receivable aging report usually outlines unpaid homeowner balances by how long they have been owed. Directors need to monitor the total delinquent amount owed and their age. They also need to check if collections remain consistent with the HOA’s policies.
Meanwhile, the accounts payable report shows any vendor invoices and outstanding bills that the HOA hasn’t paid yet. High payables may mean that your association is delaying bill payments due to cash problems.
Key Takeaway
The accounts receivable reflect whether homeowners are paying on time, while payables show whether the HOA is keeping up with its obligations.
Properly Understanding Your HOA Finances
Knowing how to read HOA financial statements gives boards and homeowners a better idea of how money flows in and out of your HOA. With regular review, the community can spot problems earlier and make more informed decisions.
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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