If 2020 was the year of crisis management and pandemic survival, then 2021 should be the year for applying the lessons learned and improving HOA and community association financial stability. A financially stable HOA is not only better prepared for an unforeseen situation, but is also set up to meet goals, address maintenance needs, and keep residents informed and happy.

Here are 7 tips for improving your HOA’s financial health and stability:

1. Prepare a solid budget. When setting the HOA’s annual budget, you’ll want to review historical data as well as project new expenses and update current ones. Take a look back over the past three years for the most accurate picture of historical spending and income. Don’t forget to review contracts for annual updates to services or fees, and also consider inflationary increases in construction and maintenance costs. Review the reserve study, and remember to include funding the reserve account as part of the regular budgeting process.

2. Review financial statements monthly. The treasurer, as well as other board members, should regularly review the financial statements. Compare expenses on the income statement to prior months as well as to budget, and investigate any unexpected variances. It’s also a good idea to check the delinquency rate for fluctuations and ensure the reserve account is where it should be per the reserve study.

3. Keep tight control over expenses. It’s a good idea to annually review vendor contracts, insurance policies, utility bills, and maintenance agreements for cost-saving opportunities. Focus on the largest contracts first. While you’re at it, be sure to compare the contract terms to actual work being performed to ensure your HOA gets what it’s paying for.

4. Protect reserve funds. Since these funds have been set aside to cover future improvements and replacements of common property and amenities, they need to be there when you need them. Don’t use the reserve account for HOA operations. Don’t make risky investments. Choose only FDIC-insured interest-bearing options like CDs or money marketing accounts after careful consideration.

5. Perform regular audits. Most governing documents specify how often an HOA must have an independent audit or other financial review. An audit, performed by a CPA, is like a financial health check, highlighting real and potential issues and risks so they can be addressed. As an audit alternative, consider an agreed-upon procedures engagement, which is also performed by a CPA but focuses on specific financial areas, such as reserves and cash receipts/disbursements.

6. Keep members informed. Maintain financial transparency with your membership about everything, including how dues are spent, the budget, future expenditures, and any issues or concerns. Most covenants or bylaws include requirements for the board to share the HOA’s financial statements at least annually, but doing so on a regular basis will improve board-to-membership relations and build trust.

7. Ensure proper insurance coverage. In addition to general liability insurance, consider a fidelity bond that covers fraud, embezzlement, and other financial losses caused by an errant employee, property manager, or even a board member. Because HOAs often keep sensitive information on members and their finances, carrying cyber insurance is also a good idea given the recent rise in data breaches and identity theft.

When evaluating ways to improve financial stability, BJM is here to help. We can evaluate your current financial status, assist in setting standards for financial reporting, and perform audits and audit alternatives. Contact us today.