Understanding HOA financial statements is essential for any well-run community. These documents show where the money is coming from, where it’s going, and whether the association is financially healthy.
Understanding HOA Financial Statements
Every homeowners association deals with money. It’s impossible to run an association without funding. These associations collect fees and fines from homeowners, pay vendors for their services, and plan budgets for the year. Many also maintain reserves.
To keep track of all this money, HOAs must prepare and maintain accurate financial statements. Homeowners association financial statements are formal reports that summarize the financial activities and position of the association.
Their main purpose is to maintain HOA financial transparency. These statements keep both board members and homeowners informed about the HOA’s financial standing.
By reviewing these statements regularly, the board can prevent mismanagement and fraudulent activity. The board can also ensure that the HOA stays within budget. Furthermore, these financial statements are essential for the board to make sound decisions about finances.
For homeowners, HOA financial statements provide insight into the association’s financial performance. These statements can signal good or bad financial performance. It’s a way for homeowners to keep board members in check.
What are the HOA Financial Statements?
Several financial statements play a role within an HOA. That said, here are the most important HOA and condo association financial statements.
1. HOA Balance Sheet
The balance sheet provides a snapshot of the HOA’s financial condition at a given point in time. It lists the association’s assets (such as bank accounts, reserve funds, or receivables), liabilities (including unpaid invoices or loans), and fund balances.
As its name suggests, the balance sheet should always be balanced according to this equation:
Assets = Liabilities + Equity
2. HOA Income Statement
One of the most essential HOA financial statements is the income statement. Also known as the profit and loss statement, this report tracks the HOA’s income and expenses over a set period.
In this statement, board members will find a breakdown of the revenue sources, including HOA dues and rental fees. The report compares this revenue with the association’s actual expenses, such as landscaping, maintenance, insurance, and management fees.
The income statement deducts the total expenses from the total revenue to arrive at a net profit or net loss. This is where board members can see if the HOA is overspending or if there are budget shortfalls. Based on this report, boards can make financial adjustments, decide to increase dues, or levy special assessments.
3. Cash Flow Statement
The cash flow statement shows how money is moving in and out of the HOA. It categorizes transactions into three main categories: operating activities, investing activities, and financing activities. Even if the income statement shows a profit, poor cash flow can indicate that the HOA is struggling to pay bills or fund projects. The ideal outcome would be to have a positive cash flow.
4. Delinquency Report
Another key HOA financial statement is the delinquency report. This report lists homeowners who have not paid their dues, along with the amount they owe. It can also include late fees, interest, and lien statuses.
A high delinquency rate indicates that many homeowners are defaulting on their dues. This can result in a negative cash flow, meaning that more money is being spent than is coming in. Consequently, HOA boards may be forced to make budget cuts or raise fees.
To lower delinquencies, an HOA board should practice effective collection methods. Of course, state laws and the HOA’s governing documents will dictate what collection methods are allowed and how the HOA must apply them. That said, most methods include charging late fees, filing lawsuits, placing liens, and even foreclosure.
5. General Ledger
The general ledger is the complete record of all the association’s financial transactions, whether it’s receiving or expending money. It includes detailed entries of each transaction. The general ledger is important because it serves as the basis for all financial statements.
6. Accounts Payable Report
This report lists all of the association’s outstanding bills, which are monies the HOA owes to other parties. With this, the HOA board can understand the association’s financial standing and any upcoming liabilities it must settle. It also helps avoid late payments.
7. Cash Disbursements Ledger
The cash disbursements ledger details all the payments the HOA has made during a specific period. It includes checks issued, electronic transfers, and other disbursements. This report is important because it ensures that the HOA is spending funds appropriately and with the board’s approval.
8. Budget Comparison Report
Also known as the variance report, this report compares the anticipated budget against the actual income and expenses of the association. It indicates whether the association has adhered to its approved budget.
If there is a big difference in a line item, the board should investigate further. The board should prepare this report regularly. In doing so, it can spot any trends in spending. For instance, if actual expenses consistently exceed the budgeted ones, the board may need to reevaluate the budget or cut costs.
9. Reserve Fund Statement
Illinois law requires associations to maintain reserves (765 ILCS 160/1-45 and 765 ILCS 605/9). To keep track of these reserves, the HOA board must prepare a reserve fund statement. This statement monitors all contributions and withdrawals from the reserve account.
Who Prepares HOA Financial Reports?
It is the responsibility of the HOA board to prepare the association’s financial statements. More specifically, the treasurer works with the rest of the board to accomplish this.
Of course, board members are just volunteer homeowners, so they don’t always have the expertise or background to prepare HOA financial statements accurately. This is why many HOAs hire an accountant or an HOA management company to assist with this task.
Typically, the HOA prepares these statements on a monthly or quarterly basis. It ultimately depends on the HOA’s size and the governing documents. A yearly report is also common.
How to Read an HOA Financial Report
Preparing financial statements is one thing, but the HOA board must also know how to read and interpret them. There is more to HOA financial reporting than just numbers and figures.
To start, the board can check if the HOA is operating within its projected budget. If the expenses are consistently higher than the income, then there’s likely a problem. The board should also check the balance sheet to make sure the association’s liabilities are under control. Moreover, the reserve fund statement should continue to steadily grow.
The HOA board should also review the cash flow to ensure the HOA is paying its bills on time. The delinquency report will show how collections are affecting the overall financial health of the association, too.
Trends might also appear over time. Board members should keep an eye out for any trends that emerge. For example, the board can explain overspending for a month, but consistent overspending could indicate deeper financial issues. If there are any significant discrepancies, especially if they can’t be explained, the board should investigate further.
How to Request HOA Financial Statements
Homeowners have a right to review the association’s financial statements (765 ILCS 605/19 and 765 ILCS 160/1-30). Typically, the board presents these statements at its annual meeting. If not, there are alternative ways for owners to view these reports.
- Upon Purchase. Buyers can request to see the HOA’s financial statements before purchasing a home in the community. This will provide them with an understanding of the association’s financial health, enabling them to make informed decisions.
- Written Request. Homeowners can ask to examine or copy the financial reports by submitting a written request to the HOA board or manager.
- Community Website. Some HOAs maintain a website and post their financial reports there for homeowners to view at their discretion.
The Final Word
HOA financial statements play a critical role in communities. For board members, knowing how to read and explain these statements is part of their fiduciary duty. For homeowners, it’s a way to stay informed and hold the board accountable.
TNWLC offers HOA financial management services to community associations in Washington, DC. Call us today at (202) 483-8282 or contact us online to get started!
