Today, more than 72 million Americans live in Homeowner Associations (HOAs), with California leading the nation. In order to provide a good service, HOAs have a huge financial responsibility when it comes to their communities. As such, the board of directors of each HOA must streamline their accounting processes. By following the right practices, the HOA can properly manage and allocate the funds with accuracy and transparency. Here are five strategies that HOAs can use to streamline the accounting processes:
1. Know your state laws
Every state has different rules, so what is allowed in one state does not mean it will be allowed in another. There are some states that even have their own laws that govern what HOAs can and can’t do. For example, in the majority of states, HOAs can choose one of three methods of accounting to prepare its statements, which are:
- Cash Basis. This method records income and expenses only when the cash is on hand. While simple, it also means that you can only record the money you have on hand, and there’s no way to verify expected payments.
- Accrual Basis. This method records income and expenses as they happen. Your balance sheet will include columns on “Assessments Receivable” and “Prepaid Assessments” to account for expected payments.
- Modified accrual basis. This method is a hybrid of the above two. You record income as it’s earned, meaning you don’t have to wait until the cash is on hand. Meanwhile, you record expenses as they are actually paid, regardless of when or how these expenses were incurred.
It is imperative to know and understand the state laws of where you reside so as not to encounter major problems. For instance, California State Law mandates that HOAs should use the Accrual Basis when preparing their pro forma operating budget.
2. Study the balance sheet
Money is the lifeblood of the HOA and it is what keeps it alive and running. Without proper balancing, the HOA could end up drowning in debt. A balance sheet is vital to an HOA’s accounting because it explains the financial condition of the association: Assets – Liabilities = Equity
Simply put, equity is the net worth of the association. According to the formula, if the equity is positive, the board is bringing in more money than it spends. If the equity is negative, too much money is being spent and the board must re-evaluate its spending habits.
3. Use the best financial programs
Producing accurate financial reports and balanced budgets can become a very tedious and mindboggling task. Especially if the size and membership of the HOA is vast, a team of board members will have a difficult time.
To ease this process, HOAs can use financial reporting software to perform these time-consuming calculations. One such program is QuickBooks for HOA Management which can dramatically simplify the arithmetic and help increase the accuracy of these financial reports. It is currently being used by 3.4 million small businesses and is a complete solution for most financial-related problems.
4. Work with a professional
It’s especially important that HOA finances are well-organized and clear. Rather than assigning this tedious task to a single member of the board, who may be juggling other responsibilities or have a conflict of interest, it’s best to work with someone with an educational background in accounting. They will have the training and certifications to work with new accounting tools. These professionals are always up to date with each state’s latest accounting laws and they also easily adapt to new technologies, which will be beneficial to HOA accounting.
5. Have an annual audit
Aside from the many reports that are already generated, a strong HOA should review the previous year’s financial statement – including the balance sheet, amounts owed, negative equity, and profits. The audit can be done internally from existing staff, or the board can choose to hire a certified public accountant. Either way, this will prepare the board members for a better year of financial planning so they can keep their eyes on the goal, manage existing assets and allocate funds wisely.
An HOA’s accounting of finances and assets can be very difficult and time-consuming. But there are always solutions to problems, and the five steps above can help you streamline the HOA accounting process.
Article exclusively written for vinteum.io
Authored by Robbie Jordan