HOA Balance Sheets
The balance sheet in your HOA financial statement is the quickest and easiest way to get a feel for the financial strength of your community association. There are three parts to a balance sheet: assets, liabilities, and equity.
Assets = Liabilities + Equity. This is the basic formula that your HOA balance sheet should follow. It will provide a general snapshot of how well your association is doing financially at a certain point in time whether it be at the end of every month, quarter, or year. It should be included in every official financial statement.
- Assets – the positive. Assets are anything of monetary worth owned by your HOA. This includes things like reserve funds, petty cash, bank accounts, property, etc.
- Liabilities – the negative. This will be anything owed by the association such as maintenance fees, improvements, or vendor bills. Anything that costs money will be a liability. Depreciation on community structures, vehicles, or equipment also counts as a liability and should also be added to the HOA balance sheet.
- Equity – what’s left. Equity is the difference between the value of the assets and the value of the liabilities. To find equity, the formula can be rearranged as: Equity = Assets – Liabilities.
If you follow the formula and your equity is positive, good job! Your association is doing well and is bringing in more money than it owes. If equity is negative, it means that you should quickly reevaluate your finances; more money is being spent than is coming in.
Not all equity is created equal. Having an equity of $5,000 would be great for a small HOA that only brings in $8,000 monthly but not so great if your community collected $100,000 monthly. That’s where equity ratio comes in. Equity ratio can be calculated by taking your total equity and dividing it by total assets: Equity Ratio = Equity / Assets. Using the same example from above, the smaller HOA would have an equity ratio of 63% while the larger HOA’s ratio would be only 5%. When listed as a ratio, it becomes quite clear which HOA is more financially sound despite having the same total equity.
HOA balance sheets, whether prepared monthly, quarterly, or annually, are a good representation of the daily operation of your community association. A negative equity on an annual sheet does not only mean that an HOA has lost money over the year, but it also means that day to day operations are flawed and need to be reconsidered.
Just as with financial statements, the more frequently balance sheets can be made up, the more insight they can provide into the financial workings of a community association. While it is perfectly acceptable to release financial and balance sheets annually, it is preferred to release them monthly or quarterly. The more information your board of directors has to work with, the more effectively they can operate.
For more information on preparing HOA financial data and balance sheets, contact the experts at CSM. We have years of experience working with homeowner’s associations throughout the country with a branch in almost every state in the US. You can reach us at 865.315.7505 or by emailing email@example.com.