Seasoned board members agree that knowing your association’s finances is essential for making good decisions for the HOA. But, an HOA’s finances are only as good as the system it follows. As such, every association must have a strong HOA financial system as a foundation.
Have an Effective HOA Financial System in Place
Keeping board members up to date and in the loop about the HOA’s finances should be a priority. Sadly, many groups don’t put the right amount of emphasis and focus on having a good HOA financial system. This can cause imbalances in your accounts and result in financial ruin. If you don’t want that to happen to your association, follow the tips below:
1. Choose the Right Accounting Method
It is vital to decide what kind of accounting and record-keeping type your association will use. There are three types of accounting methods to choose from:
Accrual Basis of Accounting
This is one of the most widely used accounting methods among HOAs nationwide. It is a thorough method and boasts accurate records each time.
The accrual basis of accounting takes into account every transaction of money, cash or otherwise. It reports both income and expenses as you earn or incur them, regardless of when actual money is exchanged.
Unlike other systems that can get confusing, this accounting system is excellent for keeping money tracked and board members in the loop.
Cash Basis of Accounting
The cash basis of accounting is not the optimal choice for keeping HOA finances accurate. It is also more tedious to do.
This method is based on tracking cash transactions and not keeping detailed logs and records. It reports income and expenses only when money is received or disbursed.
Although it may be easy to know how much money an association has, it can easily get messed up or incorrect if someone isn’t vigilant about keeping tabs on the cash.
Modified Accrual of Accounting
This method takes some aspects of both accrual and cash basis of accounting. It reports income as it is earned instead of when money is received, similar to the accrual method. On the other hand, it follows the cash method for recording expenses. Most HOAs either choose accrual or cash when picking a finance system since this method can get confusing.
The Best Accounting Method
The accrual basis of accounting may take a bit more work, but it produces the most accurate financial reports. Additionally, the accrual method is the only one that conforms with the Generally Accepted Accounting Principles. For these reasons, it is widely considered the best accounting method among the three.
2. Generate Accurate Financial Reports
There are a number of financial reports your HOA must generate. The Balance Sheet, Income Statement, and Cash Flow Statement are standard and the most common out of the bunch.
But reports such as the Accounts Payable Report, Account Delinquency Report, and Cash Disbursement Ledger are equally critical. Furthermore, you must record transactions in a General Ledger.
A good HOA financial system should produce accurate financial reports. Beyond that, you must also know how to analyze these reports and use the data to inform future financial decisions. By doing so, you ensure your association’s financial health.
3. Use the Appropriate Accounts for Expenses
A sound HOA financial system involves adding and deducting money from the correct accounts. If you are scheduled to replace that rundown playground or have a large project in the works, use the money from your association’s reserves.
Should you take from the operating fund for these expenses, you can distort your HOA finances. Similarly, if you have regular maintenance scheduled or need money to pay vendors, use your operating fund.
4. Perform an Annual Audit
An audit is a normal part of HOA financial management. Look to your HOA’s governing documents to see if there are stipulations regarding how often an audit must take place. Some associations require annual audits, while others mandate it every two to three years. Select states, such as Florida, also have laws in place concerning audits.
While most board members dread the very utterance of an audit, it is a necessary tool for financial stability. You wouldn’t know how your HOA finances are doing without performing an audit. It investigates your HOA’s finances and examines your overall financial health. Find a professional outside of your association to conduct the audit.
5. Keep Bank Account Security a Priority
With the prevalence of bank fraud, account security has become a chief concern for both individuals and organizations alike. Your HOA is no exception. You must keep your bank account completely secure.
Make sure no one has access to your HOA’s bank account without the proper credentials. Not even your property management company should have unbridled access, especially when it comes to large purchases.
6. Support Local Businesses
You may laugh at the very idea of it, but shopping locally is important to your HOA financial system. It is infinitely better to support local vendors for a number of reasons.
For one, you can cultivate a lasting relationship with them, giving rise to the possibility of obtaining discounts. Other than a way to cut down on costs, a strong working relationship with your vendor leads to higher-quality output and services.
Next, it is much easier to communicate with a local business. If you ever need additional support, your local vendor can address your requests without much hassle.
So, for all your community needs, it is best to consider local options first. If you can’t find any that suits your community’s requirements, then you can move to other options.
The Key to a Strong HOA Financial System
Choosing the best accounting method for your HOA will lead to accurate financial reporting. Make sure to schedule regular audits to assess your HOA’s financial condition. Use the right funds for the appropriate expenses and maintain bank account security at all costs. Additionally, make sure to shop locally. These things make for an unparalleled HOA financial system. And while these tips are all equally critical, a good financial system ultimately starts with you.
If your HOA is facing difficulty in establishing a solid financial system, let us give you a hand. Don’t hesitate to shoot us a message anytime.
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- The Best HOA Accounting Method: Cash, Accrual, Or Modified Accrual?
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- 9 Warning Signs That You Have An HOA Financial Problem