The Essential Guide to HOA Financial Management: 5 Key Areas for Success

Managing the finances of a Homeowner Association (HOA) or condo association is much like running a business. You have customers (residents) who pay dues (revenue) in exchange for a service (maintaining the community). Effective HOA financial management is critical to ensure the long-term sustainability and operation of the community.

Unfortunately, running an effective HOA financial operation can be challenging, especially for self-managed communities. Volunteer board members are juggling full-time jobs, families, and hobbies, and often lack the time to build a solid financial operation for their community. Additionally, many board members do not have professional backgrounds in accounting or finance, which makes this task even more difficult. 

In this post, we’ll provide an overview of the five areas board members need to master to maintain their association’s financial health. Over the next few weeks we’ll dive deeper into each of these areas, giving board members a playbook they can use to improve their HOA financial management. 

Five Key Areas of HOA Financial Management 

1. Bookkeeping (recording transactions)

2. Accounts Receivable (collecting dues)

3. Accounts Payable (paying the bills)

4. Reporting (financial statements)

5. Planning (budgeting & forecasting) 

Bookkeeping: The Foundation of HOA Financial Operations

Bookkeeping is often viewed as dull, administrative, or just a necessary task for compliance and tax purposes. However, when done correctly, proper bookkeeping can significantly improve the financial health of your community. 

At its core, bookkeeping is the foundation of accounting. It involves recording or accounting for all of the transactions and activities that impact the financials of an organization. 

An effective bookkeeping system needs to be two things: 

1. Accurate

2. Timely

Accurate bookkeeping means you are properly recording transactions according to accounting and legal standards, booking them to the correct general ledger accounts, and performing bank and account reconciliations.

Timely bookkeeping means that transactions are recorded and reviewed on a regular and consistent basis. We recommend that HOAs implement a monthly bookkeeping and review cadence. If you wait too long to enter, review, and reconcile transactions, you risk errors going unnoticed and do not have a regular view into the financial health of the community. This can have a negative impact on the finances. 

Accounts Receivable: Collecting HOA Dues 

In an HOA, accounts receivable is the process of invoicing, collecting, and reconciling payments received from residents. An effective accounts receivable function ensures consistent cash flow into the HOA.

One of the best actions an HOA board can take is adopting a formal collection policy. This document outlines the actions and procedures the board follows to collect dues from homeowners. Having a robust policy in place can help increase timely payments and reduce past due balances. 

However, a collection policy is only effective if it’s actually implemented, executed consistently, and clearly communicated to residents. This helps set expectations and increases transparency.

Accounts Payable: Managing Vendor Payments 

Accounts payable is the process and procedures used to pay 3rd party vendors and service providers, such as landscapers, snow removal companies, utilities, CPAs, lawyers, etc. While paying bills sounds simple, failing to establish a solid accounts payable process can lead to cash flow issues from mistimed payments and increase the risk of fraud.

As a general rule, you want to pay invoices when they’re due—not earlier, not later. Early payments can reduce cash flow by releasing funds before necessary, while late payments can result in unnecessary late fees. 

Fraud is one of the biggest risks in a weak accounts payable process. As guardians of your community's funds, we recommend implementing the following safeguards:

1. Dual Sign-Off on Invoices: Always require two approvals on payments to third parties. Multiple sets of eyes on outgoing funds minimizes the risk of unauthorized transactions.

   
   

2. Segregation of Duties: Don’t let one person handle both check signing and bookkeeping. Separation of duties ensures accountability and makes fraud harder to conceal.

   
   

3. Automation: Automate your accounts payable process to eliminate manual errors and fraud opportunities. At Summa Finance, we use Bill.com to streamline and automate AP processes. 

   
   

4. Vendor Verification: Always verify changes to vendor information (bank details, contact info) through multiple channels. Don’t rely on a single phone call or email, as fraudsters often exploit these weak points.

   
   

5. Annual Audit: Partner with a trusted CPA firm for an annual audit. Regular audits not only catch potential fraud but also help identify weak controls and foster transparency within your community.

Reporting: Providing Insight into HOA Financial Health 

Once you have the bookkeeping, accounts receivable, and accounts payable running smoothly, you can now develop a robust reporting framework. Financial reports provide insight into the overall financial health of your community.

HOAs should review the following four reports on a monthly basis:

1. Profit & Loss Statement: Also known as the Income Statement, this report shows your association's income, expenses, and net income or loss over a period of time. 

2. Balance Sheet: The balance sheet presents your association's assets, liabilities, and equity at a specific point in time. Remember, the balance sheet must always balance: Assets = Liabilities + Equity.

3. Budget vs. Actuals: This report compares your Profit & Loss and Balance Sheet to the budget, helping identify strengths and weaknesses in financial performance throughout the year.

4. AR & AP Aging Reports: The AR aging report lists all outstanding resident dues and how long they have been overdue. The AP aging report displays all outstanding bills of the association and their overdue duration. It’s important to take action on all overdue balances in both reports. 

Effective financial reporting should achieve five key goals:

1. Provide Information on Financial Health: Financial reports should provide a clear picture of your association’s financial status, helping board members and residents understand its overall health. 

2. Compliance: Many HOAs are legally required to provide certain reporting to the community. It’s also essential for tax compliance and filing. 

3. Cash Flow Management: It’s essential your association has enough cash to cover short- and long-term obligations. Effective reporting helps track inflows and outflows to help make sure you stay on track.

4. Facilitate Decision Making: Financial data and reporting aid the board and residents in making informed decisions about maintenance, updates, and improvements.

5. Accountability: Clear and consistent reporting holds the board accountable for their decisions, fostering transparency and trust with residents. 

Planning: Budgeting & Forecasting for Long-Term Financial Success

The last component of effective HOA financial management is planning. This includes both the annual operating budget and longer-term forecasts for major repairs or upgrades.

Some HOAs are required by state law to produce annual pro forma budgets. This is the most fundamental planning tool for your organization. 

The Operating Budget

The annual operating budget includes all of the expenses planned to keep the community running. This includes regular, planned maintenance expenses like landscaping, snow removal, and utilities. We recommend breaking out the annual budget by each calendar month in the upcoming fiscal year and then reviewing each month and the year-to-date budget-vs-actual on a monthly basis. This helps you track financial performance throughout the year and get ahead of any issues as you see them develop. You don’t want to get to the end of the year and end up in a tight cash position.

The Reserve Budget

In addition to the operating budget, you’ll need a reserve budget that details how much money is transferred to the reserve fund each month and any capital improvement projects the community is planning to complete. This budget should be driven by a reserve study, an analysis performed by a professional to assess the cost and timing of major repairs and replacements for your community’s common area components (roofs, clubhouse, pools, pavements, etc.). 

Together, these two budgets map out the short-term and long-term financial needs of the community and the dues required to support these expenses. 

Conclusion

Effective HOA financial management is critical for maintaining a thriving community. Board members carry the responsibility of building a financial system that ensures the long-term health and sustainability of the community. 

We’ve highlighted five key areas for boards to focus on: bookkeeping, accounts receivable, accounts payable, reporting, and planning. While we’ve provided a high-level overview in this post, we’ll dive deeper into each area in the coming weeks. 

If you need help improving your HOA financial operations or need help building a financial plan, don’t hesitate to reach out!