It would be an understatement to say that managing an HOA’s finances is difficult. A lot of work goes into collecting dues, paying invoices and staying on budget. Most board members don’t have a background in finance, which can make members (especially new ones) feel very apprehensive about this aspect of the job.
But, instead of leaving the numbers for the treasurer to take care of, board members are encouraged to learn what they can about HOA accounting and hire an accountant or bookkeeper for extra assistance.
The importance of knowing your numbers
Though HOAs are organized as non-profits, they do earn revenue and incur expenses like any other business would. The HOA board has an obligation to protect the association’s assets and manage its finances to the best of its abilities. Therefore, it’s crucial that everyone is aware of how the association is doing. Good or bad, board members need to know what their numbers look like so they can plan for the year ahead, then make any necessary adjustments as soon as possible.
Poor financial management can lead to a number of negative consequences, both for the HOA and owners. For instance, bad bookkeeping can lead to overspending, which means the association would need to increase fees or take out a loan to cover future costs. Similarly, if the reserve fund is too low, the HOA may have to delay major repairs. Usually, the cost ends up being greater if issues are neglected for longer than they should be.
Conversely, when an HOA is in good financial standing, it can maintain property values without having to ask owners for significantly more money.
Below is a shortlist of some of the most common accounting terms (including accounts receivable). Understanding these terms will make it easier to create, update and comprehend financial documents.
An HOA’s financial health is captured on a balance sheet. This document lists the association’s current assets, liabilities, and equity.
Any money owed to an association is documented under accounts receivable. Usually, this money comes from assessments, dues or fees. Vendor credits and late fees are also documented under accounts receivable. The amount of money owed to the association appears on a balance sheet as an asset.
Accounts payable tracks money owed by the association to another person or company. The money is often owed to a vendor. This appears as a liability on the association’s balance sheet.
HOA collections are the process of collecting money that is owed to the organization.
HOA demand fees are unpaid debts that must be paid to the association before an owner can sell their property.
HOA fees—also known as assessments or dues—are paid to the HOA to fund operational expenses, pay staff, insurance, etc.
A financial statement is a record that details all of the association’s financial activities and performance, including its revenue and expenses.
Generally accepted accounting principles (GAAP)
GAAP is a group of recognized accounting standards. They provide guidelines and best practices for the creation of financial statements and reports. Auditors and internal accountants are required to follow 10 generally accepted accounting principles.
Accounts receivable statements
Accounts receivable statements—sometimes referred to as a statement of receivables—is a document that details the outstanding charges owed to the association. The HOA may be owed money from overdue assessments, vendor credits, late fees or other outstanding sources of income.
Accounts receivable statements should contain all accounts that owe money, along with the combined total of overdue funds. Knowing the total will help the board with budgeting and financial planning. The list of overdue accounts can be used as a checklist for anyone working in collections to ensure that no account is missed.
Some associations will detail which accounts are 30, 60 and 90+ days past due. This way, collections agents will know which accounts are really behind, and which ones require more pressure.
When must a board prepare receivable statements?
At minimum, HOA receivable statements should be prepared at the same frequency as all other financial statements. However, some boards may find it helpful for the accounts receivable statement to be released more frequently (monthly, for example). There are even software programs available to automate and simplify your HOA’s AR. Having financial software can be very useful for collection purposes; it allows for more accurate documentation and helps ensure that everyone is on the same page.
Things to keep in mind when collecting fees from owners
Always be clear and concise when communicating – Don’t hide late fees, due dates or contact information in long letters. Make it easy for owners to understand what they owe, when they must pay and how to get that money to the association.
The HOA may consider sending statements electronically. It’s often easier for everyone because owners can pull up the statement at any time, and the association doesn’t have to spend time and money printing out and distributing invoices.
Encourage owners to get in contact with the manager or board if they have concerns or questions about fees.
Regulate billing practices – Minimize late payments by implementing consistent billing practices. Send billing statements in the same format, at the same time each month. Be flexible with the payment methods you accept. Online payments make it far easier for owners to cover fees and usually lead to fewer bank trips for management. For owners who wish to pay with a check, provide a convenient lockbox so that you don’t have to arrange a meeting with these owners to receive a payment on time.
Follow the process when collecting late payments – When owners don’t make payments on time, the HOA’s cash flow may suffer. It is important for the association to stay on top of outstanding fees. However, approach each situation cautiously. Follow any steps or rules laid out in your governing documents. Make sure all actions are in accordance with state laws. For example, the HOA should give owners written notices and a reasonable amount of time to pay a fee before more serious actions are taken.
Use collections as a last resort – Involving lawyers and third parties to collect fees from owners is a costly endeavor. Give owners ample time to resolve their outstanding dues before taking legal action. There are rare instances where this step will be necessary. However, if it’s clear that the owner is making an effort to stay up-to-date on dues, try to work with them instead of against them.
HOAs require money to continue operating well. Most revenue comes from owners in the form of monthly, quarterly or annual fees.
Associations must document the money they are owed, and the money they owe, to understand where they stand financially. Accounts receivable statements detail outstanding charges owed to the association. They allow boards and management to easily identify which accounts owe them money, and how late the payment is. If the board is unsure about how to handle a particular situation—or is worried about the HOA’s financial health—they are strongly encouraged to seek help from an accounting firm, CPA, or a financial management company. When it comes to the HOA’s money, the board shouldn’t be taking any unnecessary risks.