By Jennifer Kinkead, RowCal
Have you ever found yourself looking at a set of association financials that appear to be a bunch of codes that need deciphering? Imagine the pressure of being a new community manager at your first Board meeting, and you are expected to explain the association's financial position. The financial portion of the meeting is inching closer, and your worst fear of having to explain this outlandish financial blueprint is before you. At that point, you find yourself thinking, “How can I explain the financial state of the association if I cannot properly read the financials?”
I am confident we have all felt like this at one point or another in our careers. The great news is that you will become more familiar once you know how to properly read an Association’s financial statements. This incredible knowledge will empower you to provide a simplified overview that you can confidently share with your Board members and homeowners. I hope to help you comprehend the “story” your association’s financial statements tell by highlighting the key points to focus on when reading them. The best way to decipher any code is to simplify it!
To begin, you must become familiar with the accounting method(s) your association practices as there are three common accounting methods in this industry: Accrual accounting, cash-basis, and modified-accrual accounting. The most common methods used are accrual accounting and modified-accrual accounting.
The first part of this story can be compared to a “table of contents” or a list of what a financial package should contain on a monthly basis. The community manager should receive a financial package that includes: a Balance Sheet, a Revenue and Income Statement, an A/R Aging Report, and Bank Statements/Check Register. These items I have just listed can be compared to chapters of your association’s financial storybook.
The balance sheet is the part of the story that shows the financial position of the association. There are three essential items to verify when reading an association’s Balance Sheet. First is the operating account balance to ensure there are enough funds in the account to pay the monthly bills; next is the reserve funds balance to ensure there are enough funds for expected and unexpected reserve expenditures. The last key point is the receivables balance to ensure the association is not exhausting more monthly funds than received. It is important to ensure an association does not have more money in one account than is protected by FDIC insurance ($250,000.00.) The Balance sheet is a helpful way to see if there are any potential cash-flow problems.
The next chapter in the financial story is how the association operates compared to its budget. This information can be found in the Revenue and Income Statement. This statement is a side-by-side comparison of how the association is operating or spending vs. how the association budgeted. The budget is a planned, estimated expenditure for the fiscal year; however, it does provide the framework to evaluate revenue and expanse in relation to the current budget. Those two columns will not always match up, which can be described as a variance. Any variances are the key points to focus on when reading this statement, as there are two distinct types of variances. A real variance is a result of over-spending or under-spending, and a timed variance is due to the timing of the expense. Timed variances occur as most budgets are typically divided into 12-month increments, but contracts only last for a 6- or 8-month period. When a timed variance happens due to a contract, the budget will typically balance towards the end of the fiscal year. You want to focus on any variances the association may be facing and explain the reasons to your Board members.
As you navigate your financial packet, you will approach the most crucial part of your association's financial story, the A/R Aging report. This report is a detailed record of any owner who may be delinquent on their monthly assessments. You will be able to view each owner by unit address, the amount(s) they are past due, and the length an owner has been past-due. By using this report, you can ensure the association is collecting those funds according to the Collection Policy of the Association. If this number is large, this could indicate the association may be facing a cash-flow problem. Make sure you involve the Board and association's attorney on the progress of this report.
Coming to the end of our story, we will then find the bank statements and check register. When looking at the bank statements, you want to focus on ensuring it reads the same as the balance sheet. It is important to verify if the account balance has remained positive each month. The check register is a great tool to view who was paid and the details of the payments. It is also a record of those payments if you need to reference them at any time.
Knowledge is power! Remember, you gain financial knowledge by knowing how to read a financial package properly. By focusing on the key points listed above, you can confidently tell your association’s financial story, as each association has a unique story to tell.
Jennifer Kinkead is a Supervising Community Association Manager with RowCal Denver. Her career began in the Association accounting department five years ago before progressing into a Community Manager role. Jennifer takes pride in educating her colleagues on the importance of association financials, budgeting, board education, and appropriate time management.