By Russell Munz, Community Financials, Inc.
I say that the best practices are born out of lessons learned from the worst practices. If you have been a board member or manager for a few years, you may have come across some worst practices. They can result from incompetence, or in the extreme, criminal activity (embezzlement). Read on to learn about the 10 Financial Best Practices for Homeowner Associations and Condominiums.
Online Banking: A management company controller embezzled $2M by doctoring the financial reports and not providing bank statements. This would have been prevented if the board had access to the bank statements and, even better, could see the bank accounts online, view current bank information, and historical bank statements.
Online Bill Approval by 2 Board Members: Some communities have been embezzled by board members that had the checkbook and came on hard times. If you have an online bill approval system with more than one board member, you have checks and balances. You also don’t have surprise bills; instead, your board has the control to approve or reject a bill.
Monthly & On-Time Reports: Some boards I talk with have not received financial reports for months. If you don’t receive financial statements on time or for several months, there is a problem. How can you operate a community without up to date information?
Use a Comparative Income & Expense Report: Make sure you get this report. It shows the actual income and expense versus what you had budgeted and the variance. Some communities have lost thousands in water bills because they did not see the bills, and they did not have this variance report that would have shown the increase in cost (this is also a useful tool for flagging theft).
Get a Bank Reconciliation Report: This report proves that the money you have in the bank matches what you have in your financial reports. This is another protection from fraudulent activities.
Offer Owners Multiple Ways to Pay: Make it easier for owners to pay, and you can improve your cash flow. Some owners travel a lot; others don’t live at the property full time, etc. Provide a way to make payment by check, online debit of their bank account, or use of a credit card if needed. Additionally, you want a system that allows owners to set up recurring payments.
Have a Collection Policy & Systems to Follow it Uniformly: If you don’t know what a collection policy is, you need to get one set up ASAP. The collection policy outlines the community’s collection process, timing of activities, charges, etc. Then you need to be able to apply late fees, mail notices, and handoff to collection agencies or attorneys. Then make sure you are applying the same treatment for all owners.
Have Effective Deterrents: Some governing documents were written decades ago and I’ve seen late fees of five to fifteen dollars – you have to adjust these for inflation. Do you think $10 is a deterrent? Follow what large corporations are doing and charge appropriate late fees that are reasonable but work. Additionally, communities often get paid last for a 2nd reason; all the other bills report delinquencies to credit rating agencies that impact the owner’s credit score. This is available to community associations, and we have seen a dramatic 25-35% reduction in delinquent balances within 90 days.
Cash, Debit & Credit Cards: Be careful. Don’t have petty cash, period. It can be stolen, and there is no recourse when cash disappears as compared to credit cards. Debit Cards can have a daily limit set on them, but someone can just hit the limit every day for days on end. We recommend setting up a separate bank account tied to this card with a limit. Credit cards can be better as they can be set up with limits. Someone needs to track who has physical credit cards (collect them during employee or board turn over), what the limits are, etc. When possible, we encourage boards not to use these and instead use supply accounts that can be paid upon receipt of invoice, or submit for reimbursement for the few times a board member may purchase something personally on behalf of the community.
Close Unused Accounts: If you have additional accounts that you no longer use but have cash balances, close them out and consolidate them. First, former board members or employees may be signers on the account and may have an old checkbook. Second, I’ve seen where the signers on the account moved, and the new board could not get access to the funds (it took a year and a lot of work to access their money). Lastly, it simplifies your accounting and less to track and read on your reports.
I hope you incorporate these best practices into your community’s procedures. You’ll improve cash flow, you’ll reduce the chances of negative surprises, and you’ll sleep better.
Russell Munz is a Licensed / Certified CAM in 7 states and Founder and President of Community Financials, Inc. a nationwide financial management company that provides monthly accounting services to HOAs and Condos based in Boulder, CO. If you want to learn more about financial best practices, you can visit the resources page of his website at www.CommunityFinancials.com or you can send him your questions through the Contact Us page and he’ll be happy to provide additional help.