Every business uses a balance sheet. HOA balance sheets are crucial to understanding the distribution of finances. Money coming in, money used for equity, and money going out need to be tracked at all times. The tracking of finances through financial sheets is important because condo associations depend on the availability of finances for maintenance and upkeep.
What is an HOA Balance Sheet?
A balance sheet enlists every asset and liability of an HOA. They give a brief financial overview of the strength of the community. Balance sheets are populated from a general ledger and depict the day-to-day activities of the community. In fact, stakeholders, property managers, and board members, all need to understand and interpret the figures on the balance sheet if they want to make growth-based decisions.
Why are balance sheets important for HOA’s?
Every board member needs to understand how an association is fairing with numbers if they want to keep their community. HOA’s deal with:
- Bill payments
- Maintenance and preventive measures
- Improving value and appeal of community for active growth
- Generating revenue to meet expenses
These activities oblige the management of the assets and finances of the association and the best way to make such management decisions is through periodic balance sheets. A financial snapshot provided by the balance sheet determines if they should increase monthly dues, find new vendors or hire a different property manager.
What are the different parts of HOA Balance sheets?
There are three categories in a balance sheet: assets, liabilities, and equity. These three categories ensure that all the money coming in and going out is tracked by making sure that the sum of liabilities and owner’s assets is equal to assets.
That is; Assets = Liabilities + Owners Equity
There are two categories under assets: current and noncurrent assets. The current assets can also be referred to as liquid assets because they can easily be turned to cash. Some of the examples include:
- Cash held in the bank
- Reserve condo funds
- Receivable Accounts and Assessments
- Prepaid Insurance
The opposite is true for non-current assets because you cannot easily turn them to cash. In this category, you will find intangible and fixed assets that can translate to the following:
Property, Plant, and Equipment
Intellectual Properties, patents, and trademarks
Investments with long-term yields
While dealing with vendors, providers, and other third parties, HOA can owe some amount. Categories under liability represent maintenance fees, improvements, bills, and every other thing that will require expenditure from the HOA. Liabilities can also include poor structures that need a revamp, vehicles, and equipment that need replacement are counted as liabilities and must be added to the HOA balance sheet. Liabilities may be classified into current and noncurrent.
Current liabilities are costs that need to be offset within a year. They include:
- Rental Fee
- Prepaid Assessments
- Temporary Loans
Conversely, non-current liabilities also known as long-term liabilities are amounts due after a year. They include:
- Deferred Revenue
- Long-Term Loans
- Long-Term Lease Obligations
When you deduct all the liabilities from the assets, the residuals are known as equity. The amount of equity an HOA should have is dependent on its size and activities. Equity ratios can also be calculated by using the formula:
Equity Ratio = Equity / Assets
It is important to seek out the advice of a professional to understand how much equity an HOA needs to be sustainable. But as a rule of thumb, HOA’s with equity ratios of 10% to 20% are faring well.
How often should balance sheets be prepared?
Condo associations are always spending. If care is not taken, it may be difficult to notice when such a community is going overboard with its budget. Also, it is a tedious, time and resource-consuming task to prepare balance sheets on a short-term periodic basis. Yes, balance sheets offer insights and provide enough information to help managers notice small issues before they become bigger problems. But balance sheets do not need to be prepared on a monthly basis. Quarterly and annual releases are effective even if some areas may have policies that determine when balance sheets must be distributed.
Managers should also note that when balance sheets are released once a year, it becomes quite difficult to discover mistakes.
In planning the scheduling of balance sheets, remember that owners reserve the right to see balance sheets, review budgets, income statements, expense reports, and statements of their personal contributions and levies.
Balance sheets help to make pivotal decisions in the smooth running of any HOA. With information from the ledger, decision-makers can make accurate decisions. This means that any party preparing balance sheets must be wary of mistakes. Also, balance sheets should maintain a template for reference purposes. Being a critical aspect of managing condos, balance sheets should not be left to chance. Managers are strongly encouraged to seek the services of an accounting firm. At Core-Accounting, we are not just an accounting firm. We are specialized in condo services and help you with condo finance decisions and management. Feel free to reach out to us.