What to Look for in HOA Financials: Analyzing Assets, Liabilities, Income Statements & More

Introduction

Homeowners Associations (HOAs) are responsible for managing the finances of their community. As such, it is important for members to be familiar with the financials of their HOA. This article will provide an overview of what to look for when analyzing HOA financials, as well as advice on how to use the information obtained.

Analyzing the Balance Sheet

A balance sheet is a financial statement that provides a snapshot of an HOA’s financial position. It includes both assets and liabilities, as well as equity. By reviewing the balance sheet, you can get a better understanding of the HOA’s financial position.

Examining Assets

The first step in analyzing the balance sheet is to examine the assets. Assets are items of value owned by the HOA. They include cash, investments, accounts receivable, fixed assets (such as land or buildings), and other items. When reviewing the assets, it is important to consider both the current assets (assets that can be converted into cash within one year) and long-term assets (assets that will take more than one year to convert into cash).

Liabilities and Equity

The next step is to review the liabilities and equity. Liabilities are amounts owed by the HOA, such as loans or accounts payable. Equity represents the net worth of the HOA, which is calculated by subtracting total liabilities from total assets. It is important to note that if the equity is negative, it means that the HOA has more liabilities than assets.

Exploring Income Statements

Income statements provide a detailed view of an HOA’s income and expenses over a given period of time. By reviewing the income statement, you can get a better understanding of the HOA’s sources of revenue and expenses.

Sources of Revenue

It is important to understand the sources of revenue for an HOA. These typically include dues, fees, assessments, fines, and investments. It is also important to note any non-operating income, such as rental income or donations.

Expenses

The next step is to review the expenses for the HOA. These typically include operating expenses, such as salaries, utilities, maintenance, and supplies; capital expenditures, such as building repairs or upgrades; and debt service, such as loan payments or interest payments.

Investigating Cash Flow Reports

Cash flow reports provide information on the movement of money in and out of an HOA. By reviewing the cash flow report, you can track the inflow and outflow of funds, as well as identify any potential problems with cash flow. Additionally, you can use the cash flow report to identify any opportunities to increase revenue or reduce expenses.

Interpreting Accrual Accounting

Accrual accounting is the standard method used to record financial transactions. It records income and expenses when they occur, rather than when payment is received or made. By using accrual accounting, you can get a better understanding of an HOA’s financial health. For example, if an HOA is not collecting dues in a timely manner, it may result in an increase in accounts receivable, which could negatively affect the HOA’s financial health.

Reviewing Reserves and Budget

Reserves are funds set aside for future expenses. It is important for HOAs to maintain adequate reserves in order to cover unexpected expenses or major repairs. The budget is a plan for how the HOA will allocate its resources. It is important to review the budget to ensure that it is realistic and that it reflects the needs of the HOA.

Conclusion

By reviewing the financials of an HOA, you can gain insight into its financial health. This includes examining the balance sheet, exploring the income statement, investigating cash flow reports, interpreting accrual accounting, and reviewing the reserves and budget. By understanding the financials of an HOA, you can make informed decisions about how to manage its finances.