What Every Board Member Should Know About Financial Reports
To sustain the financial well-being of a community, a homeowners’ association (HOA) board of directors must understand financial reports and their importance to the success of the association. Managing and overseeing an association’s finances is one of the board’s most important responsibilities. Read on to learn everything you need to know about financial reports.
What Boards Need to Know About Financial Reports
What is a financial report?
An HOA's financial report template consists of the key economic information that'll help board members manage operations and make good decisions. The following are typically included in a financial report:
- Balance sheet
- Statement of income and expense
- General ledger
- Cash disbursements ledger
- Accounts payable report
- Account delinquency report
- Bank reconciliation
Who prepares the financial report?
In most cases, the community manager prepares the financial report and provides additional relevant documents for the board to review. For communities that are not professionally managed, a finance committee or the board treasurer may prepare the financial report.
When the responsibility falls on a community manager, it’s generally required that they send these reports to board members at least five days before the board meeting, where the financial report is finalized.
How often do we receive a financial report?
Financial reports are prepared monthly, typically in the middle of the following month after all balances post. It’s very important to review your association’s monthly financial reports as soon as possible, as they indicate the financial health of an association and inform ongoing decision-making.
RELATED: “Annual Budget Best Practices for HOA Boards”
What should I look for in the financial report?
Because HOAs are nonprofits, the income and balance sheet must balance to zero—it can’t be negative or positive. Here’s how to read a financial report to ensure your association is in good financial standing:
- Confirm there isn’t a decrease in the amount of cash on hand.
- Ensure there aren’t variances between expenses vs. budgeted items.
- Look to see that vendors are getting paid the agreed-upon amount.
- Check that there are sufficient funds in your reserves for any capital improvement projects.
- Verify there isn’t an increase in owed bills or assessments.
Who can access the report?
Due to the sensitive and personal data that can be included in the report, management companies will typically provide two different financial reports—one for board members and one for homeowners.
The board member report includes all financial information. The board is expected to follow the direction given in the governing documents to determine what’s appropriate for homeowners to see in their financial report.
LEARN MORE: “A Breakdown of HOA Governing Documents”
Where should these reports be stored?
Both your association and management company should securely store these reports indefinitely; however, requirements vary by state. Many associations store paper and digital copies of the documents, using an app like TownSq.
While financial reports can be long and dense, it’s important they’re thoroughly reviewed on a monthly basis. Doing this will ensure you’re fulfilling your fiduciary duty and protecting your association.
Financial Reporting Best Practices
To establish consistency across your community’s financial leaders, it’s necessary to communicate and establish protocols that everyone can follow. Your board, community manager, board treasurer, and financial committee should all be on the same page. Here are some tips to streamline your financial reporting processes.
Set financial reporting deadlines.
Set a deadline each month for your finance committee to receive its financial statements from banks and investment firms. The finance committee should have all the information it needs to create a monthly financial report. Because regular review of the financial report is crucial, the finance committee should meet often. The third week in the month is usually the best time for the committee to meet.
Create a monthly financial summary.
Create a summary of the financials in a format that’s easy to read. Break down both income and expenses into current period and year-to-date figures. You’ll be surprised how variances in the budget can quickly illustrate issues of concern when the reporting format is simplified.
Maintain a quarterly variance report.
The quarterly variance report includes all the items budgeted for the quarter. By organizing the budget details by account categories, you can more clearly identify and address ongoing trends. For each budget item, provide a detailed rundown that shows:
- The main account
- The sub-account
- The account number
And include the planned budget amount and the actual amount spent. As you reach your third to fourth variance report within the same 12-month fiscal period, you’ll get a clearer picture of where your community stands financially.
Set quarterly meetings among financial leaders.
A quarterly meeting with the board of directors, the finance committee, and the community manager ensures that there’s transparency among all decision-makers and that the community is on a good financial path forward. Specifically, this meeting:
- Allows the finance committee to update the board on recent significant financial changes.
- Provides the board the opportunity to give direction on how to reach the long-term goals of the association.
- Lets management offer short-term solutions to income and expense variances.
Maintain trust and transparency with the HOA CPA.
A certified public accountant (CPA) ensures accuracy in accounting practices by auditing financial statements. They prove all financial statements are error-free and 100-percent accurate by understanding the HOA’s structure and policies and reviewing all contracts, board meeting minutes, and records.
Establish a favorable relationship and communicate with your community’s auditor frequently. Don’t be afraid to ask questions; ultimately, the CPA works to confirm your community’s records remain in good order. By being properly informed, they can help your community reach its full potential.
LEARN MORE: “How to Find the Right CPA for Your HOA”
Financial Reports Are Part of a Financial-Only Management Solution
Financial-only management is a service tier that focuses solely on one of the board’s primary responsibilities—handling the association’s funds. While the particular services of financial-only management can vary by company, they typically include financial reporting. To learn more about this specialized service, read “What is Financial-Only Management?”