Money, money, money. The world runs on it. And your building’s well-being depends on it.

The issue is not just having funds, but managing them. Handling the purse for an entire building or HOA is a major responsibility, and boards -- even those made up of seasoned members -- need to stay on top of their community’s financial profile. That means checks and balances, oversight, and holding people accountable. 

“Board members are charged with a responsibility to make sure the resources and funds are being properly administered,” said Richard Holtzman, president of Prairie Shores Property Management in Chicago.

From reading statements to making sure accountants and managing companies are doing their job, here’s what boards need to know in order to protect the assets of those owners and shareholders that rely on them.

Know Your Expenses – and Your Reserves

The most obvious and crucial thing to understand are your building or association’s basic expenses and reserves. First, there needs to be enough cash inflow to cover those expenses, which include light, heat, power, salaries for employees, real estate taxes, water, sewer, management fees, and (in the case of an association) an underlying mortgage or loan, explains Stuart Halper, an attorney and the president of Stuart Halper & Associates, a management firm in Westchester, New York.

 Along with having adequate operating funds, it’s also vital to keep funds in your reserve account. “What you want to do is, because buildings age out and you have to do capital repairs, you want some money going into reserves. A good guideline is 10 percent per month should go into a reserve account,” Halper says. “You want to carry a balance of at least three to four months’ worth of your building’s expenses in reserves.” 

Pay Attention to Your Documents 

A set of financial statements are available to boards from their accountants, and all are valuable to know and understand, says Mark L. Love, CPA at M Love & Associates LLC, which has offices in Massachusetts. The balance sheet tells the cash position between operating expenses and reserves and breaks down accounts payable and receivable, the profit and loss statement shows revenue and expenses and the statement of cash flows shows changes in the balance sheet. 

 “All too often boards and unit members just look at the P&L [profit and loss] statement, but the other statements are equally telling,” says Love. “It’s like a consumer who looks at his paycheck but not his credit card statement. You should look at all three on a regular basis. It’s not just revenue and expenses, its cash accounts receivable, accounts payable, debt payable, all of those things. Just like any small business, [they] have to be looked at holistically on a regular basis.” 

Multiple professionals who work with boards to manage their financial profiles agree that it’s not enough to look at your books once a year. 

“In order to make decisions throughout the year, the board should be utilizing monthly financial statements prepared by a managing company or an in-house accountant,” says Marie D. Mirra, CPA and Managing Partner of Mirra & Associates, LLC in Hillsborough, New Jersey. “Included in those statements would also be a budget-versus-actual report. That will give them variances on a month-to-month basis and also the year to date. They can see if they’re ahead of the game or behind the eight ball. It’s very important that the board utilize and rely on these financial statements. Throughout the year those reports need to be accurate.”

Hire Professional Help

Boards should seek outside professionals to help them manage their finances for reasons that include oversight and avoiding fraud, according to multiple professionals.

At the very least, “every association should have an accountant,” says Halper. “To make yourself the most marketable and maximize value, purchasers need to see you’re doing it properly.” 

Many variables come into play when deciding how much outside help a building needs –  including the size of the association – but there are generally a few types of financial services that can be provided. An accountant, for example, would manage the day-to-day finances and is oftentimes on the payroll of the management company, explains Love. An extra layer of accountability comes at the end of the fiscal year, when the board may hire a CPA to do a year-end review.

“If you were to have three circles, one is the association manager, one the board, the third is the CPA firm. It’s the best situation to have all three,” says Love. “One circle – just the board – is the least favorable. It doesn’t mean it can’t be properly managed or run, but there are greater risks. You have one person doing everything. They call it lack of separation of duties. Even if it’s a for-profit business, one person doing everything … It’s an opportunity for something inappropriate to occur.”

And the pros advise being careful about who is tasked with handling the money, whether it’s individual volunteers on the board or hired managing agents. “Make sure the managing agent is bonded and trustworthy,” says Halper. “Even if you’re self-managed, you’ve got individuals handling monies. You want to ensure that even volunteers are honest. It’s a business. If you owned a coffee shop, a clothing store, you’d watch your finances. It’s the lifeblood of your business.”

Budgeting Properly 

The budget is an important process that happens each year. There are multiple ways to start the process of preparing the budget, from the board or finance committee preparing it to the management company taking a first crack at it. 

“You go off of last year’s budget, and anticipate this year. [Boards] should work with experts, like their managing agent and accountant, to look at what’s going on and what needs to be done in the coming year,” says Halper. 

Love agrees, but says looking at how the previous budget worked for the building is also important. “Having last year’s budget and last year’s actual results are key. You could go off last year’s budget and find it wasn’t a good budget,” he says.

One style of budgeting is called ‘zero-based budgeting,’ and involves starting from the ground up and adjusting based on contract costs and utility changes. “An analysis of historical trends, looking at a particular line item over a period of time to identify either an increasing or decreasing trend,” should also be used, says Karen P. Sackstein, a certified public accountant who practices in New Jersey. 

Of course, the budget needs to also account for planned upcoming repairs and projects as well as those that are unknown, says Love. “Not everything is going to be a burst pipe.”

And you should be looking at the year’s budget throughout the year.

“You should be looking and budgeting all year long,” says Sackstein. “Keep information as you go and adjust also. If it’s August and you’ve gone way, way over, you might be able to push something off until the next year.”

And, adds Holtzman, “It’s important that board members know how the association is doing comparatively. See if it’s over budget, make adjustments, and determine why they’re over budget on a particular expense.”

Checks and Balances 

Many associations order a financial audit or review to be completed at the end of the fiscal year by a CPA. In some cases they are mandatory per governing documents – or even state law. In Massachusetts for example, a CPA must perform an annual review for associations with more than 50 units, says Love. Although not all are required, some form of annual review by a professional outside the association is recommended.

“Many smaller associations not requiring annual audits often do not retain an accountant,” says Sackstein. “However, each entity is a corporation requiring an annual federal income tax return, which is best prepared by a seasoned industry professional. As this industry is extremely specialized, and often board member volunteers do not have experience, or even a financial background, a qualified and knowledgeable CPA will prove invaluable in providing training, knowledge and guidance in both financial and operational matters.”

Holtzman says having a third party, such as a CPA, look closely at the books is an important check and balance. “I think it’s just important to have a third party that is retained by the association and not the management company to be reviewing the financials of the association,” he says. “The board has a fiduciary responsibility for oversight, and part of good practice would be to have a third party retained by the association.”

Halper agrees. “When buildings don’t perform audits, I’m not happy.”

Beyond audits, Sackstein says that other checks and balances boards should have in place to minimize the likelihood of fraud or mismanagement of their building’s finances include “regular review of monthly receipts and disbursements including the actual bank statements, full and separate dual control over reserve transactions, a dual signature control policy for disbursements, and proper segregation and accounting for different types of association funds (operating, reserve, deferred maintenance, transition).”

The Most Important Thing Is Transparency

“Both community associations and HOAs, shareholders and owners, have a right to inspect the books and records of the entity -- the monthly statements at a minimum,” says Halper.

When it comes to disclosure of financial information to shareholders and/or non-board residents, experts strongly recommend transparency as the best policy. 

“Transparency and full disclosure is always the healthiest way to conduct affairs as a board member,” says Love. “If the board is withholding information and is reluctant to share information ... Why would that be the case? The best run are those that are the most transparent and fully disclose.”

Study Up

For boards to be successful in their duties, they need to be versed in the financials of their building, and in best practices, sources say. 

“An educated board is the best … An interested, educated board. People join for different reasons, some to accomplish a particular project or goal, others because they genuinely care about the building and their neighbors,” says Holtzman. “My life is easier when the board is fully informed … If they carefully read their monthly financial statements and participate in the budget process, that goes a long way.”

Sackstein agrees. “An informed board member is an effective and productive board member.”

To learn more, check out trade shows, read publications and articles that relate to these subjects or attend seminars hosted by the Community Associations Institute (CAI) or any of the numerous association advocacy and educational groups in existence, she encourages. Managing agents can also help.

“Remember you have a fiduciary responsibility to protect the assets of your corporation, not to be the most popular,” she says. “This will often mean tough decisions.”