DeLeon

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Financial Literacy for Community Associations
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Outline

• What financial information should we be focusing
  on and how often?
• How to read financial statements.
• Reserve studies Are they important and how
  often should they be done?
• Budgets What do they mean, are they necessary?
• Contingency Funds How are they used, why are
  they important?
• Delinquencies What can be done? Should we
  budget for them?

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What financial information should we be focused
on and how often?

• Budget
• Meeting Minutes
• What was discussed
• Is it part of budget or will it cause variance?

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What financial information should we be focused
on and how often? (CONTINUED)

• Monthly Managers reports or monthly account
  reports
• What were the expenditures
• Were they budgeted
• Were they over or under budget
• Are there collection issues
• Audit Report
• An audit report is showing history so if we are
  waiting for the audit to discover a problem it
  could be too late.
• One area to focus on with the audit is how many
  adjustments the auditor has to make and for how
  much.
• If the auditor is making adjustments it indicates
  that the accounting reports/management report are
  not accurate.

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What financial Information should we be focused
on and how often? (CONTINUED)

• Audit Report (CONTINUED)
• Also, audits should show activity in the reserve
  fund separate from the operating fund. Understand
  whether or not one fund owes the other fund
  money. Is so, this could indicate that reserves
  are not fully funded.
• Other reports
• Treasurer should review bank reconciliation every
  month and understand any old (greater than 60
  days) outstanding items.
• Delinquency reports should be reviewed every
  month by the board with verification that actions
  are taken in accordance with collection policy.

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Questions
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How to read financial statement

• Budget variance reports
• Cash position
• Audit report

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Questions
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Reserve studies

• Are they important?
• In a word YES
• Is it required?
• Check your By-Laws and also check state and
  county laws. In VA the law has been changed to
  require reserve studies and this supersedes the
  By-Laws.
• Will a study give the reserve balance goal over
  some period of time?
• What does a study cost and how long is it good
  for?
• Without a study, is there a rule of thumb reserve
  balance goal?

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Reserve funds

• In general, what is the purpose of a reserve
  fund?
• By definition what is the difference between
  replacement, capital and contingency funds? 
  Should they be separated and when should/cam they
  be used?
• If a 5,000 insurance deductible is needed, which
  fund should it come from?
• If reserve money is used for snow removal or to
  cut down a damaged tree, is that a loan that
  needs to be repaid from the next year budget?
• If there is money left over from another budget
  account at the end of the year, should it be
  added to the reserve fund?  Can it be used
  wherever the BOD wants?

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Special assessments

• What are the guidelines for deciding whether to
  draw from a reserve fund or special assessment
  for an unbudgeted expense?
• Other reserve comments Ive heard from residents
  and even from board members
• Why should I contribute to reserves I wont
  live here when that item needs to be replaced?
• From a board member if we reduce or eliminate
  the reserves we can lower the assessments and
  everyone will love us (this is a lawsuit waiting
  to happen).

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Questions
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Budgets

• What do they mean? Are they necessary?
• Are they necessary in a word yes. 
• Most by-laws require the creation of an annual
  budget.
• The budget should be the most important financial
  document created by the board. It is as good as
  the time that is spent creating it.
• The budget, if done properly, sets the plan for
  the upcoming year and establishes the amount of
  assessments that will be charged to each member.

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Budgets (CONTINUED)

• With the proper foresight, there should be no
  unforeseen items not covered by the budget.
• What about
• Large snowfalls
• Unexpected repairs
•  
• To the extent these items do occur, the creation
  and proper use of a contingency fund will ensure
  no big disruption to the financial standing of
  the Association.

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Questions
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Contingency funds

• How are they used
• In a perfect world, everyone pays their
  assessment on time and there are no variances to
  any expense.
• Has this ever happened for anyone??
• We recommend that each association create and
  fund (over time) a contingency fund to cover
  unforeseen items.
• Unusual snowfall (remember the 80 inches we had 2
  years ago)
• Water leaks (not covered by insurance)
• 5,000 insurance deductibles
• Other examples / samples

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Contingency funds (CONTINUED)

• Contingency funds should not be used for extras
  that were not budgeted for (planting flowers,
  tree trimming, etc.)
• We recommend a contingency fund equal to 8 to 10
  of annual assessments.
• You dont have to get to the full funding level
  in one year.

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Questions
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Delinquencies

• Create a strong and simple collection policy.
  Some associations have collection policies where
  liens are filed if someone is 60 days delinquent.
• Be sure there is foreclosure action in your
  policy.
• As a board commit that there will be no
  exceptions related to your collection policy
  (even in tough times).
• Even with a strong collection policy you will
  have delinquencies, especially in economic times
  like we have now. 
• We do recommend that, based on a review of
  history and consideration of where the economy
  is, associations budget some amount for bad debts.

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Delinquencies (CONTINUED)

• It is the only way to try and bring some
  consistency to your budget if you do face
  increasing delinquencies. 
• Consider publicizing delinquencies, not
  necessarily individual names but that they are
  increasing in general.
• Residents will hate the idea that they are paying
  their own assessments plus a portion of those who
  are not paying and they may help police
  collections.

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Delinquencies (CONTINUED)

• Brainstorm other creative ideas
• Withhold pool passes (many do this).
• Have cars towed (I knew one association that did
  this it got peoples attention but I would
  tread lightly here).
• More financial failures for an association occur
  because of a lack of collections than cost
  overruns (by far).

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QUESTIONS
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Allen p. DeLeon, CPAallen_at_deleonandstang.com301-
948-9825