HOA FINANCIAL HEALTH
-Indicators to watch throughout the New Year
Check your cabinets, if all the Christmas cookies are gone that means the holidays are over and it is time again to give your HOA the attention it is due. Now is a good time to assess how your community is doing financially and how prepared you are to achieve this year's goals.
Given the great diversity and complexity of community associations, it can be difficult to choose quantifiable metrics with which to describe any given community. For a quick review of your Association’s financial health try these two metrics based on issues common to almost everyone.
HOA Collections and Future Planning (Reserves)
1. Collections/Days Receivable
- Are people in my community paying dues on time?
Days Receivable is the average number of days that a debt is outstanding. It is an indication of the efficiency and effectiveness of a community's assessment collection process. Why do we care? Long collection times (greater than thirty days) could spell disaster for a community with a relatively small cash reserve, numerous bills, and large expenses that many communities incur, in an attempt to collect on old debts. It is far more cost effective and efficient to collect debts that are just past the due date than to send notices on greatly aged receivables. That's why calculating days receivable is so important for any HOA community.
How is Days Receivable calculated?
The Days Receivable Calculation is a two step process. We will talk about the calculations first and then you can try it on your own using our web tool!
Step one - is to find Average Days Member Assessments. For most Community Associations, this is fairly simple because assessments are fixed and predetermined in the Budget.
To calculate Average Days Member Assessments:
Member Assessments (Annually) / 365=Average Days Member Assessments
In an H.O.A's case, Annual Net Sales is always equal to the annual budget.
(Annual Assessment) $20,000 / 365=$54.79
If the association wants to review monthly, change the denominator to 30 (days) and use the total Member Assessment for a one month period.
Step two - to find Days Receivable you divide the value of Accounts Receivable (from the balance sheet) by Average Days Member Assessments (which you just calculated in step one).
Now, you try...use the following web tool to do this calculation. Just fill in the empty boxes:
This calculation can be done from any set of financial statements at any time. Throughout the year collection times may change especially during busy holiday seasons.
As a board member, especially if you are the treasurer, it is important to be aware of these fluctuations in collection time and be mindful of cash availability.
Also, for real estate agents, this calculation can help your buyers determine if they want to buy into the H.O.A., if the association isn't collecting on assessments, it could mean trouble for new buyers into the community.
The unfortunate fact is that slow collections in the winter months come as a double hit to association funds as heating and snow removal bills will deplete available cash quickly.
Like golf, a good Days Receivable score is a small number.
Most HOA documents require monthly payment of member dues. So, if your days receivable score is more than 30 days+ the association specific grace period, you are likely to have problems. If your community is having trouble collecting assessments in a timely manner, contact Zeato Property Management to discuss your options.
2. Future Planning/Reserve Fund Balance
- Is the Reserve Account sufficiently funded?
Drainage ponds, roofs, pool equipment, and boilers. This is a just a quick list of the big dollar items your community maintains. Keeping the assets of the association in good working order can have a huge effect on property values and general good will among community members.
"Home buyers are increasingly aware of long term cash requirements in HOA's and they are looking at your association financial statements, specifically, your reserve fund balances. A community short on cash and long overdue on critical maintenance does not look attractive to the conscientious buyer (the types of neighbors we're all trying to attract to our community)."
In many states, FHA loan requirements are dictating a minimum funding level to be transferred to reserves. In 2012, over 40% of home loans were FHA loans and FHA Approval now indicates a Financially Healthy Association to all mortgage lenders. If your association does not have a future reserve funding plan in place. Contact us now. We can help!
The first step is to develop a Reserve Plan. Your community can hire the services of a number of engineering firms that will assess the long term maintenance and construction costs related to building and equipment. If your community does not have an up to date plan, get one (or click here to contact us and we’ll do it for you)
Second, check your budget and balance sheet for whether or not the community is on track with the Reserve Plan. How much of the budget is set aside for savings each year? Is the community meeting its obligation? If not, why not? ...and most importantly... How does the association fix it?
Understanding Your Association Financials Is Key to Your Success!
The two financial indicators above should be reviewed on a regular basis so that trends and deviations thereof can be identified and controlled. Remember, every community has its own unique issues and goals for the year. What matters is that you have a clear plan and a way to track progress.