Reading condo association financial statements is a valuable skill for condo owners and board members. These statements provide a snapshot of the association’s financial health and can help you understand its income, expenses, and overall financial position.
There are several types of financial statements your HOA may use, but in this post, we’ll focus on the balance sheet and income statement. Here’s how to read condo association financial statements.
Understanding the Balance Sheet
The balance sheet, also called a Statement of Financial Position, shows the association’s assets (what it owns), liabilities (what it owes) and equity (the net assets or reserves). It’s a snapshot in time of the HOA’s current financial health and can be represented by the equation Assets = Liabilities + Equity.
When reviewing your balance sheet, pay attention to each of these areas.
- Assets – Review all the association’s assets, including cash, accounts receivable, and any investments or reserve funds. You want to ensure that the association has sufficient cash and liquid assets to cover its liabilities.
- Liabilities – Examine your HOA’s liabilities. This may include accounts payable, loans and any other outstanding obligations. Assess whether the association can meet its short-term and long-term financial obligations based on the assets it has.
- Equity – Check the equity section to understand the association’s net assets. Positive equity indicates a healthy financial position, while negative equity may suggest financial instability.
Understanding the Income Statement
The income statement, or Profit and Loss (P&L) Statement, details the association’s income (revenue) and expenses over a specific period, usually a fiscal year. The statement has two major sections: one for revenue and one for expenses. At the bottom is a final calculation of profit or loss. Here’s what to look for in each section.
- Revenue – Review the sources of revenue, which often include assessments paid by unit owners, rental income and other fees. Ensure that revenue is sufficient to cover expenses.
- Expenses – Carefully examine the expenses. Typically, your HOA will have many more line items of expenses than it will income. Expenses may include maintenance, utilities, insurance, management fees and other common area operating costs. Assess whether expenses are reasonable and in line with the association’s budget.
After reviewing these and other financial statements, the board should carefully compare the actual financial results in the statements with the budgeted amounts for the same period. Variances between the budget and actuals can highlight areas that need attention.
Understanding condo association financial statements is essential for informed decision-making and ensuring the financial stability of the community. Regularly reviewing these statements can help identify financial trends, assess the need for reserve funding, and proactively address any potential challenges your Chicago HOA may face.
To learn more about how to read your condo association’s financial statements or get help with the management responsibilities for your Illinois HOA, contact us at First Community Management.