Those who serve on their association’s board of directors should become highly familiar with their condo financial statements. These documents are key indicators of the association’s financial health and will inform decision-making, particularly when it comes to setting the annual budget.
What are Condo Financial Statements?
Condo association financial statements are formal reports that detail the COA’s financial health. These reports track income, expenses, assets, and liabilities, to name a few. The condo board typically uses these reports to make informed decisions, such as setting dues and adjusting future budgets.
Meanwhile, unit owners use these reports to keep board members accountable. These reports show them how the board is managing finances, where dues are going, and if there are any signs of mismanagement.
In Illinois, condo board members are required to act as fiduciaries for their association. This means they must make budgetary decisions that are in the best interest of the COA and do their part to serve the community as a whole. It’s a red flag if board members refuse to share these reports with owners.
Key Condominium Financial Statements to Have
There are three essential condo association audited financial statements to review: the balance sheet, the income statement, and the cash flow statement. Learning what to look for when reviewing these reports allows the board to address issues before they worsen.
Balance Sheet
The balance sheet shows what the association owns and owes at a specific point in time. Here are the key items to check in the condo association balance sheet:
- Cash balances, operating fund, and reserve accounts must match bank statements.
- Large receivables can indicate growing delinquencies.
- Rising liabilities can signal falling behind on payments.
- Fund balances show total amounts in operating and reserve accounts.
Income Statement
The income statement shows how money is coming in and going out over a period. Here are the things to watch out for:
- Actual income and expenses must closely match the budget.
- Income from dues and assessments must remain consistent.
- Repeated overruns in expenses.
- Sudden spikes in utilities, insurance, and maintenance.
- Unusual or unbudgeted expenses.
Cash Flow Statement
Cash flow tells the board whether the association has enough liquid money to pay its bills. Here are the warning signs to be on alert for:
- Large expenses that occur before revenue comes in.
- Negative cash flow, which means more money is going out than in.
- Frequent transfers between accounts.
Important Elements to Look for in Condo Financial Reports
Here are a few important elements board members and all unit owners should look for when reviewing the condo association’s financial statements.
1. Deficits and Increases
One way to read condo financial statements is to look for deficits and increases. The balance sheet and income statement, in particular, provide a snapshot of the association’s financial position. They outline revenue, expenses, assets, and liabilities.
If there are consistent deficits or rising expenses, it could indicate that spending is getting out of control. On the other hand, it could also be a sign that too many owners aren’t paying their condo fees.
2. Budget Variances
It’s also informative to assess how actual financial results compare to the budget. Identify variances and understand the reasons behind them. Evaluate whether the budget was realistic or if adjustments are needed.
After comparing the budget versus the actual report, boards should then compare them to prior months or years. One-time changes are one thing, but trends matter more in the long run. This comparison should give the board more insight on rising costs, declining income, and shrinking reserves.
3. Reserve Balances
The next place to look is the association’s reserve funds, which are funds set aside for future repairs and replacements. It is important that the association regularly funds the reserves and has a clear plan for addressing upcoming expenses.
To do this, the board should compare the current reserve balance to the recommended funding level in the reserve study. If the association is underfunded, the board may be forced to levy special assessments in the near future. Regular reserve contributions help keep long-term savings healthy.
That said, Illinois law allows condominiums to decide not to fully fund their reserves or skip part of them (765 ILCS 605/9). In that case, the board must disclose this decision. The condo financial statements must also clearly show this decision after the meeting where the waiver happens.
4. History of Special Assessments
It is also essential to consider the association’s history of special assessments. Special assessments can signal underlying financial issues. Frequent or large special assessments may be a concern for unit owners and should be explained by the board. They often point to poor planning or underfunded reserves.
5. High Delinquency
Many associations prepare a separate delinquency report, outlining the amounts owed to the COA. These reports are critical, as they show how many owners are behind on dues and for how long.
Check for the number of delinquencies. A small number of large delinquencies can indicate a larger problem than many small ones. A high delinquency rate can also indicate a poor or inconsistent collection policy.
6. Cash Flow and Liquidity
Cash flow determines whether the association can realistically meet its short-term obligations. Condo financial statements may show large receivables, but those aren’t usually liquid cash. The association needs tangible funding to cover expenses.
Even with a stable income, poor cash flow can create problems. Board members should watch out for low cash balances or frequent transfers between accounts.
7. Unusual or One-Time Expenses
Most of the time, condo financial statements show routine expenses. Because of this, unusual or one-time expenses tend to stick out like a sore thumb. While these expenses don’t occur regularly, it is still important to explain them.
Look for high or unexpected costs. The board should know why they happened and whether they will repeat in the future.
8. Operating vs Reserve Fund Usage
The operating and reserve funds have distinct purposes, and boards should never use them interchangeably. Operating funds cover routine expenses, while reserves should cover major repairs and replacements. Using reserves for maintenance or daily expenses is often a warning sign.
9. Vendor and Contract Costs
Board members must review payments to vendors and service providers. Look for sudden increases or inconsistent charges. This will help ensure that vendors aren’t swindling the association and that contracts are being managed properly. Unexplained charges can also indicate potential fraud or theft.
10. Trends Over Time
While it helps to review financial statements regularly, they tend to make more sense when viewed over time. Board members should compare current reports to the previous months or years. This will help them identify patterns, such as rising costs, declining reserves, or diminishing revenue. From there, the board can pinpoint what’s causing the change and formulate a plan to address the problem.
A Helping Hand
Reading and reviewing condo financial statements can come as a challenge, especially to volunteer board members. Given their importance, boards should never hesitate to consult a financial professional or partner with a community association management company to assist them.
First Community Management offers expert financial services to condos and HOAs in Chicago and beyond. Get in touch with us today!