Knowing how to read condo 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.
How to Read Condo Financial Statements
Financial statements are an essential planning and evaluation tool. You can use these statements to inform your decisions and ensure more accurate financial planning. Unfortunately, most board members don’t know how to read these statements at all. They don’t know what to look for and what the numbers mean.
Here’s how to read condo association financial statements.
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.
Red flags to watch out for include:
- Very low operating cash
- Large or growing delinquency balances
- Borrowing from reserves to cover operating expenses
- Negative fund balances
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.
Red flags to watch out for include:
- Expenses consistently exceeding the budget
- No clear explanation for large overages
- Income shortfalls due to high delinquencies
- A year-end operating deficit
Budget Comparison Report
This is one of the most important condominium financial statements. A budget comparison report shows the budgeted expenses versus the actual expenses the association incurred. You can use this report to make more accurate budget projections in the future.
To read this report, you should check any line items that are significantly over the budget. Trace what’s causing the overspending and plan for ways to correct it. Of course, being underbudget isn’t always a good thing either. It can signal delayed maintenance or gaps in service.
Red flags to watch out for include:
- Repeated overspending in the same category
- No reserve contributions despite budgeted amounts
- Lack of notes explaining major variances
Reserve Fund Report
The reserve fund report shows how much money the association has set aside for major repairs and replacements. It also depicts annual reserve contributions. This report is important because you can use it to compare against your reserve study. If contributions aren’t aligning with the study, it could mean you’re calculating dues improperly or too many owners are defaulting.
Red flags to watch out for include:
- Reserves that are far below recommended levels
- No clear funding plan
- Using reserves for routine operating expenses
Account Delinquency Report
When you read HOA financial reports, don’t forget the delinquency report. This report breaks down delinquent accounts and classifies them according to age. It typically shows balances that are 30, 60, 90, or more days past due.
To read this report, you should look at the percentage of total dues that are delinquent. A high rate can indicate problems with collection or payment. It can also signal financial troubles for homeowners.
Make sure to pay attention to accounts over 90 days past due. Too many accounts under this age might be a sign that your board isn’t following the association’s collection policy properly.
Other than that, this report can tell you when you need to start imposing late fees, referring accounts to a collection agency, attaching liens, or initiating foreclosure proceedings.
Red flags to watch out for include:
- Delinquency totals that increase month after month
- Accounts sitting over 90 days past due without action
- No consistent enforcement of late fees
- Delinquencies that are high enough to affect operating cash
- Repeated borrowing from reserves due to unpaid dues
General Ledger Summary
The general ledger is the basis of all condo financials. It records every financial transaction, but you don’t need to review every single entry. A summary will do.
You need to look for any large, unusual transactions. Verify that these transactions were authorized. It’s also a good idea to check for transfers between the operating and reserve accounts. These accounts shouldn’t co-mingle, and transfers can indicate that funds are insufficient.
Finally, check for one-time expenses. These are expenses that are out of the ordinary and aren’t part of the association’s projections. If something seems unclear, ask the manager or accountant to explain it in plain language.
Learn How to Read HOA Financial Statements
Understanding condo 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.