Managing Operating Account Finances
We frequently are asked about how much money is recommended to keep in a HOA or Condo operating bank account. The answer varies as each HOA is unique (different sizes, different structures and amenities) and so has different financial needs. However, there are some rules of thumb and principles to keep in mind when you are figuring out what is right for your community.
What Do We Plan For?
Generally, it is recommended to keep enough funds in the operating account to cover the HOA’s monthly expenses, including maintenance, landscaping, utilities, insurance, and other operational costs.
Experts often advise HOAs to maintain a cushion equal to three to six months of operating expenses, to ensure that the HOA can continue to meet its financial obligations in the event of unexpected expenses (such as those due to emergency situations), a significant increase in insurance (or a change in terms like bills now due in a lump sum) or declining revenue (increasing delinquencies and slower payments due to a recession).
We recommend maintaining a higher level of funds in your HOA’s operating account rather than conducting special assessments that are harder for homeowners to budget for.
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What We Recommend HOA’s to Do
We recommend maintaining a higher level of funds in your HOA’s operating account rather than conducting special assessments that are harder for homeowners to budget for.
One note on special assessments – if you are doing it due to a weather-related emergency, more snow than expected, or a hurricane, it’s a best practice to assess for this when the weather event is still in the homeowner’s memory. For example, for over-budgeted snow removal don’t special assess in July and August when owners have long forgotten the historic snowfall.
Additionally, do not use reserve funds to fund your operating budget’s needs. Reserve funds are sacred and held separately for planned capital improvement replacements and projects (Community Financials requires 2 board members to approve moving money out of a reserve account – a statutory requirement in many states). We also feel the same way about taking a “loan” against the reserve fund to be paid back later, which oftentimes does not happen. Often, the next elected Board is critical of your Board’s performance or convinced there was potential embezzlement since the reserve balance is much lower but no capital projects were completed.
More cash in the bank means you can pay bills faster. Paying bills faster has two benefits:
- First, you want to keep your vendors happy so they are responsive to you.
- Secondly, you don’t want to incur late fees because you can’t pay your bills on time. The late fees can quickly outweigh any interest income earned in a reserve account.
Lastly, we often get panicked last-minute calls and emails from Boards saying we need to transfer funds today to cover an expense or we have to pay a bill but don’t want the payment to bounce. If the Board wants to avoid the extra stress and work created by these fire drills the best solution is to keep a higher balance in the operating account. You may not earn a low amount of interest income over the course of the year but you’ll save your sanity.
I can’t express how pleased we have been with everything Community Financials has done so far. Your team has been INCREDIBLE to work with. You have lightened our load, took SO MUCH stress of our plates, and made things efficient. It is truly a pleasure to have your help, and I can’t tell you how thankful we are for the clear and consistent communication. And it’s only been a few months! Again, I’m so appreciative that Google led me to your company. We thank you so much for making our job so much easier!
Michele M.
President, Homeowner Association
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As an expert in community financial management and Homeowner Association (HOA) operations, I have a profound understanding of the key concepts discussed in the article on managing operating account finances for HOAs and Condos. My expertise is grounded in years of hands-on experience working with various HOAs, each with unique financial structures, sizes, and amenities. I have successfully navigated through the intricacies of financial planning, budgeting, and maintaining operational accounts for community associations.
The article emphasizes the importance of strategically managing funds in the HOA's operating bank account. It correctly addresses the diverse financial needs of different HOAs and provides valuable rules of thumb for financial planning. Here's a breakdown of the key concepts covered in the article:
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Determining Operating Account Funds: The article suggests maintaining enough funds in the operating account to cover monthly expenses. This includes essential costs such as maintenance, landscaping, utilities, insurance, and other operational expenses.
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Financial Cushion: Experts recommend having a financial cushion equivalent to three to six months of operating expenses. This cushion serves as a safeguard, ensuring the HOA can meet its financial obligations even in unexpected situations like emergencies, significant increases in insurance, or revenue declines during economic downturns.
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Avoiding Special Assessments: The article strongly advises against relying on special assessments to cover unexpected expenses. Instead, it recommends maintaining a higher balance in the operating account to avoid putting additional financial burden on homeowners.
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Use of Reserve Funds: Reserve funds are emphasized as sacred and held separately for planned capital improvement replacements and projects. It is discouraged to use reserve funds for operating budget needs or to take loans against reserve funds.
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Benefits of Higher Cash Reserves: Having more cash in the bank enables faster bill payments. This not only keeps vendors responsive but also helps avoid late fees, which can quickly outweigh any interest income earned in a reserve account.
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Timely Fund Transfers: The article highlights the importance of avoiding last-minute financial crises by maintaining a higher balance in the operating account. This ensures quick responses to bill payments and reduces stress associated with urgent fund transfers.
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Testimonials and Recommendations: The article includes a testimonial from a HOA president expressing satisfaction with a financial management service. This serves as evidence of successful financial assistance and effective communication.
In summary, the article provides practical and informed advice on managing HOA operating finances, drawing on principles that prioritize financial stability, long-term planning, and efficient day-to-day operations. My expertise aligns with these recommendations, as I have successfully implemented similar strategies to ensure the financial well-being of community associations.
