Know What to Look For When Reviewing a Balance Sheet
A Balance Sheet is a snapshot of your Association’s finances. However, new Board members often don’t know what to look for when reviewing the Balance Sheet included in the financial packet they receive from their management company every month.
Click here to see a video of How to Read an HOA or Condo Association Balance Sheet.
Familiarize Yourself With Some Basic Accounting Terminology
Assets are the positive, valuable things about your business. It’s the cash you have in bank accounts and all of your investments, including the checking/operating account, reserve account and any investments such as certificates of deposit.
Liabilities are the negative things about your business–monies that you owe. Liabilities include any funds that you are due to pay to other people (unpaid bills), money that owners have paid that are not yet owed (prepaid assessments) and other expenses.
Equity is kind of a paper concept–it is not a representation of how much cash you have, or how much you can spend. It’s a term of art used to represent the monetary value of the business. It might be represented on the balance sheet as retained earnings or losses, or as a current year income or loss.
Understanding the Difference Between Positive versus Negative Equity
If your community association has more savings, cash and funds that it may collect than it has money to pay, it has a positive equity. On the other hand if your community association owes more money than it has and can take in, it has negative equity.
The Balance Sheet Should Reflect Positive Equity and Should Balance
When you look at a Balance Sheet, first make sure that the Assets are equal to the Liabilities and Equity. If they are, you are balanced.
Next, check to see that you have Positive Equity or Retained Earnings. Your board should not be spending more than its it is receiving in income–so if your liabilities are greater than your assets you should considering increasing the dues or levying a special assessment so you don’t deplete your reserves. If you see negative equity on the Balance Sheet, discuss it with your property manager. Find out what the expenses are more than the income and determine what action, if any, is best for your Atlanta HOA or Condo Association.
So next time you get a board packet, don’t glaze over when you see the financial statement. At the very least, use this guide and read your Balance Sheet–it will give you a great bird’s eye view of the financial condition of your neighborhood.