HOA accounting is one of the most challenging parts of community management. It’s easy to make a mistake, especially if the management team and accountant are inexperienced when it comes to accounting for homeowners associations. However, most of the challenges can be overcome and mistakes can be avoided with good practices.
HOA Accounting and Financial Management Challenges
Most HOA financial management and accounting challenges can be circumvented. It takes ample preparation, good financial practices, and a team of seasoned professionals. What are the challenges to watch out for regarding your HOA accounting method and financial management practices? Here are some common examples.
1. Collection Management
HOA fees are the main source of income for most homeowners associations. These funds keep the community alive by paying for maintenance, supplies, and reserve funds. They keep the community from falling apart and ensure it remains a good place to live.
However, unpaid dues and multiple late fees can imbalance the association’s finances. Without timely collections, the HOA won’t have enough funds for management and upkeep. Create a schedule homeowners can follow to stay on top of monthly collections.
In addition, it may be wise to hire a collection agency or attorney to help the community manage delinquencies. HOAs should give grace to homeowners who have trouble keeping up with the expense. Nonetheless, it cannot be too lenient as it can lead to significant losses for the HOA. Everyone else will have to shoulder the cost of unpaid dues.
If possible, HOAs can use technology to speed up the process. Offering an online payment platform makes the process more convenient for both the homeowners and the HOA board. Plus, an online platform can be connected to several payment methods, such as ACHs, eChecks, and credit cards.
2. Bank Reconciliation
The HOA’s accountant might record the community’s financial activity in the books, but the records should align with the association’s bank accounts. A discrepancy could mean mismanaged funds, unrecorded transactions, or even fraud.
Unfortunately, bank reconciliation can be difficult for homeowners associations without prior experience. Most communities use Excel sheets to reconcile accounts, but this is not always a practical solution for large associations with hundreds of monthly transactions.
HOAs can mitigate potential problems with bank reconciliation by using technology. Reliable HOA management software has comprehensive accounting features that can handle bank reconciliation. If you have room in the budget, consider purchasing one for the community.
Alternatively, some HOA management companies offer bank reconciliation as part of their homeowners association accounting services. Many also have comprehensive accounting software, eliminating the need for your community to purchase your own.
3. Duplicate Bills
Duplicate bills and payments are surprisingly common. Some vendors send invoices more than once to follow up on an unpaid bill. Other times, they simply need to remember they have already billed the HOA. It’s easy to make a mistake when this happens, as HOA financial managers might not constantly check and pay the bill twice.
Fortunately, HOAs can mitigate the risk of duplicate payments by utilizing HOA management software. These tools simplify the process and reduce the possibility of human errors. Alternatively, HOAs can delegate the task to a reliable HOA management company that can process payments more thoroughly.
4. Compliance With State Law
Homeowners associations must be familiar with state laws to remain compliant while doing accounting. However, most board members need help memorizing every single piece of legislation that affects HOA accounting.
Hiring a professional HOA accountant familiar with local laws related to HOAs and financial management is essential. They can help the community remain compliant and use the correct formats when preparing HOA financial statements.
5. Filing IRS Forms
It may seem surprising to some but homeowners associations do pay taxes. If they do not qualify for exemptions, they need to file their year-end tax forms with the IRS just like other organizations.
Unfortunately, taxes are particularly confusing for homeowners associations. They’re also time-consuming and complex so it’s easy to make a mistake. This could lead to devastating consequences as failing to pay the right taxes or missing a deadline could mean penalties.
A good solution would be to utilize automation to eliminate human errors. HOA software can streamline the process and automatically generate forms and supporting documents. Plus, they’re more accurate and guarantee homeowner transparency.
If you need a little extra help, a dedicated accountant and financial manager with experience in HOA tax filing can also be beneficial. You can also ask an HOA management company to take care of the tax for you.
6. Potential Fraud
Just like other organizations, homeowners associations are subject to fraud. The best way to avoid this is to adopt internal controls when it comes to accounting, fund management, and HOA financial reporting.
Make sure that no single person has complete control over HOA finances. The person who writes the HOA’s checks should not be the same person who manages collections or invoices. Moreover, payments should all be made directly to the HOA’s bank account instead of an association officer.
In addition, we recommend assigning one person to review all deposits, invoices, and bank statements. An audit every few years is also a good idea to find any cracks in the HOA’s finances. The board must protect the community and ensure its funds are properly utilized.
7. Budgeting
The budget can make or break an association’s finances. A well-made budget can make all the difference between being in debt or having leftover funds for rainy days. Thus, each association should pay attention to the budgeting process and prepare the following year’s budget months in advance.
Consider forming a dedicated budget committee to assess the community’s financial status. They can survey vendors, research rate increases, and forecast potential expenses to create a realistic budget for the coming fiscal year.
Hire a Professional
HOA accounting and financial management are some of the most difficult parts of community governance. Without the right background or expertise, you may end up in the red and put the community in financial trouble. If nothing else, make sure to pay special attention to financial management.
Homeowners associations often need help with HOA accounting and financial management. That’s where Freedom Community Management can come in. We offer expert financial management and accounting services to associations across Florida. Call us now at 904-490-8191 or contact us online for professional HOA financial services in Florida!