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ARE 10 Tips to Assess Financial Health

Managing the financial health of an association requires diligence, foresight, and a commitment to best practices. Whether you're a seasoned board member or newly appointed, ensuring your association's financial stability is paramount to its long-term success. Here are ten tips to guide associations in navigating their financial landscape:
  1. Evaluate Yearly Performance. Take stock of your association's financial performance on a year-to-year basis. Are you consistently ending the fiscal year with a budget surplus or facing losses? Identifying trends can help pinpoint areas for improvement and form future budgetary decisions.
  1. Prioritize Expense Management. Community association budgets are primarily expense-driven. When crafting budgets, focus on scrutinizing expenses first. While it may be tempting to avoid increasing assessments, neglecting to adjust for inflation or rising costs can lead to financial strain in the long run.
  1. Avoid Unrealistic Budgeting. Beware of passing unrealistic budgets that fail to accurately reflect the association's actual expenditures. Cutting essential services or amenities to artificially lower assessments can compromise the community's well-being and lead to dissatisfaction among residents.
  1. Implement Incremental Assessment Increases. Embrace best practices by incrementally increasing assessments by 2-3% annually. This proactive approach ensures that your association stays ahead of inflation and maintains sufficient revenue to meet its financial obligations.
  1. Fund Reserves Adequately. Prioritize funding reserves in accordance with state laws and reserve study recommendations. Adequate reserves are essential for addressing deferred maintenance, unforeseen repairs, and capital improvements without resorting to special assessments or loans.
  1. Be Cautious About Deferring Maintenance. Budgets and reserves should be structured to cover routine upkeep as well as long-term capital projects. Are you deferring regular maintenance due to lack of funds? This not only may be a sign of poor financial health for an Association, it can also lead to more significant issues and increased costs down the line.
  1. Review Monthly Financials. Actively engage with your association's financial statements on a monthly basis. Don't hesitate to ask questions and seek clarification from your management company or financial professionals. Regular monitoring can help identify potential issues early on and allow for timely adjustments.
  1. Maintain Adequate Cash Reserves. Aim to maintain a minimum of two months' worth of assessments in your association's bank account at the end of each month (after paying that month’s expenses). Building up cash reserves provides a financial buffer against unexpected expenses, delinquencies, or revenue shortfalls.
  1. Monitor Equity and Retained Earnings. Keep a close eye on your association's equity, or retained earnings, and aim for a balance equivalent to 10-20% of your annual assessments. Healthy equity levels indicate financial stability and provide reassurance to stakeholders.
  1. Seek Professional Guidance When Needed. When in doubt, seek out assistance from your community manager or other financial experts specializing in community associations. Their insights and guidance can be valuable in understanding your association’s financial position and helping navigate complex financial matters.
Ultimately, prioritizing the financial health of your association is crucial for its sustainability and long-term viability. By following these tips and maintaining focus on financial management, associations can thrive and fulfill their mission of serving their communities effectively.