By Lydia Pelliccia and Matthew Green, CAE

Community association managers wear many hats and have to be well-versed in a wide range of skills, all of which are equally important. One component of a manager’s role is to completely understand the financial aspects of running a business – this means knowing and interpreting the financial pieces as well as the nuances that come along with the decisions being made.

“As an agent for our clients, a manager’s duty includes providing advice and direction to those clients regarding their financial health and trends,” said Rob Felix, CMCA, PCAM, RS, Owner of The Felix Reserve Group. “Without such action by a manager, there can be a disconnect between what a client wants, and what they’re willing to spend to get it. Matching a client’s expectations with their willingness to raise the money to do so prevents financial paralysis in communities.”

The financial element of a manager’s job include the following actions:

• Develop and implement accounts payable/receivable procedures;
• Analyze and interpret the financial statements and report significant variances from the budget;
• Manage association operations within the budget; 
• Assist in the development of the reserve study;
• Assist the board in identifying funding sources for reserve expenditures; 
• Implement the reserve funding model approved by the board; 
• Provide regularly scheduled financial statements and reports to the board and members;
• Provide the association financial records to the independent auditor and/or accountant;
• Distribute audited financial statements to the membership and the board; 
• Implement investment policies of the board; 
• Identify investment products; and,
• Document transfer of funds.

“Knowing how the money works is one of the most important services a manager provides to a Board,” said Cat Carmichael, PCAM who is the CEO of Strategy 123.  First, she suggests the manager ask the Board to describe the type of community they want to have and provide the manager with a budget that is adequate to meet the mandatory and discretionary expenses to achieve the Board’s goals. Paying close attention to the monthly financial reporting tells the manager and the Board whether the plan they created when they developed the budget is working.  “If the monthly income and expense statement has large variances to the budget, the manager should investigate why and report to the Board,” said Carmichael. “That way, the Board can make decisions to reduce or change expenses to align with the expected budget.  In some cases, there could be a good reason why a variance exists, and the Board may decide to do nothing to change its plan. That’s OK too.  It’s their community.”

Ron Duprey, CMCA, AMS, PCAM, who is a Senior Vice President at Associa explains a strong understanding of an association’s financial information is particularly important for the portfolio manager.  “The portfolio manager, working with several different community associations, will likely work with many different financial situations for each of the associations in their portfolio,” said Duprey. “Each may experience different financial challenges and require multiple solutions to solve those problems. The ability to grasp and understand the financial problems, suggest solutions and help the Board reach the best outcome can impact the financial stability and value of the properties in a community association well into the future.” Duprey noted that he believes the most important situation impacting community associations falls under the budgeting assessments for owners.

Demonstrating Financial Acumen

Budgets are the business plan for the year, but Boards can amend their plans throughout the year. For example, an association may want to host social events and lifestyle programs, but none have been provided for in the budget. Carmichael says, “It’s incumbent on the manager to help the Board understand how to achieve their goals, while assuring that the association is financially viable. For example, some solutions a manager might suggest are to reallocate funds from other discretionary expenses, or determine if ticket sales and sponsorships can cover the costs of the events.”

Felix adds, “If a client determines they’ll be short in operating income for the year and are determined to withhold funding of their reserves instead of raising the assessment, a professional manager should be able to point out the potential pitfalls of taking such action and make a recommendation to the Board to avoid the negative impact.” Further, Felix explains, “Or, should a Board decide to add a costly program mid-financial year without considering how it may impact other programs, a professional manager must be able to interpret how the community is currently spending its funds, and make recommendations on how to achieve their goals and what areas may need to be adjusted accordingly.”

Enhancing These Critical Skills

Carmichael, Felix and Duprey all offer excellent advice and insight into how professional managers can enhance their financial management skills. In their words:

Cat Carmichael: Managers should begin reviewing their management agreement and understand specifically what financial services the management company provides to its clients. If you’re self-managed, discuss the scope of work that your finance department provides. Staff accountants are seldom recognized for the work they do for a community; to the observer, financial management is less visible than strictly property management. Financial professionals really like to understand how their work benefits communities, because they rarely see their efforts translate to outcomes. Ask the accounting team to describe all aspects of the financial management services they provide, including explaining how they actually do the work. How are duties separated?  What other internal controls do they implement?  How does that desktop check scanner actually turn a paper check into a deposit?  Ask about the accounts receivable process and to show you the life of a homeowner payment, from billing to receipt to posting.  Then, ask about accounts payable from the receipt of an invoice, coding to the proper general ledger accounts, and the many ways payments to vendors are made.  Ask the accountants to walk you through the financial report so you can clearly understand how the results are presented, and how the different reports relate to one another.  It is also very important to understand how the primary banking relationship works, from operating accounts to reserve and investment accounts.

Rob Felix:  Be sure to read and fully understand each financial report a Board receives. Often times, managers are unaware of the financial position of their client because they don’t take the time to fully understand the financial reports presented to them. Ask questions of your financial manager. Prepare a variance report to the financials to explain the differences between what they’re actually spending versus what they budgeted, and why! Also, thoroughly read the last audit (if any) that was performed on the client’s financials and pay close attention to the notes section of the audit. It’s imperative that a professional manager know more than their client – that’s the value add. Nearly every manager is working with a non-profit entity, so understanding the language associated with the appropriate financial information being tracked and presented is critical, as many clients are not trained in this area.

Ron Duprey: Not everyone is a “numbers person,” which is why it’s so important to really understandbalance sheets and income statements. For a pragmatic approach to really grasping the basics I suggest a manager, not comfortable with spreadsheets or financial statements in general, first sit down and prepare a balance sheet and income statement for their own “business” of life. Thinking about their own assets or what they own that has value and liabilities of what they owe to others is a great way to understand a balance sheet. Assets less liabilities equals net worth. Net worth plus liabilities balances with assets. Hence a balance sheet. The income statement is simply the income or revenue they bring in from all sources deposited into the checking account. The check book identifies all that they spend. The difference is net income. Mentally referencing their personal financial situation is a great start to understanding business balance sheets and income statements. 

Resource Corner

Making use of the wide variety of professional development resources available to managers is critical to staying on top of industry news, events, and any changes arising in the profession.  Below is a sampling of industry resources.

CAI’s Education for Managers – CAI offers a series of courses specific to financial management, risk management and other topics which are covered in detail in the following courses M-100, M-200, M-205, M-206 and others. Upcoming offerings and dates can be found here: https://www.caionline.org/LearningCenter/Education-for-Managers/Pages/default.aspx

CAI Publications – CAI’s Best Practice Reports, covering topics including Community Association Finances, Delinquencies and How to Draft A Budget, are available for a fee and can be found here: https://cai.caionline.org/eweb/DynamicPage.aspx?site=CAI&WebCode=storeCatList&catKey=017b3c55-8dd3-45f9-beba-1c92d456eaf5&catName=Best+Practices

In addition, CAI offers Guides for Association Practitioners that cover topics such as Reserve Funds, Risk Management and The Board Treasurer, which can be found here: https://cai.caionline.org/eweb/DynamicPage.aspx?site=CAI&WebCode=storeCatList&catKey=d68ff6e8-b241-4ce2-aa03-9ef7b9cfd7d0&catName=Guides+for+Association+Practitioners+(GAPs)&pg=3

Foundation for Community Association Research (FCAR) – The Foundation supports research and develops publications on a variety of topics that can help managers develop more effective and harmonious community associations. For example, its Best Practices Reports on Financial Operations and Reserve Studies can be downloaded for free here: https://foundation.caionline.org/publications/best-practices-reports/

HOAleader.com – HOAleader.com was created to support the dedicated community of association managers and other professionals who work to realize the potential of their association—Board and committee members, property managers, attorneys, financial professionals, insurance professionals, developers, vendors, and homeowners. A free, downloadable white paper entitled HOA Finances: Best Practices For Getting Your Homeowners Association Through Difficult Economic Times is available on HOALeader.com in addition to a special report on HOA Reserves, Special Assessments, Loans & More: A Homeowners Association Board Member’s Guide To HOA Funding Options.

CAI Exchange – An online forum that allows members to collaborate and connect with colleagues. These informal discussions are extremely helpful in sharing innovative approaches to common and uncommon situations as well as best practices and advice. Financial topics range from issues arising from unexpected major expenses, to the misappropriation of funds, to reserve studies using component method funding.

Community Managers With Strong Financial Management Skills Drive Sound Decision Making For Associations And Boards is the third in a series of articles, produced by CAMICB staff, that delve into the important issues and topics affecting community association managers.

Lydia Pelliccia is a freelance writer. Matthew Green is executive director of Community Associations Managers International Certification Board.