The HOA Finance Committee and Its Role
The HOA finance committee fulfills many essential responsibilities, especially in a self-managed community. With a capable finance committee, the HOA board will find it easier to manage its financial duties.
What is the HOA Finance Committee?
Homeowners associations require a set of board members at the helm, with several committees overseeing different aspects of the community. The number and nature of these committees can vary from one association to another. Typically, more minor associations only need to rely on the board for their day-to-day operations. But, larger communities usually need extra help. For self-managed associations, committees are often a must.
But what is an HOA finance committee anyway? As its name suggests, a finance committee is responsible for the association's financial activities. Just as an architectural committee handles architectural reviews, the finance committee manages all things finance-related.
Because of the subject matter, it's a good idea to include volunteers with a background or financial management experience. Additionally, board members can also join the committee to serve as supervisors.
What is the Function of a Finance Committee?
A typical finance committee takes on several responsibilities, though the specifics will depend on the association itself. Some HOAs only delegate a small number of tasks to their finance committees, preferring to reserve most decisions for the board. Meanwhile, other HOAs give their finance committees a broader scope.
In general, though, the most common finance committee roles and responsibilities include the following:
1 Preparing the Annual Budget
The annual budget sets the financial tone for the coming year. It includes all of the association's anticipated costs. But, setting a budget isn't always easy. It involves an in-depth analysis of certain economic factors and a review of past expense reports.
The finance committee must look at the association's ongoing expenses to prepare the annual budget. These are the expenses that the HOA regularly incurs, such as insurance premiums, maintenance fees, and the like. It's helpful to look at previous years' financial statements to give the committee an idea of how much to budget for each line item.
Additionally, the committee must consider external economic factors like inflation, the rising cost of goods, and increased wages. These can affect how much the association will spend in the coming year. It's ideal to allocate a contingency fund for unexpected costs.
2 Maintaining Financial Records
The HOA finance committee is also responsible for maintaining the association's financial records, which means keeping track of all income and expenses, filing invoices, and storing receipts. These will come in handy later when the association files its tax returns.
Accounting and bookkeeping are a huge part of successful financial management because they allow a committee to monitor all the money that goes in and out of the association's bank account. Committee members should also review bank reconciliations, insurance policies, and investment summaries to ensure the HOA is in good financial condition.
3 Preparing Financial Statements
Without a third-party accountant or HOA manager, the finance committee's duty of preparing the association's financial reports falls. These reports need not be complicated, but they should at least include all pertinent information. Some of the most crucial financial reports include a balance sheet, an income statement, an accounts receivable report, and an accounts payable description. It's also a good idea to prepare a report that compares budgeted expenses against actual expenses.
The reporting frequency will depend on the association, though monthly reports are recommended. The finance committee should also create annual reports to assess the financial health of the HOA for the year.
Most associations are required to present the HOA's financial reports to the homeowners. Before giving this, the finance committee should also edit or conceal confidential information. And then, some reports shouldn't be made available to members. For instance, delinquency reports are best reserved for the eyes of the board.
4 Reviewing Bids
The HOA finance committee also helps the board solicit and review bids from contractors or vendors. The committee can examine the bids from a financial perspective and make recommendations based on the same point of view. When selecting a bid, the committee must remember that cheap doesn't always mean good.
5 Managing the Reserve Fund
Depending on where you are, your association may require a reserve fund. Even if state law doesn't mandate it, it's still best to maintain a reserve fund to avoid financial setbacks in the future.
The reserve fund is a separate fund that an HOA can use for the future cost of significant repairs and replacements. Every year, homeowners make reserve contributions as part of their regular dues. These contributions build the reserve fund and keep it at a satisfactory level.
Reserve studies are not something the finance committee can do. To determine the satisfactory level of funding, an association should have a professional conduct a reserve study. This study identifies the HOA's assets, computes the remaining estimated life of each one, and determines how much it will cost to repair or replace them when they reach the end of their useful life.
6 Advising the Board
Ideally, the finance committee would deeply grasp the association's finances. This way, it can advise the board on certain financial matters. It is worth noting that the HOA board usually has the final say on all decisions. The committee can present information and recommend a well-informed decision.
7 Working With Other Committees
Lastly, the HOA finance committee should work closely with other committees. This committee can advise others on financial matters and assist when needed. For example, suppose the security committee wishes to propose the installation of additional security cameras. In that case, it can consult the finance committee to see how much money they can work with the security committee.
Does a Self-Managed HOA Need a Finance Committee?
It's never a good idea to run an entire community by yourself. You need help as well as other people to keep you in check. A finance committee introduces internal controls and allows the association to get more than a single perspective on different issues.
However, you should know that not all associations can have a finance committee. You should check your governing documents to see if they allow the formation of committees or, more specifically, an HOA finance committee.
Additionally, it is worth gauging the talent in your community. Those with a background or expertise in finance are the preferred candidates, though that shouldn't stop you from encouraging others to join the committee.
A Helping Hand
The HOA finance committee plays a significant role in the community. This committee tackles several aspects of financial management, including accounting, bookkeeping, budget preparation, and reporting. If your board needs help in this respect, then perhaps forming a finance committee is well within the community's best interests. Call Condominium Associates today! W are here to help!