Your Balance Sheet Knows Before Your Budget Does

Most HOA board members go straight to the budget every month. They check actual spending against projected spending and move on. Stacie Donnelly, CFO of Condominium Financial Management, says that skips the most important document in the package.

"The number one indicator for me is the balance sheet," Donnelly said on a recent episode of The Uncommon Area. A budget built without checking the balance sheet first can repeat last year's mistakes. Five months of unfunded reserves, for example, is not a footnote. It should shape the entire next budget.

Host Matthew Holbrook explored this with Donnelly and Bob Spillar, a longtime HOA board member and California Legislative Action Committee member. Together they broke down what a balance sheet contains, what a budget surplus really means, and one California deadline that can cost an association real money.

What to Check on an HOA Balance Sheet

You do not need to understand every line on a balance sheet. You do need to ask about the ones you do not understand. Start with these:

Bank balance. The operating account. Most people recognize this one already.

Accounts receivable. What homeowners currently owe the association. It should tie to a separate aging report.

Prepaid insurance. Should decline steadily each month as the policy is used up, not sit still.

Liabilities. Accruals, insurance payable, taxes payable. Ask what each one means for your budget.

A twelve thousand dollar insurance policy should show a prepaid balance of about six thousand dollars at the six month mark. If the number has not moved, an entry is missing somewhere. Boards do not need to run that math. They just need to notice when a number that should move has not, and ask why.

A Budget Surplus Is Not Always Good News

It is tempting to treat a surplus as room to lower next year's assessments. Donnelly pushes back on that instinct. Her first question is always whether reserves need the money first, and in her experience the answer is yes eight or nine times out of ten.

Using a surplus to cut assessments instead of funding reserves is a red flag, since it does nothing about rising costs. Spillar offered a better alternative: an abatement, a temporary break rather than a permanent rate cut that has to be reversed the following year.

A surplus can also signal a problem rather than a win. High staff turnover, for example, can leave positions unfilled and create a surplus that actually reflects a service the community paid for and did not get.

Reserve Funding Comes Down to a Few Key Assets

Spillar compared underfunded reserves to skipping oil changes on a car. Eventually something breaks down completely, turning a manageable expense into a major one.

Boards do not need to obsess over every line of a reserve study equally. Reserve funding is usually driven by roughly five major assets. Get the useful life and replacement cost right on those, and the rest of the study moves the monthly number only slightly.

California's Budget Deadline Has Real Teeth

Associations with a calendar year fiscal year end need their budget package finalized about a month before year end, in order to mail it with the required notice. Miss that window, and the association loses the ability to raise assessments by the full 20 percent civil code otherwise allows.

Donnelly's advice: raise questions early. Budget packages include insurance disclosures and reserve disclosures on top of the budget itself, and there is no room to fix a rushed process once the deadline is close.

How to Read an Accounts Receivable Aging Report

The accounts receivable number on the balance sheet should always tie to an aging report, which lists every homeowner who owes money as of a given date. It is typically broken into current balances, over 30 days, over 60 days, and over 90 days.

A large balance in the 90 day column is worth a direct question. Spillar's boards typically offer struggling homeowners a repayment plan, sometimes six to eighteen months, and monitor it closely. When a homeowner stops engaging, the process moves toward foreclosure. Some balances simply cannot be collected, and boards eventually have to write them off and move on.

Donnelly's recommendation for associations with a pattern of accounts past 90 days: bring in a collections attorney regularly, rather than waiting until the balance grows unmanageable.

The Takeaway

The earlier a board asks a question, the more options it has. The balance sheet is where those questions start. The budget shows what an association plans to spend. The balance sheet shows what is actually true.