By: Jeremy Newman CPA, Newman Certified Public Accountant PC
We introduced you to balance sheets in our last blog, which was the first in our Reading Financial Statements Series ©
In this and following blogs we will explore some typical association balance sheet accounts in more detail.
Everyone likes cash! Associations are no different. Without enough cash, association management and community property can become neglected, often leading to future major repairs requiring loans and special assessments. Understanding what activities have the most impact on cash balances is vital to the future success of an association’s operations. As managers and board leaders, it is so important to review cash activity and balances continuously. Be proactive in a timely manner. Not reactive two years down the road.
Cash includes petty cash, checking, and money market accounts. Remember from the last blog, assets represent what an association owns. We recommend a serious review of cash every month. Cash balances are going to significantly impact an association’s ability to pay for budgeted expenses. Not addressing near term cash challenges can result in current and future budget constraints and economic pressure on the association and its members, including surprise assessment increases. Please refer to our article on budgeting which discusses assessment increases.
If you have significant owner delinquencies, your cash holdings will be negatively impacted. We recommend that you review the accounts receivable balances in conjunction with a review of cash balances every month. As assessments receivable/delinquencies increase, you will usually see a decrease cash balances. Addressing reductions in cash received compared to budgeted revenues will help you to determine if you also need to work on reducing expenses. Know how much money is received each month.
Contributions of assessments to the reserves fund:
Associations budget for monthly contributions of assessments to the reserves fund. When associations do not make payments from the operating fund to the reserves fund each month because there is not enough money in operating bank account, the reserves fund will start to be underfunded. The association still has a liability to fund reserves per its ratified budget. Not funding reserves because of operating fund shortages will lead to significant cash pressures as major repairs and replacements are deferred and future special assessments and loans may be required to fund expenditures.
We will continue to address various aspects of cash management and controls surrounding cash in future blogs
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