Money, money, money. The world runs on it. And your building’s well-being depends on it.

The issue is not just having funds, but managing them. Handling the finances for an entire building or association is a major responsibility, and boards – even those made up with seasoned members – need to stay on top of their community’s performance. That means checks and balances, oversight, and holding people accountable. “Board members are charged with a responsibility to make sure the resources and funds are being properly administered,” said Richard Holtzman, president of Prairie Shores Property Management in Chicago.

From reading statements to making sure accountants and managing companies are doing their job, here’s what boards need to know in order to protect the assets of  the residents who rely on them.

Expenses and Reserves

The most obvious and crucial things to understand are your building or association’s basic expenses and reserves. First, there needs to be enough cash flow to manage those expenses, which include utilities, salaries for employees, real estate taxes, management fees, and – in the case of a co-op – an underlying mortgage or loan, explains Stuart Halper, an attorney and the president of Stuart Halper & Associates, a management firm in Westchester, New York

 And keep funds in your reserve account. “Because buildings age out and you have to do capital repairs, you want some money going into reserves,” Halper says. “A good guideline is 10 percent per month should go into a reserve account. You want to carry a balance of at least three to four months of a building’s expenses in reserves.” 

Condo vs. Co-op

A major difference between condo and co-op finances is that while a cooperative housing corporation owns the land and building, with the residents owning shares in the corporation that entitle them to occupy an apartment unit, in a condominium the land and building are owned in common by each unit owner. Because of this, the balance sheets for each association are different, explains Karen P. Sackstein, a certified public accountant who practices in New Jersey. The balance sheet of the co-op will reflect real estate taxes while the condo sheet won’t. “The real estate tax is an expense of each owner, not of the condominium association, and is therefore not included on the condominium’s statement of revenues and expenses,” she says.

Know Your Documents 

A set of financial statements are available to boards from their accountants, and all are valuable to know and understand, says Mark L. Love, CPA at M Love & Associates LLC, which has offices in Massachusetts. The balance sheet tells the cash position between operating expenses and reserves, and breaks down accounts payable and receivable; the profit and loss statement shows revenue and expenses; and the statement of cash flows shows changes in the balance sheet.  

“All too often, boards and unit members just look at the P&L [profit and loss statement], but the other statements are equally telling,” says Love. “It’s like a consumer who looks at his paycheck but not his credit card statement. You should look at all three on a regular basis. It’s not just revenue and expenses, it’s cash accounts receivable, accounts payable, debt payable, all of those things. Just like any small business, [they] have to be looked at holistically on a regular basis.” 

Multiple professionals who work with boards to manage their financial profiles agreed it’s not enough to look at your books once a year. 

“In order to make decisions throughout the year, a board should be utilizing monthly financial statements prepared by a managing company or an in-house accountant,” says Marie D. Mirra, CPA and managing partner of Mirra & Associates, LLC in Hillsborough, New Jersey. “Included in those statements would also be a budget versus actual report. That will give them variances on a month to month basis and also year to date. They can see if they’re ahead of the game or behind the eight ball. It’s very important that the board utilize and rely on these financial statements. Throughout the year those reports need to be accurate.”

Hire Professional Help

Boards should seek outside professionals to help them manage their finances for many reasons – not least of which might include oversight and avoiding fraud, according to multiple professionals. At the very least, “Every co-op should have an accountant,” says Halper. “To make yourself the most marketable and maximize value, purchasers need to see you’re doing it properly.”

Many variables come into play when deciding how much outside help a building needs, including the size of the association, but there are generally a few types of financial services that can be provided. An accountant, for example, manages the community’s day-to-day finances and is oftentimes on the payroll of the management company, explains Love. An extra layer of accountability comes at the end of the fiscal year, when the board may hire a CPA to do a year-end review.

“If you were to have three circles, one is the property manager, one the board, the third is the CPA firm,” says Love. “It’s the best situation to have all three [overlap]. One circle is the least favorable, which is just the board. It doesn’t mean the association can’t be properly managed or run [by the board alone], but there are greater risks if you have one person doing everything. They call it ‘lack of separation of duties.’ Even if it’s a for-profit business, one person doing everything … It’s an opportunity for something inappropriate to occur.” 

And be careful with who is tasked with handling the money, whether it’s individual volunteers on the board or hired managing agents. “Make sure the managing agent is bonded and trustworthy,” adds Halper. “Even self-managed, you’ve got individuals handling monies. You want to ensure that even volunteers are honest. It’s a business. If you owned a coffee shop, a clothing store, you’d watch your finances. It’s the lifeblood of your business.”

Budgeting Properly

The budget is an important process that happens each year. There are multiple ways to start the process of preparing the budget, from the board or finance committee preparing it to the management company taking a first crack at it. 

“You go off of last year’s budget and what you’re anticipating this year,” says Halper. “[Boards] should work with experts, managing agent and accountant, to look at what’s going on and what needs to be done in the coming year.”

Love agrees,  but says looking at how the previous budget worked for the building is also important. “Having last year’s budget and last year’s actual results are key. You could go off last year’s budget and find it wasn’t a good one,” he says.

According to Sackstein, another style of budgeting is called ‘zero-based’ budgeting, where you start from the ground up and adjust based on contract costs and utility changes. “An analysis of historical trends, looking at a particular line item over a period of time to identify either an increasing or decreasing trend,” should also be used, she says. 

Of course, the budget also needs to  account for planned upcoming repairs and projects, as well as those that may be unknown, says Love. “Not everything is going to be a burst pipe.”

And smart financial planning isn’t a set-it-and-forget-it deal; you should be looking at the year’s budget periodically throughout the year. “You should be looking and budgeting all year long,” says Sackstein. “Keep information as you go, and adjust as needed. If it’s August and you’ve gone way way over [budget], you might be able to push something off until the next year.”

“It’s important that board members know how the association is doing comparatively,” adds Holtzman. “See if it’s over budget, make adjustments, and determine why they’re over budget on a particular expense.”

Checks and Balances 

Many associations have a financial audit or review completed at the end of the fiscal year by a CPA. In some cases they are mandatory, according to governing documents or even state law. In Massachusetts for example, a CPA must perform an annual review for associations with more than 50 units, says Love. Although not all are required, some form of annual review by a professional outside the association is recommended.

“Many smaller associations not requiring annual audits often do not retain an accountant,” says Sackstein. “However, each entity is a corporation requiring an annual federal income tax return, which is best prepared by a seasoned industry professional. As this industry is extremely specialized, and often board member volunteers do not have experience, or even a financial background, a qualified and knowledgeable CPA will prove invaluable in providing training, knowledge and guidance in both financial and operational matters.”

Holtzman says having a third party, such as a CPA, look closely at the books is an important check and balance. “I think it’s just important to have a third party that is retained by the association and not the management company to be reviewing the financials of the association,” he says. “The board has fiduciary responsibility for oversight and part of good practice would be to have a third party retained by the association.”

Halper agrees. “When buildings don’t perform audits, I’m not happy.” 

Beyond audits, other checks and balances boards should have in place to minimize the likelihood of fraud or mismanagement of their building’s finances include “regular review of monthly receipts and disbursements including the actual bank statements, full and separate dual control over reserve transactions, a dual signature control policy for disbursements, and proper segregation and accounting for different types of association funds (operating, reserve, deferred maintenance, transition),” says Sackstein.

Transparency Is Crucial 

“Both co-ops and condos, shareholders and owners, have a right to inspect the books and records of the entity – the monthly statements at a minimum,” says Halper.

 When it comes to disclosure of financial information to shareholders and/ or non-board residents, experts suggest transparency as the best policy. “Transparency and full disclosure is always the healthiest way to conduct affairs as a board member,” Love adds. “If the board is withholding information and is reluctant to share information ... Why would that be the case? The best run are those that are the most transparent and fully disclose.”

Study Up

For boards to be successful in upholding their fiduciary duty, they need to be versed in the financials of their building, and in best practices, sources say. 

“An educated board is the best … An interested, educated board,” says Holtzman. “People join for different reasons; some to accomplish a particular project or goal, others because they genuinely care about the building and their neighbors. My life is easier when the board is fully informed. If they carefully read their monthly financial statements and participate in the budget process, that goes a long way.”

Sackstein agrees. “An informed board member is an effective and productive board member.”

To learn more about budgeting, finances, and how to best maintain your own community’s financial health, check out trade shows like The Chicagoland Cooperator’s two annual Expos, read publications and articles that relate to these subjects, or attend seminars hosted by any of the numerous condo and co-op advocacy and educational groups in existence. 

Managing agents can also help, says Sackstein. “Remember you have a fiduciary responsibility to protect the assets of your corporation, not to be the most popular,” she says. “This will often mean tough decisions.”             

 Georgia Kral is a staff writer and reporter for The Chicagoland Cooperator.