A healthy HOA cash flow supports daily and long-term financial activities for an association, but far too many volunteer boards don’t know how to monitor and ensure it. Cash flow management requires understanding and a clear action plan for when things go sideways.
What is HOA Cash Flow?
Cash flow tracks the actual cash that comes in and goes out of an HOA community over a specific period.
Associations operate similarly to corporations. They generate revenue through owner dues and spend money on expenses, such as landscaping, maintenance, and insurance. By monitoring cash flow, the HOA board can ensure it has sufficient funds to cover costs and closely track delinquencies.
Cash flow tracks only cash funding and activities. Receivables and payables are not included.
What is an HOA Cash Flow Statement?
An HOA cash flow statement divides all cash transactions into three main activities: operating, investing, and financing. Let’s discuss these below.
Operating Activities
Operating activities refer to the day-to-day movement of money. To track HOA operating cash flow, board members must review both inflows and outflows.
Inflows focus on cash that goes into the association’s accounts. Examples include regular dues, special assessments, late fees, transfer or resale fees, and interest income. Outflows, on the other hand, focus on cash that leaves the association’s accounts. Examples include vendor payments, utilities, payrolls, and insurance premiums.
Investing Activities
Investing activities refer to cash the association uses to buy or sell investments or long-term assets. Common activities include buying short-term certificates of deposit (CDs), purchasing equipment, or selling land.
Financing Activities
Financing activities involve borrowing funds or changes in HOA cash reserves. For example, an HOA may take out a bank loan to fund a major project or pay a debt. Another example is when the board transfers funds to or from the reserve account.
The Importance of Tracking HOA Cash Flow
Cash flow monitoring is essential to ensure liquidity, flag delinquencies early, and keep funds separate.
Associations pay vendors all the time. Tracking cash flow helps the board confirm the operating account has enough money to cover invoices and bills. A negative cash flow can halt services and put the association in debt.
Board members can also use cash flow to spot warning signs of delinquency. If inflow drops sharply, the board should trace it back to the root cause. Often, it’s due to a rising delinquency rate, meaning owners aren’t paying their dues.
Finally, most governing documents require HOAs to keep operating and reserve funds separate. By tracking cash flow, the board can ensure these funds don’t commingle.
What Causes an HOA Negative Cash Flow?
Several factors can cause an HOA to have negative cash flow, but the most common are high delinquency rates, budget overruns, and artificially low dues. Let’s discuss each cause below.
1. High Delinquency Rates
When owners fail or refuse to pay their dues on time, the association won’t have enough money to cover financial obligations. This can lead to a negative cash flow.
2. Budget Overruns
The HOA board anticipates costs by preparing an annual budget. When these projections fall short of actual amounts, a deficit occurs. Utility prices and vendor services often spike, which is why many associations pad their budget.
3. Artificially Low Dues
Low dues aren’t always a good thing. To keep owners happy, some boards may delay dues increases, but doing this for too long can push the HOA into negative cash flow. Associations must keep up with inflation and rising costs.
What are the Consequences of a Negative HOA Cash Flow?
When an HOA has negative cash flow, it can face delayed vendor payments, service interruptions, depleted reserves, special assessments or dues hikes, and issues with lenders or property values. Let’s take a closer look below.
1. Delayed Vendor Payments
Negative net cash hinders an association’s ability to cover bills and invoices. Maintenance workers, utility companies, and other contractors are then left unpaid.
2. Service Interruptions
As a direct aftermath of the previous point, vendors and contractors may cut off services to nonpaying associations. This means an HOA could lose landscaping, trash removal, security, and maintenance services, among other things.
3. Depleted Reserves
To cover a budget deficit, the HOA board may move money from the reserve account. This is a temporary solution because it doesn’t address the root cause. Plus, underfunded reserves only create more obligations.
4. Special Assessments or Dues Hikes
Board members may impose a large special assessment or significantly increase dues to dig the association out of the financial hole. This, of course, won’t go over well with homeowners.
5. Lender and Property Value Issues
Mortgage lenders may deny loans or refinancing if the HOA’s finances are unstable. As a result, property values will likely plummet.
How to Improve HOA Cash Flow
An HOA can improve cash flow by enforcing a strict delinquency policy, cutting unnecessary expenses, adjusting dues, building a budget cushion, and hiring professional management. Let’s discuss these below.
1. Enforce a Strict Delinquency Policy
To support a steady cash inflow, the board should enforce strict collections. This includes sending late notices, charging interest or late fees, taking legal action, and even placing liens against delinquent owners.
In both Virginia (Section 55.1-1833) and Maryland (Section 11B-117), associations can attach and enforce liens. These associations can then initiate foreclosure.
2. Cut Unnecessary Expenses
Another strategy is to review the association’s budget and prioritize costs. Review every line item to identify unnecessary or non-urgent expenses. The board can also renegotiate vendor contracts.
3. Adjust Dues
Dues and assessments are the lifeblood of any association. Board members should adjust dues to realistically reflect the association’s needs and current economic conditions. Low dues may make owners happy now, but that decision will ultimately backfire.
4. Cushion the Budget
An HOA’s reserves aren’t a contingency fund. They are set aside for long-term major repairs and replacements. Instead of raiding the reserves, the board should pad the budget as a precaution.
5. Hire Professional Management
Board members are just volunteers, and they don’t always have the right background or experience to maintain a positive cash flow. An HOA management company is well-versed in overseeing and monitoring funds, as well as creating a long-term plan for budgeting and financial stability.
A Board’s Duty
Monitoring HOA cash flow is a key part of managing an association’s finances. Board members are responsible for keeping the HOA in the green, and a cash flow statement can shed light on current conditions. When cash flow turns negative, the board must get the association back on the right track.
Majerle Management, Inc. provides management services to HOAs and condo associations in Maryland. Call us today at (301) 220-1850 or contact us online to start your journey!
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