CAI-NJ March 2017

MANAGEMENT TRENDS

Fit Test Your Financials Each Fiscal Year By Christopher Nicosia, CMCA, AMS, MM Prime Management, Inc.

H ow fit are your community’s financial statements? Do the individuals that use the statements to make decisions get a clear picture when they glance over the balance sheet or do they have to “decipher” them to understand the financial position of the association? Performing a financial fit test and looking for key items like those listed below can help improve financial reporting and improve on a community’s financial fitness. Budget Line Items One area that can cloud the financial picture of the Association is line items in a budget. More specifically, grouping expenses into one-line items as opposed to giving each expense its own General Ledger (G/L) account can create a skewed financial picture. For example, an association has lighting expenses for street lights, clubhouse and building lighting but lumps all utilities together on the budget. If one area has a spike in usage, the entire line item increases. Now – without looking at each bill to find out where the increase is com- ing from, there is no way to identify the culprit because the budget is not sufficiently broken out to provide more specific information. If three separate line items with three separate G/L codes were included in the budget, each category (street lights, clubhouse and building lighting) could be tracked and variances would be more easily identified. This is especially important the larger the asso- ciation’s budget becomes, as one category could include a large amount of funds that are difficult to breakout without separate line items to keep track. Capital Reserve & Deferred Maintenance Accounts Another group of items that should be clear on the financial report are association funds. Each fund should be accounted for separately on the balance sheet, so board members and

© iStockphoto.com

other stakeholders can easily see how much is in each fund and the respective cash balances available each month. As an example, Capital Reserve and Deferred Maintenance funds are used for different types of projects and have different rules governing their use. Co-mingling the funds can create a skewed picture and makes it difficult to know how much is allocated to each account. This can cause problems down the line, especially if accounts owe each other money due to shortfalls in funding or project cost overruns. Additionally, there may be IRS implications for co-mingled funds as it relates to Capital Reserves. Instead, each fund account should have its own G/L account for tracking the cash account and fund account for quick and easy reference at any given time. Additionally, once accounts reach certain thresholds, they are usually invested financial instruments, such as CDs, bonds and other “safe” investments that allow for growth over time while protecting the principle investment. If funds are co-mingled, it becomes difficult to know what funds are where and makes allocation that much more difficult as time goes on. Accounts Receivable One area that has become a major area of discussion for communities is bad debt and allowance for doubtful accounts.

CONT I NU E S ON PAGE 61

40

M A R C H , 2 0 1 7