Condo Financial Statements… Directors just need to review and ask questions… Follow the money!
From the Volume 12, Summer 2022 issue of the CCI GHC Condo News Magazine
Many years ago, I was posted to Cleveland, Ohio and my boss and mentor there was a man by the name of Jack Breen………… a brilliant business guy. If there was one thing I learned (and there were many: things that is), it was this……. don’t ever show up at a monthly meeting for your division if you don’t know your metrics. Translation…… financial statements.
Fast forward to today, I marvel at the meetings I go to where the monthly financials are not thoroughly reviewed. They are merely passed by motions to adopt.
Once a user of financials gets used to them, and it is not hard, they tell a story. In this case directors would be the main users, but informed resident owners should also be reviewing.
Role of Financial Statements
The financials are a guide to looking for mistakes, early warning systems for asset failure, costs in certain areas rising too fast or not fast enough. A road map to continuously measure the financial health of the corporation.
They must be accurate, and this is on the Property Management company if they are the provider. Directors need to remember that most property management companies carry a portfolio of properties and mistakes can happen.
So, consistency of reporting is important.
Now you are probably asking yourself what costs could and should be rising faster?
In this case, potentially a cost to the resident. Directors need to be certain that fees are where they should be. It is great to say we have the lowest fees in our class of community but if they are not keeping pace with proper funding of the reserve and yearly operations……….. there is a big problem.
So, if you are a director, you need to watch the fee structure and make sure it is where it should be. Only by monitoring the financials will you know.
Role of the accountant (auditor)
These folks are professionals……. Chartered Professional Accountants. They know the laws, the tax protocols, they can often see where money can be saved. Yet, too often they are never asked. When it is too late to right a mistake, they are too often asked to make things look good for year-end statements.
If you ask any company CEO, he/she will tell you they hardly go to lunch without talking to their accountants. In the condo world, this frequency is not necessary, but I would say that every 6 months should feature a sit down with the auditor to review operations. It is money well spent.
Role of the Property Management Company
They are the providers of the monthly financials. They pay the invoices for services and collate the expenses according to line items. It is basically a data entry task so mistakes can happen.
I remember one instance where an accounts payable number showed up on the monthly balance sheet for many months without the number changing. Not good.
The property manager should be continually looking at the Reserve Fund and comparing the numbers there to the Reserve Fund Study. This requires looking ahead to anticipate if the “study numbers” will be met. This is also where the directors need to be vigilant. If the numbers seem to be falling short, then decisions must be made. Did I hear someone say, “you can pay me now or pay me later”?
I am an advocate of properly funding the reserve. In doing so, the balance earns interest which in the long run saves the residents money. There are instances where assessments are necessary but………………
Role of Directors
So often I fear that condo directors do not feel comfortable reviewing financials. They may tend to hope that the property manager has the tiller. Oops!
Directors are responsible for “managing the affairs of the corporation;” period………full stop. As such they have a responsibility to understand the monthly financials at least on a working basis. They do not have to be accountants.
What does this entail. Review the statements before the meeting. Make comparisons with previous periods and years. Compare to budget numbers. Make notes and be ready to ask questions at the next meeting.
Don’t be afraid to invite the accountant to the next meeting to explain something that doesn’t look right or to ask his/her advice about the numbers you are concerned about.
Finally, communicate, communicate, communicate! So often, I worry that residents/owners assume when they don’t hear anything their assumption is “all is good.”
This is where semi-annual town-hall meetings come into play. These meetings can be a great opportunity to receive input on all subjects; upcoming projects, safety issues, and most of all simple “power point” financial presentations(updates) to the resident owners. It is true that not everyone will show up but over time, you will be surprised at how knowledgeable these same folks will become and in sync with decisions to be made.
Some Sample Financials
Most financial statements provide two years of data TY vs LY. Sometimes there is a budget column. So, the best course of action is to compare years, look for major changes, determine if there is a number that is consistently rising or falling without explanation. If need be, look back yet another year to see if the trend is longer. This would give three years of data.
It may take a few monthly statements to get used to doing this, but I guarantee the practice will make you comfortable.
Balance Sheet/Statement of Financial Position
This statement is a snapshot of assets (what the corporation owns) and liabilities (what is owed). There is also a “Reserve Fund Line” that provides annual contribution to the reserve and the balance in the reserve. Sometimes there will be columns for both Reserve and Operating. In our example below we will just show one total column for purposes of brevity.
So, cash is cash and receivables are monies owed to the corporation. These could be late fees, chargebacks not yet received but deemed owing. Most condo corps do not carry inventories but if you are self-managed you could have some rock salt or garden soil or whatever. The same could apply to equipment that is owned.
On the liability side, accounts payable, which are monies owed to suppliers of goods and services and not yet paid for. Periodically you may see some accruals which are usually goods or services received for which an invoice has not been received.
Then there is usually a position on the Reserve both at month end and year to date.
- Interest receivable is income from investments for the reserve. This is something that directors can verify. There should always be a list of the investments and the accompanying interest rates. These interest rates usually vary from 1% to say 3%. We used an average of 2% for our example. The point here is, if you saw a figure of interest receivable of say 25,000. in our example, that should generate a question. Don’t laugh, I have seen it happen all too often.
Comment: So there is no great cause for concern here. Cash is down a bit from year earlier but that could be one or more expenses that were up in the period. I would ask for an explanation if it is a 10% difference but not serious. Receivables are up a bit so are there some arrears in fees accumulating?
There is little in the payables to worry about they are just marginally changed and that will always be.
These numbers are made up and do not represent a known corporation. The objective was to show two things. The first is there will always be a difference because prices go up and timing can change. The second is to watch for big differences……..this is when questions should be asked.
This chart is abbreviated to save space and time. There are some big questions here. There is a substantial drop in cash year over year. What is that all about?
There is also a noticeable increase in Accounts payable. Yikes! Give or take the difference in both is almost the same. So, what happened here?
Comment: So, this corporation is about to borrow $5m to finance a major renovation. The work started in one fiscal year and would continue in the next. Someone decided that to save interest, the loan would not be initiated until the next fiscal and the corporation would use the cash reserves to pay the initial phase.
Possibly a good strategy to save interest. However, would the corporation have been better served to initiate the loan in year one if the lower interest rates could have been locked in?
Did they have to delay payment to normal suppliers to make the payment out of cash reserves. If so, does that damage the reputation of the corporation?
If this was discussed and debated at board level, then the decision might be good. The financial institution should have been consulted for input on future interest rates.
Another consideration for discussion; in these times of strange weather events, is the corporation now cash strapped if an event happens that would not be covered by insurance or that is covered but would raise rates to real expensive levels.
In many cases, financial statement scrutiny can generate not only tactical questions but strategic considerations as well. Therefore, boards need to have healthy discussions around the numbers.
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