016 | Know your HOA's Financial Numbers!

Russell Munz: 0:00

I have talked to many boards where they feel like they're getting delivered a package of information. That's maybe an inch or two thick of financial reports to look at before the board meeting. You know if rather than trying to impress board members by providing a stack of financial reports, doing the inverse, which is giving board members fewer financial reports that they can take action from is what should be the gold standard in this industry.

Announcer: HOA Insights: 0:32

Common Sense for Common Areas exists to help all 2 million volunteer board members nationwide have the right information at the right time to make the right decisions for their future. This podcast is sponsored by four companies that care about Board Members Association insights and marketplace, association reserves, community financials, and Kevin Davis Insurance Services. You'll find links to their websites and social media in the show notes.

Robert Nordlund: 1:02

Welcome back to common sense for common areas. I'm Robert Nordlund. And I'm here today with an expert on Community Association financial management. We've enjoyed having as a guest expert on some of our webinars, board members usually come into their leadership position with little financial training, leading to blank stares and confused facial expressions when it comes to looking at the monthly financial reports. Well, we want to eliminate that that's dangerous for any business, especially a nonprofit running on thin margins. This is episode number 16. And before I make the introduction to our guest expert, I want to encourage everyone to check out episode number 15, which was another great discussion with regular co host, Kevin Davis, on another interesting aspect of insurance coverage that will help you make better insurance related decisions at your association. So today, I'd like to introduce you to Russell Munz of community financials a firm that provides the financial management services for the self managed and professionally managed community associations all across the country committee financials efficiently and effectively takes the burden of assembling the financial reports off the shoulders of the board or management. Russell started community financials in 2018, after many years in the community management business. So it's our pleasure to welcome Russell today to common sense for common areas. Welcome to the program.

Unknown: 2:31

Thank you, Robert. And thank you for that introduction. Glad to be here.

Robert Nordlund: 2:36

Great, well, why don't you start out by telling our audience what led you to start community financials.

Russell Munz: 2:41

So I started off as a community manager worked my way up to become president and co owner of well, large regional management company. And over that period of time I met with hundreds of board members see since so that was I think, 16 and a half years. So I met a lot of board members. And I'd always say why are you looking to make a change in management companies, because at that point, I was running a management company. And they would always say, to rent two main reasons were the themes. So one, the manager net, it was poor at responding to them. So poor communication, nobody picks up the phones, nobody answers emails, and, and so there was lack of responsive communication. That was the first thing. The second thing was the financial reports either didn't show up on time, there was no transparency, there is no approval of items pride, you know, prior to them actually being money being spent. bills were getting paid late final statements to the homeowners for their dues were not sent on time, there was no follow up on late payers. And so that was they lost trust in the accounting or the financial aspect of management. And so when I left the management company, I wanted to create a business that took large management company systems and processes and solve those two problems in this industry. And so it's set out to provide very responsive communication to inquiries, and then provide transparency to allow your board to be able to look up information themselves, have that control over their funds, and by approving invoices before payments are made, and in a in a seamless way and just just get everything done on a timely basis. So I'm a former army captain, I like to have kind of everything happening, you know, in a sequence. And so I try and bring that order to what could be a chaotic process. And oftentimes, you know, not any fault of the map property managers, when they're working on it, sometimes they started off as an individual technician. And then they got into now now they've got 10, or 12, or 15 properties. And it's difficult to do the accounting as well as going on site and taking care of all the challenges. So they might need some help. And so sometimes we have customers that split it into the management from the accounting. And then we've got boards where, you know, probably a third of all homeowners associations and kind of communities are self managed. And we've got boards that are, you know, volunteer doing it themselves, but there might be burned out from lack of better word, doing that as itself. So we step in, and we help out and provide the transparent systems, upgrade their systems and provide great service because the board member has typically has a day job and as unavailable to homeowner inquiries during mostly that week.

Robert Nordlund: 6:00

Right? Well, we understand the pressure on the community association management business, because the association's themselves are nonprofits. And so the management companies compete on price. And the way they do that is by as you suggested having managers be very busy. And the managers I know are the best ones are human factors, managers, that people who know how to work with boards, how to help keep peace of the association help them to move forward effectively as a as a team. And that's not necessarily the same financial background skills that you may want to look for. And so I appreciate what's going on here. I appreciate some of those factors. And the same is true for the board members themselves, as you suggested there. They're busy, they have other jobs, they have families, they have other responsibilities, and they don't necessarily come to the table, well equipped to know, how am I going to run this? Well, if you take the value of the real estate and multimillion dollar real estate Corporation, what do I need to know? And I appreciate that, you know, I don't think I knew that you were had a background in the army. Thank you very much. And that explains your desire for order when the things together, know where your assets are, and have them accounted for those kinds of things. So yeah, and then clarity with the Association, understanding your numbers, having the mysteries disappear,

Russell Munz: 7:34

my experience, the number of times that a community in looks out, and they have a retired CPA as their treasure is very few times, right? Maybe maybe 10, maybe 10% of the communities listening are the lucky few that have somebody that know numbers. And you know, how about when they have a property manager? How many times is that property manager gonna have a background in being an accountant, right? So very few times also. And so it's trying to make the numbers tell a story and speak to the board so they can take action with what they're being shown without feeling overwhelmed, right. And that's also part of what drives us. Yeah, well,

Robert Nordlund: 8:15

even with the lucky associations that may have someone in the financial services industry, on the board, that's still just one person. And a board member is a team. So my desire would be to help with this podcast, help our board member listeners understand how can I be a little bit better? How can I be aware? And that's what I want to accomplish in the next few minutes here. So every board member is able to look at the numbers, and comprehend and know what they're telling about their association. So, Russell, lead us forward, we're talking about timeliness. Let's presume that your management company, your, your in house treasurer, whoever is doing your numbers, at least gets them there in a timely manner. What are you looking for? If you're a words, people, if you're a people person, and someone hands you the financials? Hopefully you get them a few days before the board meeting, so you're not coming in cold, but what are they and then help turn that black and white into color? How do they start to come alive?

Russell Munz: 9:19

So first, I'll say it's important for board members to and understand their financial reports, because it is going to tell that story of the community. And you know, we're all talking about organization on a fixed income, just like psi, like if any one of the homeowners or board members on fixed income, right, because earnings is not infinite. The board is dealing with a fixed budget. So the main thing that we're going to be looking at is are we collecting our money from homeowners? Are we on budget? So are our expenses tracking with what we budget you know, which we button budgeted for and so So it kind of gives a dashboard of let the flooding the board members now, do we need to put on the brakes or excesses and this one category if we take a look at the income and expense report? And do we need to do a special assessment if we went over budget for like, say snow or some storm or insurance that increase that wasn't expected when we originally did the budget last fall? So if that if the reality has changed, what do we need to do about it also? And do we need to, you know, assess people now to say that we make up the shortfall, and then we're not taking money out of the reserve account, which we're not supposed to be doing, because that's earmarked for capital improvement items. So the importance or of the financial reports as to make, you know, make better decisions as a board where they need to spend some time and attention. And so it's a there's where's the Say that again, Ella's story? Yeah, the bottom line is help the board make decisions. It's not just the numbers and you look at him, you say,

Robert Nordlund: 11:05

I saw him, let's move on. But it's the information that helps, you know, are we on track? What's the pulse of the association? Whoa, what happens when we go to the doctor's office, they put us on the scale, they check our blood pressure, they check our pulse, just that those basic things that help the doctor know, okay, what's going on with this person? And that's the financial reports for the association, right? Just the basic information? How is it doing? Okay, so walk me through? Do you want to do these one at a time? Or how do you want to take us through ritual?

Russell Munz: 11:38

Sure, well, I'll I'll first start off by saying, I have talked to many boards, where they feel like they're getting delivered a package of information that's maybe an inch or two thick of financial reports to look at before the board meeting. And then their eyes glaze over. And they don't have the time for that. And they don't know where to start, right. I've also been at organizations where I've overheard them say, well, we'll just, you know, they're asking for information. So we'll give them tons of it, when I'm sift through it. And, you know, that could be good or bad, right? Because there's plenty of information. But I think, you know, if rather than trying to impress board members by providing a stack of financial reports, doing the inverse, which is giving board members, fewer financial reports that they can take actions from is what they what should be the gold standard in this industry. And so then you take a look and see what what financial reports should they be looking at, if you have a limited amount of time as a volunteer, and you only want to take a look at a couple a handful of reports to make sure that the association is on track. And then that that health, you know, that Health Check is is, you know, the patient is still doing? Well, we're going to take a look at, I'd say the my four top reports. So it would be one, you're going to look at your balance sheet, which is going to show it's a snapshot in time it was what assets are at the association. So you can take a look and see, okay, what's my bank balance? And sometimes you can track on the balance sheet, what you have earmarked for particular capital improvement projects? Have we saved enough for those improvement projects? How much do we have in the reserves versus versus operating? So that's a great place to start. So you can see how much money you've got you have in the bank as of the end of a period. So do you compare that when you get that, let me dial this all the way back. So it may be as simple as almost four sheets of paper. And each one has a different purpose that are kind of complimentary as they come together? Yes, yes. Okay. Rather than rather than being overwhelmed by 50 sheets of paper, or 60 sheets of paper, if you if you boil it down to just these reports, you'll get a great sense. And then if you if you if questions arise, then you can go deeper into the other works that are supported in my

Robert Nordlund: 14:01

pain. Right? So with the balance sheet, it's going to tell you, how much money do we have. And I would imagine, then it's appropriate to compare it to last month to see if we have more or less are about the same. And you can take

Russell Munz: 14:13

a look at that. And also See also your liabilities too, right? So if the community has a credit card, or if they've got a loan, and so you can kind of take a look at your liabilities and your outstanding obligations. Like if you owe 50 grand to the referrer for the last payment on the roof project. Maybe it could be accounts payable outstanding as a liability if that hasn't been paid? If right, so that could be on there. But then also, you know, a few like I said, if you had a credit card with the credit card balance go up if you had a loan, the loan balance go down. So you can take you can compare those things and see how your track

Robert Nordlund: 14:46

got it. So that's the purpose of the balance sheet. Right.

Russell Munz: 14:49

Next up I would say in this was my favorite tool as a property manager and I think the best way to operate the community is to look at the comparative income and expense statement. which shows the income and the expenses were a given month versus the budget, and then the variance for that time period. And then also has the actual year to date total of all the income and expenses, as well as the budget and any variance. So you can see, for those line items, say you have the income, and you're looking at your dues you budgeted for collecting dues of $100,000 in this period, but you only have$80,000 worth of dues. So there's a variance of 20,000. And it makes you say, Okay, well, let's take a look and see why we're not on budget for collecting the money that we're supposed to be collecting. Because, again, we're

Robert Nordlund: 15:45

a fixed budget association. So if I can stop you there that yeah, maybe we'll put an asterisk on that, because that's probably going to point us to maybe the age delinquencies,

Russell Munz: 15:55

that's right, which is like one of the other four, okay, we'll get there, we'll get there.

Robert Nordlund: 15:59

But yes, visually, if I close my eyes, and I'm thinking of that income and expense statement, or I think of it as the budget, it's classically What, like maybe four columns, Budget to Actual for current month current period, and Budget to Actual for year to date.

Russell Munz: 16:17

Correct. Plus, we had maybe more two more columns for the variance for those periods. So which is the difference between the actual and the budget so that variance or difference? And so if you're at an expense, say for you look at your landscaping expense, or your water bill, and your water bill, you had budgeted for$5,000, for the year to date so far, and you were at $8,000? Well, that would be a good place for you to go and take a look and see. Okay, did the water rates increase that much? Or is it possible that we have a leak underground, or maybe somebody's toilets are running or some other place where water is leaking out, and so the money's leaking out of our budget. So it allows you to kind of research a little bit more than just decide on that. You can't believe the number of times I've had boards tell me, we, you know, we had water bills that you know, we spent twice as much on water bills, we weren't aware of it. And then this is the way that you become aware of that you look specifically if you've got old pipes that may have been maybe you had some work done at the property, a roofer drove over the a pipe, and then underground, it's leaking because you didn't see it because the roofer drove a truck over the pipe and broke and to be able to get to the to the roof. So by looking into the numbers a little bit more, you can ask some questions, and then you can catch things earlier and prevent them by the end of the year being you know, enormous expenses. Because your HOA or condo self managed and you don't want to work as hard volunteering. Are you full managed and looking to save money? Or are you looking to split the accounting from a manager's role for better service, like community financials handle the monthly accounting for you, we collect dues pay bills, produce financial reports, include portals and help with other support services, all while providing awesome service, we'd love the opportunity to help you make your community accounting stress free with our industry leading systems and expert team, visit our website community financials.com to learn more.

Robert Nordlund: 18:22

So you catch them at the current interval. You say, Oh, this is way over this way under, you see that difference between the budget and the actual. And then you can look, if you the first step would be to go to year to date. And because maybe some of them just vary from month to month. And then you can do your investigation. And that would be in the case of the water bill that went Hi, check with your landscaper or do a test on it? Is the timer broken? Is it on 24 hours. But anyway, allows you as a board member, we'll get back to the basic. It allows you as a board member to be able to make decisions, ask questions and make decisions to move the association forward.

Russell Munz: 19:00

You know, these these financial reports allow the board to make better decisions because they're informed decisions and you can make the decisions earlier not be a victim at the end of the year saying oh my gosh, we were over budget by $50,000 out of this hand. Well, you had 12 opportunities at monthly intervals to look at the but if you're if you're again, if you're overwhelmed by looking at all these other reports and you're kind of confused, it might, you know you might not take the time, but it's you know you're laser focused on looking at a handful of reports you can do that and 1015 minutes.

Robert Nordlund: 19:35

Excellent. That's what we're looking for here. So the income and expenses. Some people might call it the budget you look for the variances

Russell Munz: 19:43

and again retention of a pair the the variance for the month but you're also looking at the variance for the year if you're still on budget for the year you're you're probably in pretty good shape. You can take a look at the bottom of the month first. Excellent. I like that. So that next up that talked you know, we talked we alluded to Do it earlier, is that age delinquency report. So when we're looking at the Income and Expense Report, and we see that we're, you know, we're not collecting as much income as we budgeted for where we had like 100% of the owners all paying their fees on time. Now we look at how come, we're only, you know, 20% of the fees haven't been collected. So now we go to the age delinquency report, and we'll be able to see a list of all the owners that have haven't paid, and they'll be in different buckets. So this is, you know, their current, or they're over 30 over the over 60, or they're over 90. And you can see how long they've owed that money, and then the total. And so what, of course, what you want to see is, you don't have many that are over 90, or if they are there with your collection agency or your collections attorney to go through the that process. But your this is going to give you the board a chance to look and see okay, how are we going to use this information to then be the basis of triggering our collection policy actions. So your collection policy is going to be as kind of like the roadmap for when someone's delinquent, what you're going to do, so of course, you've got the late fee gets applied at a certain date, then maybe there's a late notice that goes out to the owner, then after a period of time, there's might be a final notice that goes out to the owner may be sent certified. And then after that, it gets handed over to the attorney or collection agency to then go through a process of you know, their process of collections. And in some cases, I would say, you know, and just just an added tip. There's the ability these days to also report delinquent owners to the credit rating agencies, which gets their attention and takes the bill for the HOA and condo from the bottom of the must pay byl to the top along with the other things like card and mortgage and credit card because they don't want to get a ding on their credit report. But right. So that's the age delinquency report, it's going to help the board have a discussion around. Okay, what are we doing for this particular homeowner that now hasn't paid for 60 days?

Robert Nordlund: 22:15

Well, hopefully, again, we're starting with the financials, we're looking for how it helps with the decisions. Hopefully, the board has made the decision in the past to have a protocol or a policy, that then they just know, which I think you use the word buckets which bucket to have it fall into. If you've got at your association, let's call it unit number 13, who is regularly 30 days late, they're just someone who just has a hard time paying their bills on time, they always get to it. But some ones are on time, some ones are not on time, you say oh, gee, it's number 13. Not a big deal. You don't worry too much about that. You start to get nervous when it gets into 60s and 90s. Again, you want to make sure that's when you have the policy in place or the procedure in place. And you have other members on your team, you spoke about the collection agency, the attorneys, those kinds of things. And that's again, just part of running a healthy association is having a team to support you as the board.

Russell Munz: 23:15

So and in some cases, I'd also say that, you know, the time the clock is ticking, because the community in some cases in some states only kind of guaranteed a certain amount of months that the that the board manual that the they can ensure that they're going to collect from the delinquent owner, because if you sit on your hands, the law will not support you. Right. Yeah, exactly. And then also, you know, so that's the first thing. And then the second thing is you get somebody sooner, that obviously the bill is smaller. So psychologically, they should be able to make make a payment somehow or come up with a payment plan before it becomes too overwhelming. And then they just throw their hands up.

Robert Nordlund: 23:58

Right? If you've got $350 A month of condo assessments, it's one thing for it to be 30 days behind or even 60 days behind your 700 bucks. But if you let it go for 10 months, you're talking about 1000s of dollars. And that's that can become a problem. And you don't want to have that problem. Yeah, you know, we wouldn't have that problem.

Russell Munz: 24:17

So if you if if you're not collecting that$4,000 is the same as you have going over budget on an expense item by $4,000. Because again, you've got a fixed budget, and you know, fixed income. And so the money's got to come from somewhere. Right? Right. You're going to save extra money by by putting off a landscaping project or something else, or, you know, what are you going to do? So you want to make sure that you're taking care of your income, but also keeping an eye on your expenses? Yeah, it's not gonna go over very well with the electric company when you say oh, we would have paid you this month, but we forgot to follow up on our delinquencies and so we'll get to that. Yeah, too late. company, they want to get paid. So make sure you protect your income stream. Of course, you know, you've seen boards that are very, you know, have a Hawkeye for like getting the lowest bid for a vendor. But they need to have that same sharp focus on this age delinquency report, because it's the same thing. Right? The bottom line is the bottom line.

Robert Nordlund: 25:20

Yeah, got to protect their income stream. Okay. You alluded to four reports, that's three so far. Balance sheet, income and expense, and age delinquencies. Number four.

Russell Munz: 25:31

All right, so I'll give a little color for this one. So another reason why I got into this business was, and when I was writing the management company, I had a major competitor, where staff members that competitor stole money from a number of communities. And it was lots and lots and lots of money. And the way that they did that was they did not provide bank statements. And they did not provide a bank reconciliation report. Those are things that, you know, of course, is built into our service in order to provide that transparency. But this particular report, the bank reconciliation report, is a report that proves that what is shown on the financial reports is what is on the bank statements. So it's a way of ensuring that you don't have fraud going on at your community. And so, you know, financial reports could be doctored. Like, in the case of job radio, for the, the example I just gave, but they can't be if you've got a record that holds you to being true, right holds you to being honest. So that print, you got my attention with preventing fraud, you want to have that report. And then the you know, the supporting document for that is the bank statement. But basically, it's pulling all the information from the bank, and the bank balance. And so if it ties the bank balance, that means that your financial reports or are proven will just

Robert Nordlund: 27:07

like you said earlier with the income and expense, if your income is low, you want to cross check that with the age delinquencies and say, oh, yeah, we have two people that are haven't been paying now that explains why our income is down, you want to have that cross checking, kind of circle of information. And then with when you're looking at your monthly statement from XYZ bank, when it has a number on it, you'd like that number to, in your words reconcile with your balance sheet. So again, they're they're cross checking in you're getting, can we use the word confirmation?

Russell Munz: 27:41

Yeah, and you're getting a peace of mind no, and had your, your, you know, there's no funny business happening and your community. Cool.

Robert Nordlund: 27:49

So we're talking about income expense, balance sheet, Asia delinquencies, and the bank reconciliation, they individually providing you different pieces of information, you can go other places to look for more detail, you can even look in each other, as some of those reports kind of cross reference each other. All for the purpose of helping the board, make better decisions, understand what's going on. Understanding the pulse of the association. Again, it's take a couple of minutes, and not all 10 minutes, it doesn't take a long time if you know what you're looking for. And I think we made it pretty clear here to help you understand what's going on at your association. So you're not relying on the manager to say everything's fine. Or one board member to say, Everything's fine.

Russell Munz: 28:36

Yeah, and when we talk about the board as a collective, and as individual members have a fiduciary responsibility to all the homeowners, which elected them to make sure that the association is is fiscally responsible, but also that the you know, the money is being used, as it says being used, and there's no funny business going on. So this fiscal responsibility is part of what the board, you know, part of their duties and responsibilities is to take a little bit of time. And hopefully, by taking a look at these four reports, it's just a little bit of time, but you're then all able to ask questions, have a meaningful conversation, whether you're, you know, you're talking to your treasurer, or you're talking to a manager where you're able to participate. And then there's also mean, legal cases where the board as the business judgment rule, and so part of business judgment is being able to read these reports, and, you know, ensure that they're operating this community and their balance sheet, their assets, their income, everything in a prudent business like what

Robert Nordlund: 29:45

what we've been able to cover here in this one podcast, should enable them to have that basic information so they can be a participating member of the financial decisions team. Absolutely. Hey, um, last question before we wrap this episode. What does getting a timely set of financial reports? mean?

Russell Munz: 30:05

Well, this kind of goes back to why I started this business in the first place. So financial reports are generated at the end of the month. Right. And so your which is best practice bookkeeping, not getting it on a quarterly basis, but getting it on a monthly basis. So you're more up to date. Given that, it by the time the month closes, and you get that bank statements of maybe investment account statements than anything else, there's, you need some time to pull all that together and do your financial reports. So typically, that's going to be a couple of weeks, you know, so you're going to already be getting old information, right? Maybe one month old information, three week old information. But that's much better than the alternative, where I've talked with board members that have received financial reports and 236 months. And I don't understand how they can operate a community just based off all the conversations we've had so far today. How can they run their community without this information? So we spoke earlier? Yeah, very important. Because you'll be able to stay on top of your collections activity, you'll be able to stay on top of whether you're on budget or not, you'll be able to see if you've got expenses, you'll be able to see if heaven forbid, there's no funny business with the money, you know what they're fine. You know, we're having manipulation with money, anywhere. So you can catch all of that. And so you need to have timely information in order to make better decisions and to operate the community. And the homeowners want to make sure that you're doing that as well, if you can have the confidence of the homeowners that the association is good in good hands with the leadership, as going to make a lot of other problems melt away. So in time on a regular basis, I imagine you're really busy the first two or three months or first two or three weeks of any month? Yes, absolutely. I would recommend that if a board is meeting, that they make sure that their meeting schedule is the third or fourth week of the month to allow the person preparing their financial reports, enough time to close the period, get all the information, do the reconciliations for not just them about all the other properties that they're working with. And that gives, you know enough time for them to be able to get the report before the meeting, hopefully by a couple of days, they can review it, and then talk about it at that board meeting.

Robert Nordlund: 32:33

Fantastic. Thank you, Russell, we're taking some of your time today to share your insights about financial reports, answering questions to help board members make better decisions stay on track. The problem is small before they get big, knowing where the money's going, Is it coming in, and where it's being spent? Sometimes I think of it as driving a car, the way we do something very complicated, but we do it regularly, all the time. We know to swing our heads we know to look at our instruments, we look at our mirrors. And I think that's what you're talking about here. Just knowing what to look for, in those four simple reports will tell us where our audience can get in touch with you. Thank you very much for our it's been a pleasure talking with you today about financials, I love the industry I love from, you know, educating board members. And so this is right up my alley, board members and other people listening to this podcast can find out more about us communityfinancials.com That's with an s at the ends of communityfinancials.com. And there's also I believe on there the top four financial reports and a little information about each one of them and some some arrows on where to look for information that they can refer to if they wanted to. They could go on to our website and get that tool for their community. So they could see some notes about what we spoke about today in the podcast, show notes and also by going to community financials. We hope you learned something today from our discussion that helps you bring common sense to your common areas. If you have a topic you'd like to have us address, or questions you'd like to have us answer in a future episode. Please call us at 805-203-3130 or email us at podcast@reservestudy.com. We look forward to having you join us for another great episode. Next week.

Announcer: 34:23

You've been listening to Hoa insights common sense for common areas, you can subscribe on any of the most popular podcasts platforms. You can also watch the show on our YouTube channel. Check the show notes for helpful links. If you liked the show, and want to support the work we do, you can do so in a number of ways. The most important thing you can do is to engage in the conversation. Email your questions or voice memos to podcast at reserves teddy.com Or leave us a voicemail at 805-203-3130 if you gain any insights from the show though, please do us a HUGE favor by sharing the show with other board members you know, you can also support us by supporting the brands that sponsor this program. Please remember that the views and opinions expressed by the podcast do not constitute legal advice. You'll want to consult your own legal counsel before making any important decisions. Finally, this podcast was expertly mixed and mastered by Stoke Light Video & Marketing. With stoke light on your team. You'll reach more customers with marketing expertise that inspires action. See the show notes to connect with stoke light