Evaluating Monthly Financials

(00:00) Speaker: It's time for AMG's 2023 Community Leaders Series Podcast Edition. Over the last three decades, AMG has worked to make the role of community leaders more effective and less of a headache. Seminar topics are a response to what our Executive Board members have requested. And now here's your host and CEO of AMG, Paul K. Mengert.

(00:23) Paul K. Mengert: Welcome, everyone. This is AMG's 2023 Community Leaders Podcast Edition. This episode is proudly sponsored by Kerns Landscaping, a company specializing in landscape and lawn care since 1997. For more information about Kerns Landscaping and the services they provide, please visit their website at KernsLandscaping.com or give them a call at (336) 215-1131. Our topic for this episode is evaluating monthly financials and I'm pleased to have AMG's Director of Operations for the Triad area, Candace Cole, as our special guest today. Candace, welcome.

(01:05) Candace Cole: Thanks, Paul. I'm glad to be here.

(01:07) Paul K. Mengert: I want to just mention to our listeners that Candace holds the AMS and CMCA designations through the Community Association Institute. She has impeccable leadership skills that have been showcased through her time in the industry. She has received key administrative training during her time working for the United States Marine Corps. Candace, it's a true honor and pleasure to have you with us today. Thank you for taking the time to do this.

(01:35) Candace Cole: Of course, Paul, I'm more than happy to do so. And it's always great to discuss monthly financials with the board of directors.

(01:41) Paul K Mengert: Well, let's just jump right in, Candace, and begin with the major reports that I believe the directors get are a balance sheet and an income or profit and loss statement, sometimes called a change in fund balances and a list of disbursements and delinquencies. But let's just start with the balance sheet. What's that all about and what should directors or community leaders be looking for on the balance sheet?

(02:06) Candace Cole: Sure. This is usually, you know, the first page of the report that we send to directors to review. It really just kind of gives them a snapshot of how much money they have on hand at a certain time. So, it'll show their operating account and their reserve account balance, kind of like their own personal checking and savings accounts. You know, they really just need to be glancing at this, looking at this, maybe not evaluate it so closely on a month-to-month basis, but, you know, need to know if it's decreasing or increasing and why. As a personal account, we usually like to see our money going up and up and up. We're trying to accumulate wealth. But, you know, as a director for an association, large decreases are not necessarily a bad thing. You know, they could have recently re roofed their community, which is a large expenditure, but they just want to kind of know what they have, you know, on a month-to-month basis. And if they do have reserve account like they should as an association, they really maybe want to discuss having a reserve study done with their manager if that's something they haven't done in the past.

(03:14) Paul K Mengert: That's excellent, and you know, I know a lot of times directors will ask a question about what the equity or liability section of the balance sheet is all about. And in most cases, you think of that as just being the equity is the amount of equity or ownership that the members have. So, as it was best described to me, I think it was if the association was to end, the equity would be distributed among the members. And of course, associations rarely do end, but it would be the assets minus any liabilities and the rest of it would be distributed out to the members. Candace, sometimes I know you get CPAs at the end of the year when they do an audit or end of year statement, they end up making some adjustments and that will leave some unusual things on the balance sheet. What might you look at for those?

(04:08) Candace Cole: So, Paul, just real quick, typically in the balance sheet, we could see some unusual things. You know, if we hire a CPA, do audits, things of that nature, what should board members be on the lookout there?

(04:21) Paul K. Mengert: Well, first of all, Candace, I would, as you know, always encourage our community association leaders to engage an annual audit of the financials, it builds confidence among members. And it is a safeguard looking for errors. And I think it's an important balancing act of having good financial operations. So, our monthly financials at AMG are largely kept like an individual would keep their checkbook where we record money as it comes in and goes out and we tend not to record future responsibilities or liabilities onto the financial statements on a monthly basis. However, the auditors to get them to the standard that's accepted in the CPA world, they record both receivables and liabilities and those would naturally show up on the balance sheet. But AMG would either be furnishing a report of unpaid bills or a list of the receivables on a monthly basis, so it's handled just a little bit differently. Candace, thanks for raising that question. And with that, I'm going to head into the first AMG news break of the podcast. Thank you for being with us again and we'll be back after the AMG Community Leaders Series newsbreak.

(05:41) Speaker: And now it's time for your HOA Solutions Today newsbreak.

(05:45) Newsbreak: In a recent development, State Farm has made the announcement stating that they're no longer accepting applications for any insurance policies in California. Simultaneously, Allstate has taken a cautious approach by pausing new homeowners’ insurance and HOA insurance policies to safeguard the interests of existing customers. The decision comes amid the backdrop of soaring property insurance rates in California, prompting HOAs to explore alternative options like the bare walls approach. With the bare walls approach gaining traction, HOAs are contemplating a shift towards obtaining insurance that restores damaged homes to a shell condition, leaving the responsibility for the interior build outs to the homeowners. However, experts advise that before making such a significant change, HOAs should gather bare wall quotes, seek legal counsel, and take other beneficial steps to ensure a smooth transition. Typically, most condominiums insure the entire building and its contents, as stipulated by the CCRs. Additionally attached plan development HOAs, where homeowners own both the structures and the land underneath, but the homes are interconnected into a townhome or patio home style, also follow a similar practice of insuring the entire building and interiors. As the California insurance landscape evolves, HOAs are proactively assessing their options to best protect their communities and navigate the complexities of the current insurance market. The decision made by State Farm and Allstate are sending ripples through the industry, prompting a careful evaluation of insurance plans to ensure the continued well-being of homeowners and their properties.

(07:12) Paul K. Mengert: We are back. I'm Paul K. Mengert here with Candace Cole, discussing how to evaluate monthly financials. Candace, we've covered the balance sheet as we go to the profit and loss or PNL or change in fund balances, depending on what you want to call it. Tell us the key things to look for on that statement and what does it show everybody?

(07:33) Candace Cole: Sure. Really important to look at. This is a great report for directors to use on a monthly and annual basis. It really just shows what we've budgeted and what we've done in a typical time period. So, I'd like to say income expense statement. I know there's about a million names for this report, but it pretty much all shows the same thing. It'll show what we've budgeted for that month and that year to date and how much we either received or spent. This is a great tool for not only the directors but for the association manager as well. It can show us, you know, maybe we've coded something incorrectly on the, you know, when we're paying the bill just because we have a huge variance. So, it can also show us if we have no insurance payment and we've budgeted an insurance payment, that's something we really need to look at because that's something we don't want to lapse. How are our assessments doing? Are we bringing in the amount of assessments that we are supposed to be bringing in on that basis? So really what we're looking for here are just any large variances. The difference between what we've budgeted and what we've spent or what we've budgeted and what we've collected, so we can see if there's something that went wrong or something that needs to be changed.

(08:53) Paul K. Mengert: Excellent point. And you know, I have found over the years that looking for things that are under budget are as important as over budget because both of them tell you that something's not going according to plan. Now, usually it's been my experience there's a good reason why it may not have been going exactly according to plan. It may be that we budgeted for a project and rather than it starting in March, it started in April. So rather than getting paid in May, he gets paid in June. So, there's often a good reason that things would be under or over budget. But this is the, in my mind, the best barometer to use to see how we are performing compared to our plan. And with that, I want to also mention how important it is that the directors and leaders be tuned in to the budget process so that they understand what the plan is and know what to anticipate the spending for the year is going to be and I think doesn't hurt to plug reserve studies yet again to say how much money should we be putting into the reserve and that should be showing up as a on the PNL, as a monthly outgo from going from the operating fund into the reserve fund. So, make sure that when you're evaluating the budget to actual that you're looking to see are we able to fund the reserve as we have planned, if we're not able to fund it as planned, that needs to merit a serious discussion.

(10:26) Candace Cole: Exactly. And Paul, you know, talking about the budgeting process, I also you know, we've had some directors and managers, you know, use a GL code during a year that we didn't have a specific line item budgeted for because it was such a, you know, increased expense that we needed to know how are we going to budget for that next year. So, it also really helps in the future budgeting process.

(10:49) Paul K. Mengert: Absolutely. And we really welcome the community leaders to work with us in putting together the budget. AMG typically puts together a draft budget. But of course, it's one of the important responsibilities of the board to approve that budget and make sure that they've got the right plan for their community in place. Candace let's hold this thought for just a minute and go to our second newsbreak. We welcome everyone to this episode of the AMG Communities Leaders Podcast edition, and we pause for this important newsbreak.

(11:24) Speaker: And here's another HOA Solutions Today newsbreak.

(11:28) Newsbreak: New York City's impending carbon emissions law has co-op and condo boards exploring different approaches to electrification, utilizing clean electricity to meet the 2024 Caps requirement. The substantial cost of electrification, which can range from $10,000 to $40,000 per apartment when accounting for boiler replacements and other expenses, has led experts to advocate for a more gradual and cost-effective approach. Rather than immediately adopting heat electrification industry leaders emphasize starting with energy efficient measures like roof insulation. Beyond the cost concerns, co-op and condo boards have another compelling reason to embrace gradual electrification. As heat pumps and other electrification technologies become more widely adopted, economies of scale are expected to kick in, resulting in reduced cost over time. The consensus among experts is that the energy efficiency should be the primary focus, enabling co-op and condo buildings to lay the groundwork for a more sustainable future. Electrification is seen as a longer-term strategy, with multifamily buildings potentially starting by electrifying their hot water systems before addressing heating, as the technology involved is more manageable and adaptable. With carbon regulations approaching, co-op and condo boards are carefully weighing their options to strike a balance between environmental responsibility and financial practicality.

(12:43) Paul K. Mengert: Welcome back, folks. I'm Paul K. Mengert here discussing how to evaluate monthly financials with AMG’s Director of Operations for the Triad area, Candace Cole. Candace, again, I want to thank you on behalf of our clients and listeners for taking a few minutes out of your day to discuss the evaluation of the monthly financials. We've covered the balance sheet and the profit and loss statement. One of the other statements that we encourage directors to spend a good bit of time looking at is the collection report. Why is that so essential and what should they be looking for?

(13:23) Candace Cole: Thanks, Paul. Yes, this is another important report that directors should be looking at on a monthly basis. So, our collections are a delinquency report. This is going to show those accounts that are behind on their assessments. It will show how far behind they are, how long they’ve been behind, what notice they're on, if they’re, if this is their first notice, their second notice, or if they have been sent over to the attorney for collections. It shows certain things like the balance on the account as well as how many late fees that they've collected. This is another important plug for a collection policy. You know, an association should really have a policy in place for collections and, you know, an association attorney who can go ahead and help with these collections. You know, if they get too far down the process and we need to go ahead and get some help on those, this is instrumental to an association being able to run smoothly. You know, if you have $30,000 in delinquencies, there may be some projects or some things the association won't be able to do that are necessary. So hopefully once you get that, you know, good HOA attorney in place, good collection policy in place, you'll see this list get shorter and shorter every month. You know, as we work to collect those assessments that are due.

(14:46) Paul K. Mengert: Well, and typically, the budgets, as we were discussing a few minutes ago, call for bringing in X number of dollars and often call for spending X number of dollars. So, in order to do all the spending that is planned, it really requires bringing in all the money. And if you fail to bring in some of the money, it means that either the reserve or some other important spending has to be delayed or sidelined, which is a real problem. So, I also just want to mention that AMG has found over the years that the best time to collect a debt is when it's not very much past due. So typically, it's not that hard to get paid on something that's one month or two months past due, but it becomes much harder to collect a bill that is a year past due and sometimes for various reasons, often beyond anybody's control, occasionally you'll have an account that will become seriously delinquent. But one of the reasons I know that Candace encourages everybody to look at this delinquency report every month is the time to start asking questions about why an account is delinquent is when it's 1- or 2-months delinquent, not when it's 8- or 10-months delinquent. So, we’ve really encouraged people to deal with the collection sooner than later. You know, I just will say one other thing that we really found with this, it's really much better to your neighbors and fellow homeowners to be approaching them about an account that's 1 or 2 months past due when the pain of paying it is probably not that great. The problem is when it gets a year past due, a lot of times you just end up in a situation where folks just simply don't have the resources to pay an account that is that far delinquent. So, keeping them current is super important. And Candace, I know that you and your colleagues always preach that part of the part of this process is doing good education to owners on why it's important to pay and what exactly the money is going for. In many associations, we see the bulk of the money going to very concrete and understandable items such as insurance and water and grounds keeping. And we really like to see that broken down on a budget to like per home or per lot per month so that people can really understand where this money is going. And very little of it is really discretionary spending. Almost all of it becomes required spending when you really analyze it.

(17:29) Candace Cole: Exactly Paul, and I think also, you know, in today's society, so many things are electronic and automated. So, a lot of individuals will set a payment for automatic payment for six months, 12 months, and then that can suddenly end without them even realizing it. So, waiting seven, eight, nine, ten months to tell them, hey, your automatic payment stopped. It's a larger pill to swallow than the first month that it's not there. They get a notice saying, hey, you’re past due, you know, just wanted to let you know, like you were saying, it's much easier to catch it sooner rather than later.

(18:01) Paul K. Mengert: Absolutely. Well, there's one other report that I know AMG really encourages directors to look over each month, and that's the disbursements report or sometimes called the Accounts Payable report, which shows the details about what has been paid and of course would correlate back to the profit and loss statement. Do you have any quick comments on that?

(18:28) Candace Cole: Sure. You know, we just want to be looking over this as well. Make sure things are coded to the right line items. It's almost like checking your checking account to see where all your checks were written to, where everything was paid to. You know, a brief glance at this review of this will definitely help to find any outliers or, you know, something that may be wonky or, you know, we've had things paid and one month or maybe even duplicate, we paid, you know, paid twice in one month. And this is somewhere along with the income expense statement where we can really catch that and then make it right before it continues to snowball in.

(19:01) Paul K. Mengert: Candace, I know one of your roles at AMG is to be one of the people that put eyes on these financial reports each month internally before they go to our clients. And we certainly appreciate you looking at that and certainly want our clients to know that we are doing our part as the professional to review these statements, but sometimes the community leaders are the ones the closest to who the vendors are and what vendors should be paid and what work has been done. So, we see it as a true partnership to be looking over these things mutually and make sure that we have it 100% right for the community members.

(19:47) Candace Cole: I was just going to jump in, and I say, you know, and we really encourage directors to ask questions. You know, if there's something on the report that doesn't look right or they just want information about, you know, we welcome those questions and are happy to help.

(20:00) Paul K. Mengert: Absolutely. And I think we certainly have the attitude, like I said a minute ago, that this is a partnership and having this right and sometimes the community leaders really are the ones that are closest to it and have a certain piece or set of information that the manager or AMG accounting department may not have. Well, we're going to go to our final newsbreak here at the AMG Community Leaders Podcast edition, and we'll be right back for some closing thoughts from Candace Cole.

(20:32) Speaker: And now our final HOA Solutions Today newsbreak.

(20:36) Newsbreak: The rapid rise of pickleball, a sport that has experienced a surge in popularity during the pandemic, is causing a nationwide issue of noise complaints, petitions, and lawsuits from homeowners against municipalities and HOAs. The distinctive and incessant popping noise generated during pickleball games has become a point of conflict. USA pickleball reported a significant increase in players with about 4.8 million Americans engaging in the sport in 2020, marking a nearly 40% rise in just two years. The sport's accessibility and low entry barrier have contributed to its democratization, as it requires minimal investment and time to learn the rules and basic strokes. However, researchers have found that the noise produced when a solid pickleball strikes a hard plastic wiffle ball like balls can exceed 25dB louder than the sound of a tennis ball being hit by a Wilson racket. Various solutions have been proposed to mitigate the noise impact, including windscreens and wooden fence installations, free monthly pickleball workshops and reduce usage fees. However, implementing a soundproof barrier and introducing new paddles and balls designed to reduce noise may prove costly, unpopular, and impractical. As the sport continues to grow in popularity, finding a balance between accommodating players’ enthusiasm and addressing noise related concerns remains a challenge for communities across the country.

(21:50) Paul K. Mengert: We're back, everybody. I want to thank again Candace for her help in walking us through some of these financial reports. Candace, we always kind of wrap these podcasts up by trying to give the participants who are listening out there three main takeaways from today's episode. You want to go first today?

(22:09) Candace Cole: Sure. Some of these might sound silly, but number one, look at the financial statement. I know that's silly, but you have to look at it to review it. Number two, use your community manager. They look at these reports all the time. They know the ins and outs of them. So please, please use them as a resource and ask questions.

(22:32) Paul K. Mengert: My three takeaways are, in some cases, I think similar to what Candace said. Number one, spend a little bit of time to understand the reports. Once you understand them, you can really look at them pretty quickly. So, follow number one, look at them. So, I agree with Candace. Number two, familiarize yourself with each of the reports. And I think Candace has given us some good go by as to what to look for in each of them. So, once you're familiar with them, it tends to go pretty quickly to review it. And the third thing I would say is use the time you're reviewing the monthly financials to focus on the big picture for the association. Certainly, we want to make sure that all the pennies, nickels and dimes are accurately reported. But also remember that one of the primary roles of the community leaders is to be planning for the future of the association. And don't get too tied down in whether we could have gotten some service for a dollar or to less and be focused on are we saving appropriately for the future and are there any big policy things that the association can control that might help materially impact future assessments or property values? Candace, I'll give you the final thought.

(23:50) Candace Cole: Well, Paul, I'm kind of you know, I'm right there with you on these. I think the best thing that a directors can do is just familiarize themselves with the reports and like I said before, you know, use your community manager. That's what we're here for. You know, we like to help, we like to answer questions. I will say a lot of the times questions on financials are better in an email. So, we can do some research if we need to, but we'll get, you know, accounting involved if we have to. We want to make sure that everything is right and correct for your community.

(24:22) Paul K. Mengert: Candace, thank you. And thank you to everyone for tuning in to our podcast, Special Edition for the Community Leaders Series. Thanks to AMG Director of Triad Operations, Candace Cole, for speaking with us on this topic. We would also like to sincerely thank Kerns Landscaping, a company specializing in landscaping and lawn care since 1997. For more information about Kerns landscaping and the services they provide or can provide, please visit their website at www.KernsLandscaping.com or give them a call at (336) 215- 1131. I'm Paul Mengert, your host for the 2023 AMG Community Leaders Series Podcast Edition. If you would like to explore more of our podcast episodes or access additional 2023 Community Leaders Series content, please visit HOACommunityLeaders.com.

(25:22) Speaker: Thanks for listening to 2023 AMG's Community Leaders Series Podcast Edition. To find more information on this episode, please visit HOACommunityLeaders.com. This podcast is a production of BG Ad Group. All rights reserved.

• Look at the financial statements monthly.

• Take some time to understand the financial statements and familiarize yourself with each of the reports.

• Use the time you're reviewing the monthly financials to focus on the big picture for the association.

State Farm is Outta There: Insurance Company Will Stop Accepting Applications for New Properties in California

In a recent development, State Farm has made an announcement stating that they are no longer accepting applications for any insurance policies in California. Simultaneously, Allstate has taken a cautious approach by "pausing" new homeowners’ insurance and HOA insurance policies to safeguard the interests of existing customers. The decision comes amid the backdrop of soaring property insurance rates in California, prompting HOAs to explore alternative options like the "bare walls" approach. With the "bare walls" approach gaining traction, HOAs are contemplating a shift towards obtaining insurance that restores damaged homes to a shell condition, leaving the responsibility for interior buildouts to homeowners. However, experts advise that before making such a significant change, HOAs should gather bare walls quotes, seek legal counsel, and take other beneficial steps to ensure a smooth transition. Typically, most condominiums insure the entire building and its contents as stipulated by the CC&Rs. Additionally, attached, planned development HOAs, where homeowners own both the structures and the land underneath, but the homes are interconnected in a townhome or patio homestyle, also follow a similar practice of insuring the entire building and interiors. As the California insurance landscape evolves, HOAs are proactively assessing their options to best protect their communities and navigate the complexities of the current insurance market. The decisions made by State Farm and Allstate are sending ripples through the industry, prompting a careful evaluation of insurance plans to ensure the continued well-being of homeowners and their properties.

For Co-op and Condo Boards, Many Paths to Electrification

New York City's impending carbon emissions law has co-op and condo boards exploring different approaches to electrification, utilizing clean electricity to meet the 2024 caps requirement. The substantial cost of electrification, which can range from $10,000 to $40,000 per apartment when accounting for boiler replacements and other expenses, has led experts to advocate for a more gradual and cost-effective approach. Rather than immediately adopting heating electrification, industry leaders emphasize starting with energy-efficient measures like roof insulation. Beyond the cost concerns, co-op and condo boards have another compelling reason to embrace gradual electrification. As heat pumps and other electrification technologies become more widely adopted, economies of scale are expected to kick in, resulting in reduced costs over time. The consensus among experts is that energy efficiency should be the primary focus, enabling co-op and condo buildings to lay the groundwork for a more sustainable future. Electrification is seen as a longer-term strategy, with multifamily buildings potentially starting by electrifying their hot water systems before addressing heating, as the technology involved is more manageable and adaptable. With carbon regulations approaching, co-op and condo boards are carefully weighing their options to strike a balance between environmental responsibility and financial practicality.

Pickleball Noise Is Fueling Neighborhood Drama from Coast to Coast

The rapid rise of pickleball, a sport that has experienced a surge in popularity during the pandemic, is causing a nationwide issue of noise complaints, petitions, and lawsuits from homeowners against municipalities and HOAs. The distinctive and incessant popping noise generated during pickleball games has become a point of conflict. USA Pickleball reported a significant increase in players, with about 4.8 million Americans engaging in the sport in 2020, marking a nearly 40% rise in just two years. The sport's accessibility and low entry barrier have contributed to its democratization, as it requires minimal investment and time to learn the rules and basic strokes. However, researchers have found that the noise produced when a solid pickleball paddle strikes the hard plastic wiffleball-like balls can exceed 25 decibels louder than the sound of a tennis ball being hit by a Wilson racket. Various solutions have been proposed to mitigate the noise impact, including windscreen and wooden fencing installations, free monthly pickleball workshops, and reduced usage fees. However, implementing soundproof barriers and introducing new paddles and balls designed to reduce noise may prove costly, unpopular, or impractical. As the sport continues to grow in popularity, finding a balance between accommodating players' enthusiasm and addressing noise-related concerns remains a challenge for communities across the country.