Reading the Balance Sheet — and Beyond: A Practical Guide to HOA Board Financial Responsibilities
For many HOA board members, financial oversight is one of the most critical — and least intuitive — aspects of their role. While budgets are reviewed annually, the deeper responsibility lies in understanding what financial statements are actually saying and identifying risks before they become crises.
That challenge is compounded by the fact that most board members are not finance professionals. Yet they are responsible for safeguarding the financial health of an entire resort community.
According to Clyde Gant, vice president of HOA financial strategy at Vacatia, one of the most common issues is not neglect, but lack of clarity.
“I think probably the first place to start is deficits,” Gant said. “Boards may have a clear understanding of how to put together a budget but any existing actual deficits that are on their balance sheet is often a blind spot.”
Start With the Balance Sheet — Not the Budget
Boards tend to focus on whether the current year’s budget balances. Gant said that approach can overlook a more important question: what condition the association is already in.
“What a deficit indicates is an expectation of a shortfall of cash,” he said. “That means that expenses have exceeded the maintenance fee and other revenues, and they’ve been using cash for future years in current years.”
Even a balanced operating budget for the next year does not resolve that issue. “That really is where they should start their next year’s budgeting exercise,” Gant said. “Is it positive or negative? If it’s negative, that means that you have a deficit that can run into the next fiscal year.”
Michael Taylor, vice president of property accounting and finance at Vacatia, pointed to a related warning sign. “If they ever see negative equity, that typically means you’re billing early because you don’t have the cash to get through the year,” Taylor explains.
The implication for boards is clear: the income statement shows annual performance, but the balance sheet reveals whether the association is financially stable.
Cash Flow vs. Financial Reality
A second challenge is understanding how accounting methods affect what boards are seeing. Many legacy resorts still operate on a cash basis, which records transactions only when money changes hands. While simple, it can distort financial performance.
“Just because you pay the electric bill in April doesn’t mean that it’s for April; it’s likely for March,” Taylor said. “Accrual accounting matches the month that it’s incurred, and it’s also compliant when we go into the audit.”
Without accrual accounting, boards may unknowingly rely on short-term fixes that create longer-term risk.
“If your prepaid is larger than your cash balance, that’s usually a problem,” Taylor said. “Chances are you’ve spent next year’s money in this year.”
This disconnect between cash flow and financial reality is one of the most common sources of confusion — and one of the easiest ways for problems to go undetected.
Delinquency Obscured
Delinquency is widely recognized as a challenge, but both Gant and Taylor emphasized that boards often lack full visibility into its scope.
Taylor noted that accounts receivable figures may not always reflect the true number of delinquent owners. “We have seen where accounts are seriously delinquent, some won’t even put them on their books,” he said. “You could have 5,000 unit weeks, but you may only show active owners.”
That gap makes it difficult to assess risk and plan effectively.
Boards should request detailed receivables reporting, including aging and collection status, rather than relying solely on summary financial statements.
Gant added that delinquency directly impacts overall financial health.
“It also means that you have a higher expense called bad debt expense,” he said. “That often is the largest contributor to existing deficits.”
Reserve Funds and Long-Term Planning
If deficits reflect past decisions and delinquency reflects current pressure, reserve funding represents future risk.
“I make a strong recommendation that all associations have a reserve study,” Gant said. “In many jurisdictions, it is required by law. You should refresh that reserve study at least every five to 10 years. I think five years is the sweet spot.”
Taylor emphasized that reserve studies provide the only reliable benchmark for adequacy. “That’s the only way you can really know if you’re adequately funded,” he said. “It may say you should have $3 million and then you realize you’ve only got $100,000.”
When reserves are underfunded, boards are forced into reactive decisions — often special assessments or borrowing. “Borrowing doesn’t really cure the issues,” Gant said. “It just gives you another debt to pay.”
A structured, multi-year plan that aligns reserve funding with anticipated capital needs is essential to avoiding those scenarios.
Red Flags Boards Should Not Ignore
Several indicators consistently point to deeper financial issues:
- Negative equity or balance sheet deficits
- Prepaid dues exceeding available cash
- Use of reserve funds for operating expenses
- Incomplete or unclear receivables reporting
- Rising bad debt expense
- Outdated or unused reserve studies
Running out of cash, pursuing loans or implementing large special assessments are often symptoms rather than solutions. “Come up with a plan for how you are going to dig yourself out of the hole,” Gant advises.
Advising on such plans is an integral part of the services that Vacatia provides to the resorts it serves.”
Transparency, Alignment and Fiduciary Responsibility
Financial oversight is not just about numbers. It is also about governance, specifically, transparency and alignment between boards and management. “You should be working with management that is committed to transparency,” Gant said.
Board officers should regularly review bank reconciliations and financial reports to verify accuracy. “They should be able to see that the bank agrees that that cash exists,” he said.
Equally important is engagement. “Those financial statements represent the board itself,” Gant said. “Board member share responsibility in the accurateness of those financial statements.”
While board members are generally not personally liable absent misconduct, they do carry a fiduciary duty to act in the best interests of owners. “They bear a great responsibility for the rest of that ownership,” Gant said.
In practice, that means asking questions, understanding the data and ensuring that management relationships are structured around clarity and accountability.
Judy Kenninger, principal of Kenninger Communications, has been covering the vacation real estate industry for the past two decades.
