Working Capital

Started by PasqualeG • 9 replies • 3062 views

💬 Join us to post & get advice from 50,000 HOA & Condo leaders.

⚡ Takes 30 seconds

Already a member? Log in

PasqualeG (Maryland)
Posts: 5

Posted:

I live in a 220 unit condo that has recently been completed. During the development, all buyers were required to provide the equivalent of three months' assessments to a "working capital" account. Now that development is complete there is no more direct input into this account. My questions are: 1. at what what level should this working capital account be maintained and; 2. should there be a line item in the budget for funds to feed this account.

SusanW1 (Michigan)
Posts: 5,202

Posted:

Your board should have the answers to your questions.

Ask them: What is the plan and/or function of this fund? and How are they going to grow this fund to pay for future planned expenses?

KirkW1 (Texas)
Posts: 1,665

Posted:

If you don't already have one, this should be the start of your reserve fund. And you should consider getting a reserve study. That will tell you how much you need. And it will make recommendations on how much should be put in. The idea is to have the money to deal with the major expenses that you know will come around. For instance, if you have a club house you know that eventually you will have to replace the roof. This would be a line item and you put enough back each year that when the roof needs replaced you have the money without having a special assessment.

MaryA1 (Arizona)
Posts: 7,043

Posted:

Quote:

Posted By KirkW1 on 10/06/2008 5:47 PM
If you don't already have one, this should be the start of your reserve fund. And you should consider getting a reserve study. That will tell you how much you need. And it will make recommendations on how much should be put in. The idea is to have the money to deal with the major expenses that you know will come around. For instance, if you have a club house you know that eventually you will have to replace the roof. This would be a line item and you put enough back each year that when the roof needs replaced you have the money without having a special assessment.

Kirk,

I agree with your suggestion of starting a reserve fund with the "working capital" and to also get a reserve study. However, I'm not quite sure about your example to show a reserve fund item as a line item in the budget. This is the way my assn shows reserve deposits and expenditures (our manager's co. does our financials; our treasurer is a CPA):

Transfer to Reserves is shown as a credit to Income.
The anticipated reserve expenditures are not shown as line items in the budget. However a separate statement is prepared outlining the anticipated reserve spending for the year.

PasqualeG (Maryland)
Posts: 5

Posted:

I appreciate the responses to this question. Our association has done a reserve study and has reasonably well funded reserve account which is a budgeted item included in our assessment. The "working capital" is a separate item that shows up in the monthly balance sheet we receive from our management company. There is no line in the budget to fund this and funds for it are not included in our monthly assessment. In a business, working capital is used to pay for purchases and bills before customers have made their payments. It is also used to expand the business (the alternative being to borrow the money and we all know how hard that is at the moment!). I am trying to determine how working capital applies to a condo association. I am working with the board and the finance committee to prepare the 2009 budget and this issue is causing a lot of confusion. Any further clarification would be greatly appreciated.

SusanW1 (Michigan)
Posts: 5,202

Posted:

What is your annual budget and how large is this fund?

Keeping 2-3 month's worth of reserve money to the side is not unusual, but the amount may be suspect.

MaryA1 (Arizona)
Posts: 7,043

Posted:

Quote:

Posted By PasqualeG on 10/07/2008 4:43 AM
I appreciate the responses to this question. Our association has done a reserve study and has reasonably well funded reserve account which is a budgeted item included in our assessment. The "working capital" is a separate item that shows up in the monthly balance sheet we receive from our management company. There is no line in the budget to fund this and funds for it are not included in our monthly assessment. In a business, working capital is used to pay for purchases and bills before customers have made their payments. It is also used to expand the business (the alternative being to borrow the money and we all know how hard that is at the moment!). I am trying to determine how working capital applies to a condo association. I am working with the board and the finance committee to prepare the 2009 budget and this issue is causing a lot of confusion. Any further clarification would be greatly appreciated.

Pasquale,

What you refer to as "working capital" may more commonly be called a "contingency fund". This money should be kept in a separate savings account and used whenever an emergency situation arises or if the operating fund gets too low. It would be shown on the balance sheet as an asset under cash.

SusanW1 (Michigan)
Posts: 5,202

Posted:

3 month's assessment deposit, times 220, in a contingency fund?!

Am I getting this right?

How much is in this fund?

PasqualeG (Maryland)
Posts: 5

Posted:

Susan,

I don't know the current balance but over the three years that units were built/sold, over $100,000 was contributed. The question remains does this level of working capital need to be maintained.

SusanW1 (Michigan)
Posts: 5,202

Posted:

THAT'S why I asked you before : How much is your HOA's annual budget?

I am trying to get a finacial picture of your HOA.

Maybe this amount is reasonable, maybe not. It depends on your financial activities and your assets, (which are really liabilities.)

🎯 You've read this entire discussion

Join the conversation with 50,000 HOA & Condo Leaders:

✓ Ask follow-up questions
✓ Share your experience
✓ Get expert advice
✓ Access 350,000 discussions

Create Free Account →

⚡ Takes 30 seconds

Already a member? Log in here