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Subject: Working Capital v. Capital Reserve Fund
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02/11/2020 6:43 PM  
We are in Pennsylvania and live in an unincorporated HOA community. Is it a "best practice" to take money from the Capital Reserve Fund and put it into the Working Capital Fund and then transfer from Working Capital to the Operating Fund? Or is it OK to take from Capital Reserve and put it into the Working Capital fund and spend money from the Working Capital fund? The money would be spent on capital improvements that were budgeted to come from Working Capital fund. A bit confused here...

Thank you for any advice or opinion.


02/12/2020 4:34 AM  
I’m not an accounting expert, but it seems you’re confused as to what these terms really mean, so here’s what I found on Google:

Working capital is the difference between a company's current assets, such as cash, accounts receivable (customers' unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable. It’s used to cover all of a company's short-term expenses, including inventory, payments on short-term debt and operating expenses. Basically, working capital is used to keep a business operating smoothly and meet all its financial obligations within the coming year

Capital reserves – an account separate from the operating fund used to pay for major repairs and improvements to the common area, such as roofing (if you live in a high rise condo or townhomes). Usually, a portion of your assessments is deposited into reserves, which should be in some sort of interest bearing account or CD. The amount you should be depositing is usually based on the recommendations you get by commissioning a reserve study

Operating fund – the account from which you pay routine expenses like the property management company’s fee, association master insurance, landscaping, etc.

In our community, we have a reserve fund and a operating fund. When assessments are paid, we deduct the reserve fund portion and deposit it accordingly. The rest goes in the operating fund.

When the time comes for a capital expense, such as roof repair, we transfer the amount needed from reserves to the operating fund, where it’s promptly paid to the contractor.

When we prepare next year’s budget, we figure out how much we’ll put in reserves (along with looking at the reserve study to see if we're keeping up with its recommendations) and look at routine expense to see how much they’ve increased or decreased and determine how much the assessment will be.
At the end of the year, we look at the balances of both accounts – depending on how much is in the operating fund, we may transfer a portion back into reserves because we’re always trying to build that up for future expenses.

I don’t know who’s doing your accounting, but if you don’t even know what the terms mean, that can cause problems. Get an accountant to walk through this stuff with you to determine what procedures would be best for your community.
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Forums > Homeowner Association > HOA Discussions > Working Capital v. Capital Reserve Fund

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