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Subject: Cushion in the Operating Account
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FrankL10
(New Jersey)

Posts:2


09/08/2020 7:43 PM  
I'm the treasurer of a very small (7 units) HOA. Our operating budget is about 50k annually. How much of a cash cushion is reasonable-to-conservative to maintain in the operating account? (Not referring to the capital reserve). In looking on-line I don't find consensus around best practice.

Thanks for your thoughts.
MelissaP1
(Alabama)

Posts:9532


09/08/2020 7:55 PM  
Your non-profit. Your to spend as much as you collect. Otherwise it can be subject to taxes. Remember a HOA does NOT run like your home budget. It is a corporation. It is also EVERYONE's money. Which means people have a say on how it is spent via the board.

If you need a "cushion" then set up a savings account. Otherwise, try to keep close to budget you need.

Former HOA President
GenoS
(Florida)

Posts:4064


09/08/2020 10:37 PM  
I think 2 or 3 months' worth of expenses is typical.
TimB4
(Virginia)

Posts:16955


09/09/2020 2:53 AM  
As a minimum, when I was treasurer (and with board approval) I would maintain 1 month of normal bills plus any prepaid assessments (Jan assessments paid in December) to roll over into the new year. This equated to around $3K + prepays.


If assessment are mostly being paid on time and there are few delinquent accounts (delinquent being 90 days or more) then you can likely work with one month.

If there are a lot of late payments, you might need two.

If there are a lot of delinquent accounts, you might need 3 or more.

Note: normal bills are those paid monthly on a regular basis (trash/recycling, mowing, electric, water, etc.).
I did not include those bills that are not paid on a monthly basis.



Home owners are typically told to have 3-6 months of finances saved away.
The pandemic has had many say you should now have 9-12 months of finances saved.

HOAs/COAs don't really have a solid rule as there are many variables:
Amount of expenses
Number of units to share the expenses
Typical number of late payers (for your Association)
Typical number of delinquent accounts (for your Association)
etc.


TimB4
(Virginia)

Posts:16955


09/09/2020 4:17 AM  
Some info if interested:

How To Develop Your Nonprofit Operating Reserves from sgenguage

Operating Reserves for Nonprofits from Council of Nonprofits

OPERATING RESERVE POLICY TOOL KIT FOR NONPROFIT ORGANIZATIONS Sponsored by the National Center for Charitable Statistics,Center on Nonprofits and Philanthropy at the Urban Institute, and United Way Worldwide

About Operating Reserves for Nonprofits from NonProfit Accounting Basics


A past discussion on HOATalk on Operating Reserves (please do not reactivate):

Subject: Operating reserves fund a 2008 thread



ND
(PA)

Posts:494


09/09/2020 6:54 AM  
Posted By GenoS on 09/08/2020 10:37 PM
I think 2 or 3 months' worth of expenses is typical.



This was our practice as well, was disclosed yearly in tax documentation, and for the over 12 year history I had with the HOA, never saw scrutiny from the IRS. Not sure if it is a "best practice", but it seemed to work for us. Some "cushion" is understandable at all times since it highly unlikely that both income and expenses are totally consistent from month to month. And the cushion is needed to account for differences from month to month as well as unexpected situations.

Posted By MelissaP1 on 09/08/2020 7:55 PM
Your non-profit. Your to spend as much as you collect. Otherwise it can be subject to taxes. Remember a HOA does NOT run like your home budget. It is a corporation. It is also EVERYONE's money. Which means people have a say on how it is spent via the board.

If you need a "cushion" then set up a savings account. Otherwise, try to keep close to budget you need.




I disagree. Setting up a separate account (a savings acct versus a checking acct) does not suddenly transition that income/surplus to something else. It's still money in excess of what the HOA is supposed to have (according to the budgeted expenses) . . . you just propose calling it something else, which does not make it allowable. That said, rules/laws vary state by state as to what can be done with end of year surplus money . . . so best to confirm what's possible with your state's HOA laws and your own documents.
GeorgeS21
(Florida)

Posts:3113


09/09/2020 8:07 AM  
I like the percentage basis approach - in addition to simplifying late accounting at the end of the year, it ensures there is never an over expenditure situation. A month may be sufficient, but if turmoil is expected at the end of the year, consider planning for two months. Keep it simple!

Just roll it as accrued, and spend it the next year.

IMO, way too much is made of this topic.
JohnC46
(South Carolina)

Posts:9877


09/09/2020 11:42 AM  
Our budget is $95,000 per year. We list General Reserves ($5K for the year) as a line item but we do not fund it until the beginning of the next year. This is our cushion.
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