Word to the Wise: Don’t Fake Your HOA Budget

Episode Blog

INTRO: on this week’s episode of CACM chat HOA life to hear exclusive insights and expert perspectives on community association management from leaders across California. This podcast is about the hard work that managers do to positively impact the lives of more than 15 million residents living in over 50 ,000 homeowner associations across California.

TOM: Hey, welcome back to another episode of the CACM Chat: HOA Life podcast where no HOA topic is off limits. Look in California, we’re going through a crazy time, which is called budget season. So, in recognition of the crazy budget season, today’s episode highlights budget processes, how best to present the budget, how to read and understand and present to financial state. So, my guest today is Lorena Sterling of the Community Association Financial Services in Palm Springs. Lorena, thank you very much for joining us.

LORENA: Thank you, Tom. I’m so thrilled to be able to talk to you and to our listeners about budget season. It is something we specialize in. Financial services is our expertise and we enjoy being the experts of that for all of our clients here in the desert. We manage about 80 associations here locally. We’re just trying to help everyone out that’s looking for a lead on managing their association in regard to financials. Here we are. This is what we do. And we are in the heat of the season of budgets.

TOM: So, no pun intended? Heat, Desert.

LORENA: A lot of pun intended.

TOM: So, you get it. So, the people in the desert. in California, we love you, but oh my God, you guys are getting hit double whammy, it’s, you as you said, it’s a hot season right now for budgets and prep rate, but you also get it in the weather. So, the rest of us get, you know, top 75 degrees and sunny and Richard Burroughs is like, whoa, out there. I was out there, I don’t know, like a week or two ago and the thermometer in my car said it was 112 degrees. I hit what? I don’t want to get out of my car.

LORENA: Yeah, that’s pretty normal. I don’t understand why we like it, but we love it. I do hot yoga and I’m in it.

TOM: Oh my God. Do you do hot yoga inside or outside?

LORENA: Inside.

TOM: Because you can do it outside and not have to worry about it because it’s already hot. Right. I’ve not done hot yoga, but I have done yoga. Love yoga. But I’ve not done hot yoga because I don’t like hot. So, it is what it is.

LORENA: That’s part of the self-care that we have to maintain in the industry, right?

TOM: Absolutely. Self-care in this industry is important. I did a podcast earlier on burnout and I think it’s, I think it’s mental health and self-awareness and reflection and just taking time to be you and be who you are outside of the working world, I think is extremely important for managers because we all live in a, in a very strange and difficult career. So. You had mentioned you manage. So, do you manage, manage or do you, or are you specifically financial management?

LORENA: Financial management. So, we share the management of the HOA with the property manager. We do the financial management. So, we allow the property manager to do whatever they need to do on property. We realize that a lot of our managers do struggle with the financial aspect of our communities. So, we take that over and say, let us do our part, you do your part, we come together, and we make a fine unit.

TOM: Well, I’m sure. financing financials in a homeowner association is extremely valuable for obvious reasons, not to mention, you know, it’s a requirement. Essentially, the managers and yourself as a financial management company. You all have a contractual responsibility to the client to maintain financials, to maintain budget levels and so on and so on. It’s the associations that have that fiduciary responsibility to the members. So, it has to be a good partnership. So, you phrased that extremely well. So, if you don’t mind, we’re going to jump right into it.

LORENA: Let’s go.

TOM:  So, what is the best way for a manager to prepare a budget for their client? What’s their thought process? How do you, as a financial management company, prepare budgets? Then how do you recommend a manager, whether they’re using another company for financial management or they’re doing their financing or their financial statements in -house? What’s your recommendation on that process? What does that look like to you?

LORENA: So, throughout the year, you’re coding specific invoices to general ledgers. Be very mindful when you’re doing so because that’ll lead up until the end of the year when you’re printing out first things first. You’re going to go into your budget and say what am I doing here? out a full general ledger of all of your accounts and see what you got and where you’re at. And that’s going to show whether you have coded things correctly or incorrectly. Or reclassifying items, maybe you’re over on one budget item and you want to move it over to somewhere else where it looks like sometimes there’s a slip where you put a pool contract amount into landscaping, and you didn’t catch that on a monthly financial. So that’s the opportunity to find those little nuances that’ll clear up the budget amount for the end of your fiscal year.

So that’s my first step there. And then monthly, when you’re looking at your financials, look at what your variances look at that month end. And it’ll tell you, can I spend a little, can I, do I need to scale back on expenses here or how much are we looking at for the rest of the year, what we can afford so that when you’re preparing your budget, you’re not looking at scary amounts like, gosh, we have to increase all the way up to that 20 % mark.

TOM: Ouch. Is that a normal increase? I know they’re all over the board, but.

LORENA: The last two years in big increases.

TOM: Now is that specific to insurance?

LORENA: Insurance was a big one. Here in the desert, we have a water thing. Gas increase, our SoCal gas didn’t even tell us that we were going to have an increase. In January 2023, all of a sudden, we’ve seen a 5 % increase that nobody budgeted. So, what would have been a $5 ,000 bill turned into a $10 ,000 bill and that was the whole budget.

TOM: Oh, my Goodness.

LORENA: So, the entire year, they just ran in a deficit according to their budget, but what could they do? They could maybe do a 5 % special assessment, but it was what it was, and they thought through it.

TOM: So special assessments, in my opinion, are never really good. They’re good for like an immediate need, but I think homeowners, board members, and sometimes management tend to confuse applying a special assessment thinking, we’re going to solve this financial crisis for this project or whatever the case may be by doing a special assessment without considering you actually have to collect the special assessment. So, to you, what would you recommend in that kind of a scenario if a homeowner’s association where your management company comes to you and says, “hey, you know, this association is not going to make it we have a massive project coming in. there was recently legislation passed,” well, passed, not yet signed by the governor. It came out of Orange County on a massive project for homeowner association that was delayed months and months and months because you know, massive projects and homeowner association or emergency conditions currently are very difficult to accomplish. But they wanted to do a special, one of their concepts was doing a special assessment. So, we kind of, when the Senator touched base with us, I gave them some options to try to think through it. Well, look at it this way, does the association have the reserve funds? How do you fund the reserve funds? You know, what are the other options? So, if an association or a management company came in and said, “hey, we need to do a special assessment.” What is your process? What would you recommend a manager consider going through or having a discussion with their board in order to A, approve and apply a special assessment, but then B, collect the special assessment because again, those are two completely different components.

LORENA: Yeah, they are. So, if it’s a 5 % without the membership approval, that’s the easy one, right? On our end, not for the membership who has to pay.

And you know it ranges. Say that there’s a $10 ,000 special assessment due in the next 30 days and some homeowners don’t have that $10 ,000 right up front to pay. So, the board knows their membership and what they can afford. We do have clients that say, you go, $10 ,000 check. And we do have those clients that say, gosh, we can only afford $500 a month. So, then you’re being a little creative and starting a payment plan and maybe doing four payments. But then we need to talk about, the project has to be done right away. And we’re still waiting for this money to come in. So, either you’re looking at a bank loan, if that is even something that you want to look into or tap into the reserves, is it do you have enough reserve funding? Are you replenishing your funding through your annual budget and what percentage are you really funded at? I mean I’d like to think 70 % is your good, but we do have those that are only 20 % funded.

TOM: Oh, my notes.

LORENA: So, know, 20 % funded, you’re waiting on payments to come in through homeowners, you’ve got to get the project done right now. Where do you find that money? In your couch, you know?

TOM: Well, that would be impressive. That is a little worrisome at the same time. I’m going to do a shameless plug. There is a legislative bill that we work very heavily on, the one I just mentioned out of Orange County. It’s SB 900 that if it is not signed yet by the governor, but it has passed all the committees, is pending governor’s signature or governor veto. So, I hesitate to get too into the weeds with it because it might just be vetoed and I’ve just wasted a lot of time. But that bill will change this discussion in emergency conditions. It provides a lot more opportunity for the associations board and managementization to go through this process a little easier and a little quicker and without all the bureaucracy involved. We’ll see whether that gets signed or not, but it is what it is. You also mentioned reserves. So, there’s been some discussions on legislating minimum reserve balances. It’s been difficult to get professional reservists to all agree on what, have a consensus on what that level is. So, appreciating that you’re not a professional reservist, you mentioned 70 % in funding and reserves. Is your recommendation to managers for their clients that you should have some level of reserve funding and what would that balance be? It could be what you had mentioned 30 % and that’s very, very 20 % it’s very, very scary to me. 70 % is someplace, someplace I’ve always strived to get my association, when I was on the management side, my clients too. But my average was about 50 to 55, 55 to 60, somewhere in that range. Because if you’re at 20, it’s going to take a massive special assessment to bring that up to 50 per 60%. So, what would be your normal recommendation to a homeowner association and a manager to look at when they’re looking at their reserve study?

LORNA: Usually in a reserve study, your reserve analyst gives you a 10 -year expended term. So, what do you have that needs to be repaired? What components? What is that amount for that year? And are you even feeding your reserve that much money for that year? Or is there some stuff that can be deferred? There is some. If you have a really old community, ouch, ouch, ouch, you just got to figure it out with the board, with the members.

But I do that 50 % to 70 % is a little sweet, comfortable place to be in. Like we don’t have to worry, but we should always maintain improvement and be feeding our results just a little more each year. It’s just, it goes hand in hand with your monthly dues. If your monthly dues are not increasing each year, then be scared. You know, it’s just that proactive deal with your HOA. I like to say that whenever you live in an HOA, it’s for richer or poorer. If your HOA is poor, you’re poor too. If your HOA is rich, you’re rich right there with them.

TOM: Yeah, that makes sense. That’s good analogy. So, I teed that up a little bit and you teed it up a little bit to ask the question. A lot of managers have the concept, and I know this from practical experience. I just went through it on a personal level, in a condo that I own somewhere in that association. And the manager was telling me how they created the budget, and I was like, no, don’t, no, no. But a lot of managers create a budget based on the reserve study, not necessarily solely based on operating expense plus the reserve study. So how would you recommend or what would you recommend managers focus on appreciating all factors? But would you recommend a manager focus on creating the budget based on the reserve study and the needs of the reserve study? I think it’s half and half. So, you have your operating expenses, but like I said, tie in that 10 -year expenditure, sit with your board, ask them, what are you guys planning on repairing this upcoming year?

This is how much we need to feed the reserves in order to replenish. You can’t just spend it all and think like if you’re spending 500, you can’t give it 500. You probably should be giving it a thousand. So, you’re kind of doubling up on that expense and the replenishment of the dollar value. And then also your operating expenses, talk to your vendors, ask them what the increases look like. Go negotiate. These are all your negotiating operating expenses and then you’re negotiating your reserve expenses and that kind of it’s like this symbiotic relationship with both the operating and the reserve, so you don’t find yourself with a due to from on your balance sheet and always tapping into the reserve. I have a lot of clients that you talked about insurances increasing, some clients, what they’ve done is they’ll, they have a policy that costs them 50 ,000 for the year. They don’t quite have the 50 ,000 in their operating. They’ll borrow it from the reserve and do that 12-month payback. And that’s fine as long as they’re affording that 12-month payback. But that’s some creative work there that you, that Davis Sterling allows us to do and as long as you’re paying it back and at the end of the year, if you haven’t, then you’ve got to increase your dues that much more.

TOM: Well, well said. The way I originally, I cut my teeth in Manhattan, New York in this industry. It’s a very crazy little world in and of itself. And then added in this crazy little world that we’re in. But way back then, a mentor of mine tried to explain this process of budget development and so on. Now I had a lot of rental management experience, so I understood the basics. But when it came to homeowner associations, this was where it cut my teeth. And they explained it like, look at your personal finances. If you have a savings account, you have a checking account. Apply that to a homeowner association’s accounting process. The association has an operating account, and they have reserves, which essentially is their savings account.

And you’re saying as you are individual, as an individual, you should be creating your own little personal budget going, well, I know what my expenses are. So, I, on a monthly basis, on an annual basis. So, and then I know I’d like to save for this vacation or this project or whatever the case may be. Would you agree that it’s a similar concept to a homeowner association for the benefit of the managers to try to get them to help just simplify the thought process instead of over complicating it?

LORENA: Yeah, that is simple to look at it that way. I like that you brought that up, Tom. When we get to relate our work life to our home life, it is just an easier picture to see what, how we need to reinvent the wheel in an HOA style. And numbers kind of scare people. So we kind of tend to get a little shy and not want, like, I just don’t want to deal with it. But look at it, deal with it. What do you need to spend? What do you need to contribute? And what does the future look like? You can’t just plan for this the next month or the next year. That’s why we have that 10 -year scope of work that we get to choose on what we’re going to pay for what we’re not. Not that we’re getting free work, but this year we’re doing this and in the next five years, we’ll follow through with the rest of the projects.

But I do like that. So, I think that there’s a rule of thumb to have at least three months of pay in your bank account. So maybe that’s something that you can kind of relate to the HOA industry. I would like, for all of my clients, to have at least a month and a half worth of monthly dues in their operating account.

TOM: Not collect, just to clarify, or qualify, not collected dues, but collectable. You know?

LORENA: Yeah.

Okay. All right. That’s, it’s extremely good advice. So if I created a $900 ,000 budget and it was a zero based budget, let’s just say, meaning for those listeners that didn’t understand what that means, you’re creating a budget that says your, revenue is going to equal the exact same amount of your expenses or your expenses are going to equal the exact same amount of your revenue that’s considered a zero -based budget. Let’s just say I created a $900 ,000 zero -based budget where that was where my revenue was, let’s just say. However, my expenses came in at $950 ,000. So, I’ve got a $50 ,000 negative budget. What would your recommendation be to find $50 ,000 to create or to make a zero -based budget? And I’ll tee it up just a little bit for you. Some people have suggested and actually practice, well, your first line on the cut is your reserve of contributions because that’s the easiest. So, what is your thought process?

LORENA: It is the easiest, but it’s actually the most problematic long, like long term. So, can you increase the dues? We don’t like to, but you know, they’re just feeding themselves again back for rich or poor. Can we increase the dues? Can we cut a project? Can we go back and renegotiate a contract? Do we need some type of service that is no longer serving the community? I’ve seen a lot of our clients say, the only reason why we have that contract is because that president 10 years ago had us doing this project here and nobody even uses it.

Are you feeding things that are no longer serving your community? So those are little areas to kind of, I don’t know, nip and…

TOM: Cut.

LORENA: Yeah, cut back on.

TOM: So, if you have a reserve study and it says you should have X, would you agree that you should not mess with that?

You should make sure that your reserve study has X in the budget. Your contribution has to be X. Let’s just say, again, if you want to make that $900 ,000 budget work, but part of that is $250 ,000 annually into your reserves, your recommendation, I’m assuming, would be make the $250 ,000 and find another carrier to work with to reduce those costs, the operating costs.

LORENA: I’ve played with it. I’ve done a little more, a little less or the exact amount. I’ve seen it for every budget that I’ve worked on and maybe we do give a little less, but I will tell you, we work with a lot of escrow companies and potential homeowners that know how to read these reserve studies will question it and it will affect the real estate in your community.

TOM: That’s a very good point.

LORENA: People will not want to buy into an HOA that your reserve analyst has to say on that reserve study, this HOA is underfunded by this much amount of money per homeowner. And that’ll affect a sale.

TOM: Yeah. In California, they have a statute for full disclosure and reserves for our listeners out of California. So yes, that’s an extremely, extremely important concept. One of the things you touched on was contracts. And so, I know it’s not necessarily specific to financials, but it is specific to budgeting and financials in a roundabout way. How often do you recommend a manager go out and bid out their contracts? It could be monthly contracts, could be annual, it could be their annual audit, you know, whatever the case may be. How often would you recommend managers go out and bid out their contracts from a financial perspective? I understand the fiduciary side, but from a financial perspective.

LORENA: It’s annual. You know, you want to carry that relationship with your industry partners where I respect you enough to ask you where you are at and where are we at. It’s that once a year deal that you get to make with your vendors and see them eye to eye. That’s one. That’s a relationship and it’s renewing that amount to whether they say, “hey, you know what? You guys no longer need this extra service. So, we’re going to cut back.”

I mean, that happens very far and like doesn’t really happen. But again, back to that relationship. When you build on that relationship, your vendors will be a lot more honest with you instead of I’m angry with you. You haven’t told me to give you an increase in five years. So, you know what, I quit or I’m racking you all the way up to the top of my list that I’m increasing the due for your monthly contract.

TOM: So that’s why we turn them industry partners because I’m a firm believer that managers partner with the industry partners, the vendors, they don’t just hire them. They’re partners. I understand it’s a contract, understand the contracts with the board of directors of the association. I get all that. And so those listeners who don’t get that, your managers, you’re not the contractor or you’re not the client. The client is, you’re an agent for the client.

And that’s why we term it partnership because they are a partner. So, you had mentioned planning and we’ve talked about reserves and so on. How, in your opinion, does a maintenance plan for a community association play into both the monthly operating and the annual budget and financials? hey, this month you need to address this maintenance, like an actual plan for the community.

LORENA: That’s more of a detailed oriented deal that you get to have a scope of 12 months, what we’re doing and how much we’re paying. Now you’re really becoming very detail oriented on your budget. So, you know that although your budget calls for $1 ,000 for the year, you know that, well, we’ve only spent 10 in June. Yeah, but your tree trimming is going to hit in July and that’s where all of your budget is going to go instead of, “well, in March, we still have a thousand dollars to spend.” Don’t spend that until July.

TOM: Well, that’s very valid. So, if there is a lack of a maintenance plan in a homeowner association, wouldn’t that cause a little bit of potential or probable deferred maintenance, which has a very negative effect on a homeowner association?

LORENA: Yes, so that’s all of your preventative maintenance. You’re naturally just maintaining your property. And although you’re paying an extra $500 a year or, you know, the storm drain issue that we’re seeing, we’re going into where the cities are going to have to monitor each HOA cleaning out storm drains. That’s your preventative maintenance. You want to make sure that you’re obtaining that, that maintenance for that year.

And, you know, although it’s the whole preventative maintenance subject, let’s turn to the membership. And that’s your cue on, “hey guys, we are being preventative. We are doing what it takes to maintain the community. We know what we’re doing. We got you covered,” So that you’re not being hit with other issues.

TOM: If you have a budget, you know it’s September. Everybody, at least in California, for the listeners right now, we’re recording this in the middle of September. As we said earlier, it is a very hot budget season. How does a manager create a budget now when they only have 2023 year -end financials to really pay attention to from a year -end perspective? So, they have to forecast, they have all the expenses, year -to -date actuals and then all that compared to budget and all that stuff. But how do they… How would you recommend a manager focus on the… let’s just say their budget needs to be completed for their October 3rd board meeting. So therefore, they’re going to use financials through August unless they’re really good and they can actually get a financial statement for September. But they have to actually then forecast for the rest of the year. What’s your thought process and how would you recommend a manager approach that?

LORENA:  I usually use the months prior. So, I’ll use September, October, November, December of 2023. We are systematic doing the same thing over again. I’m sure that the last four months of the year 2023 will most likely be a light for 2024. So, I’ll use a full 12 months, but just in a different year. And that’s okay. And I will even go back into 2023 to check out.

Does 2023 look similar to 2022 and 2021? And they are almost always alike. Gas goes up, November, December, January. There’s just this rhythm with all of the expenses. So, you know what to expect if you’re, look back, you have plenty of history. If you keep looking back, you’ll see the rhythm is almost alike. I’ve seen where they’re like, pennies off and I’m like, this is just so systematic. You could almost just guarantee what the expense will look like unless your utility company says they’re increasing.

TOM: I was going to ask because there is a knowledge base behind this. It’s not only a prior historical relationship or review that, as you very well put it, the likelihood is that it’s going to be very mirrored in let’s just say in 2024 in this current year.

However, knowledge base is extremely important too. You know, I’ve just been notified rates are going to increase. So, I have to take this number that I’ve already plugged in. Now I have to take that number and modify it based on the new rates, based on the usage, the historical usage. And correct me if I’m wrong, but I think it’s the same concept.

When you’re looking at pretty much any maintenance project, already, if you know, it’s at the end of September in the month of November, you’re going to have to do XYZ project or you’re going to, you’re something the board hasn’t done in the past, but they want to decorate the community for the holidays. Yeah. Well, you know that that’s going to be an added expense where it’s not going to be in the history because it was never done. So, knowledge -based budgeting is also extremely valuable.

In my very humble opinion, would you agree with that?

LORENA: Yes, it is. It’s the experience, right? The experience you’ve had across the line. And I also will go on to the CPI website, or, you know, and look at the consumer index. so, for Riverside County in June of 2024, it was like at a 4 .3%. So, I know what to expect before these guys are coming to my table.

I am trying to do the research to make sure that I’m being proactive before putting out numbers to the board. It’s really hard when you say, okay, this is your budget and you go, Oh no. I just…

TOM: That was awesome.

LORENA: …give me that back.

TOM: All right. Well, I appreciate that. So, I’m going to tap on financials real quick, if I may.

So, part of the budget process is not only creating a budget, but you have to present the budget. Creating a budget is pretty simple because this is what our expenses are, and this is what our revenue is going to be. And this is, you know, the zero-based budget or whatever the budget turns out to be. And I, by the way, for the listeners, do highly recommend providing your board of directors with a real budget. If the board comes back and says, “I want a zero-based budget,” let them tell you how to modify it. You, as managers, should be presenting a real budget.

If it shows up that you’re $100 ,000 to the negative, it shows that you’re $100 ,000 to the negative. Give the board a real budget and let them come back and say, “hey, no, this needs to be zero -based budget” and then create a committee where you guys can get together and figure out what line items you might be able to massage you a little bit to bring it down to a zero -based budget or increase the revenue. Be creative.

A lot of communities don’t have laundry rooms. lot of communities, that’s an obvious revenue. A lot of communities don’t have certain services that you could implement to increase your revenue. Always present, and correct me if I’m wrong Lorena, would you agree? Always present the real, no matter what the bottom line says, at least the initial should always be a real budget.

LORENA: Yes. And also, you were talking about revenue. I’ve seen a couple of communities that will do these cable rebates. They will include the cable cost into the dues, and they say, we’re going to get back $50 ,000 for our 2025 budget. Slow down. What does that rebate look like? Is it over a five -year contract? You need to amortize that for five years, not just throw that into 2025 and say, we’ve got $50 ,000 extra to spend in 2025.

TOM: Outstanding point. That has really skewed a lot of budgets. Another one is investments, reserves. A lot of our investment accounts were making about 5%. And so, you need to make sure that you realize when tax season comes in, you’re going to be paying about 30 % of that income.

TOM: Sure. Absolutely. So, on the revenue from your investments? Is the revenue, I’m sorry, is the investment like T -bills, CDs, or do you see associations moving towards mutual funds and the equity market, which I have not, most documents I’m aware of don’t allow that. Most documents say it needs to be in a safe and secure investment, meaning T -bills or CDs. But I have seen more or less the last maybe 10 years or so, people or associations are moving towards other investment options. What do you see?

LORENA: I’ve seen mostly its CDs, CEDARS, people are moving away from sweep accounts. And then now there’s some interest in the T -bills. But you know, what is today? September 18th. I think the Fed’s just met. Something is happening.

TOM:15 minutes. For those listeners, it’s 1045 on the on the West Coast right now and the Fed is meeting in 15 minutes, or at least they’re going to announce and supposed to announce in 15 minutes Whether they are or are not going to give a rate cut and what that percentage is going to be.

LORENA: Yeah, see we’re right on it Tom. We’re right on it. You know, there’s these things that happen all around us and that depicts on what our Boards are willing to take a risk at and you know over the last two weeks I’ve seen the banks decrease their rates at about maybe 40 points.

TOM: That’s a big change.

LORENA: Yeah, it is. But I mean, they’re still higher than what they were two years ago.

TOM: Yeah. Okay. Well, at least for now.

LORENA: For now.

TOM: So, touching on a financial statement, on financial statements, what would you, how would you recommend a manager approach? Most managers I have to qualify don’t actually create the financial statements.

Their company does, but if they’re not a direct employee of the association without a management company involved, they typically, and in those cases more times than not, they hire a firm like yourself that will do the financial management for them. So how would a manager approach be reading a financial statement or reviewing a financial statement and presenting the financial statement to the board of directors? Meaning, “hey, this month, we’re $10 ,000 over budget, and this is why.”

It’s, it’s not just to me, it’s not just “hey, this is where we are.” In my opinion, really, really, really good managers should take that extra step and say, “Hey”- well, all managers take that extra step and say, “Hey, this is why we’re over budget or under budgets.” To that matter. What, how would you recommend managers approach that?

LORENA: It’s a quick summary. Well for me, it’s a quick summary, but you say this is what you guys have in your operating. This is what you guys have in your reserve. This is what is in accounts receivable. What is owed to the association? Sometimes that’s a scary number. What we plan on doing. This is a list of all the homeowners that are aging. We have five homeowners that are out to be sent a pre -leaning letter, you know, so you’re actively working to decrease that accounts receivable. And then, so that’s your balance sheet side. You move over to your income and expense statement, and you say, okay, we’re over budget in landscaping. Like you said, why we have overspent on this category here. You guys are spending too much money on irrigation repairs.

TOM: Flower rotation.

LORENA: Yeah, that’s a good budget line item too. Don’t forget about your colored flowers for the season.

TOM: And you’ll be reminded if you do forget. Your homeowners will absolutely very quickly remind you, hey, what about the flower change?

LORENA: That’s right. That’s really important for the aesthetic.

TOM: To simplify, for the newer managers listening.

To simplify that process, most negative balances, whether it be you didn’t make enough revenue according to budget, or you over expensed compared to your budget on the expense side, there’s always a parentheses. The negative almost is always in a parenthesis, or it’s a red line. That’s why they call it you’re in the red. So, to simplify it, would you suggest that they just look at the line from a reporting standpoint?

Look at the line item and just simply say, hey, this line item is over budget or under budget in reserve. So just say for, you’re looking at that, this letter, this line item is under budget, this line item is over budget, because then they can actually address the individual line item without, I mean, and that’s a simple way of identifying those line items without having to really overanalyze an entire financial statement. So, would you agree with that level of simplification on, on reviewing and preparing to make a report on it?

LORENA: Yes, that’s where your eyes should be looking at. Those are the things that you should catch are those parentheses like you said and doing a little investigation so that you go into your board meeting and you’re not just presenting it to the treasurer to read because sometimes the treasurer doesn’t even know what they’re doing. So, you have to be that guiding source for them and say,

“Here’s the financial and treasure. By the way, I did your homework and here’s what-”

TOM: Managers, take note of what she just said. Please make sure you say that because I really value that. I apologize, I cut you off. Go ahead. I totally value that.

LORENA: Yeah, it makes you look good. It makes your company look good and the board trusts you more by doing that little piece of homework and preparing yourself to know why does that look like that. Or why are we off budget? Why have we not spent enough money? We’re always talking about why we’ve spent more money. Why have we not spent enough money? Because sometimes, I don’t know, it falls by the wayside and you’re like, my gosh, I forgot to do that preventative maintenance. We forgot to clean the storm drains. Let’s go back. Okay, I’m on it. I already scheduled the appointment.

TOM: Well, thank you. We’re about out of time. Do you have any parting words that you’d like to share with our listeners? Both board members, managers, whatever the case may be.

LORENA: Two things. Don’t fake your budget. This is not one of those fake it till you make it because you will feel the repercussions of it later down the year when you’re having to figure out a special assessment or fight with your membership about it. Cause that will come to the table and let the experts do their job. They know what they’re doing, and they will give you fine guidance and trust them.

Continue to make those trusting relationships with your business partners because those will make your job easier.

TOM: Well, thank you Lorena Sterling with Community Association Financial Services Palm Springs. Thank you so much for joining us. I do greatly appreciate your time I know how valuable and limited time is during this very, very busy and hot budget season, both in Palm Springs and just generally. but I want to say thank you very much for joining us. To our listeners, thank you very much for listening in. please send any comments, stories, if you have a fun story or a scary story, or just, you just have some questions or comments, on the financial side, you maybe you want to ask Lorena something specifically on financials. Feel free to email us at podcast@cacm.org. We’ll make sure that she gets that, and we would love to hear from you anyway. So, Lorena, thank you so much.

LORENA: Thank you, Tom. I appreciate your time.

TOM: All right. Watch for us next time, folks. Thanks.

OUTRO: And that concludes this week’s episode of CACM Chat, HOA Life. Have questions you want answered? Send them to podcast@cacm.org and we’ll address them in an upcoming episode. Make sure to regularly check out our website at cacm.org. And don’t forget to join our rapidly expanding social media community. Just follow @CACMChat on LinkedIn, Facebook, Instagram, and X. Thanks for joining me.