Every board member should receive monthly financial reports. These typically include three key documents:

Balance Sheet (Statement of Financial Position):

• Shows what the association owns (assets) and owes (liabilities) at a point in time
• Assets include bank accounts, receivables (unpaid assessments), and prepaid expenses
• Liabilities include accounts payable, prepaid assessments, and any loans
• The difference between assets and liabilities is fund balance (equity)

Income Statement (Profit & Loss):

• Shows income and expenses over a period (typically month and year-to-date)
• Compare actual results to budget to spot variances
• Look for unusual expenses or income significantly above or below expectations

Accounts Receivable Aging:

• Shows who owes money and how long they've owed it
• Aging categories typically: current, 30 days, 60 days, 90+ days
• Watch the 90+ day category closely. These debts are hardest to collect.

One Williamson County treasurer admitted she was intimidated by financial reports for her first year on the board. "I finally asked our manager to walk me through each report line by line. Once I understood what I was looking at, I could spot problems immediately. Now I'm the one asking tough questions."

The annual budget is the board's financial roadmap. Understanding and approving a sound budget is one of your most important duties.

Budget components to understand:

• Operating expenses: Ongoing costs like landscaping, utilities, insurance, management fees
• Reserve contributions: Money set aside for future major repairs and replacements
• Assessment income: Regular assessments that fund operations and reserves

Questions to ask when reviewing budgets:

• How does this compare to last year's actual expenses?
• What's driving any significant increases?
• Is the reserve contribution adequate based on our reserve study?
• Are there any known expenses not included?
• What happens if we have an unexpected major expense?

Monthly budget monitoring:

• Compare actual spending to budget each month
• Investigate significant variances (typically 10% or more)
• Project year-end results based on current trends
• Adjust spending if necessary to stay on track

Reserves are funds set aside for major repairs and replacements: roofs, roads, pools, HVAC systems, and other components with limited lifespans. Proper reserve management prevents special assessments and protects property values.

Reserve study basics:

• A reserve study identifies major components, estimates their remaining life, and recommends funding levels
• Should be updated every 3-5 years by a qualified reserve specialist
• Tennessee doesn't require reserve studies, but smart boards conduct them anyway

Key reserve metrics:

• Percent funded: Current reserves divided by recommended reserves. 70%+ is generally considered adequate.
• Annual contribution: How much the association should add to reserves each year
• Threshold funding: Minimum needed to avoid special assessments in the near term

Reserve fund best practices:

• Keep reserve funds separate from operating accounts
• Invest reserves conservatively (CDs, money market) rather than aggressively
• Don't "borrow" from reserves for operating expenses
• Update reserve study assumptions when actual costs differ from projections

Embezzlement happens in community associations more often than boards like to admit. Internal controls protect the association and the individuals who handle money.

Essential internal controls:

• Separation of duties: The person who writes checks should not reconcile bank statements
• Dual signatures: Require two signatures on checks above a threshold (typically $5,000-$10,000)
• Bank statement review: A board member should receive and review unopened bank statements monthly
• Regular reconciliation: Bank accounts should be reconciled monthly and reviewed by the treasurer

When using a management company:

• Ensure the company has fidelity insurance covering employee dishonesty
• Request direct bank account access (read-only) to monitor activity
• Review check registers and bank reconciliations monthly
• Conduct periodic audits of association accounts

We've seen associations lose tens of thousands of dollars to trusted volunteers and employees. The common factor? Lack of oversight and controls. Trust, but verify.

When homeowners don't pay assessments, it affects everyone. The association still has bills to pay, and honest-paying owners end up covering the shortfall.

Collection policy essentials:

• Have a written collection policy that's consistently applied
• Start collection efforts early. The longer you wait, the harder recovery becomes.
• Document all collection efforts and communications
• Know your legal options: late fees, interest, liens, and foreclosure

Tennessee collection considerations:

• Your Declaration determines your authority to charge late fees and interest
• Liens can be filed for unpaid assessments but require careful legal compliance
• Foreclosure is possible but typically a last resort
• Fair Debt Collection Practices Act applies to third-party collectors

What to monitor:

• Total delinquencies as a percentage of expected income (5% or less is healthy)
• Number of accounts in each aging category
• Trend over time: are delinquencies increasing or decreasing?
• Status of accounts in collection or legal proceedings

Independent review of your financial records provides assurance that funds are being handled properly and statements are accurate.

Types of financial reviews:

• Compilation: CPA compiles financial statements from your records without verification. Lowest cost and assurance.
• Review: CPA performs limited analysis and inquiries. Moderate cost and assurance.
• Audit: CPA performs thorough testing and verification. Highest cost and assurance.

When to consider each level:

• Smaller associations often use compilations or reviews
• Larger associations or those with complex finances should consider audits
• Check your governing documents for requirements
• After any suspicion of financial irregularities, conduct an audit

The cost of an annual review or audit is minor compared to the protection it provides. It also creates accountability for whoever handles the association's finances.