Financial Management, Budgeting, and Reserve Planning
The three pools of money
Operating funds pay recurring costs; reserve funds pay major repair and replacement of components the association owns; special assessments cover shortfalls. Commingling reserve and operating money is both a practical and a governance failure.
Budget cycle
A sound budget projects income (assessments, fees, interest, other) and expenses by line, adds a contingency, allocates any deficit to reserves, and is adopted on a schedule that lets owners receive notice before assessments change. Know the difference between cash and accrual reporting, the role of the monthly financial package (balance sheet, income statement with budget comparison, delinquency report), and who must approve assessment increases versus special assessments.
Reserve study
A reserve study has a physical analysis (component inventory, quantity, replacement cost, useful life, remaining life) and a financial analysis (funding goal and plan). Know that a study is updated annually and re-inspected periodically, and distinguish funding approaches: full/baseline funding, threshold funding, and straight-line or component funding. Percent funded compares the actual reserve balance to the fully funded balance; a low number signals risk of special assessment or deferred maintenance.
Controls and traps
Segregation of duties, dual signatures, board review of bank statements, an investment policy, and a written collections policy are exam staples. Common traps: calling a cash balance "fully funded," using straight-line funding as if it were full funding, treating a compilation as an audit, spending reserves on operating overruns, and forgetting that the reserve contribution belongs in the operating budget.
Rule of thumb: contribution = (replacement cost ÷ useful life) ÷ 12, reviewed every year the study is updated.