Managing HOA accounts payable is part of the board’s responsibilities, but it is not always easy. In fact, mistakes can result in missed invoices, duplicate payments, and even acts of fraud. Fortunately, there are some strategies the board can employ to handle payables properly.
What is HOA Accounts Payable?
Accounts payable (AP) is a term that most people commonly associate with business. Homeowners associations and condominiums work in much the same way as corporations, managing funds, payables, and receivables.
In the context of an HOA or condo, accounts payable refers to the money the association owes. More often than not, associations hire vendors and contractors for various services, including landscaping, maintenance, and repairs.
Not many communities pay these costs in a single lump sum. In fact, most rely on an invoice process. The vendor sends their invoice to the HOA. Once the board reviews and approves this invoice, it releases the payment to the vendor, contractor, or service provider.
Boards must track their payables to ensure the association stays financially stable. Failure to pay can result in late fees, legal action, loss of service, and strained relationships with vendors. It can even give the association a bad reputation, discouraging other vendors from working with the HOA.
Who Manages the HOA Accounts Payable?
The HOA or condo board oversees the association’s operations, but finances, including AP, largely remain in the hands of the treasurer. Of course, due to a lack of time or expertise, many communities hire an HOA management company or Certified Public Accountant (CPA) to help with the job.
How Should HOA Accounts Payable Work?
Accounts payable follows a simple process. The board first receives and logs the invoice, then verifies that the work has been completed. From there, the board codes the invoice and allocates the funds for it. Following board approval, the payment is processed and recorded.
1. Invoice Receipt and Logging
When boards receive an invoice from a vendor, they must acknowledge receipt and log it. This ensures a paper trail.
Of course, board members must review the invoice thoroughly, too. Make sure that the invoice is real and accurate. Cross-reference it with the pricing structure of the contract.
2. Verification of Work Completed
Before paying the vendor, the board must check to see if the vendor has completed all deliverables. Confirm that the quality of service is up to par. Otherwise, the board can lodge a complaint and withhold the payment until the vendor corrects the mistake.
3. Invoice Coding and Budget Allocation
The next step is to invoice code and allocate funds to settle the invoice. This ensures proper expense tracking and efficient workflows. Coding is also essential for financial reporting later on.
4. Board or Manager Approval
Vendor payments often require approval from the board or manager. This limits unauthorized payments or disbursements. Board approval is often necessary for payments over a certain amount, whereas managers can proceed with payment processing for smaller balances.
5. Payment Processing
After securing approval, it is time to process the payment. This involves preparing a check, setting up an online payment, or using another payment method.
6. Recordkeeping and Financial Reporting
Once payment has been made, the board should ensure it maintains all records, including the invoice and approval. This will ensure more accurate financial reporting. In fact, Texas law requires associations to retain financial records for at least seven years (Section 209.005).
Vendors should also be made to sign an acknowledgement receipt.
How to Manage HOA Accounts Payable
Associations work with vendors and handle large sums of money regularly. To facilitate a smooth AP process and prevent misdealing, the board should employ the following strategies.
HOA Invoice Approval
Communities must establish a clear process for receiving, approving, and paying invoices. This helps avoid duplicate payments or overspending. Boards must review every invoice, match it to a work order, verify contract terms, and secure approval from the proper authority.
Some associations use management software that comes with an HOA digital invoice approval feature. This streamlines the process and allows for remote authorization.
Payment Calendar
Some vendors request payment on a regular basis rather than upon project completion. This is usually the case for ongoing services. To avoid missing a payment and cutting off essential services, boards should follow a payment calendar. Many associations even set up autopay features in their banking apps.
Internal Controls
Managing HOA accounts payable comes with certain financial risks. To mitigate these risks, boards should require:
- Separation of Duties. One director or manager should not hold too much power over the association’s finances. The person in charge of approving invoices should not be the same person in charge of disbursing payments or auditing financials.
- Two Signatories. Requiring two signatures for disbursements can limit fraud and theft, as they can keep each other in line.
- Board Approval for Large Payments. It’s a good idea to require board approval for invoices above a certain threshold.
- Secure Methods. Using secure payment methods minimizes the risk of tampering, cybercrimes, and fraud.
Regular Reporting
Boards must prepare and review HOA accounts payable reports. These reports show pending payments according to their age. By checking this report regularly, the board can prioritize invoices, monitor cash flow, and stay on top of debt management.
Common Mistakes in Accounts Payable in Homeowners Associations
Mistakes might seem innocent enough, but they can spiral and drag the association down a path to financial ruin. Here are the most common issues that boards must be wary of:
- Failing to verify invoices
- Neglecting to match payments to purchase orders
- Missing due dates
- Duplicating payments
- Paying unapproved vendors
- Failing to separate duties
- Maintaining inadequate documentation
While manual processes have long dominated, technology has since evolved to address these errors. Investing in HOA accounts payable automation can reduce human error. Computers are less likely to issue duplicates, miss due dates, and log incorrect information.
Professional Services
Board members are responsible for managing HOA accounts payable, but the job can be tricky without enough time or expertise. Relying on an HOA management company is ideal. Such a company can help the association establish internal controls, ensure on-time payments, and prepare accurate reports.
PAMco offers exceptional HOA management services to communities in Central Texas. Call us today at 512-918-8100 or contact us online to learn more!
RELATED ARTICLES:
