Escrow Accounts and Budgeting Strategies Aid Condo and Co-op Treasurers in Cash Flow Management

Understanding cash flow is a common challenge for co-op and condo board treasurers. As with so many things in life, timing is everything. Having cash on hand precisely when you need it is the name of the game. 

“One co-op’s treasurer wanted us to pay some bills immediately, but the funds weren’t available,” says Thomas Thibodeaux, the CFO of New Bedford Management. “It’s not just about the cash in the bank today; it’s about understanding the timing of cash needs.”

Thibodeaux emphasizes the cyclical nature of cash flow: “In the summer,” he says, “you might see a healthy bank balance, but that money is often needed for higher expenses in the winter, like heating bills. It’s crucial to manage cash flow with this seasonality in mind.”

The Power of Escrow Accounts

To ensure that funds are available when they’re needed, Thibodeaux recommends using escrow accounts. “We take predictable expenses, like quarterly taxes or water bills, and transfer funds into an escrow account monthly,” he says. “This way, when the bill is due, the money is already set aside.”

For example, a $45,000 quarterly tax bill can be divided into three monthly transfers of $15,000. “This approach flattens fluctuations in the operating account, giving treasurers a clearer picture of available funds,” Thibodeaux says. “It’s about making financial management more predictable and transparent.”

Escrow accounts are not to be confused with reserve accounts, he says: “Reserve funds are for long-term capital improvements and emergencies. Escrow accounts handle predictable, recurring expenses. Both are vital, but they serve different purposes.” And on the plus side, if escrows are held in money market accounts, the funds earn interest until needed. “This not only improves financial management,” he says, “but also maximizes the building’s earnings.” 

Budgeting for Cash Flow

Without an understanding of cash flow, boards that are very involved in the monthly payment of bills might get frustrated. Thibodeaux offers an example: “‘Let’s pay these bills this month,’ a treasurer might instruct us. Since our job is to protect the building, protect the board and protect the cash flow, we might have to respond, ‘Well, we can’t exactly pay that because we have this tax and insurance bill in three months, we have a water bill that’s coming up and we’re in the beginning of a five-week payroll month.’”

The bank balance doesn’t tell the real story of a building’s cash position.

“Annual budgets often get divided by 12, but that doesn’t reflect actual cash flow,” he says. “Bills like heating and insurance have their own cycles, and budgets should account for these fluctuations. Understanding when expenses occur helps boards plan better and avoid cash shortfalls.”

Board Treasurers Weigh In

Board treasurers play a pivotal role in financial oversight, but micromanagement can be a problem. “Some treasurers want to be involved in every detail, which can be challenging,” Thibodeaux says. “But if the treasurer truly understands the building’s cash, it makes it so much easier when tough decisions have to be made.”

For effective financial management to occur, there has to be continuous and open communication between the board and the management company. “We sit down with treasurers and board members to explain cash flow, budgeting and financial planning,” Thibodeaux says. “It’s an ongoing dialogue. When board members understand the financial intricacies, they   can lead with confidence.”