Cash Flow Secrets: Why Your Building's Bank Balance Is Deceiving

Tracking your building’s financial health can be confusing, and one of the reasons is that your building’s bank balance doesn’t tell the whole story. In this episode, Thomas Thibodeaux, CFO at New Bedford Management, explains what items create misleading cash positions and offers some strategies boards can use to understand what is really going on. Habitat’s Carol Ott conducts the interview.

How To Run Your Building: For Co-ops and Condos

Transcript

Carol Ott: Welcome to Inside Track, a conversation with New York's leading property management executives. I'm Carol Ott with Habitat Magazine, and my guest today is Thomas Thibodeaux, CFO of New Bedford Management. Cash is king in most co-ops and condos, and many board treasurers scrutinize monthly financial reports to see which bills are being paid and when.

But understanding your building's cash flow is more complicated than just how much money is in your checking account today. Thomas, you are working with one co-op where the treasurer wants your company to pay some of its bills now, and you're advising her that there isn't enough money in their accounts to do that.

Clearly something's not being understood. Can you share what's happening there? 

Thomas Thibodeaux: Sure. Thank you for having me. So one of the issues is that a lot of times we look at their arrears reports, we look at the payables, you see the cash balance. And maybe the treasurer wants you to pay some bills because they see the cash in the bank.

And the misunderstanding happens about the actual cash flow and when the funds are needed. Sometimes there's a cyclical seasonal time when you have more money in the bank in the summer that you're gonna need during the winter, because that's when the majority of your bills are gonna come through during that heating season.

So we try to get that understanding over to our board members, and we do that through several ways. One of them is escrows we use where we will maybe take the quarterly water bill, quarterly tax bills, and we'll move that on a monthly basis and then move it back to the operating account.

Carol Ott: We will look at taxes, which is an amount that you do know how much it is. When you say escrow, if they owe $50,000 in taxes, you're dividing that by 12 or eight or whatever sum. So that's a monthly-- 

Thomas Thibodeaux: Let's say $45,000 and it's for the quarterly, and then we'll split that into three.

So $15,000 transfers every month to that escrow account, and then we transfer it back at the end of the quarter. 

Carol Ott: And it transfers from the operating account to the escrow account? 

Thomas Thibodeaux: Correct. 

Carol Ott: Okay. So for the treasurer that reads as a monthly expense, even though it's paid quarterly.

Thomas Thibodeaux: Correct. So what it does is flattens the fluctuation in the operating account. Now you have this money that's coming out on a monthly basis because, let's say you're at the end of the quarter, you see an extra $45,000 in the account. The treasurer's ready to pay bills. That $45,000 is already spoken for a quarterly tax bill.

So we can do that for water, we can do that for taxes. We even do it for insurance. We can have that money out of the operating account. It makes it a lot easier for the board and for the treasurer in particular to understand what the true cash balance is-- usable cash for paying monthly expenses.

Carol Ott: Is that something that's done in every building? Do most management companies work like this? 

Thomas Thibodeaux: I wouldn't say most do it. A standard one that is escrowed especially for the co-ops, a lot of times the mortgage company will escrow for the real estate taxes, but not some of the larger expenses. When you're looking at the larger buildings, you could have an annual tax bill that's $200,000. You could have a monthly payroll at $60,000. So it's not something that I see as often done, but our boards really appreciate it when we bring that idea to 'em. And it gives 'em a better idea what funds they have, because it can be frustrating if one month you feel like you have plenty of cash and the next month you don't, just because of some of those cyclical bills have gone out. 

Carol Ott: And I'm curious, the escrow account, that's separate from the reserve account, is that correct? 

Thomas Thibodeaux: It is separate from the reserve, but you bring up another good point. Instead of those funds hitting an operating account, now you're earning interest on that separate account because we open those escrows as money market accounts.

So now they're earning interest on that in between having to pay 'em out every quarter. 

Carol Ott: And in general if you're self-managed, you're doing this, or if you have a management company who is doing this. And if you don't have that, then your bank balance in fact, won't reflect your cash flow.

And so aside from escrowing, are there other ways that a bank balance can be set up or can be used so it does reflect cash flow? 

Thomas Thibodeaux: You know what it's the cash flow, but it's also the understanding of the fluctuation of the cash. So we even look at our budgeting. When we budget, a lot of times you'll figure out the annual budget divided by 12, and that's it.

It's not actually a cash flow of your money throughout the year. Like I was talking about before with heating season, you have about four months where a majority of that heating bill is going out. Almost all of it in those four months. So it's important to understand that. It's important to know that some bills are paid quarterly and not monthly.

It's important to insurance. We escrow for that as well. That's paid once a year; we're escrowing. So the budget process is another way we can get more transparency to our boards so they can understand when that cash flow is gonna happen. So it's not a surprise when that annual insurance bill comes.

It's not a surprise when those quarterly bills come, or the fluctuation with your operating balance with the heating season and the summer season. 

Carol Ott: I'm curious. I know this particular treasurer you were telling me about was looking at when bills were paid, and I am curious if in your experience board treasurers are that involved in seeing when bills are paid or how late they're paid or how early they're paid.

It would seem like that's not their job. 

Thomas Thibodeaux: You can't tell a client that it's not their job when it's their money and their building. So I guess we start with that. But it's a great point because some boards, they have a general understanding of it. They look at the management reports, they follow along and they trust us to pay certain bills to a certain threshold.

And no surprises. If they're over a certain amount, we will have that conversation with the board. But there are a lot of board members and treasurers that are very involved in the monthly paying of bills. And that's where the frustration comes in. If they don't understand the true cash flow, the request would be to pay these bills; let's pay these bills this month. And our job is also to protect the building, protect the board, protect the cash flow, and say we can't exactly pay that because we have this tax bill, and we have insurance in three months, and we have this water bill that's coming up and we're in the beginning of month. It's a five week payroll this month. So we have to provide that information so they can make the right decisions. Everything I talked about before helps 'em to make those decisions. If they have a clear idea of what funds they actually have to pay bills on a monthly basis. 

Carol Ott: And to get that clear idea they clearly cannot look at their bank balances 'cause that's not gonna reflect it.

Are you sending them a different kind of report that they can see what's what? Or how would a board treasurer even understand what you're talking 

Thomas Thibodeaux: about. 

You're right. And so it comes from conversations like this. We sit down with the treasurer. If someone wants to be really involved, we have these conversations.

And sometimes some of our treasurers we provide logins to the accounts so they can see the real bank balances. And everyone handles their personal finances differently. So you might have someone that, they look at the bank, if they see money, they pay bills, in their own personal life.

So trying to understand, you're running a little business here. It's not even a small business for some buildings. If you have a couple million dollar budget you can't just see money and pay. We have to look at book balances. We have outstanding checks and we have projected expenses in the future.

The good thing is that we have the blueprint. You hit the nail on the head there. We have the information, we know what's gonna happen, for the most part, to a certain amount of certainty. And so it's just conveying that and being on the same page with that treasurer.

Because what happens is if they're trying to take control and they want to pay things and we're saying we can't pay this, there becomes the frustration. And if there's a frustration of, why can't we pay this bill? The vendor is calling me personally to get paid. We just have to be on the same page.

And if we can get on the same page, then we can make the right decisions on do we have the proper money? Did we do the increase or did some expenses go up? Maybe we need a mid-year increase. Maybe we need an assessment. But those conversations are easier if the board understands what their true balances are.

Carol Ott: Do you think in your experience it's a good thing or a bad thing? I understand it's a complicated thing for you, if the board treasurer is that involved? In the actual sort of day to day, let me look at the balances. Let me understand what we can pay. Let me instruct you who we can pay. Is that a good thing or a bad thing from their perspective?

I understand it complicates your life. 

Thomas Thibodeaux: So I think it's a good thing. I think a lot of management companies would think it's a bad thing. It would probably say, the client's micromanaging us. For me, it's a good thing because the more the board understands their cash, this is the second biggest asset.

You have the building and then you have the cash. If they truly understand the cash, when we have to make hard decisions, they feel more confident about it, right? When we have to do that maintenance increase or we have to call for an assessment trying to get up to speed at that point. Why there might be a deficit or why certain funds aren't available at certain times.

That's a much more difficult conversation to have. So I think being on the same page about the financial position of the building is super important. So we try to have those day one: a new building comes on. This is where you're at right now, and we say, this is where we wanna be.

It doesn't have to be tomorrow, but, arrears, payables, cash balances, escrow accounts, all set up. This is where we want to be and this is why it's important. So we have that conversation. And once we get on that same page, it's easier going forward. And so I think it makes the boards feel more comfortable instead of the management companies taking care of it.

Because when they get asked, when something happens, they want to be able to have that confidence that they look at the numbers and they understand the numbers and also the fluctuations in the cash. 

Carol Ott: Alright. Thank you very much. It was very good insights and I hope board treasurers take this to heart.

Thanks so much for joining us, Thomas. 

Thomas Thibodeaux: Thank you.