May 7th, 2015 by Aegis CMS
Virtually every Association has the need to purchase goods and supplies. From light bulbs to AC filters to fuel and tools of all nature, the Board is often challenged by the most effective, timely, and economical way to procure those goods and supplies. Some Associations rely on their vendors to purchase the materials they require, which may or may not include a markup by the vendor, using whatever source and price the vendor chooses. Some Associations calculate the total purchase and issue a check in advance. Some Community Managers or Board members use their own money and rely on a timely reimbursement. Any of the above solutions either delay necessary purchases, adds unnecessary expense, creates a lurking and ugly financial dispute, or all of the above.
What is clear is that the way that consumers make purchases is changing and will continue to change. While names like Google and Apple work towards novel solutions to these common problems and others such as identity theft an cyber crime, Associations today are left with very traditional means by which to pay for the purchases they make.
Petty cash is just that, cash on hand for petty expenses. Cash is supplied to a responsible party and each subsequent expense is logged and backed up a receipt. Either at regular intervals or when cash is depleted, the user submits a petty cash report which results in the supply of cash being replenished by the amount of the approved expenses.
Very convenient as cash is accepted everywhere goods and supplies are sold, even when purchases from private parties. The financial exposure is limited to the cash on hand. Petty cash can be easily integrated with a work order system.
Cash must be protected as there is no fraud protection available. Recordkeeping can be cumbersome as retaining receipts is very important. Depending on the needs of the Association, the petty cash account may be significant. Cash cannot be used for online transactions.
Traditional credit cards offer a pre-approved spending or credit limit along with card(s) to be issued to authorized users.
Credit cards are extremely convenient and can be used most anywhere including online vendors. Liability for unauthorized charges is capped at $50 and most often these charges are reversed quite rapidly after they are reported to the card issuer. Some cards include features such as purchase order tracking and authorization and online access to the subject receipts and invoices. Some credit cards can also be leveraged by using available cash rebate programs. Credit card charges can be integrated into a work order system.
Although not impossible, a traditional credit card can be very difficult for an Association to obtain. Most often, the issuer requires the personal guaranty of a Board officer. Because of the temporary nature of Board service, most are unwilling to place their personal credit and identity at risk for purchase they don’t fully control. If the Association is unable to pay the balance in full each month, it exposes itself to meaningful interest charges. Most private parties cannot accept credit card transactions. Credit cards must be managed as user change.
Debit cards act like a credit card but are backed up by cash in a bank account tied to the card. Debit cards are issued directly by banks and charges are debited directly from the bank account.
The financial exposure to fraud and inappropriate expenses is limited to the cash deposited in the bank account. The card is convenient and acts like a credit card in most cases, including online transactions. The card is often PIN protected to avoid unauthorized use. Users can shop for the best price available.
Debit card bank accounts are usually subject to a service charge if the balance falls below a predetermined minimum balance, which requires constant attention. This minimum balance may be high, thereby exposing more assets to fraud and loss. While a credit card user is protected from fraudulent charges over $50, a debit card is treated differently and the account holder may be exposed to the loss of all the money in the account, making online transactions particularly risky. Private parties will not accept debit card transactions. Like a credit card, a debit card requires diligence to ensure that cards are managed as users change.
Retail Credit Accounts
Most home improvement stores, commercial supply houses, and even smaller specialized retail stores offer in house credit accounts. Authorized users can purchase supplies on the account and each month the invoices are provided to the Association.
Very convenient and can be integrated into a work order system. Larger retailers offer delivery options, reducing the time, expense, and liability associated with trips to the supplier. Home improvement stores offer a wide selection which meets the needs of most Associations.
Users must retain copies of every receipt and compare to the monthly statement. Unapproved charges must be disputed. Purchases are limited to the particular retail outlet issuing the card. Cards must be managed as authorized users change. Unless the balance is paid in full each month, interest charges are usually higher than traditional credit cards. Cards must be managed as authorized users change.
So why doesn’t our management company allow the Association to purchase supplies using their credit? Most management companies are unwilling to arrange for credit accounts that are in the name of the management company, but used for purposes specific to their clients and there are various reasons why. Primarily, especially as the management company grows, they may simply not have the means to carry the credit burden for more and more clients. There may also be concerns surrounding commingling the management company assets with that of the Association, which may be unlawful in some states. The management company may also be fearful of a bill arriving for an Association purchase after that Association is no longer a client, and finds itself unable to secure reimbursement. Lastly, a management company will share all of the same concerns as an ordinary consumer would regarding fraud and accurate expense tracking, if numerous individuals are making numerous purchases for numerous Associations.
Every Association must arrange for the solution that best fits their needs. Whichever payment option it chooses, it must develop a policy that allows for appropriate security, expense approval measures, and accounting/recordkeeping. At a minimum, an effective solution will include information about who can incur expenses, where the card/cash will be safely stored, how the expenses will be reported and integrate with any work order system, and who will be responsible for adding and removing authorized users from credit account profiles. Further, cyber crime and fraud can originate from any source, online or otherwise. It is important, if the Association is to utilize traditional credit in any form, that it monitors the account and takes necessary precautions against theft and fraud. The Board has the duty to protect the assets of the Association and by taking customary precautions it can take advantage of the marketplace in order to make the most of its resources.