In this blog post, we’ll look at the two most common financial statements that boards of directors receive on a regular basis: the Balance Sheet, and the Income Statement (sometimes called a profit and loss, or P&L statement, or a Statement of Revenues, Expenditures and Surplus [Deficit]). There are a couple of other commonly used financial statements that you may see, but this post is only going to focus on these two statements, as they are the main statements that most people refer to.
Please note these ideas are just to help you get started on understanding financial statements. I am not an accountant, or any kind of certified finance expert! There are lots of great resources out there (and accounting and finance classes) that can provide you with much more in-depth information. Bookkeepers, accountants, auditors, and your local credit union are also wonderful resources to ask for help to better understand your co-operative’s financials. That said, let’s get started with some basics!
What ARE financial statements?
Financial statements give you a snapshot in time of your organization’s financial position.
The Balance Sheet and Income Statement tell you what money and assets your co-op has, what is owed to your co-op, what your co-op owes to others, how much revenue and expenses your co-op has at a particular point in time, and whether your co-op is in a position of profit (usually called surplus in co-operatives) or loss (sometimes called deficit). Your co-operative’s financial statements (primarily the Income Statement) can also help you understand how well the co-op is performing, compared to the budget. This variance to budget information is used by the board and management to assess whether revenues and expenses are in line with what the plan for the year was, and helps identify areas that need attention (e.g. large differences in revenue or expenses than what was planned for).
It is part of a board of director’s fiduciary responsibility to provide oversight. Approving the budget, and comparing the financial results to the budgetary plan is one of the main ways that boards fill this oversight role.
What is a Balance Sheet?
A co-operative balance sheet has three main sections:
- Liabilities, and
- Equity (often called members’ equity).
The Balance Sheet shows your co-operative’s net worth on a given day.
What are assets, liabilities, and equity?
- Assets are what your co-operative owns (money in the bank, computers, buildings, money owed to your co-op by other people [called accounts receivable], etc.).
- Liabilities are what your co-operative owes (mortgage, unpaid bills [called accounts payable], money received but not yet used for future projects [called deferred revenue], etc.).
- Equity is the difference between assets and liability, so that assets = liabilities + equity. Equity is typically composed of your retained surplus and membership shares, if your co-op has membership shares. If you have any internally restricted reserves, those funds would also be part of your co-op’s equity.
What is an Income Statement?
An Income Statement (sometimes called a Profit and Loss Statement) shows whether your co-operative made money, lost money or broke even during a specific period of time. It shows the money that came into your co-operative during that time, and the money that was spent, grouped into categories, by revenues and expenses.
The types of revenues and expenses your co-operative has will be specific to your co-operative and your operations. For example, revenue may be grouped into categories like membership fees or dues, product or service sales, fundraising, administrative revenues, and others. Expense categories could include cost of sales, administration (like telephones, internet, salaries, etc.), education for members, etc. The types of revenues and expenses your co-operative has will be specific to your operations. The difference between revenue and expenses is the “bottom line” and shows whether your co-operative had a surplus or deficit for the time the statement covers.
An Income Statement can cover any amount of time but is typically used in either a monthly or year to date format.
When will I see financial statements?
Depending on your co-operative and your role in your co-operative, you may be likely to see financial statements monthly, quarterly, or annually. Directors, managers, and members will see financial statements at different times. Typically, members will see the audited annual financial statements of your co-operative, at your Annual General Meeting. Your board of directors will want to see (and ask questions about, monitor, and approve or receive the financial statements) financial statements on a regular basis (usually monthly or quarterly), typically coinciding with board meetings. Your co-operative’s manager (or treasurer, if you don’t have staff) will typically view monthly financial statements. If you have a finance committee and/or a treasurer, they may view the financial statements more frequently than the board of directors.
But what does it all mean?
This blog post was just the beginning, looking at what the two main documents are in financial statements. Check out our next SCA blog post to learn more about what some of the numbers mean on the statements, and what kinds of questions board members may want to ask management about the financials.
 There are different schools of thought as to whether a board should make a motion to adopt financial statements, receive or accept the financial statements, or receive them as part of a consent agenda. Here’s a couple of ideas about that: https://www.bartleby.com/176/54.html , http://www.governinggood.ca/do-we-need-a-motion-for-that/.
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