Thursday, 25 June 2020 15:37

Understanding Financial Statements, Part 2 - Using the Statements to Assess Financial Health

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In my last blog post, we looked at what the main financial statement documents are and what they mean. Now that you understand what each of the financial statements are for, this blog post looks more closely at some of the items you can expect to see on the financials, and how this information can help you assess your co-operative’s financial health. 

There are many ways to look at financials, from the basics of are you losing money or building a profitable (or at least break even) venture, to assessing where money is being spent, and whether the funds are aligning with what the budget/plan was for the organization. One thing to keep in mind is the concept of materiality. Small changes from budget to reality or from last reporting period to the current one occur often, but some changes are too small for the board to worry about. What constitutes a “small” amount is the level of materiality, which is different for every organization. For example, if your expenses are out by $10 from the budgeted amount and your overall budget is $100,000, the $10 is not material. But if your spending is $10 too much and your budget is $20, that would be material. Your auditor will usually set a level of materiality each year for your audit (sometimes in discussion with management, or the finance committee), but your board may want to actively set its’ own level of materiality for financial discussions during the year. That said, management should be able to answer board questions about any financial details, whether those are variance from the budget or from prior reporting periods. 

 

10 things to look for to asses your co-op’s financial health

 

So, let’s look at a few examples of some of the information you’ll find on your financial statements, and what kinds of information you might want to monitor, ask management about, and otherwise assess.  - With many thanks to (and much borrowing from) the Co-operative Housing Federation of Canada’s great guide to help (housing) co-op directors examine their co-op’s financial statements. This document is a great resource if you want to take a more in-depth look at this topic. 

Item

Where to Find It 

What is it? 

Some Ideas of What to Look For

Cash and Current Assets

Assets/Balance Sheet

Cash in your credit union account, investments, prepaid expenses

·       Is there enough cash to cover current financial obligations (e.g. salaries for the next month/quarter/etc.)?

·       Is the amount increasing or decreasing?

·       Is the change planned? 

Accounts Receivable

Assets/Balance Sheet

This is money that people owe you. They’ve been sent an invoice but haven’t paid yet. 

·       Increasing amounts / amounts not collected over multiple reporting periods

·       Is the amount a comfortable amount for your finances? Or is a ballooning A/R creating problems with your cash flow? 

Accounts Payable

Liabilities/Balance Sheet

This is money you owe others. Bills you’ve received but haven’t yet paid

·       Increasing amounts, especially over multiple reporting periods. These are unpaid bills, so you need enough $$ to pay this and need cash on hand to be able to pay. 

Other Payables

Liabilities/Balance Sheet

This is money you owe others. These payables could include funds owed to staff, CRA for taxes, GST, CPP, EI, etc. 

·       Depending on your billing and payment cycles, you may have something owing in some of these categories, but generally, it’s good to keep these amounts as low as possible. 

·       If the co-op ever dissolves, these funds are owed to staff, CRA, etc. and the board of directors is responsible to ensure these amounts to CRA and staff are paid. 

Retained Surplus

Equity/Balance Sheet

The surplus/profit (or loss) from prior years

·       Does the end surplus/profit amount echo the budget? If not, why not? 

·       Is there enough money here to help with unforeseen issues? If not, is there a plan in place to grow this amount for future needs? 

·       Are any of these funds earmarked for a specific purpose? 

·       Is this amount growing? 

Current Earnings or Current Surplus (or Deficit)

Equity/Balance Sheet

The surplus/profit (or loss/deficit) for the year to date or month

·       Does the amount match the budget? Why or why not? 

Revenues compared to budget

Revenues/Income Statement

How much revenue your co-op brought in vs. what the planned amount was 

·       Does the amount match the budget? Why or why not?

·       If the amount is higher, great - can you replicate that success again? What led to the increases? 

·       If the amount is lower - is it cause for concern and/or is there a plan to bring in revenue another way, to increase it in future periods, etc.? 

Expenses compared to budget

Expenses/Income Statement

Your co-op’s spending vs. what the plan was

·       Does the amount match the budget? Why or why not?

·       If the amount is higher - is there a reasonable explanation why? Is there a plan to mitigate more increases, or an increase in revenue to offset this? 

Net Income

End of the Income Statement

This is the bottom line… have you covered all your expenses? Are you generating a surplus or profit? 

·       Does the amount match the budget? Why or why not?

Within each of the above categories, there will be specific line items that will provide more details and separate your operations into function areas. On the Balance Sheet, for example, you may see information about investments, capital assets like buildings, furniture or computers, the value of vacation time owed to staff, member shares, etc. On the Income Statement, you may see revenues generated from products, programming, or service sales, merchandise, donations or grants (if you're a non-profit or community service co-operative), or interest revenue, and expenses like administrative (salaries, rent or leasing, telephones, accounting and legal fees, etc.), and the expenses of conducting your business, for example. Board members may have similar questions on specific line items that would echo the questions for the overall categories on the financial statements. 

Conclusion 

These are a few ideas to get you started on understanding the basics of what you are seeing on co-operative financial statements, and why the numbers are important. Understanding statements and how they work can help you be more effective as a board member or manager of a co-operative. There are lots of great tools, courses, and websites out there with more in-depth information if you want or need to know more. Happy learning! 

References

10 things to look for in your co-op’s financial statements, by Co-operative Housing Federation of Canada

https://chfcanada.coop/wp-content/uploads/2017/04/10-things-to-look-for-in-your-co-ops-financial-statements.pdf

What is materiality?, by Accounting Coach

https://www.accountingcoach.com/blog/what-is-materiality

 

 

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Last modified on Friday, 16 October 2020 20:13