Agenda. 10 things to look for in your co-op s financial statements

Transcription

1 10 things to look for in your co-op s financial Judy Shaw June 8, 2017 Agenda 1. Introductions 2. Choose your own adventure agenda 3. Finance items 4. Resources 5. Wrap-up 1 CHF Canada Workshop 1

2 What do you want to discuss? 1. Key finance terms 2. How do the balance sheet and income statement work? 3. Accrual accounting 4. Cash 5. Capital reserves 6. Member receivables 7. Accounts payable 8. Surplus or deficit 9. Bad debt 10. Housing charge revenue 11. Maintenance expenses 12. Comparing actuals to budget and comparative balance sheet 2 3 CHF Canada Workshop 2

3 Key financial terms: Balance sheet (1) Assets everything of financial value that the co-op owns Current assets cash or can be turned into cash soon Prepaid expenses something you have already paid for but not used yet 4 Key financial terms: Balance sheet (2) Restricted assets cash and investments you can only use for certain purposes Fixed assets physical assets that have value over time (e.g. property) Liabilities money owed to others 5 CHF Canada Workshop 3

4 Key financial terms: Balance sheet (3) Current liabilities funds due to others by the co-op within one year accounts payable accrued interest on the mortgage member deposits unearned income Long-term liabilities loans the co-op must repay over more than one year (e.g. mortgage) Accumulated deficit or surplus since the co-op began, whether revenue is more or less than expenses 6 Key financial terms: Income statement Revenue what the co-op earns Expenses the cost of the goods and services the co-op buys Surplus when revenue is greater than expenses Deficit when the revenue is less than expenses CHF Canada Workshop 4

5 Key financial terms: A few more Depreciation the amount that the value of an item, usually a fixed asset, decreases over time Budget a financial plan for the year and a guide during the year for financial performances 8 9 CHF Canada Workshop 5

6 How the work Balance sheet Assets = Liabilities + Equity (includes surplus/deficit) CHF Canada Workshop 6

7 Balance sheet Snapshot of co-op s finances at a specific point in time A = L + E Assets things the co-op owns such as cash, land, buildings, equipment - and what the co-op is owed Liabilities what the co-op owes, such as mortgage, accounts payable, member/security deposits Equity what the co-op actually owns if it sold everything difference between assets and liabilities Consider having a comparative balance sheet 1 3 CHF Canada Workshop 7

8 1 4 The income statement CHF Canada Workshop 8

9 Income statement Revenue housing charges & subsidies other (interest, laundry, etc.) - Expenses mortgage payments maintenance expenses office expenses property taxes reserve fund allocation Balance sheet Assets = Liabilities + Equity (including current surplus (or deficit) = Current surplus (or deficit) Income statement Record of income and expenses over time often a fiscal year No need for it to be more than one page Use summaries of types of expense Line items maintenance, utilities, administration etc. Can be broken down into more detailed lines Detail can also be given in schedules Will tell you if your co-op has an operating surplus or deficit Budget for the year, year- to-date (YTD) Budget, Actual YTD, Variance Difference between actual YTD and budget YTD CHF Canada Workshop 9

10 This section is your expenses - all monies which must be paid out including funding your reserves Revenues Expenses = Net Income or deficit CHF Canada Workshop 10

11 Accrual accounting: Why does it matter? If you buy an item using your credit card today, but the bill doesn t arrive until next month, is it an expense today, or next month? Accrual accounting: Why does it matter?!? Accrual accounting means recording revenues when they re earned recording expenses when they take place Otherwise, you re using a cash basis and that s not accurate. CHF Canada Workshop 11

12 Cash: Balance sheet (1) What to look for Do you have enough cash to cover your mortgage? payroll? accounts payable? monthly reserve contribution? CHF Canada Workshop 12

13 Cash: Balance sheet (2) In other words, the minimum cash balance on hand the board and manager should decide a balance between too much and cash on hand and too little to meet obligations Cash: Balance sheet (3) What to look for Operating cash declining CHF Canada Workshop 13

14 Cash: Balance sheet (4) Why is cash declining? arrears vacancies investing large bill payments CHF Canada Workshop 14

15 Replacement reserves: Balance sheet Shows on both sides of the balance sheet Assets may be called investments Liabilities and equity They should match Why on both sides? Liabilities and equity: Replacement reserve is like a debt to yourselves. It is money you must set aside for the future. Assets: This is the amount you actually do have set aside in investments to fund the replacement reserve. CHF Canada Workshop 15

16 Where do the numbers come from? (1) On the liability/equity side: Increases: From the monthly amount on the income statement From earnings/interest on your investments From extra allocations Decreases: From losses on your investments From capital expenses Where do the numbers come from? (2) On the asset side: Increases: Money actually set aside in the replacement reserve fund/investments Decreases: Money actually taken out of or redeemed from investments CHF Canada Workshop 16

17 Capital reserves: Balance sheet What to look for reserves are not fully funded declining balance (both sides) no capital plan to support the amount of reserve funding Note the balance will fluctuate as replacements and contributions to the reserve are made CHF Canada Workshop 17

18 Member receivables: Balance sheet (1) Amounts members owe to the co-op, usually for unpaid housing charges What to look for o high arrears balance o arrears growing o Does the amount on the balance sheet match the arrears report? Member receivables: Balance sheet (2) Zero arrears should always be your target Arrears should be no greater than 3% of housing charges paid by the members CHF Canada Workshop 18

19 Accounts payable: Balance sheet Money the co-op owes to others, usually suppliers of goods and services What to look for o bills going unpaid o payables aging Payables can include invoices and bills for utilities, maintenance, management services, and property taxes Current payables are payments due within 12 months or less (usually much less for co-ops) CHF Canada Workshop 19

20 Operating surplus or deficit: Income statement Surplus when revenue for the current year is greater than expenses for the current year Deficit when the revenue for the current year is less than expenses for the current year 39 CHF Canada Workshop 20

21 Current year surplus or deficit on the income statement feeds into Accumulated surplus or deficit on the balance sheet 40 OPERATING DEFICITS CAN LEAD TO AN ACCUMULATED DEFICIT The difference between an operating deficit and an accumulated deficit Income statement and balance sheet CHF Canada Workshop 21

22 Accumulated surplus or deficit: Balance sheet Since the co-op began, whether revenue is more or less than expenses Your co-op s net worth 42 From the balance sheet Accumulated surplus (beginning of the year) Operating deficit (current income statement) $12,385 (15,500) Total accumulated deficit (balance sheet) ($3,115) 43 CHF Canada Workshop 22

23 Operating deficit: Income statement Board must stay on top of this Planned deficit? Adjust operations to increase revenue or decrease expenses? Adjust budget? 44 Accumulated deficit: Balance sheet (1) Need to focus on reducing the deficit Cash may become a problem not enough to pay bills and not enough to set aside for replacement reserve Maintenance may be difficult CHF Canada Workshop 23

24 Accumulated deficit: Balance sheet (2) Getting rid of the deficit will take several years and during that time the board must make sure each budget prepared plans for an operating deficit ask every month when the financial are received if you are on track with the budget and the deficit reduction for the year achieve the surplus set out in the budget every year CHF Canada Workshop 24

25 Bad debt: Income statement (1) An expense Not money spent Money not collected Is arrears that you think you can t collect Arrears are member receivables on the balance sheet The higher the arrears, the higher bad debt Bad debt: Income statement (2) What to look for bad debt as a high percentage of member receivables bad debt increasing/over budget Causes failure to collect housing charges poor arrears management culture of non-payment CHF Canada Workshop 25

26 Housing charge revenue: Income statement (1) What to look for housing charge revenue lower than budget What is part of housing charge revenue in the budget? market housing charges on all units vacancy loss CHF Canada Workshop 26

27 Housing charge revenue Income statement (2) What to look for o housing charge revenue lower than budget o What is the only reason it can be lower than budget? o Vacancy loss higher than budget Housing charge revenue: Income statement (3) Causes of high vacancy loss poor process for filling vacancies no marketing strategy vacant units not ready for occupancy a combination of these factors member CHF Canada Workshop 27

28 Maintenance expenses: Income statement (1) What to look for maintenance budget significantly under-spent Some causes co-op is deferring maintenance use of unskilled personnel no maintenance plan Under spending on the maintenance budget is not good CHF Canada Workshop 28

29 Maintenance expenses: Income statement (2) Co-ops need: A comprehensive plan for responsive, preventive and emergency maintenance Adequate budgeting to support the plan Timely (not deferred) maintenance using skilled experts CHF Canada Workshop 29

30 Expenses compared to budget: Income statement (1) What to look for significant variances in actual spending compared to budget Expenses compared to budget: Income statement (2) Some causes a timing issue only not necessarily a concern poor budgeting process lack of spending control failure to carry out planned spending Your manager should be able to explain the variances. CHF Canada Workshop 30

31 Comparative balance sheet Balance sheet a snap shot at a moment in time Need two dates to do a comparison and see a trend Today compared to last month Today compared to this time last year Today compared to year end (after audit) Comparative balance sheet Assets May 31, 2017 Dec. 31, 2016 Current assets: Current account 49,150 32,124 Member receivables 6,001 7,115 Ex Member receivables 21,026 19,904 Subsidy receivable 10,804 44,205 Prepaid expense 2,701 2,701 HST receivable 8,335 8,010 Total current assets $98,017 $114,059 CHF Canada Workshop 31

32 Taking information back to your co-op Is there anything you think you need clarified? What is the most important thing you will take away from today s session? A resource on financial CHF Canada Workshop 32

33 Getting workshop materials CHF Canada Website AGM Conference App Time for Evaluation Evaluations on Conference App Paper copies also available in the workshop room! CHF Canada Workshop 33

34 42 CHF Canada Workshop 34

35 10 things to look for in your co-op's financial Income statement Record of income and expenses over time often a fiscal year Revenue - expenses = surplus or deficit Will tell you if your co-op has an operating surplus or deficit Balance sheet Snapshot of co-op s finances at a specific point in time A = L + E Assets things the co-op owns such as cash, land, buildings, equipment - and what the co-op is owed Liabilities what the co-op owes, such as mortgage, accounts payable, member/security deposits Equity what the co-op actually owns if it sold everything difference between assets and liabilities Acc. surplus (deficit) at the beginning of the year + Op. surplus (deficit) from income statement = Current acc. surplus (deficit) on the balance sheet

36 The ten things Balance sheet Is your amount of cash decreasing? Do you have enough invested to cover your reserve fund? Are member receivables (arrears) high? Are accounts payable high and old? Is your reserve fund enough for repairs and replacements of capital items? Do you have an accumulated deficit? Watch for changes! Income statement Is vacancy loss over budget? How do your actual expenses compare to your budget? Are you spending enough on maintenance to take of your co-op? Is bad debt high? Do you have an operating surplus or deficit? Look for trends! Ask questions!

37 C O - O P E R A T I V E H O U S I N G F E D E R A T I O N O F C A N A D A How much should the co-op have in its replacement reserve as of May 31, 2017? At the end of the last fiscal year, the audited show that the co-op should have had $460,000 invested in its replacement reserve. We know from the income statement that the co-op has allocated $100,000 to its replacement reserve so far this year. We know from our investment report that we have earned $25,000 on our investments. Rules say that the earnings on investments must go back into the replacement reserves. The co-op has had a lot of capital expenses this year: new toilets, paving, some furnaces, and new carpet in the office. The total of all these expenses is $75,000. Figure out how much the co-op should have in its replacement reserve now. Opening balance Allocations Earnings Expenses Current balance 1. Where is this number on the balance sheet? a. Assets b. Liabilities and equity c. It s not on the balance sheet, it s on the income statement. 2. Check the balance sheet, the co-op has $320,000 invested? Is the reserve fully funded? CHF Canada Workshop

38 C O - O P E R A T I V E H O U S I N G F E D E R A T I O N O F C A N A D A Reserve Funds: Asset and Equity In the chart below, decide whether the item will change the replacement reserve on the asset side or the equity side of the balance sheet. Item Asset Equity Both Interest on the replacement reserve investments Roof replacement Monthly allocation to reserve on income statement Transfer of funds from the operating account to investments Driveway paving Building condition assessment Project management fee CHF Canada Workshop