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 Statements Presenter: Andrew Sitko June 7, 2018 AGENDA 1. Introduction/Overview 2. The Financial Statement Dictionary 3. The Balance Sheet 4. The Income Statement things to look for in your co-op s financial 6. Review and conclusion 2 CHF Canada Workshop 1

2 WORKSHOP OBJECTIVES At the end of this workshop participants should be able to: Understand the importance of a balance sheet and income statement for a co-op Identify 10 key indicators of financial health 3 A SUCCESSFUL CO-OP HAS: Sound Management A successful co-op understands that sound, expert management is key to operating successfully and offering members good service. It consistently achieves the results detailed in the core management standards adopted by CHF Canada s members. 4 CHF Canada Workshop 2

3 THE TOOLKIT Sound Management Getting Management Right The Sound Management Test 10 things to look for on your Co-op s Financial Statements 5 A RESOURCE ON FINANCIAL STATEMENTS 6 CHF Canada Workshop 3

4 A FEW QUESTIONS BEFORE WE START: What frightens/confuses you about financial? How often do you receive them? Are they explained to you? By whom? 7 WHO NEEDS TO UNDERSTAND THE FINANCIAL STATEMENTS IN YOUR CO-OP? Your manager The board of directors The members Understanding the co-op s finances is both a management and governance responsibility for directors, members and managers. 8 CHF Canada Workshop 4

5 THE FINANCIAL STATEMENT DICTIONARY SPEAKING THE LANGUAGE 10 CHF Canada Workshop 5

6 ASSETS - DEFINITIONS Assets everything of financial value that the co-op owns Current assets cash or can be turned into cash soon (within one year) Prepaid expenses something you have already paid for but not used yet Restricted assets cash and investments you can only use for certain purposes Capital (fixed) assets assets (usually physical) that have value over a long time (e.g. buildings) 11 LIABILITIES - DEFINITIONS Liabilities what the co-op owes to others Current liabilities what the co-op owes to others and must pay within one year o accounts payable o accrued interest on the mortgage o unearned income Long-term liabilities money the co-op must repay over more than one year (e.g. mortgage) 12 CHF Canada Workshop 6

7 Revenue INCOME - DEFINITIONS what the co-op earns from providing housing and other activities Expenses costs to operate the co-op Surplus or deficit the difference between the total revenues and the total expenses for a period of time surplus = revenues are greater than expenses deficit = expenses are greater than revenues 13 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? 14 CHF Canada Workshop 7

8 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 dangerous. 15 FINANCIAL STATEMENTS Your co-op s financial include: balance sheet member arrears report income statement statement of cash flows 16 CHF Canada Workshop 8

9 FINANCIAL STATEMENTS OUR FOCUS In this workshop we will focus on two of these : balance sheet income statement 17 THE BALANCE SHEET CHF Canada Workshop 9

10 THE BALANCE SHEET A snapshot of your co-op s finances on a particular date 19 THE BALANCE SHEET Point in time statement a snapshot of the co-op s finances Also known as the statement of financial position (auditors) Two sides must always balance Assets: what the co-op owns that is of value Liabilities + Equity: what is owed to others + what is left over for the co-op 20 CHF Canada Workshop 10

11 EXERCISE JEAN S BALANCE SHEET Try to draft Jean s balance sheet using the info in the handout provided 21 BALANCE SHEET - ASSETS Assets: Cash 5,000 Accounts Receivable (Tax Refund) 1,500 TOTAL ASSETS $6, CHF Canada Workshop 11

12 BALANCE SHEET - LIABILITIES Liabilities: Accounts Payable student loan 2,000 Accounts payable credit card 500 Equity 4,000 TOTAL LIABILITIES AND EQUITY $6, BALANCE SHEET ASSETS = LIABILITIES + EQUITY 24 CHF Canada Workshop 12

13 THE INCOME STATEMENT INCOME STATEMENT Statement showing income over time (monthly, quarterly) Also known as the statement of operations and changes in fund balances (auditors) It has two components revenues and expenses If revenues are greater than expenses, the co-op has a surplus If expenses are greater than revenues, the co-op has deficit 26 CHF Canada Workshop 13

14 TEN THINGS TO LOOK FOR IN YOUR CO-OP S FINANCIAL STATEMENTS on the balance sheet: 10 THINGS TO LOOK FOR 1. Cash and reserve funding assets side 2. Member receivables (arrears) assets side 3. Accounts payable liabilities and equity side 4. Amounts of capital reserves liabilities and equity side 5. Accumulated surplus or deficit liabilities and equity side. 28 CHF Canada Workshop 14

15 10 THINGS TO LOOK FOR on the income statement: 1. Housing charge revenue revenues section 2. Expenses compared to budget expenses section 3. Maintenance spending expenses section 4. Bad debt expenses section 5. Current operating surplus or deficit bottom line THINGS TO LOOK FOR In each case it s important to look at Actual amounts Trends, whether things are getting better or worse 30 CHF Canada Workshop 15

16 BALANCE SHET 31 What to look for: 1. CASH AND RESERVE FUNDING Operating cash at least 1.5 times your full monthly housing charge budget 2 times or more is best 32 CHF Canada Workshop 16

17 CASH AND RESERVE FUNDING What to look for: Operating cash declining over time 33 CASH AND RESERVE FUNDING What to look for: Reserves - are they fully funded by cash? 34 CHF Canada Workshop 17

18 2. MEMBER RECEIVABLES Amounts members owe to the co-op (arrears), Usually for unpaid housing charges What to look for: high arrears balance arrears growing 35 MEMBER RECEIVABLES Zero arrears should always be your target Sound Management: Arrears should be no greater than 3% of housing charges paid by the members 36 CHF Canada Workshop 18

19 3. ACCOUNTS PAYABLE Money the co-op owes to others, usually suppliers of goods and services What to look for bills going unpaid payables aging Payables can include invoices and bills for utilities, maintenance, management services, and property taxes CAPITAL RESERVES What to look for declining balance no capital plan to support the amount of reserve funding reserves are not matched by the restricted assets on the assets side of the balance sheet Note the balance will fluctuate as replacements and contributions to the reserve are made 38 CHF Canada Workshop 19

20 5. ACCUMULATED SURPLUS OR DEFICIT An accumulated deficit means that, since day one of your coop s operations, your expenses have been greater than your revenues. Accumulated surplus is the opposite. What to look for Accumulated deficit 39 INCOME STATEMENT 40 CHF Canada Workshop 20

21 1. HOUSING CHARGE REVENUE What to look for Housing charge revenue lower than budget (including vacancies) Causes Poor process for filling vacancies No marketing strategy Vacant units not ready for occupancy A combination of these factors EXPENSES COMPARED TO BUDGET What to look for Significant variances in actual spending compared to budget 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. 42 CHF Canada Workshop 21

22 3. MAINTENANCE SPENDING What to look for Maintenance budget significantly underspent Some causes Co-op is deferring maintenance Use of unskilled personnel No maintenance plan Over budget on other expense lines Underspending the maintenance budget is not good 43 Co-ops need: MAINTENANCE SPENDING A comprehensive plan for responsive, preventive and emergency maintenance Adequate budgeting to support the plan Timely (not deferred) maintenance using skilled experts 44 CHF Canada Workshop 22

23 4. BAD DEBT What to look for Bad debt as a significant ratio of member receivables Bad debt increasing/over budget Causes Failure to collect housing charges on time Poor arrears management Culture of non-payment 45 BAD DEBT Presentation on financial May only be recognized on income statement at fiscal year end Balance sheet may show an allowance for bad debt Co-op can still collect bad debts after an allowance has been set up 46 CHF Canada Workshop 23

24 5. CURRENT OPERATING SURPLUS/DEFICIT What to look for operating deficit for current fiscal year If expenses are lower than revenues: operating surplus If expenses are greater than revenues: operating deficit Causes Revenues are lower than budgeted Expenses are higher than budgeted 47 AUDITED FINANCIAL STATEMENTS KEY Audited Statements: Statement of financial position Statement of operations and changes in fund balances fund accounting presentation Monthly Statements: Balance sheet Income statement Standard accounting presentation CHF Canada Workshop 24

25 INFORMATION Is there anything you think you need more clarity on? How can you support the rest of your co-op in understanding the finances? Is there anything that you would like to share with your manager about what you have learned? What is the most important thing you will take away from today s session? 49 WORKSHOP EVALUATION Thank you for attending this workshop Please take a few minutes to complete your evaluations Your feedback is very important for us to learn how to improve our Education Program 50 CHF Canada Workshop 25

26 CHF Canada Website: Resources Getting Workshop Materials AGM Website: Events AGM Conference App CHF Canada Workshop 26

27 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 10 THINGS TO LOOK FOR IN YOUR CO-OP S FINANCIAL STATEMENTS Handout Exercise - Drafting Jean's Balance Sheet Meet Jean. She has $5,000 in the bank. She's waiting for a tax refund of $1,500. These are her assets. She owes $2,000 in student loans that she's steadily paying off. She also owes $500 on her credit card. These debts are called her liabilities. So what is Jean's equity? It's the amount left over if Jean paid off all her debts today. Knowing all this complete, Jean's balance sheet. Jean's balance sheet as of today Assets: Cash Accounts receivable TOTAL ASSETS Liabilities: Accounts payable Equity TOTAL LIABILITIES AND EQUITY CHF Canada Workshop

28 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 Exercise - Reviewing the Statements Working with a partner use the balance sheet to answer the following questions: 1. Does the co-op have enough cash to cover the accounts payable? 2. What are the member arrears? Is this balance healthy? 3. What was the co-op's accumulated surplus/deficit at the beginning of this year? 4. Does the co-op have enough invested to fund its replacement reserve? 5. Is the replacement reserve balance healthy? Working with a partner use the income statement to answer the following questions: 6. How does the actual year-to-date revenue compare with the year-to date budget? 7. What is the year-to-date vacancy loss? How does it compare with the yearto-date budget? 8. Using the main categories of expense, are there any year-to-date expenses that are significantly under the year-to-date budget? Why do you think that is? 9. Using the main categories of expense, are there any year-to-date expenses that are over the year-to-date budget? Why do you think that is? 10. What is the co-op's surplus/deficit so far this year? Where else can you find this? General Question Looking at these over all do you think the co-op is in good financial shape? Why or why not? Are things getting better or worse? CHF Canada Workshop

29 Cloudy Days Housing Co-operative Statement of Income for the month ended May 31, 2018 Fiscal period No. 8 CURRENT Y.T.D. TOTAL YEAR BUDGET % BUDGET MONTH ACTUAL BUDGET REMAINING EARNED/SPENT REVENUE: Housing charges & subsidies 32, , , , % Less: Vacancy -1, , , % Interest % Parking income , % Laundry Income , , % Penalty Charges % Misc. Income % TOTAL REVENUE 31, , , , % EXPENSES: Operating: Property taxes 1, , , , % Insurance , , , % Garbage/Recycling , % Water/Sewer 1, , , , % Electrical 2, , , , % Laundry Equipment , % GST , , , % OPERATING - TOTAL 6, , , , % Maintenance: Exterior 2, , , , % Common areas , , , % In suite 3, , , , % Appliance repairs , , % Painting 1, , , % Service contracts , % Keys and Locks % Tools/Supplies % Contingency expenses , , % Landscaping , , , % MAINTENANCE - TOTAL 7, , , , % Administration: Telephone , % Advertising % Bank charges % Management Services 1, , , , % Office expense , % Membership Dues , , , % Audit Expense , , , % Legal % ADMINISTRATION - TOTAL 2, , , , % Committees: Membership % Social % Education % Travel/meetings % Other committees % COMMITTEES - TOTAL % Continued on the next page

30 CURRENT Y.T.D. TOTAL YEAR BUDGET % BUDGET MONTH ACTUAL BUDGET REMAINING EARNED/SPENT Mortgage & Reserves: Mortgage Interest 17, , , , % Replacement Reserve Alloc. 1, , , , % RESERVES - TOTAL 19, , , , % TOTAL EXPENSES 35, , , , % NET INCOME/(DEFICIT) -4, , ,806.25

31 Balance Sheet as at May 31, 2018 Cloudy Days Housing Co-op ASSETS Current assets: Unrestricted cash: 29, Accounts receivable - Members 2, Accounts Receivable-Other Interest Receivable Prepaid expense 3, Total unrestricted current assets 36, Restricted assets: Replacement Reserve Fund 65, Subsidy Surplus Fund 3, Total restricted assets 68, Fixed assets: Land & Buildings 524, Less:Accum.depreciation (397,260.88) Total fixed assets 127, TOTAL ASSETS 232, LIABILITIES & EQUITY Current liabilities: Accounts payable 1, Accrued mortgage interest 1, Total current liabilities 2, Long term liabilities: Mortgage 127, Total long term liabilities 127, Total liabilities 129, Reserves, Equity: Replacement Reserve 65, Subsidy Surplus Fund 3, Shares 35, Accumulated surplus/(deficit)-prior years (650.63) Surplus/(deficit) for the current period (2,730.93) Total reserves, equity 100, TOTAL LIABILITIES & EQUITY 232,809.35