Jun
14

Reading and Understanding a Co-op Financial Statement

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It’s bad enough to keep poor track of your own spending habits. But in the case of a co-op board, which is responsible for the financial well-being of a corporation, it can be catastrophic. Most of the board’s business hinges on financial matters: dealing with shareholder arrears, taking out new mortgages, estimating the cost of needed repair work, and so on. Financial statements are the backbone of the industry. Here’s how to read one.

A co-op’s financial statement consists of several parts: the opinion letter, or auditor’s report; the statements (balance sheet, statement of income and expenses and deficit, and statement of cash flows); and footnotes.

  • Play fair. The auditor’s report, which is usually addressed to the shareholders and/or the board, should affirm that the financial statement presents fairly the financial position of the co-op and the results of its operations and cash flows for a stated period (usually a year). Take note of the concept of “presenting fairly.” It’s not a penny-precise accounting, and it’s not a judgment on the co-op’s financial position. It simply means that the information is accurate and complete enough to be the basis of a well-informed decision.
  • In and out. Your primary interest in reading the financials is the co-op’s cash flow and how it will affect maintenance fees. You’ll find this information in the income and expense statement. Have the co-op’s maintenance charges and other income covered its operating expenses? If the building ran a large deficit, absent extraordinary circumstances, a whopping maintenance increase is on the way. 
  • Looking ahead. The next figures to look at are the mortgages, which are found under “Liabilities” on the balance sheet. The important items to note for each mortgage are the due date and the interest rate. A more remote due date assures a stable line item in the co-op’s expenses, and the interest rate’s relation to current market rates suggests whether a refinancing will bring higher or lower payments. 
  • Taking credit. The existence of a revolving line of credit is also important. It enables the cooperative to cover emergency needs without an assessment, if it so chooses. To some extent it exists as a substitute for reserve funds.
  • Show me the money. After the credit, look to the cash. This can be found at the top of the balance sheet. Find the cash position and any liquid investments. Taken together, will these give the co-op sufficient cash to meet its operating expenses as they come due? If the co-op is “cash poor” and reliant on its shareholders paying on time, the result may be emergency assessments, a general strain on credit and finances, and higher maintenance. 
  • Reserve judgment. Another element of the cash picture is the recurring question: how big a reserve fund should a co-op have? The answer depends on many things, including the age and condition of the building and the types of shareholders living there. An old building needing a lot of repairs, or one with elderly shareholders on fixed incomes, should have more cash on hand to deal with emergencies rather than using assessments.
  • Loose ends. As the final step in your review of the co-op’s financials, you should then look at all remaining items, noting those that you can’t explain or don’t understand, and discuss them with the treasurer. When you finish reviewing the financial statements, you should have a better understanding of your corporation’s finances and be better able to participate in the task of running your co-op.

 

From Habitat Magazine

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