If you’re a co-op member – and especially if you’re a board member – being able to read your co-op’s financial statements is an important part of your job. Effective members ensure the co-op is operating sustainably and meeting the needs of the membership, and understanding the co-op’s financial situation is central to that task.  

This doesn’t mean you have to be a bookkeeper or accountant. Understanding a few key terms and concepts will help you interpret financial statements like a pro and give you peace of mind that you know what’s going on with your co-op’s finances.   

Here are three key indicators to understand and assess your co-op’s finances.  

1.Your Co-op’s Debt-to-Equity Ratio 

 The first place to look to understand the financial health of your co-op is its balance sheet. But before we dive into what you should look for, you need to understand a simple equation: assets = liabilities + equity  

Let’s break it down: 

• Assets: the money, investments, equipment, property, and inventory that your co-op uses to operate 

• Liabilities (i.e. debt): money the co-op owes vendors and lenders 

• Equity: the value of the co-op’s assets the co-op and its member own outright

An important indicator of the co-op’s financial health is the debt-to-equity ratio (in other words, how much the business owes compared to how much it owns). This ratio tells you how the co-op has financed its operations and managed its debt. The lower this ratio is, the better.   

A co-op that raises most of its funds from members and investors, or has paid down its debt, will be in a more stable position than one that has borrowed a lot of money to begin operating. The balance sheet below shows a very healthy debt-to-equity ratio of 0.25. (To find this, just divide the total liabilities by the total member’s equity).   

Co-ops with a debt-to-equity ratio of 3 or higher (meaning the co-op owes three times the value of what they own outright) may have a hard time repaying debts. If you’re concerned with your co-op’s level of debt, ask what leadership’s plan is to repay it.  

2. Your Co-op’s Cash Flow

In business, cash is critical, so the next thing to understand is your cash flow statement. This document tells you how cash moves through the business. Your co-op needs cash to pay staff, buy inventory, and advertise — but where that cash comes from is also important. Co-ops can get cash from their operations, from financing (e.g., loans), and from investing activities (e.g., issuing shares to members).   

Ideally, your co-op will be profitable and will have a steady supply of cash from its operations. But, if your co-op is losing money and relies on debt financing for its supply of cash, you may want to raise some questions about its plans. How does the co-op plan to balance its sources of cash?   

Co-ops aren’t required to provide a cash flow statement in their annual report. Ideally, your co-op’s leadership will provide it anyway — though they may not. If you do have access to it, a cash flow statement is complex. But you can keep your analysis simple: look at the difference between the co-op’s cash at the beginning and end of the year and look where that cash came from. If the co-op is only cash-positive because of debt, that can be a red flag. If cash is going down because the co-op is purchasing new equipment or otherwise investing in the business, that can be good!  

3. Your Co-op’s Profits

Your co-op’s operating statement will show whether the co-op was profitable in a specific period. When looking for this in your co-op’s financial statements, it might also be called a statement of income and expenses, statement of profit and loss, statement of earnings, statement of net earnings, or statement of operations. If you see a number in square, that means the number is negative.  

This statement outlines the revenue the co-op generates and all its operational expenses. It’s important to note whether your co-op is profitable – this might be called “net savings” or “net income” instead of “profit”. Check if the co-op is covering its expenses and rewarding members with dividends. If not, consider asking why. Did sales decline in the previous year? Are some costs higher than industry standard?  

The operating statement will also demonstrate how much money the co-op is allocating to members from its profits – this might be called a “patronage allocation” or “patronage return”. Ideally, you’ll want to see this allocation grow year-over-year as the co-op’s revenue increases and the membership expands.   

Continue learning  

You won’t become a financial expert overnight. But practice makes perfect. The longer you attend AGMs, board meetings, and engage with your co-op’s financials, the more familiar these concepts will become.   

Still confused? We got you. Watch our webinar A Beginner’s Guide to Financial Statements for a deeper dive and even more tips.