Reading Financial Information – I



Reading Financial Information – I

Basic Financial Reports for All Board Members

Presented by William K. Henley, CPM

Introduction

All Board Members have a responsibility to understand the fundamental financial facts

of their cooperative. When you examine the major business problems, news headlines

and corporate scandals of the past 8 years, the names Enron, FannieMae and Lehman come quickly to mind. These, and many others, are examples of a Board of Directors not

dealing with the financial facts that were placed in front of them every month.

Does an individual Board Member have to examine the details of every financial transaction? Certainly not! But should a Board Member know what types of reports

are being presented, how to read them and how to get a sense of the financial status

and direction of the cooperative? Absolutely!

This seminar explains Board Member responsibility and then provides simple

solutions, regardless of an individual’s level of comfort with financial reports.

What Type of Report and Information is Needed?

How do you identify a Board Member? They are the cooperative member with one arm

longer than the other from carrying around huge packs of paper financial reports!

Is that you? It should not be the case. Financial reports have been found on some

cooperatives that were hundreds of pages long! Copies of checks, copies of invoices,

bank reconciliation statements, general ledger entries and financial schedules, most of

it not only unnecessary, but probably not even read by anyone.

A proper, monthly financial report can be as short as 10 pages. It will provide each

member with:

• Cash Summary of Operations

• Balance Sheet

• Statement of Profit and Loss

From those three reports, a Board Member is able to identify key areas of concern:

• The financial position of the cooperative

• Trends in operations

• Progress toward short and long term objectives

• Performance to Budget

Page Two

Reading Financial Information – I

Financial Report Types and Functions

1) Cash Summary of Operations: Balances in key checking accounts

Identifies amounts and sources of income

Details each check written during the month

Identifies accounts receivable and payable

2) Balance Sheet: Reports the position of the corporation at a point in time

3) Statement of Profit and Loss: Reports the financial results during a period of time

4) General Ledger: Reports the detailed transactions during a period the resulted in

the Balance Sheet and the P&L

5) Annual Audit: Professional assessment of the corporation’s accounting processes

and controls, reporting the results of the prior

financial year’s activity.

6) Annual Budget: The plan for financial operations for the year. It is also reported

monthly on the P&L by comparison to actual results

Basic Financial Analysis Techniques

Prior to a Board Meeting, an individual Board Member should have received the prior

month’s financial report. Taking less than 30 minutes, the reports can be reviewed for

issues that require additional information or follow up. A Board Member’s concerns

would include:

• What is the cash balance at month end?

• What are the accounts payable at month end, and are they consistent, month-to-month?

• What are the accounts receivable?

• Does reported vacancy loss match the known number of vacant units?

• What is the difference between the year-to-date budget and the actual results?

Have these differences been discussed and understood at Board Meetings?

• Are check numbers consistent, with all checks accounted? Are the payees

all companies that are familiar?

Any questions that arise can usually be answered quickly. Some may require additional

data or financial reports. In any case, a Board Member should never be reluctant to ask

a financial question. The cooperative is a financial entity, and all Board Members should

understand the fundamentals of financial reports and their community.

Page Three

Reading Financial Information – I

Terminology

A Board Member should become familiar with the following terms. All of these terms are fully defined in the seminar.

Balance Sheet

Statement of Profit and Loss

General Ledger

Assets

Liabilities

Equity

Cash vs. Accrual Accounting

Mortgage Principal and Interest

Audit

Capital Expenditure vs. Expense

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