Professional Documents
Culture Documents
Contents
The Balance Sheet 2
Nurturing Your Income Statement 5
Internal Control 8
Cash Management 11
Assets
Assets, the first section on the balance sheet, is a list of items of value
that are owned or controlled by the cooperative and that are expected to
generate future benefit for the cooperative.
Current assets are those items that could be converted to cash
within a year. In general, current assets include cash, accounts receivable, inventory, and prepaid expenses.
Cash is the keystone of the balance sheet. It includes all bank or
credit union accounts and all cash on hand at your business. It must be
reconciled regularly and controlled closely. (The areas associated with
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My Food Cooperative
Balance Sheet
June 30, 2012
ASSETS
CURRENT ASSETS
Cash
Accounts receivable
Inventory
Prepaid expenses
$500,000
20,000
300,000
40,000
860,000
FIXED ASSETS
Land
Building
Equipment
200,00
2,300,000
3,000,000
5,500,000
1,500,000
4,000,000
OTHER ASSETS
Intangible assetsnet
Investments and deposits in
other cooperatives
Total assets
10,000
130,000
$5,000,000
$500,000
300,000
200,000
1,000,000
LO N G - T E R M L I A B I L I T I E S
Long-term debt less current portion
2,100,000
Total liabilities
3,100,000
OWNERS EQUITY
Owner shares
Preferred shares
Retained patronage
Retained earnings
700,000
200,000
400,000
600,000
1,900,000
$5,000,000
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MY COOPERATIVE
statement of INCOME
Year ended June 30, 2012
Amount
Percent
SALES REVENUE
Sales
$19,970,000
99.85
Nonmember markup
40,000
0.20
Senior discount
(10,000)
(0.05)
Gross sales
Gross margin
20,000,000
100.00
(12,500,000)
(62.50)
7,500,000
37.50
OPERATING EXPENSES
Personnel
Occupancy
Operating expenses
Depreciation
Administrative
Board/Governance
Promotions/Marketing
4,900,000
600,000
600,000
200,000
200,000
75,000
250,000
24.50
3.00
3.00
1.00
1.00
0.38
1.25
6,825,000
34.13
675,000
3.37
75,000
(130,000)
(40,000)
0.38
(0.65)
(0.20)
(95,000)
(0.47)
580,000
2.90
(50,000)
(0.25)
$530,000
2.65
Net income
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Expenses
Taxable Income
There are several items that are not normally shown on the income statement, but we wanted to
note two. The first is patronage dividends (that you give to your owners). GAAP does not specify
that patronage dividends must be a deduction from income nor that they must be a direct reduction of retained earnings. In a retail food co-op, showing patronage dividends separately from
the income statement is logical as a deduction from retained earnings.
Patronage dividends are typically not all paid in cash, and the retained portion may be held
indefinitely. The logic of not deducting patronage dividends may best be illustrated by example.
If a co-op earns a 3 percent net income it is generally considered to be doing well. If it pays half
of that in patronage dividends and deducts those in calculating net income it will show a 1.5 percent net income. If only 20 percent of that patronage dividend is paid in cash the only cash cost
in the near term is 20 percent of 1.5 percentor just 0.3 percent of sales. If an outside reader,
such as a bank, sees a 1.5% net income it may make a very different judgment about lending
than if it saw a 3% net income.
Since patronage dividends are a discretionary decision and often not paid fully in cash,19
it makes sense to show them as an equity transaction similar to preferred share dividends.
Regardless of the income statement treatment, patronage dividends are deductible in calculating
taxable net income if the IRSs rules are followed.
The second item not normally shown on the income statement, if your co-op has them, is
dividends paid on preferred shares. These dividends are a return on invested equity and are a
direct reduction of retained earnings. These preferred share dividends are also not deductible in
calculating taxable income.
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Other lines
Other income and expenses will normally be
any income earned or expenses incurred that
are outside of your day-to-day operations.
Patronage dividends received from other
* There is a valid argument that patronage dividends from other co-ops should be netted against the expenses originally incurred. The netting might typically
be to COGS or to membership dues. This is in accordance with the idea that patronage dividends are a refund of an overcharge by the cooperative. A policy
on classifying patronage from each cooperative vendor could be made based on an analysis of each relationship. These decisions are often made with your
accountant.
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Internal Control
he accounting best practices in this article will differ from the previous two articles since the
guidelines are more dependent on your
specific co-ops operations. While the specific systems for good internal controls
may vary, the areas of your co-op operation that
require a good internal control system are the
same and are discussed here. A qualified accountant or a risk management specialist can be an
important resource for you in analyzing your
internal control practices and needs.
For background to the finance concepts discussed below, see the definitions sidebar, page 9.
The Basics
The basic concept of internal control from an accounting perspective is that no one person should have control
over all aspects of a financial transaction. This helps to ensure
that errors or misappropriations will be prevented or detected quickly.
This article provides examples and explanations to highlight primary
areas where an internal control system is needed and should be in place
at a retail food co-op.
In general, you can prevent or detect errors and misappropriations
more quickly and easily with internal controls that monitor variance
from expected values. Strong internal control systems can also reduce
the likelihood of someone attempting fraud and help to protect the
assetsboth people and cashof your organization. If an internal
control system is not well-built, anyone who uses it likely will become
aware of its weak points over time and may take advantage of them.
Proper internal controls are written down and make it possible to
investigate and do random verifications when questions arise. These
well-documented systems can also be adjusted more easily as your organization grows and your needs change.
Front End
A longtime cashier is dismissed, the police are called, and an insurance claim is
filed. Through an accidental discovery, the front-end manager found the cashier
pocketing cash while reconciling the drawer at the end of a shift. The cashier was
ringing up some small sales during the day and then canceling them with the no
sale key. At the end of the day, the cashier would reconcile his drawer to the POS
and pocket the extra cash. Sifting through past POS reports, it appeared that the
cashier had likely taken more than $10,000 over the course of several years.
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Cash Disbursements
A general manager (GM) doesnt like gathering receipts to verify credit card
charges. The finance manager (FM) reviews and initiates the payment of credit
card bills, but there is no further review and approval process for the GMs credit
card or reimbursements. The GM signs the credit card and reimbursement checks.
The FM is not sure all of the expenses are legitimate but, without an approval process, the FM does not have the authority to insist on documentation of the business
purpose or receipts that verify the purchases. The lack of a formal procedure leaves
the FM in the awkward position of having to decide to keep quiet and wonder if
there is fraud or to speak up and risk her/his job.
The account security that could have prevented this is called positive pay. This requires a customer to transmit information to the bank
on all checks written. Any check not transmitted to the bank will not
be cleared by the bank. All co-ops should discuss electronic security
features with their financial institutions. Controls such as dual authorization for any electronic funds transfers or payments may also be
available.
Payroll Accuracy
The employee who initiates payroll makes a deal with another staff person to
increase that persons wage, and they split the difference. How easily could this be
prevented or detected in your system?
Very few systems have pay rates locked, so routine detection would
require a detailed comparison of payroll to the underlying personnel
file. If discovered, it would look like an innocent error.
With a large payroll it may be impractical to trace every employees
pay rate to the personnel files for each payroll. But it is practical to test
a random payroll in detail at least once or twice each year. This testing
must be done by someone other than the people who initiate or review
payroll on a regular basis. As a more general control, the person initiating a payroll should not also be the person verifying the resulting dollar
amount of the payroll for reasonableness before it is recorded in the
accounting software.
Labor hours: Your time clock system should require department
Shrink Prevention
Backdoor systems: A produce buyer set up a vendor file with a fake name and
address. She passed along invoices from this vendor and received the payments at a
home address. With a bank account set up in the name of this vendor she was easily
able to cash the checks. Requiring verification of new vendors by someone outside of
a department can prevent this.
The COSO framework then outlines five components of a system of internal control:
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Financial Reporting
Most headline frauds in public companies
happen when top management colludes to
manipulate sales and profits. This is often done
by the chief financial officer or controller with
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journal entries that bypass the normal accounting department processes. Improper journal
entries can also cover other frauds such as theft
of receivables. Does your co-op have any controls over journal entries? Each journal entry
should have a person identified as creating the
entry and a person responsible for reviewing
and approving it.
The controls over financial reporting
should include a periodic reconciliation of
each balance sheet account to the underlying documentation such as bank statements,
inventory counts, and subsidiary ledgers. Passwords on the accounting software should limit
staff access to the necessary areas for their job
descriptions, reducing the possibility of unauthorized journal entries or other improper
modifications.
A Backup System!
The accounting computer just crashed.
Internal Auditing
So youve considered your risks, analyzed the
costs and benefits and laid out a great internal
control system. How do you monitor whether
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it is working? Internal audits tell you if internal controls are functioning as intended and
may also help to identify areas where modifications are needed to respond to changes in your
organization.
One internal audit function noted earlier
is the verification, on a test basis, of payroll records compared to personnel records.
Another example is tracing a sample of checks
back to invoices and testing the invoices for
authorization and mathematical accuracy.
Having a written description of your internal
control systems allows you to do unscheduled
random checks as well as annual reviews. An
external audit can give you feedback on your
internal controls and also perform limited
testing of their operation.
Conclusion
The implementation of sufficient internal controls requires a careful analysis of your operation in all of the areas described here. Writing
down your procedures and systems for internal
control will allow you to review and change
them as your organization grows. It will also
make it easier to detect irregularities and investigate them. Your CPA firm should be able to
review your internal control systems for you.
Remember, if you are unsure, seek someone with experience to discuss your co-ops
particular implementation issues. Building
good internal controls is critical to the smooth
functioning of any co-op and the safe maintenance of your co-ops assets. Its time to start
your assessment!
Cash Management
il lu st r at ion by M HJ
Banking relationships
Good cash management includes establishing and maintaining a good
relationship with the banking institution that holds your cash. Many coops have been able to obtain needed capital at critical moments based on
their rapport with lenders and others.
Two important notes: One, do not underestimate the value of your
business to a bank. Having the high volume of transactions, large cash
balances, and the need for loans and other banking services makes your
co-op attractive to a bank. Two, when evaluating a bank, make sure
that you will have the ability to review bank transactions online. This
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Line of credit
Having a line of credit available is a best practice and is important to be able to cover any
temporary shortfalls without causing disruption
to your operations. It is especially important
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Inventory management
One of the largest assets on your balance sheet
is inventory. There are a few different ways to
generate cash quickly from your inventory.
Extend your terms. If you can defer payment of vendor invoices by extending your
invoice terms from, say, 10 days to 21 days,
your cash should go up by the average dollar amount of 11 days worth of invoices. In
essence, your vendor becomes a partner in
financing your inventory.
Since it is such a large asset, reducing
inventory can be another way of generating
cash quickly. This is generally accomplished by
carefully decreasing the amount of back stock
that you keep on hand without causing unnecessary out of stocks. A ratio you can use over
time to monitor progress is inventory days
(aka days of inventory), which is the average
number of days that inventory is owned by the
store before it is sold. The greater the number,
the longer the inventory sits in the backroom
or on the shelf before it is sold.
If your back stock is already lean, you could
consider intensifying your category management efforts for ways to generate cash, but this
would likely take longer.
A new wellness manager was hired in one
co-op, and after six months the store manager
discovered that wellness department inventory
had gradually increased by $50,000. The GM
was furious, but upon reflection recognized
At all times, it is important to maintain and strengthen internal controls. Transparency, accountability, and checks and balances must be
high priorities, especially in difficult times. One thing that we have
personally observed more than once is the damage that can be done
by a well-meaning bookkeeper who keeps the bad news from other
staff and the GM. This can take the form of transferring funds from
savings and covering up that draw down, hiding invoices and not
recording them in the payables system, or preparing checks but not
sending them.
Debt-to-equity formula:
debt / equity
that the department manager was new to management and did not
have proper training, plus there were no policies in place to prevent
such a mishap.
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peers and experts can assist you in detecting and answering questions that
facilitate your understanding of risk so that you can protect and leverage
your co-ops assets with more confidence.
Members have a role in investing in their co-ops future. Developing ways for them to invest in the co-op can build less-expensive sources
of capital for the co-op. It can also contribute to co-op profitability by
decreasing the amount of interest paid through higher loan rates. And it
can deliver interest to co-op members instead of outside lenders. Larger
net profits for the co-op can deliver larger patronage dividends to members in good years.
In years when the board of directors declares a patronage dividend, it
is important to know your working capital needs before you declare what
portion will be delivered to member owners in cash. An analysis of paying
taxes or paying patronage dividends often shows the advantage of paying
patronage dividends, especially if only a portion is paid out in cash. The
maximum a co-op can retain is 80 percent. This serves to reward members
who shop at the co-op, and it builds your balance sheet (member equity)
while reducing your tax obligation. Designing the patronage dividend cash
portion so that it can be redeemed as a store coupon can also help to keep
more of the cash portion in the co-op.
Conclusion
Cash management is critical to the success of your co-op. We have discussed
ways to evaluate the liquidity needs and capital structure of your co-op, as
well as some of the options for managing your cash. Running a successful
co-op requires expertise in so many areas that it is critical that you consult
with experienced advisors when the stakes are high and knowledge of the
options may not be readily available on staff or with your board.
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