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Interpreting Financial Statements

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START WITH THE BIG PICTURE

There are three types of financial statements that your water co-op should have and be able to explain: a balance sheet, an income statement, and a statement of cash flow.

If your rural water co-op uses a basic accounting software (like Sage or QuickBooks), pulling these reports is relatively simple.

STATEMENT TYPE	WHAT IT SHOWS
Balance Sheet required for AGM	This is the statement of financial position that shows what the water co-op owns (assets), and what it owes (liabilities), and how much members hold in equity.

KEY QUESTIONS TO ANSWER: INTERPRETING THE BALANCE SHEET

Has our overall financial position improved or weakened from last year? Why?
Do we have enough funds in our operating account to cover expenses?
Are our member-owners paying their invoices on time (A/R)?
Have we paid out bills by the time they are due?
Are our reserves growing steadily, or have we had to draw them down?
Are we carrying any loans? If so, are they manageable?
Have we added any new assets or major equipment?
How old is our infrastructure? Are we preparing for replacement costs?
Are there risks (like member delinquencies) that could affect our stability?

Income Statement required for AGM	This Income Statement tells members what happened this year. It shows money in, money out, and whether the water co-op had a financial surplus or deficit for the fiscal year.
KEY QUESTIONS TO ANSWER: INTERPRETING THE INCOME STATEMENT Are we spending more or less than we planned for in the budget? Why? Did our revenues meet expectations? Were member rate changes effective? What parts of the budget were hardest to predict this year? Are we balancing routine costs with setting money aside for the future? Are we collecting money from members on time? Are late payments increasing?
Cash Flow Statement	This report reveals how the money moves through the water co-op and the ability the water co-op has to cover expenses month to month.
KEY QUESTIONS TO ANSWER: INTERPRETING THE CASH FLOW STATEMENT Did we have enough cash month-to-month to pay the water co-op’s bills? Were there times we dipped into reserves or delayed payments? Are member payments coming in smoothly, seasonally, or unpredictably? Do we need to adjust billing cycles or improve reminders to stabilize income? Are big projects or repairs draining cash faster than we can replenish the funds?

FINANCIAL STATEMENTS AND THE ANNUAL GENERAL MEETING

At each Annual General Meeting (AGM), members of the water co-op have the right and responsibility of reviewing and approving the year-end financial reports.

At this time, members will also turn to the Board of Directors for a recommendation on whether or not the water co-op should spend money hiring an external auditor, which can be costly.

At the AGM, members must vote on who they wish to appoint as the auditor for the following year. The auditor’s role is to review the water co-op’s accounting records and provide an independent opinion to the membership about the accuracy of the co-op’s financial position.

Smaller water co-ops can appoint a member that is not on the Board to perform the audit. Some co-ops are required to hire an external auditor who has a professional designation.

These democratic duties of the membership rely on the Board’s ability to interpret and communicate the financial statements accurately, and answer questions about them. They also set the foundation needed for the members to support the operational budget and approve the rate or fee structure to fund operations, maintenance and future needs of the water co-op.

TURN THE NUMBERS INTO A NARRATIVE

The job of communicating the financial situation to the Board and members typically falls to the Board Treasurer, but it’s everyone else’s job to listen, learn, ask questions and understand what is going on financially with the water co-op they’re a member-owner of. A Treasurer’s report at a Board meeting and at the AGM, should include the numbers and strive to turn them into an engaging narrative.

Think like a journalist or storyteller. Start with a few strong headlines and a couple of key stories you want to report on. Describe the setting and add meaning. Help the audience understand why things are happening. Position the water co-op as the main character, talk about what they’re doing and offer some subtle foreshadowing about what’s to come.

For example:

TYPICAL TREASURER’S REPORT	ADDING THE FINANCIAL STORYTELLING APPROACH
Repairs and maintenance costs rose from $_____ to $_____ .	We replaced several old valves and serviced the pump station, which increased costs but prevented emergency downtime for members.
Accounts receivables increased by $_____ .	A few members are behind on payments, likely due to higher input costs for agricultural producers and shrinking margins because of international trade conditions. We’re in contact with the members in arrears, and the new amendments to the payment arrangements policy will help get members through this period while reducing financial risk to the water co-op.
We transferred $_____ to the reserve fund.	We are proud of our members’ contributions! Thank you for helping build our reserve fund to save for future capital projects like water line and pump replacements.
Next year’s budget will increase by ___ %.	A small rate adjustment will help the water co-op keep up with preventative maintenance and build a reserve fund for future capital projects. By planning ahead and funding it now, we can ensure the sustainability of our local water system and reduce the likelihood of needing a cash call in the future.

The Headline:

We are making progress on our reserve fund goals, even with inflation and rising operating costs.

The Setting:

Like most of you on farms and acreages, the water co-op also experienced higher electricity and insurance costs this year. Extreme weather events and climate conditions like drought are largely outside of our control but do impact the premiums we pay even though we haven’t had any recent insurance claims.

The Story Line:

The Board is watching costs closely to reduce the risk of financial surprises. The proactive and preventative measures we’ve taken to adjust rates incrementally, and to invest in maintenance initiatives while building a savings account for bigger projects, is what gives our members stability and predictability in their financial contributions to the water co-op.

A number of volunteers have taken training and certification this year with financial support from the Alberta Federation of Rural Water Co-ops. This upskilling improves safety and operations, and helps us reduce contractor costs, and/or hire local members to do the work we need done. Over the last year, four (4) local members gave their time to be trained on pump operation, maintenance and repair, confined spaces and fall protection, and other workshops like basic bookkeeping, to help save the water co-op money and ensure strong, sustainable operations.

Looking Forward:

The Board is completing a needs assessment for future capital projects (infrastructure). With each member contributing $15/month, our water co-op can put at least $6,500/year into a reserve fund. This money will help us be prepared to make equipment and technology upgrades in case we need to respond to changes in the legislative or regulatory environment down the road.

SUMMARY

Interpret the financial statements in a way that clearly communicates the impact to members and the real world story behind changes or variances in the water co-op’s finances.

In the situation above, impact to members is going to be a $15/month increase. The real world story is that all businesses are facing inflation and higher insurance and electricity costs. The Board and members are doing all they can to manage expenses, including training local members who can contribute their skills in order to help keep operation and repair costs down.