Financial analysis of social enterprises (NPO – CO-OP)

1. Financial analysis of social enterprises (NPO – CO-OP)

2. Session Outline • Why adjust the financial statements? • The parameters of the social economy. • Review of the main financial statements. • What are these adjustments and how are they different from conventional financial statements? • How are these adjustments made? • Determining the capacity to meet financial commitments.

3. Any information on the enterprise’s social performance – partial illustration of performance Difficulty presenting the non-monetary dimension, such as the fair value of the balance sheet assets, involvement of volunteers, donations of fixed assets Difficulty presenting the revenue coming from Government contracts in the results Difficulty standardizing the representation of the investments of the specialty funds No balance sheet item allowing representation of quasi-equity investments The financial statements do not value…

4. A picture that doesn’t show the special features of a social enterprise

5. Why adjust the financial statements? • Improve the chances of success for social enterprises • Increase access to financing • Evaluate the real capacity to meet financial commitments

6. Financial statements based on an approach that is CONVENTIONAL instead of SOCIAL

7. Brief review… Importance of financial statements • Very revealing image of the enterprise’s financial position • Allows the enterprise to establish short-term and long-term plans and control current operations • Used for several external purposes: lenders, government agencies for funding, employee representatives for union negotiations

8. Brief review… • Income statement: summary between 2 periods / efficiency of operational management • Balance sheet: reflection of the financial position at a specific date • Statement of net assets (NPO) – Statement of reserve (CO-OP): measures the increase or decrease of assets or the reserve 4. Cash flows: inflows and outflows of funds from operating, investing and financing activities

9. Adjustment of the Income Statement

10. Social enterprises NPO – CO-OP Revenues come from … • Sale of goods or services • Revenue from government contributions: contribution = NPO grant or contribution = CO-OP 3. Fundraising activities and other revenue

11. Why? To determine: the recurring nature of the revenues the increase of the revenues (or not) Adjustment of the income statement 11

12. According to the social economy approach Recurring revenue Related to the organization’s fundamental mission Delivery of goods or services at the market cost Recurring nature

13. Revenue reclassification • Recurring revenue: sale of goods or provision of services, government revenue related to the mission • Non-recurring revenue: grants from external contributions • Other revenue: not obtained directly from operations

14. Reclassification of revenue Impact on self-financing ratios and on appraisal of operating surpluses (deficits)

15. Before adjustment… • the “non-recurring” or final surplus (deficit) includes non-recurring revenue and expenditure items, …on which the analysis of future results cannot be based

16. After adjustment… • Income statement = actual current operating revenues and expenditures • Assess the medium and long-term economic viability as the basis for the financing decision

17. Balance sheet adjustment

18. Balance sheet adjustment Why? Determine the enterprise’s real debt and equity structure (or net worth) How is the enterprise financed in the long term?

19. Long-term debt = secured bank loan or specialty fund loans + deferred contributions (NPO) or deferred grants / contributions (Co-op) = deferred grants for acquisition of fixed assets + Shares (Co-op) Equity (the enterprise’s net worth) = Net assets (NPO) Net equity (CO-OP) According to the Canadian Institute of Chartered Accountants

20. Deferred contributions or grants ≠ are not repayable debts Certain types of loans = long-term debt Reclassification of long-term liabilities

21. Deferred contributions or grants = equity Certain types of loans = patient capital (or quasi-equity) Reclassification of long-term liabilities

22. Patient capital or Quasi-equity 2 conditions: Generally with no security on the financed assets Principal repayment is often flexible Only the long-term portion of the long-term debt can be reclassified as quasi-equity Current liabilities will never be reclassified Debt structure on the balance sheet

23. Except that…according to Co-op Act • According to section 149 of the Canada Co-operatives Act: not required to redeem the shares if this jeopardizes its financial health • The Co-op and its members = flexibility regarding redemption by the issuer– which allows the shares to be considered equity

24. Fair value of the assets In short… • Account for more flexible repayment commitments • Identify the margin of safety and forbearance constituted in the liabilities • Impact on the financial stability ratios

25. The ratios

26. The ratios • about fifteen financial ratios for financial analysis 3 categories of ratios: • Liquidity indicators • Financial stability indicators • Management indicators

27. Analysis of resultsPercentage ratio - Co-op

28. Meeting its financial commitments

29. THE question asked by every lender = What are the generated funds?

30. The capacity to meet its financial commitments • Principal repayment of the current and future debt • Replacement of current assets • Purchase of new fixed assets • Redemption of membership and preferred shares (Co-op) • Working capital necessary for development

31. Financial resources Internal or external: • Funds generated from operations • Grants for acquisition of fixed assets • New term borrowing • New capitalization loans • Issue of membership and preferred shares (Co-op)

32. Appropriate financing • Matching Scenario • High-Risk Scenario • Risky Long-Term Scenario

33. Equity financing • Permanent capital • Equity of a Co-op or net assets of an NPO • Obtained from members, philanthropic investors, donors • The more equity an enterprise has, the more leverage it obtains

34. Patient capital (quasi-equity) financing • Patient capital • Comes from investment funds for capitalization or development purposes • Little availability outside Quebec

35. External financing • Long-term / short-term borrowing • Sectoral • Technical support

36. The key: maintaining the balance between debt and internal financing

37. Thank you!