By Adam R. Prescot, Esq. | Shareholder, Bernstein Shur Sawyer & Nelson, P.A. | Portland, Maine
The cooperative business model promotes democracy and strives to facilitate much-needed fairness, equality, and justice in the marketplace. Co-op businesses also help bring new goods and services to market that might not otherwise exist in a community on a local, sustainable, and affordable level. But whether incorporated as a non-profit or for-profit entity, co-ops are, at their core, businesses that require a positive margin if they are to survive.
For a co-op to reach its economic, democratic, and social goals—including providing financial benefits to its members and other partners—the business must first achieve a solid and sustainable financial foundation from which work to attain those goals can flourish. In that regard, co-ops are similar to other types of businesses that rise and fall on financial performance. Yet, for a co-op, financial instability—or even failure—carries with it not only monetary loss to members, lenders, creditors, and others in the community. Poor financial performance also results in the lost opportunity to achieve those democratic ideals and improve the community.
The definition of financial distress can vary by business and industry, but generally speaking, financial distress exists when a company cannot generate sufficient revenue to pay its expenses as they come due. Businesses of all types encounter financial distress through many different factors such as rising supply costs, increased overhead, changing consumer demand, or inadequate capitalization. In some cases, those financial problems are even created at the time of the co-op’s formation, including by taking on far too much debt than the business can reasonably service given its revenue and expenses. However, as a professional in the field of business reorganizations, I have observed one commonality among financially struggling businesses that stands out from the rest: the inability to recognize the financial danger until it is too late to fix.
Here are four warning signs that every co-op board and management team should watch for to ensure that financial risks are recognized early and necessary changes are implemented quickly, allowing your co-op to achieve its goals:
The cooperative business structure plays a vital part in the American economy. When a co-op thrives, its members, vendors, customers, lenders, and entire community benefit. However, those benefits are only realized when the co-op is financially healthy and can achieve its economic and non-economic goals.
Because you cannot solve a problem until you recognize that it exists, staying vigilant for signs of financial trouble will ensure that the maximum range of options is available for a co-op to make necessary changes and to get back on track to achieving its goals.