Many co-ops today face the same predicament: After years of deferring reinvestments in infrastructure and talent in the face of stagnant sales, improvements are becoming unavoidable. However, waning earnings performance at co-ops and a potential recession on the horizon make financing harder to get and risky. 

The cold facts: Reinvestments can only be deferred for a while before it hurts the customer experience and the co-op’s ability to compete. Low or no sales growth is going to continue or — if we face a recession — perhaps even worsen in the years to come. The only way forward is to finance reinvestment the old-fashioned way: through earnings.

A few GMs suggested we lower our recommendation for EBITDAP and other key indicators given the challenging marketplace. But we believe 4% EBITDAP is the minimum amount necessary to generate profit and retain some earnings for the future. At most co-ops, 4 to 6% EBITDAP generates 1 to 2% net income. It is out of net income that we should be financing reinvestment and retaining earnings to build member equity.

Here are a few concepts we need to address as a system:

Profitability is necessary. 

For any co-ops interested in business sustainability and the ability to positively impact communities long-term, being profitable needs to be embraced. Yet some stakeholders still characterize profit and even growth as contrary to co-op values or “corporate.” We need to have conversations with our stakeholders to communicate that it’s what we do with our profit that sets us apart from the corporate world:

• Corporations put profit into the hands of shareholders. Period.
• Co-ops put profit back into the hands of members, the co-op (in the form of improvements to infrastructure and employee development and compensation) and into our communities.

Reinvestment isn’t optional. 

While having those conversations about profitability and growth, make sure everyone understands that reinvestment isn’t optional. Often, reinvestment isn’t part of a co-op’s culture, and the prevailing sentiment is “if it ain’t broke, don’t fix it.” Yet the single most common denominator among co-ops that have closed in recent years or that are in crisis today is long-term under-investment in staff and infrastructure. Failure to reinvest results in rundown stores and under-developed talent, and becomes a cyclical problem from which it is difficult to recover.

Plan for sufficient earnings. 

Make sure financial goals allow for sufficient earnings. If your co-op isn’t budgeting for 4 to 6% EBITDAP, it is worth having a discussion about why and what the co-op can do to improve earnings. Co-ops should generate a capital budget as part of a three- or five-year budget cycle. Significant improvements should be built into long-range budget forecast so boards and staff can be aware of upcoming needs, anticipate how much improvements will cost and how they will impact cash flow. NCG offers a multi-year operating budget template with projected income statements, balance sheets and capital budgets. Users report that it is an effective tool without being too complicated or inaccessible to stakeholders.

Rising personnel expenses need to be addressed. 

The biggest barrier to improved earnings performance at most co-ops today is the personnel expense. Some co-ops that operate with below-average margins might have some room to improve earnings through improved margin performance, but in most cases earnings improvements will need to come from controlling personnel costs.

Watch for signs of underinvestment. 

Aside from earnings and profit, look for these other signs of underinvestment:

• Days of cash on hand. NCG requires that co-ops maintain a floor of at least 10 days of cash on hand, but having greater than 30 days of cash on hand may signal that the co-op isn’t reinvesting sufficiently.​
• Debt to equity. A low debt-to-equity ratio can be a sign that a co-op is under-leveraged and isn’t adequately reinvesting in the business.
• Depreciation. Co-ops that report little or no depreciation are often due for reinvestment.