Blood and Oxygen: Navigating the Valley of Death

By Peter HoughMay 2007

Co-op Development’s Biggest Challenge How to survive the first three years!

Every year approximately 10% of all businesses fail.

Businesses in the first three years comprise the greatest proportion.

Once a business is past the first three years it has statistically roughly the same chances of failure as all other businesses regardless of age.

Success Not Guarantee Challenges unfolds within a broad context,

of which we always have limited knowledge, and which can and will influence the outcomes of our activities in ways we do not expect and that are beyond our sphere of control or influence.

To have a hope of success, co-op entrepreneurs must constantly expand the limits of their knowledge and institutionalize and incorporate it into the day-to-day life of the co-op in flexible and effective ways.

Getting On With It The greatest ongoing challenge is

to determine what are the most important priorities, what needs to be accomplished in order to create a sustainable co-op, and how one ensures that resources are secured and allocated to achieve these priorities.

Ideal World Key steps in an effective co-op development initiative are

laid out and the resources secured. The members’ vision is developed with the participation

of all, from the first glimmers to a clear guide for the specific proposed operational realization.

Members understand the Co-op Principles and Values, their specific co-op’s needs, and their roles in meeting them.

The necessary capital is secured, based upon a clear financial model of the co-op which highlights the key financial relationships

All in all, member commitment is strong and their expectations are realistic and the resources are at hand.

Actual World In practice, it is usually far messier. Even when the ideal approach is known and

appreciated, it is often not realized due to circumstances.

All the resources needed to carry out the work may not be available.

Opportunities needs often drives timing. Some capital may have been secured, but not quite as

much capital as is truly needed. Judgments likely have been made about key

assumptions based upon limited and inadequate

information.

What Needs To Be Done? Hence, the co-op entrepreneurs will not

have everything neatly in place, they will get surprises - some good but many bad.

They will have challenges in all aspects of the endeavour, and difficulties agreeing upon what needs to be done and when a task or step should be completed.

The members need clear criteria for sifting through the many competing demands on the co-op’s limited resources.

Blood and Oxygen Stick to the life and death issues – cash

and member commitment! Organize and allocate resources based

on whether the activity will enhance or deplete these assets; most activities do one or the other.

Without both healthy cash flow and strong member commitment and participation, the co-op will die.

Cash and Member Commitment These two assets are

complementary, interdependent, and facilitate the development of one another. Neither cash nor member commitment are enough on their own.

Cash Cash allows the co-op to pursue the

fundamental goals for which it was created. Meeting these strengthens member

commitment. Having cash provides resources for

member development, education, training, etc.

A strong cash position is a continuing sign to members that the co-op is doing well and encourages members to think long-term in their relationship to the co-op.

Member Commitment Committed members provide cash

(members’ shares) to the co-op. Use the services of the co-op which

generate revenue. They reduce their personal cash demands to

a minimum, if required, for short periods of time.

They work collaboratively with others to put in place the required systems for success and to confront the many expected and unexpected challenges the co-op faces.

Cash Key Priorities Generating Cash Managing Cash

Generating Cash Generating cash includes:

initial and ongoing capitalization (for example: equity, debt, grants, operating lines, etc.)

securing operational cash – in other words, making sales of goods and services the co-op produces and getting paid for them.

cash is also ‘generated’ (i.e. preserved), by not spending it and by limiting and/or reducing operational expenses.

Managing Cash Managing cash includes:

Knowing how much you have. How much you are spending, and/or

must spend. How quickly, and from what sources,

it is being replenished.

A Financial Model Is ACritical Tool A financial model of the business; this will

enable you to understand the key financial relationships.

Allows you to evaluate your working assumptions by comparing actual results to the model’s projected results.

Facilitates evaluation of alternative approaches for the future: What happens if we change prices? Get more debt or more equity? What level of sales generates positive cash flow? Or, what happens if we change members’ wages, or prices for members’ products, etc.?

Members’ Role The model cannot do this by itself. The members must understand the model

and must provide accurate information for input into the model.

The co-op must have effective budgeting, accounting, costing, and bookkeeping systems in place as soon as possible, in the ideal world, before start-up. But if not then, it must be a top priority after start-up.

Priority areas for generating cash Capitalization

Does the co-op have enough capital to reach the point at which it generates positive cash flow through operations?

The key objective is to identify any potential cash shortfalls well in advance of their occurrence as it is much easier to get additional outside capital well in advance of the need than to convince capital providers to “ante up” at the crisis point

Poor capitalization or inadequate cash management can undercut this commitment by making unexpected demands for additional member investment and raising the question for the members of the co-op’s viability.

Priority areas for generating cash Sales

The key source of cash from operations. Depending upon the type of co-op, sales may be an

immediate focus, (e.g. a retail consumer co-op), or it may be a medium term focus for the co-operative that manufactures or processes products.

Have clear and realistic sales goals, target markets, and promotion plans.

Sales results need to be monitored daily or weekly. Co-op must be prepared to adapt quickly to negative or

positive results. It is crucial not to stay fixed upon an original concept if

it isn’t working and to always be looking new opportunities.

Priority areas for generating cash Collections

Unless the co-op is being paid in a timely manner, making sales won’t add to the co-op’s cash.

Having clear payment terms and collection policies and procedures is fundamental to generating cash.

The terms and collection policies and procedures are part of the value package offered by the co-op and must meet the requirements of both the customer and the co-op.

It is vital that sales staff understands them, are committed to these policies, and can communicate them to the customers - member or non-member.

Priorities for Cash Management Monitoring

Good records must be kept and the data used with the co-op’s financial model to monitor and predict the cash flow of the co-op.

This is a foundational priority that often meets resistance from members who may see it as needless, non-productive, busy work.

It is crucial that the board and management take the lead in demonstrating its importance, and ensuring data collection systems are truly relevant, and as simple as possible to complete.

Priorities for Cash Management Purchasing (both equipment and service)

It is sometimes difficult to be disciplined with purchases, because there is (or at least often is) significant cash on hand (i.e. the cash needed to cover costs until the co-op generates its own positive cash flow).

The problem is that the amount secured is based upon future projections from assumptions that have yet to be proven.

So before you make a purchase you need to ask: “Will it reduce operational expenditures by more than its costs and in what time frame? Will it contribute to increased sales or collections? Or, will it contribute substantively to increasing member commitment, thus generating more member financial participation.

Priorities for Cash Management Controlling and reducing expenses

Many operational improvements can be gained by having members and staff focused as a co-operative team, the ongoing creative dynamic developed will generate continuous improvements.

The co-op’s level of production (particularly if things are going well) will be constantly increasing and what was effective last week may no longer be the best way to meet the increasing demands.

Reducing the cost of resources is usually more challenging, because it often requires gaining knowledge of factors beyond the co-op’s working environment such as discovering new suppliers or new cheaper products -check industry publications, attend industry events, and do other research.

Member Commitment Two areas of member commitment

Determining members’ needs and expectations

Managing to meet those expectations.

In summary, what does the co-op need to do to gain and hold member commitment?

Don’t Members Have Commitment? At start-up, members clearly have made some level of

commitment to the co-op in the belief that it will meet their vision and produce the expected benefits.

This commitment is usually based upon some clear and some not so clear understandings and assumptions made by the members about the requirements, activities, and expected results of the co-op.

The proof will be in the pudding, and members’ commitment will be put to the test as the real challenges of making the co-op a long-term success become apparent.

Experience shows the commitment of many of the members at this stage of development is very fragile and easily broken.

Rubber Hits the Road Having the broad vision and goals is

fairly straightforward. However, translating them into

detailed operational activities that get at the particularities of members’ needs is a large next step.

Doing this within the financial and other resource constraints is even larger.

Priorities for Member Commitment Implement systems for receiving and

disseminating information. create ways for genuine dialogue with members - forums

for members to raise questions, make suggestions, and express concerns both individually and collectively.

The members need to experience an openness and readiness for dialogue and timely responses.

This dialogue, depending upon the co-op, may take place with any or all of frontline staff, managers, directors, or with other members.

The members need to know what communication vehicles are available: newsletters, surveys, websites, email discussion forums, formal meetings; who is responsible for them; and who will respond to the members on behalf of the co-op.

Priorities for Member Commitment Continue to build an understanding of

members needs. Develop an ongoing approach that generates a

greater understanding of members’ needs. Understanding and analysis may lead to uncovering

surprising similarities that become unexpected opportunities for the co-op.

Some of the communication vehicles developed should have a clear focus on members’ needs.

As a extra benefit the co-op is learning quickly of changes in the external environments that are affecting members’ needs and that will also affect the co-op.  

Priorities for Member Commitment Build participation in governance and

operations with transparent accountability. Are the members truly in control of the co-op? What

authority do they have, and what are the limitations?  For members to play the appropriate role in governing

the co-op requires a thorough understanding of the co-op, its operations, the formal governance processes of the Board of Directors and the members’ roles, the financial and market circumstance of the co-op, and the roles of management and staff, and the authority and responsibility they have and to whom they are accountable.  

Priorities for Member Commitment

Achieving this understanding is no small task.

Training, standard financial reporting, and clear policies are required.

This new knowledge needs to become embedded in the life of the co-op, and can only happen by having members participating in the co-op’s decision-making.

Because of the difficulty of this challenge, a co-op board must be committed to not isolating itself, or only giving real authority to staff or others “in the know”.

Priorities for Member Commitment Continually develop both short-term and

long-term operational visions for responding to members’ needs.

The co-op’s short term and long-term operational vision is vital to developing member commitment.

Members need to understand exactly what to expect from the co-op, what it can (and can’t) do and why.

They need to see how the overall activities are building towards a future which will meet their needs and future aspirations.

Priorities for Member Commitment

Having this vision enables the co-op’s board, managers and committees to communicate the results it achieves and enables the members to have realistic expectations against which to judge the co-op’s progress.

The sense of accomplishment, the proof that the co-op is and will continue to meet the challenges it faces, is the cornerstone for building and maintaining member commitment.

So What Now? So what does this all mean for trying to deal with

the many challenges of the first three years after start-up.

Simply put, there is no substitute for good judgment based upon sound information.

Making good decisions in the hustle and bustle of the everyday life of the co-op is a challenge of far greater magnitude than writing about the process.

These suggestions for key priorities can be used to help focus the many decisions the co-op entrepreneurs must make during this crucial early period but won’t guarantee success.

So move forward with respect and humility for the work of yourself and your colleagues regardless of the outcome.