Picture your director’s in a meeting with State or Federal Regulator’s and the regulators are discussing the credit unions financial performance and asking directors specific questions about the credit unions financial performance ratios and trends. Picture your director not comprehending what the regulators are discussing or asking. At that point, you might be saying to yourself, “Houston, we have a problem.” Not a good scenario. Both State and Federal Regulators hold your credit unions volunteers accountable for understanding the credit unions key measures and ratios that indicate financial health of the institution that they oversee. NCUA Regulation 701.4 and Illinois Credit Union Act 205 ILCS, Part 305/Sec 30 states, in part, that each director must have a working familiarity with basic finance and accounting practices, including the ability to read and understand the credit union’s balance sheet and income statement and to ask, as appropriate, substantive questions of management and the internal and external auditors. Some questions we should be able to ask and answer;
- Are we financially sound?
- Do we have adequate net worth or capital?
- Are we profitable or profitable enough?
- Are we growing?
- Is our business model working?
- Which direction do we need to go and do we know how to measure that?
In essence, what this means, is that each director, as part of the credit unions governance policy is required to have a working knowledge of the credit unions finances, ratio’s and trends and be able to independently ask questions of management regarding the overall financial health of the credit union. Although not specifically spelled out in regulation, this is also an important topic at all levels of credit union management. Learning the complexities of Balance Sheet and Income Statement ratios is very important at all levels of the credit union. ICUL, CUNA and many others have training programs that can make learning and understanding financial ratios and trends more understandable and empower directors and managers to be able to ask questions and plan for a healthy financial future.
By: Patrick E. Voss, Assistant Vice President – Member Outreach