What businesses can learn from the financial models of co-ops and credit unions.
Currently, I think we are all agreed that we are in a state of considerable uncertainty, a position that also extends to the economy. Financial institutions, economic forecasters, and even the Bank of England are unable to predict the future of the economy at present. Whilst the UK government has extended furlough measures to October to help those businesses who are struggling, significant redundancy numbers are still likely. The current climate has already led to the highest levels of universal credit claimants in recent times, with nearly two million claims submitted.
Why do unexpected events cause financial shockwaves?
Lockdown, whilst an essential measure, has had a huge impact on the economy, with Britain experiencing the deepest economic slump on record, even before the full impact of the extraordinary measures we’ve all felt the effects of were fully in place. The pandemic has also had an impact on the NHS, who have experienced a surge in hospital admissions in the past few months due to Covid-19. This in an organisation that was already financially stretched due to years of ‘least cost means’ and real-terms per capita budget cuts. That itself has had an indirect impact on UK plc.
The popularity of take up rates for furloughing has left some of us asking why so many businesses don’t have a cash and capital reserve or a stronger model for unexpected times like this. For too many firms, their focus is short term, often just having enough ready reserves to maintain ongoing business, with the vast majority of capital generated used to pay out shareholder dividends (or executive salaries).
Furthermore, it seems apparent that a high proportion of businesses rely on just-in-time transactions to see them through on an ongoing basis. If you are in a continual cycle of short term payout, where can you build in long term financial resources to deal with impacts such as this? Maybe it is time to change, to face up to shareholders and their expectations, and to introduce strength into the business model. Let’s not forget that excessive focus on short term rewards for the few costs all of us in terms of the environmental and societal consequences.
What can we learn from the financial models of co-ops and credit unions?
There is a lot to be learnt from credit unions and co-ops. Our financial structure has a focus on the long-term and our members, who are ‘investors’ as well as customers, have a different outlook to your traditional shareholders. Credit unions not only consider how we can help people in the immediate future, but also look to create an organisation that will survive in the long term, serving communities for 20, 50, and even 100 years in the future.
We do this by not being bound by financialisation and short term dividend payments - the economic structure that too often results in weakened sustainability for businesses. Instead, considerations are focused on the broader impact of what we do for our neighbourhoods and communities. This is achieved by ensuring we do the right thing for our members and, by building capital reserves for future stability, we’re able to weather more storms and make sure we’re paying our way in terms of our impact on the world we live in.
Any economic structure has its drawbacks and the financial construct of co-ops and credit unions is no different. We have less access to external capital and there is more pressure on obtaining financial resources, particularly amongst smaller co-ops. Growth rates can be slower and more organic than others, and democratic control can sometimes lead to risk aversion. However, the drawbacks of our economic structures do not as often result in liquidation, or financial hardship, as shown by the comparative 5 year start-up survival rates set out in Co-op UK’s 2020 report into the sector. This shows co-ops’ and credit unions’ strong financial stability and organizational resilience which enable us to withstand economic disruption.
How can businesses build financial resilience?
The pandemic has made one thing undeniable: we need to build our financial resilience. This has been made obvious by the amount of people on furlough pay. Whilst the government furlough scheme is essential, this money will need to be repaid in the future. This is likely to be through tax increases, meaning we will all pay the costs for the years of profit-extraction. If businesses had built their financial resilience before the crisis, rather than focusing on the short-term, the furlough repayments and hence the cost to us as taxpayers could have been significantly reduced.
Business leaders should observe the financial and governance structures put in place by co-ops and credit unions and learn from them. Bristol Credit Union’s co-operative model allows us the resources to adapt to the current circumstances and implement measures for the benefit of our members, such as our zero interest loans for NHS workers. We’re also able to support individuals to improve their own financial well-being and resilience, for example through our employer partnership scheme, which we urge more employers to get involved in.
The pandemic has given us the opportunity to take a step back from standard economic processes and look at new financial models to assess if a change is the way forward. The pandemic has taught us that we are not infallible. We need to develop more robust, resilient financial processes in order to turn adversity into opportunity.