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Fiscal Year 2010 Operations and Capital Budgets

The approved operations and capital budgets for fiscal year 2010 (FY10) were carefully reviewed by the Finance Committee and then presented to the full Board and approved on June 16th, 2009.

Approved Operating Budget FY10 Sales
We are projecting sales of $17,810,172 for fiscal year 2010 (FY10). This sales estimate represents a 2.4% decrease over our actual sales for FY10. Two events—the opening of Hy-Vee in Fall 2009 and Williamson Street road reconstruction in Spring/Summer 2010—are expected to negatively impact the Co-op’s sales. The Board and management have agreed to a lower sales target in order to prudently plan expenditures, but are concurrently mitigating these issues with the goal of exceeding budgeted sales.

Gross margin
Gross margin refers to the percent of sales that is left after subtracting the cost of goods sold, which then allows us to fund all store operations. If we are careful with these operating costs, it also allows the Co-op to generate a small profit as directed by the Board of Directors.

The budgeted gross margin of 35.4% represents a target that is slightly lower than last year, reflecting our continued focus on passing more and better deals on to our Owners. Over the last year, store staff has diligently re-worked backstock areas to allow more room for our product buyers to take advantage of more vendor discounts. This work recently helped us triple the size of our Owner Rewards promotional program! For more details onthe Co-op’s efforts to improve pricing for Owners, see Assistant Store Manager Dan Frost’s April 2009 Reader article: http://www.willystreet.coop/article/900.
Personnel expenses

FY10 personnel expenses are budgeted at 25.4% of sales. This is an increase over what we achieved in FY09 due to higher benefit expenses. Health insurance premiums alone are expected to grow 15% in the coming year! There are four governance policies set by the Board that provide a framework for the Co-op’s personnel goals and corresponding budgeted expenses:

  1. Become an employer of choice in Madison.
  2. Enable the staff to earn a living wage.
  3. Strive to give staff a cost-of-living adjustment no less than every other year.
  4. Provide some portion of staff compensation contingent upon the financial performance of the Co-op.

Total operating expenses
Personnel expenses represent almost three-fourths of total store operating expenses. The rest of the store expenses include occupancy, operating, depreciation, administrative, governance, and communications, which are budgeted at 9.21% of sales. Overall, operating expenses are budgeted at 34.6% of sales.

Net income
Despite a budget that calls for decreased sales, a lower gross margin, and increased personnel expenses, we are still able to budget for a net income of 1.2% of sales which equals $209,093. This is made possible by reducing the Co-op’s operating and income tax expenses (see Patronage Refunds below). While our budgeted net income is aimed at modesty, compared to most conventional businesses, net income is needed to help capitalize the business and fulfill our directive to operate a fiscally sound natural foods grocery store.

For the first time in the Co-op’s history, the FY10 budget includes the allocation of patronage refunds to our Owners. Patronage refunds were approved by the Board in FY09, and enable the Co-op to return profits earned on sales to Owners in the form of cash and equity retained in each Owner’s name (different than Fair Share equity). According to Bruce Mayer, accountant at Wegner LLP, “Patronage refunds originated with the Rochdale Society cooperative principles that included ‘net margins distributed according to patronage.’ Since cooperatives had a long history prior to the enactment of the U.S. income tax laws, cooperatives were accommodated in the tax code.” Thus, for all profits that are allocated to Owners, the Co-op does not pay income taxes.

Please note that patronage refunds will be allocated the next time the Co-op earns a profit. If the Co-op signs a lease for a second retail location, the operations and capital budgets will be updated to reflect the increase in expenditures. In the case of expansion, it will likely take a couple of years to regain profitability. We will be sharing additional information with Owners regarding patronage refunds, once we get close to the end of our next profitable fiscal year.

Approved Capital Budget FY10
The FY10 approved capital budget total is $189,000. Items included in the capital budget typically involve significant investments to support strategic initiatives (sales growth and/or operational efficiency) or replacement of equipment. Though we invest significantly in the repair and maintenance of our equipment, we additionally allocate money in the capital budget for unanticipated equipment replacement.

The capital budget this year focuses on improving access and services to Owners. Mostly this is achieved by enhancing or replacing much of the Co-op’s aging information systems infrastructure. The highlight is a new point-of-sale (POS) system that will be rolled out in late Winter 2010. The POS will include new cash register and credit card terminals, and will provide flexibility to offer greater service to our Owners. It also has a back office component that will improve inventory management, increase product promotion capabilities, and provide an infrastructure that can grow to serve multiple retail locations. This system is budgeted to cost the Co-op $105,000. Additional information on the new POS will be made available to Owners as implementation approaches.

While the POS is by far the most expansive and impactful expenditure that Owners will notice in the coming year, other important expenditures are planned and are summarized in the table.