Acquiring and Maintaining Adequate Equity

Phil Kenkel

Bill Fitzwater Cooperative Chair, Oklahoma State University

In a recent national project, academic researchers, cooperative managers and members, USDA, agricultural foundations and other stakeholders collaborated to identify the critical issues facing agricultural cooperatives. A two-stage Delphi survey was conducted, followed by expert panel sessions in Washington, D.C. and Minneapolis, Minnesota. The material below summarizes some of the findings from the project.

The major financial issue identified by the panel of cooperative experts was the need to acquire and …

Cooperative Financing

Author: Chris Peterson, Michigan State University, peters17@msu.edu

 

What is finance and why does it matter to cooperatives?

In the context of business firms, finance encompasses all aspects of raising and using cash and related funds for the long-run and short-run purposes of a firm. Finance includes cash management (taking in and expending cash), extending and using trade credit (accounts receivable and accounts payable), investing in long-run assets (e.g., property, plant and equipment) and short-run assets (e.g., inventory), raising funds (e.g., …

Cooperative-Level Profits

Author: Chris Peterson, Michigan State University, peters17@msu.edu

Historically, cooperatives were thought of as “nonprofit” or “not-for-profit” organizations. These terms confuse the original notion of the operation-at-cost principle with profit-generating ability. Like all businesses, cooperatives need to generate profit to survive and prosper. They are never in business merely to break even.

Like all businesses, cooperatives create revenues through sales and have expenses. The difference between revenues and expenses is profit or net income just like any standard business would have. …

Returning Cooperative-Level Profits: Mechanics of Patronage Refunds

Author: Chris Peterson, Michigan State University, peters17@msu.edu

The mechanics of returning net income to members is rather straightforward. On an annual basis, net income is divided by patronage revenue. Assume that this number is 10 percent for a particular cooperative for a particular year. Each member receives a patronage refund equal to 10 percent of the value of the patronage business that the member did with the cooperative. If the member did $10,000 in patronage, the refund is $1,000 ($10,000 …

Defining Financial Condition and its Warning Signs

Author: Chris Peterson, Michigan State University, peters17@msu.edu

Because members are owners, they need to care about the financial condition of their cooperative. Financial condition reflects a firm’s ability to raise and use funds. Strong financial condition results from effective operating profitability (revenues exceed expenses), efficient asset management (only necessary and profitable assets are invested in), efficient capital structure management (liabilities are not used in excess) and appropriate pay out of returns to owners through dividends and appreciation of ownership value. …

Future Challenges for Cooperative Finance: Reasons that more Capital, not less will be Essential

Author: Chris Peterson, Michigan State University, peters17@msu.edu

The good news about cooperative finance is that many members coming together to form and operate a cooperative have more financial resources collectively than each would have alone. As a result, cooperatives allow members to reap returns on assets related to their personal operations that they could not otherwise reap. But challenges exist for cooperatives and their members in the financial arena.

As the only source of equity capital, the total pool of …

How should cooperatives make and pay out their profits?

Author: Chris Peterson, Michigan State University, peters17@msu.edu

Every cooperative has to struggle with the proper balance between cooperative-level profits (net income and patronage refunds) and member-level profits. Some suggestions can be made to guide these key cooperative financial decisions.

(1) Cooperatives should attempt to create a significant amount of their returns at the cooperative level. The ability to more objectively measure these returns provides the motivation for this recommendation. The subjectivity of measurement and variability of return evaluation makes reliance …

Why Cooperatives need Money and why Members need to Invest Money

Author: Chris Peterson, Michigan State University, peters17@msu.edu

The fundamental principles of cooperatives clearly indicate that members use and own the cooperative. The user role does not entail anything more than normal patronage of any business. If you buy from the cooperative (or any other type of business), you need to pay for what you buy, or if you sell to a cooperative (and/or other type of business), the cooperative needs to pay you. There is nothing unusual or unique about …