1 / 38

Unit IV.

Unit IV. Co-op Finance. Co-op Balance Sheet. = a financial statement that lists the value of what the co-op owns (assets), what it owes to others or creditors (liabiilties), and what the owners have invested in the business (net worth or equity). Unique Co-op Balance Sheet Items. Assets

cormac
Download Presentation

Unit IV.

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Unit IV. Co-op Finance

  2. Co-op Balance Sheet = a financial statement that lists the value of what the co-op owns (assets), what it owes to others or creditors (liabiilties), and what the owners have invested in the business (net worth or equity)

  3. Unique Co-op Balance Sheet Items • Assets Investments in other co-ops • Liabilities Cash patronage refunds payable Accounts payable to patrons Loans payable to bank for cooperatives • Net Worth Allocated credits Retained patronage refunds Certificates of investment Revolving equity Surplus Unallocated reserves (= retained earnings)

  4. Allocated Equity Capital = • Money invested in a business that can be assigned or attributed to and, therefore, claimed by an individual owner

  5. Co-op Sources of Funds • Equity Capital • Debt Capital • Operations: Earnings, Depreciation • Sale of Assets

  6. Co-op Equity Capital Characteristics

  7. Co-op Needs for Equity • To provide services • To survive adversity (risk capital) • To obtain credit

  8. Equity Capital of 100 Largest Ag Co-ops % of Total Capital Typically, 35-40% of total  co-ops have difficulty obtaining sufficient funding from members.

  9. Per-Unit Capital Retains = investments in a co-op made by patrons through check-offs or deductions that are based on the dollar value or physical quantity of products marketed/purchased through the co-op. Purpose: For capital investments, not for operating expenses. Example Co-ops: Swiss Valley, Sunkist

  10. +s and –s of Alternative Co-op Equity Types • Direct Investments + May provide required start-up capital + Indication of prospective member interest - Difficult to collect

  11. Retained Patronage Refunds + Easy to collect + May encourage nonmembers to become members + Equity provided in proportion to use - Fluctuate with earnings - Often considered debt or temporary capital by members - May lead to over expansion

  12. Per Unit Retains + Same as patronage refunds plus independent of earnings - Same as patronage refunds plus often viewed as a price increase instead of an investment

  13. Unallocated Equity + reserve against losses + helps relationships w/creditors + mbrs less likely to ask for it back + may be some tax advtgs - not consistent w/operation at cost - ownership by mbrs not as clear

  14. Co-op Uses of Funds • Pay cash patronage refunds • Pay dividends • Redeem certificates of equity • Redeem capital stock • Pay taxes • Redeem bonds • Repay loans • Increase working capital • Asset investment

  15. Co-op Cash Patronage Refunds • Avg. = 38-40% • Most Common = 20-24%

  16. Equity Redemption • The payment to members (in cash or other property) of previously retained patronage refunds or capital retains

  17. The authority and responsibility for administering a co-op’s program for acquiring and redeemingequity belong to the board of directors.

  18. General Co-op Equity Redemption Methods • SYSTEMATIC: A definite plan carried out with a fair degree of predictability and regularity • SPECIAL EVENT: Carried out in response to special events occurring which do not happen very predictably or regularly

  19. Special Event Methods • Death (most common spec. event = 95%) • Quit farming • Reach certain age (2nd most common spec. event = 33%) • Retire • Patron demand or hardship • Patron no longer active

  20. Why Co-ops Need to Redeem Equity? • To insure ownership by those who use the business. • To encourage patronage by producers. • To counteract negative image co-ops may have on this matter. • To force improved financial planning on management. • To reduce legislative pressures for mandatory equity retirement. • To reduce possible conflicts between active members and inactive members.

  21. Systematic Methods • Revolving Fund • Base Capital • Percent of Total Equities

  22. Equity Redemption Practices TYPE% of Co-ops Systematic only 16 Special only 34 Systematic and special 26 No program 10 Equity not redeemable 14

  23. Systematic Plan% of Co-ops Revolving Fund 91.9 Base Capital 2.4 % of Equities 4.5 Other 1.2

  24. Equity Collection and Redemption Evaluation Criteria • Adequacy of capital provided. • Extent to which it results in members supplying equity in proportion to use. • Flexibility. • Ease of understanding it. • Ease of administering it.

  25. Revolving Fund Method • Oldest equities redeemed first. • Equities redeemed on a first-in, first-out basis

  26. Co-op Revolving Fund Example

  27. Revolving Fund +s and -s + Easy to understand + Easy to administer + Flexibility +/- Results in user ownership • Erratic source of funds • Unrealistic member expectations

  28. Length of Revolving Fund% of Co-ops 1-5 years 8 6-10 22 11-15 25 16-20 26 21-25 7 25+ 12

  29. Base Capital Method • Determine co-ops equity need (goal) • Determine each member’s share • Determine how to adjust (#2 above) from actual to desired Example co-ops: CHS, CF Industries

  30. Co-op Base Capital Plan Example Assumptions: 1) 5-year base period 2) desired equity = $18.5 mil. ___________________ 1Over past 5 years. 2Share of business x desired equity.

  31. Base Capital +s and -s + Direct link between use and investment + Flexible + Proper member expectations • Hard to understand • Hard to administer

  32. % of Total Equities = same % of all equities redeemed (regardless of age)

  33. Co-op % of Equity Redemption Example

  34. % of Equities +s and -s + Easy to understand + Easy to administer + Attractive to new (young?) members + Flexible - User ownership

  35. Sources and Uses of Funds $ Sources = $ Uses To  Use X  1.  Sources 2.  Other Uses

  36. Alternative Ways of Increasing Equity Redemption • Increase earnings • Decrease other uses of funds (e.g. cash patronage refunds, dividends) • Increase debt • Redemption earlier but at a discount • Allow for member exchange of equity • Use more unallocated equity (if it increases cash flow) • Convert to debt or preferred stock • Increase assistance from regionals

  37. Increasing Cash Patronage Refunds May - • Reduce capital investments • Reduce equity retirement efforts • Delay loan paybacks • Have short-run and long-run effects on co-op revenues and costs • Impact member satisfaction • Impact co-op’s ability to meet service/product needs of members • Increase need to borrow or obtain money from other sources

  38. A Potential Source of Conflict: Capital Needs of Co-op Vs. Redemption Expectations of Members

More Related