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Finance

Finance. Prepared for GrowMark Director Training. Key to Success: Balance. Business. Market for Goods or Services. Market for Debt & Equity. Goods/Services Produced. Goods/Services. Demanded. $. $. Business Processes. ROA/ROE. Price/Quality. Assets. $. Risk/Return.

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Finance

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  1. Finance Prepared for GrowMark Director Training

  2. Key to Success: Balance Business Market for Goods or Services Market for Debt & Equity Goods/Services Produced Goods/Services Demanded $ $ Business Processes ROA/ROE Price/Quality Assets $ Risk/Return

  3. What is finance? • Initially it was a discipline that focused on managing the liabilities and equity side of the balance sheet. • Corporate governance on behalf of equity investors. • Capital structure. • Capital budgeting to ensure that sufficient return was generated for funds.

  4. How Does Finance Work? Securities Securities Financial Institutions Financial Markets Funds Funds Funds Demanders of Funds Suppliers of Funds Securities Funds Securities Funds Funds Securities Securities

  5. What is the Goal of the Corporation? • Maximizing firm value? • Maximizing shareholder wealth? • What is the goal of the co-operative?

  6. Co-operative Balance Co-operative Goods/Services Produced Goods/Services Market for Debt Members Patronage $ $ Business Processes Revenue $ Interest Price/Quality Investment $ Assets $ Perceived cost/benefit Risk/Return

  7. What is the role of the board of directors? • Supervise managers of the corporation. • Set corporate policy. • Approve large corporate expenditures.

  8. Supervise Management • Assess performance: • Financial statement analysis • Liquidity •Efficiency • Leverage •Profitability • How well have they achieved the ultimate goal the of cooperative? • Setting salary and bonus. • Hiring, firing, disciplining (as needed).

  9. Set corporate policy • The board is in a unique position to set policies about: • Pricing • Retention of earnings • Financial risk policy (capital structure) • Patronage payments • Strategic planning

  10. Capital Expenditures • Typically capital budgeting is used to analyze capital budgeting decisions. • According to a 1997 study of American Agricultural co-ops: • 79% used Payback Period • 58% used IRR • 56% used Profitability Index • 51% used NPV

  11. Capital Budgeting • NPV, Profitability Index and IRR all assume that the organization is trying to maximize firm value. • They also assume a WACC can be calculated. • Cost of equity is difficult for co-operatives. • NPV can be used to test whether the long-term capital structure will shift.

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