Author: Chris Peterson, Michigan State University,
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., short- and long-term debt, preferred equity and common equity) and returning funds to debt holders (principle and interest) and investors (dividends and stock retirement). Cash and related funds are the life blood of any firm. If their flow is not handled properly, the firm suffers. If the flow is handled well, the firm is in a position to prosper. The finance function within a firm ensures to the extent possible that the flow of funds fully supports the needs of the business for successful performance.
- Why Cooperatives need Money and why Members need to Invest Money
- Defining Equity and Members’ Role as a Unique Source of Equity
- Defining Financial Condition and its Warning Signs
How is cooperative finance different from conventional business finance?
One of the key differences between cooperative finance and conventional finance has already been noted: Members use and own the cooperative business. Therefore, members are the unique source of equity capital for cooperatives. It turns out that this primary difference directs several other critical differences between cooperative finance and conventional finance.
- Return of Cooperative Profits
- True Proportional-to-Capital Dividends
- Where Profits are Generated
The bottom line is that unifying the user and the owner in a cooperative business structure does change the nature of cooperative finance in these three critical ways: (1) profits are paid in the vast majority of circumstances to patronage and not to capital (thus the classic cooperative term, patronage dividends), (2) capital dividends are strictly limited, and (3) some profits that arise from cooperative patronage actually occur at the member level and not the cooperative level.
Where do cooperative profits come from and how are they paid out to members?
We now move on to a deeper consideration of where cooperative profits come from.
- Cooperative-Level Profits
- Returning Cooperative-Level Profits: Mechanics of Patronage Refunds
- How should cooperatives make and pay out their profits?
Resources
Current Challenges in Financing Agricultural Cooperatives, Choices magazine, Agricultural and Applied Economics Association, 2011 – Current challenges in agricultural cooperative finance are discussed. Finance is an important topic for senior cooperative leaders and boards of directors. Education is needed on how to align cooperative finance principles with cooperative principles and business models.
Co-operatives describes a form of business organisations where a group of consumers or producers come together voluntarily or out of their free will to form an association with the aim to produce, distribute or consume a particular good or service. A co-operative can therefore be seen both as a business organization and an association.
In a co-operative, the owners are united often by the fact that they have a common interest. One main reason why people form co-operative is because they believe that by coming together, they can better protect their interest.
WHAT ARE THE SOURCES OF INCOME OF CO-OPERATIVE SOCIETIES?
Savings and contributions of its members
To raise capital, Co-operative Society members may decide to pull all their personal savings together to use as capital with which they will start their business operations. Normally, the number of shares a member has is commensurate with the amount of money or contribution made by the member. The greater the amount, the more the shares he or she will own. Financing can also be derived from the annual, monthly or weekly contributions or dues collected from its members. This money may be given back only when the member decides to leave the organization.
To finance their business, a co-operative society can take a loan from a financial institution or a bank. Financial institutions usually see a co-operative society as a much safer body to lend money to than leading it to them individually. This kinds of syndicated loan allows for proper use of co-operatives money because the use of the funds is not left to the care of just one person, since these loans are secured by the collateral of several members and not just one person, offering a much better guarantee of repayment.
Credit Purchasing or Purchasing on Credit
Co-operatives can also make purchase on credit from their suppliers. This enables the co-operative to be able to engage in their desired business without having to spend money up front. Once the goods bought on credit are sold, the co-operative may keep the profit after paying back for the amount of goods obtained on credit. This way a co-operative is gradually able to raise the capital they require.
Government Subsidies and Government Subvention
Governments can also decide to subsidize the things cooperatives buy. For example, if a product is sold for $ 20, the government could decide to pay $5 of that amount on each of the items purchased by the co-operative, this increases the profit margin when the society sells the item. Subsidies are actually another way government gives money to co-operatives. Subventions are specified amount of money that organizations receive from government to help them run their activities. A government may decide to give subvention to a co-operative because the government feels that the co-operative is engaged in an area which is important to the government. For example, a consumer co-operative society which is very active in protecting consumers from being cheated or exploited by producers.
A government may decide not to tax the activities of a co-operative because the government believes that the co-operative’s operation is considered a social good. In other words, they are in the general interest of the public. These tax rebates are therefore a way of putting money into the activities of co-operative societies.
A co-operative can also receive money from both international and local donors in the form of Aids or grants. International organisations, who’s interest is in the kind of business the co-operative is engaged in, may decide to donate money, equipment or materials to the co-operative. This is often given to the co-operative in the form of aids or grants.
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This section outlines the various finance options you have as a co-op.
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