Agribusiness Library LESSON L060076: THE GOVERNANCE AND OPERATIONS OF A COOPERATIVE

Objectives 1. Explain the differences between a cooperative and a for-profit company. 2. Analyze the role/duties of the members/owners, board of directors, and manager in a cooperative. 3. Describe open membership and criteria for membership. 4. Explain how to use a cooperative balance sheet and income statement.

Terms Assets Balance sheet Current assets Current liabilities Fixed assets Income statement Liabilities Long-term liabilities Operating loans Revenue

 Business differences  A. Characteristics unique to a cooperative  1. The first goal is member service.  2. Owners are members.  3. It provides a service to members at a cost to make a profit, but the cooperative shares profits with members.  4. Members are people who use the business.  5. Members have an equal say in the business.  6. All members have one vote on company decisions.

 B. For-profit company  1. The ultimate goal is to make money.  2. These companies sell products or services for a maximum profit.  3. The more money a person has invested, the more decision-making ability he or she receives.  4. A person does not have to use or be a member to be an owner in the business.  5. It shares profits based on the amount a person has invested.

 Roles and duties  A. Members/owners  1. These people provide direction for the cooperative.  2. They educate the public about cooperatives.  3. They maintain the high ethics of the cooperative.  B. Board of directors  1. It is comprised of members.  2. It carries out membership philosophies.  3. It provides leadership and makes decisions about the economic direction of the cooperative.

 C. Manager  1. The manager is the decision-making element.  2. He or she has total control of the day-to-day operations of the cooperative.  3. The manager is in charge of financial reports.  4. The manager combines ideas, processes, materials, facilities, and people to effectively provide the needed services to members/owners.  5. In addition to providing good service, he or she maintains financial soundness and implements operating efficiencies to successfully meet goals.

 Membership in a cooperative  A. Open membership  1. All users of the cooperative have the right to membership.  2. Each member has an equal right to a say in the operation and achievement of social goals in the cooperative.  3. Members are rewarded with a share of profits based on the amount of profits of the cooperative that year.  B. Becoming a member  1. The only requirement of membership is use of the cooperative.  2. Some cooperatives may charge a one-time minimal joining fee.

 Balance sheets and income statements  A. The balance sheet is a tool used to report the financial position of the cooperative at a given point in time.  1. Balance sheets are usually developed at the end of the month, quarter, or year.  2. A balance sheet provides assets against liabilities plus member equity.  (Assets = Liabilities + Equity.)  Assets are resources owned by the cooperative, and liabilities are debts owed by the cooperative.  Equity is the member’s interest in the cooperative.

 a. Assets are shown as current assets and fixed assets.  (1) Current assets are credits that are expected income to be converted into cash within a year.  An example is a fertilizer dealer who has nitrogen in stock or a feed store that has an inventory of dog food.  Accounts receivable are considered current assets.  (2) Fixed assets are those items the cooperative will use during normal operations.  Generally, fixed assets do not disappear over a period of two to three years.  An example is a fertilizer dealer who has buildings, equipment, machinery, and trucks or a feed store that owns a building and a forklift.

 b. Liabilities are shown as current liabilities or long-term liabilities.  (1) Current liabilities are debts paid within one year.  An example is a fertilizer dealer who has accounts payable (operating loans).  Operating loans are loans that will be paid within one year.  An example is the purchase of nitrogen that will be sold within a year; then the fertilizer dealership will pay off the loan.  (2) Long-term liabilities are those debts due beyond the next 12 months.  An example is a fertilizer dealer who has a loan on a fertilizer truck for the next five years.

 B. The income statement reports the results of all business transactions of the cooperative that occurred during a certain time period.  Income statements may be developed monthly, quarterly, or yearly.  (Profit – Expenses = Net Income.)  1. Income statements show the total dollar revenue of the cooperative, the total expenses, and the resulting net income (or loss).  Revenue is the monetary amount produced by the cooperative from operations.

 2. Components of an income statement  a. Revenue can come from several sources, such as selling merchandise in a supply cooperative, charging members for services, or marketing products.  b. An example is a fertilizer company’s total bulk fertilizer sale of $120,000.  c. The cost of the material must be subtracted first.

 d. For instance, the fertilizer company sold $120,000 worth of bulk material, but the cost it paid for the goods from the distributor was $20,000.  The $20,000 will then be subtracted from the $120,000, resulting in a gross margin or profit of $100,000.  e. In some cases, there will be a service cost.  In the fertilizer example, the service would be spreading the fertilizer.  Therefore, the service cost will be added in as revenue.  f. Expenses are listed and then totaled.  g. Then it is necessary to calculate it.  (Profits – Expenses = Net income.)

REVIEW How does a cooperative differ from a for- profit company? How do cooperative roles differ among members, the board of directors, and management? What is open membership, and how can a person become a member? How do you use a balance sheet and income statement?