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Business LibreTexts

3: Income Distribution and Equity Decisions

  • Page ID
    4265
  • The first chapter described the features shared by cooperatives and mutual and non-cooperative corporations, while Chapter Two discussed features that are unique with regard to how members participate in benefits, control, and ownership. This chapter focuses on participation in benefits and how cooperatives distribute income, because that is how most members think about their membership in a cooperative. Cooperatives and mutuals must be competitive like any business and aligned on customer needs. They must be managed as businesses that can compete in a capitalistic and highly competitive market economy. Many cooperatives operate simply to allow producers to achieve economies of scale and increased bargaining power in purchasing inputs and marketing their commodities. The same can be said about consumer cooperatives and mutual insurance firms.

    Irrespective of its purpose and role, a cooperative should strive to be as profitable as possible and then distribute those profits to its patrons. A core principle of the cooperative and mutual business model is service or operation at cost. This does not imply that the cooperative or mutual should set prices to eliminate the opportunity for a profit. Instead, a cooperative should implement this principle by being competitive in the market place, making as much profit as possible, and then distributing profits and residual cash to patron-owners. Profits should be distributed in a way that maximizes the long-run benefits to members, keeping in mind that members have heterogeneous interests due to their unique places in their business and personal life cycles. This distribution of patronage refunds or per unit retains implements the service at cost principle of cooperatives. Patron-owners get what is left over through a combination of cash patronage payments (e.g., immediate redemption), cash equity redemption payments, and cash payments of net marketing proceeds. A member’s life cycle encompasses their use as a customer of the cooperative, which differs as they age and begin, expand, or contract their business or household.

    As mentioned in Chapter Two, cooperatives are participatory organizations. Two of the three ways that members participate include benefits and ownership. The easiest way to understand these concepts is to observe their impact on the income statement and balance sheet. The three ways in which members participate in a cooperative comprise an interrelated set of decisions that influence each member and provide unique challenges for boards of directors and management to develop a business strategy that takes into account the impacts on a cooperative’s balance sheet.