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3.1: Introduction

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  • Cooperative firms are unique in that they create equity when they pay patronage refunds in the form of common stock, and they destroy equity when they redeem previously issued equity for cash. Cooperatives should actively manage their balance sheet when making decisions on income distribution and equity redemption. A cooperative must position and protect the business for short-run and long-run sustainability by adhering to a balance sheet management philosophy that manages both liquidity and solvency. Adequate risk capital must be provided by retaining and managing equity as an element in the overall business strategy. Then the cooperative should pay out to patron-owners any residual cash as cash patronage refunds and equity redemptions. As discussed in Chapter One, owners, as residual claimants, get what is left over in any business.

    The evaluation and choice of alternative strategies must be done within an integrated and comprehensive finance, strategy, and risk management framework. For cooperatives, this should include both the patron-producer or patron-consumer perspective and the cooperative business perspective. In other words, a cooperative can be viewed as an extension of the patron’s business, such as a farm or house, or as an independent firm that attempts to prosper in a market economy. Both perspectives are important.

    Most members of agricultural cooperatives are unique in that they seek to remain farmers in their own geography. That is, a member will not typically sell their farm and move to a geographic region or country to begin farming again. With that in mind, a member utilizes a cooperative to receive goods and services at a lower cost than they could by doing it themselves. Thus, a cooperative should align itself on the needs of its customers who are its members and owners, and help make them profitable and cost efficient so they can achieve the goal of remaining farmers in that geography. Many remain in multi-generational farming families and patronize the cooperative over generations.

    Generally accepted accounting principles (GAAP), and the basic structure and rationale of income, cash flow, statement of changes in equity, and balance sheets look the same for cooperatives as for other business



    entities. However, cooperative principles are embedded in these statements just like in legal statutes. They reflect the nature of transactions being done with members. It is important to have an understanding of accounting and finance to fully understand how a member participates in benefits and ownership. A good way to do this is to understand the impact of the economic transaction a member does with the cooperative as a customer, and observe its impact on the income statement and balance sheet.