The Member Investment
Investing risk capital is a basic member responsibility. The initial investment required (equity capital) from each member will be determined by the projected cost of facilities, estimated daily volume of business, cash flow requirements, projected number of members, and their volume or use of the business.
Members’ initial risk capital investment should be large enough for them to realize they have a financial stake in the business to protect. If the investment ( equity) requirement is based on volume (vs. number of members), the investment should be in proportion to their expected use. Those who wish to contribute more than their share may purchase preferred stock or capital certificates that earn fixed dividends, but carry no additional voting privileges. Members may also provide short-term debt capital in the form of certificates of investment.
Members provide additional amounts of risk (equity) capital as they use their cooperative. One method is through per-unit capital retains. The cooperative deducts from transactions an amount based on the value or quantity of services provided or products marketed. Another method is to retain part of the cooperative’s net earnings at the end of each business year. Under both of these methods, the risk capital (equity) investments are credited to members’ equity account in the cooperative’s accounting system.
Like other businesses, cooperatives must build financial reserves. These can be used both to carry them through times when operating expenses exceed income and to financial growth. Sometimes, part of these reserves is dedicated to a specific purpose, such as covering uncollectible accounts (bad debts). Another portion may be set aside to fund a new facility or the startup of a new member service.
Accumulated reserves relieve the pressure on the cooperative to borrow money or reduce important services through tough times. And they lessen the likelihood the cooperative will have to ask the members for a direct investment of additional risk capital to meet unexpected needs.
As part of the capitalization plan, the steering committee estimates the amount of reserves that will be needed and the method of obtaining them. State law should be checked for rules on reserve levels or methods of accumulation.
The membership fee or payment for a share of stock is usually retained by the cooperative, at least until the membership is terminated. However, another element of the capitalization plan should be a strategy for revolving member equity capital related to business done with the cooperative, retained patronage refunds, and per-unit retains. When the cooperative’s equity is sufficient to meet its needs, a portion of each year’s income should be used to redeem the oldest patronage-based equity.
This equity is replaced by funds retained from the current year’s patrons. The schedule for revolving equity is set by the board of directors, A systematic equity redemption program keeps the cooperative financed by current users in proportion to their use.