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Financing the Co-operative Society

Every business needs finance to purchase assets and fund working capital requirements. A Co-operative also needs finance for the same purposes. Some of the decisions relating to finance in Co-operatives are affected by their special nature but many of the decisions are affected by the same factors as apply in other types of business.

The chief problem in finance is to use capital most efficiently to secure the objectives of the Co-operative. Capital required to achieve these objectives on one hand needs to be paid for at the lowest possible cost. However, the holders of capital expect reasonable rates of interest on the funds under their purview.
Sources of Capital

Co-operative obtains its finance from:


Members, who purchase shares, make loans to or who open deposit (savings) accounts with the Co-operative

Returns from investments, where the Society gains from putting its funds into shares of other organizations, unit trusts, bonds, sale of assets, term accounts and profits from its sales and services.


External funding such as loans and grants from International agencies, commercial banks, Government' etc.
The main sources of capital for Co-operative Societies in Jamaica are as follows:

Shares - Each person has to invest an agreed amount of money in the Co-operative on becoming a member. This is called the share. The total money invested by members in shares is called the Share Capital. Members invest it in the Co-operative so that the Co-operative can use it for business purposes. 

Shares are only purchased by members (either as individuals or member Societies). Shares may be purchased outright or by installments. In some cases shares may be subscribed to by a cess or by purchasing them with bonus. Shares may either be withdrawable or transferable.
Where the Society is registered "with limited liability" the member’s liability is limited to the extent of the shares that the member has agreed to take up. Shares only receive a "Dividend" if there is profit or surplus.

Deposits - Members (and some case non-members) may place or leave money with the Society on deposit. This money is used to help finance the business. The terms of deposit are usually fixed by the Board and include the rate of interest to be paid. The maximum payable must be fixed in the Rules. Sometimes, deposits are entered in a share and deposit passbook or in some cases, usually when the deposit is for a fixed term, a certificate is issued.

Retained Earnings - A business needs to make money to be successful. The alternative is to lose it, in which case the business fails to make money. An individual may spend an amount and get back more. For example, you can buy at one price and sell at a higher price. The difference is gross profit, or as we call it in Co-operatives Gross Surplus

From the gross surplus for running the business, such as salaries, wages, rent, utilities financial charges are met. The balance running is known as Net Surplus and belongs to the owners of the business – the members. The members decide what portion of the net surplus to be distributed or retained in the business. Using the net surplus to expand the Co-operatives is the most economical way of finding money to run the Co-operative business.

Money that is retained in the business in the form of reserves is also part of the finance of the business. Reserves are the best form of capital because, of course, no dividend or interest is paid upon this capital, as it is collectively owned by all of the members. Reserves may be statutory of profit, or may be general or special reserves.

Loans - The Share Capital may not be enough for running the Co-operative properly and it may be necessary to borrow more. Money borrowed is called Loan Capital. Loans may be raised for either a general or a specific purpose. Normally they are for a specific purpose and the Society will need to show the person lending the money how the loan will improve the business of the Society and how the money will be repaid.

Loans are usually the most expensive form of capital and interest rates usually vary according to the level of security available to the lending institution, and the terms of the loan.

The shortest-term loan is a Bank Overdraft and the interest rate is usually high. Longer-term loans are often in the form of a mortgage against a piece of land and/or buildings. Co-operatives can obtain different types of loans from:

  • Credit Unions

  • Credit Banks

  • Development Banks

  • Commodity Boards 

  • Commercial Banks

  • Government Agencies

  • Members

But remember, it is not easy to borrow money. The ability to repay both principal and interest must be shown and repayment obligations met consistently.

Creditors or Accounts Payable - It is often possible to obtain some finance by securing credit from your suppliers. This costs the supplier money to provide the credit and so may attract a hidden cost in the price of the supplies.

Retained Depreciation
- The Society’s assets need to be depreciated, by charging the operating accounts for the part of value expended. The depreciation is retained in the business although it does not show in the books of the Society as a source of finance. The value of the assets is in effect reduced by the amount of depreciation.

- This is a charge imposed on any product handled on behalf of its members by the Society as stipulated in the registered Rules of the Society. Any such charge remaining unpaid by members shall be considered recoverable in accordance with Sections 16(a) & 50 of the Co-operative Societies Act and Regulations.

Value for work done - This occurs where members perform duties, which have a value. This value is then deposited to the members’ share accounts at their request, which would result in an increase in Capital.

The Cost of Capital
- Different types of capital usually carry different rates of interest. The rate of interest on loans which are for an undetermined term e.g. overdrafts, loans without full security or loans for business with a high risk, usually carry high rates of interest. It is usual for the Coffee Co-operatives to offer future crops as security. This is called a crop lien. The cost of capital used in the business is a very important consideration. The Co-operative cannot afford to use capital in the business, which costs more than the return profit that is being made on that capital.

The Return on Capital (ROC) is determined by calculating the annual rate of net profit (without the inclusion of charges as expenses) and expressing it as percentage of the capital employed in the business.

The Use of Capital
- Capital is used to purchase fixed assets e.g. land, buildings and movable assets (e.g. fixtures and fittings) as well as stock and working capital, required to pay current expenses, to finance current crops or work in progress.

The decisions on the use of capital are all important and require that budgets be prepared in order to decide whether or not capital can be profitably employed in any particular enterprise.

Those decisions which are usually termed “Capital decisions” refer to the purchase of assets which are to be used in the business over a number of years i.e. fixed assets, require most careful consideration as they affect the long term viability of the business.

The other types of decisions on using capital in the business usually have shorter-term effects and can more easily be corrected, they nevertheless require to be dealt with by careful budgeting and control.

Over Capitalisation - A business is said to be over-capitalized when more capital is being used in the business than is really necessary to secure the objectives of the enterprise. Consequently the Return On Capital employed is unduly low and usually the capital is at risk due to inadequate control.

The most common inefficiencies in the use of capital are:

  • Too elaborate buildings, fixtures and equipment than are really required to carry on the business.

  • Too many vehicles being used leading to wasted capital and expenses.

  • Too much stock being held leading to deterioration in the value of the stock.

  • Too many and too much accounts receivable, caused by uncontrolled credit to members or customers.

  • Too large current account bank balances, capital being kept in accounts earning little or no interest when it could be used in the business or placed on investment to secure a reasonable rate of return.

Liquidity - It is insufficient to have achieved an operating profit, or an adequate Return On Capital (ROC) employed. It is also necessary to maintain a reasonable level of liquidity. This means sufficient cash must be available when it is needed in the business or to repay that borrowed capital or pay creditors.

In order to make sure that funds are available when they are required it is necessary to operate a “Cash Flow Budget”. This Budget is a plan, which sets out when cash will come in, and when it will be paid out.

The operation of a cash flow budget allows for planning of the use of finance and for decisions to be made when assets can be obtained, when loans are required and when investments can be made.

Management - The management of finance is an integral part of the management of any Co-operative and it is necessary that any manager with overall responsibility for the management of a Co-operative be fully aware of his responsibilities in this regard. Hence, he must avail himself of pertinent information relative to the environment surrounding the financial market and the cost of money, to be able to provide technical leadership regarding proper fiduciary management within the Co-operative.

registrar of D.C.F.S

The Department of Co-operatives and Friendly Societies (DCFS), an agency within the Ministry of Industry, Commerce, Agriculture and fisheries, continues its relentless pursuit of social equity and unity of purpose, which embrace the core values of decency, civility and co-operation. Read more...