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MEMBER COOPERATIVE

By Michelle Berry,2014-05-05 08:33
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MEMBER COOPERATIVE

MEMBER COOPERATIVE

FINANCIAL RATIOS & GUIDELINES

    TABLE of CONTENTS

     PAGE

    CASH FLOW

     Cash Flow / Long Term Debt .............................................................................. 3

PROFITABILITY

     Return on Invested Capital ................................................................................... 4

     Return on Invested Capital - Local ..................................................................... 5

     People & Related Expense / Gross & Service Income ......................................... 6

     Facility Expense / Gross & Service Income......................................................... 7

     Administrative Expense / Gross & Service Income ............................................ 8

CAPITALIZATION

     Long Term Debt / Invested Capital ................................................................... 9

     Stockholders’ Equity / Required Capital ........................................................... 10

     Retained Earnings / Stockholders’ Equity ......................................................... 11

LIQUIDITY

     Net Working Capital / Merchandise Sales ......................................................... 12

FINANCING GUIDELINES .......................................................................... 13

     2

    KEY RATIO

CASH FLOW / LONG TERM DEBT

Definition:

    Cash flow is defined as the change in working capital for the fiscal year, prior to the

    change in long term debt. Long term debt is the amount shown at the beginning of

    the fiscal year.

Purpose:

    This ratio measures the company’s ability to service its long term debt and interest as

    well as provide for future growth such as facility expansion or acquisition. Low

    ratios over a number of years will make it difficult for the company to make long term

    debt payments, purchase needed capital assets, and take advantage of acquisition

    opportunities.

Guidelines:

    GOOD 35% and above

    NEEDS REVIEW 25 - 35%

    PROBLEM Below 25%

     3

    KEY RATIO

RETURN on INVESTED CAPITAL

Definition:

    Return is defined as pre-distribution net income plus long term debt interest. Invested

    capital is the sum of all long term liabilities and stockholders’ equity.

Purpose:

    This ratio measures the amount of profit generated by the company for each dollar

    invested. Since long term liabilities are considered invested capital, the long term

    debt interest is not considered an expense for purposes of this calculation. Low

    ratios over a number of years will strain the company’s ability to generate positive

    cash flow. This will result in higher than desired debt ratios as the company uses

    more and more debt to meet its cash requirements.

Guidelines:

    GOOD 18% and above

    NEEDS REVIEW 13 - 18%

    PROBLEM Below 13%

     4

    PROFITABILITY RATIO

RETURN on INVESTED CAPITAL - LOCAL

Definition:

    Local return is defined as pre-distribution net income less patronage refunds received,

    plus long term debt interest. Invested capital is the sum of working capital, net fixed

    assets and other long term assets.

Purpose:

    This ratio measures the amount of profit generated by the company on “local assets”,

    or assets it has control over. Term debt interest is generally not associated with the

    company’s stock investments, and is therefore not considered an expense for purposes

    of this calculation. Ratios below the company’s cost of money over a number of years,

    will indicate to the lender that your company is overly reliant on regional

    cooperatives for its earnings, which could be risky should the regionals’ earnings

    begin to decline.

Guidelines:

    Cost of Long Term Money:

     Currently (1/03) 5.00%

     5

     PROFITABILITY RATIO

PEOPLE & RELATED EXPENSE / GROSS & SERVICE INCOME

Definition:

    Total people costs typically include wages, payroll taxes, employee benefits and

    employee relations. This number is then divided by total gross and service income.

Purpose:

    This ratio is a measure of the proportion of gross income used to cover people costs.

    A high ratio when gross income/sales meets the guidelines indicates people costs are

    too high. A high ratio when gross income/sales is below the guidelines may indicate

    a twofold problem in both high people costs and inadequate gross income generation

    on product sales. Since people costs make up over 50% of total operating expenses,

    these must be monitored closely.

Guidelines:

    GOOD 46% and below

    NEEDS REVIEW 46 - 49%

    PROBLEM Above 49%

     6

    PROFITABILITY RATIO

FACILITY EXPENSE / GROSS & SERVICE INCOME

Definition:

    Total facility expenses typically include truck, repair, utility, insurance, property tax,

    lease and depreciation expenses. This number is then divided by total gross and

    service income.

Purpose:

    This ratio is a measure of the proportion of gross income used to cover facility costs.

    A high ratio when gross income/sales meets the guidelines indicates facility costs are

    too high. A high ratio when gross income/sales is below the guidelines may indicate

    a twofold problem in both high facility costs and inadequate gross income generation

    on product sales.

Guidelines:

    GOOD 35% and below

    NEEDS REVIEW 35 - 38%

    PROBLEM Above 38%

     7

    PROFITABILITY RATIO

ADMINISTRATIVE EXPENSE / GROSS & SERVICE INCOME

Definition:

    Total administrative costs typically include sales promotion, bad debts, meeting,

    director, professional, office supply and computer expenses. This number is then

    divided by total gross and service income.

Purpose:

    This ratio is a measure of the proportion of gross income used to cover administrative

    costs. A high ratio when gross income/sales meets the guidelines indicates

    administrative costs are too high. A high ratio when gross income/sales is below the

    guidelines may indicate a twofold problem in both high administrative costs and

    inadequate gross income generation on product sales.

Guidelines:

    GOOD 7% and below

    NEEDS REVIEW 7 - 8%

    PROBLEM Above 8%

     8

    KEY RATIO

LONG TERM DEBT / INVESTED CAPITAL

Definition:

    Long term debt is defined as all long term liabilities including amortized or revolving

    term debt, long term capital leases, debentures and deferred income taxes. Invested

    capital is the sum of all long term liabilities and stockholders’ equity.

Purpose:

    This ratio measures the extent of the company’s debt financing versus equity

    financing. Low ratios maximize the degree of control and flexibility the board and

    management have over the company’s affairs; however, a mix of leverage and equity

    within the guidelines can also maximize growth and shareholder return.

Guidelines:

    GOOD Below 20%

    NEEDS REVIEW 20 - 25%

    PROBLEM Above 25%

     9

    CAPITALIZATION RATIO

STOCKHOLDERS’ EQUITY / REQUIRED CAPITAL

Definition:

    Stockholders’ equity is defined as the sum of all capital stock outstanding, stock

    credits, paid in capital and retained earnings. Required capital is the sum of net

    fixed assets, long term investments, other long-term assets, working capital @ 8% of

    merchandise sales and 2% of grain sales.

Purpose:

    This ratio measures what portion of the company’s assets are financed by the

    stockholders’ assuming working capital at the NO PROBLEM guideline level. A low

    ratio indicates the company is being financed too heavily with debt capital.

    Ramifications of a low ratio over time are the same as for a high long term debt /

    invested capital ratio.

Guidelines:

    GOOD 80% and above

    NEEDS REVIEW 70 - 80%

    PROBLEM Below 70%

     10

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