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
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.
- 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
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
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.
- 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
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:
But remember, it
is not easy to borrow money. The ability to
repay both principal and interest must be
shown and repayment obligations met
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.
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
- 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
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
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
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:
buildings, fixtures and equipment than are
really required to carry on the business.
Too many vehicles
being used leading to wasted capital and
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
- 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.
- 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