Retained Earnings or Returned Earnings?

Ask co-op members anywhere, "What's the purpose of this co-op, anyway?" and you'll likely get some variation of the answer, "To serve the members." Ask them how best to do that, however, and we get into some interesting philosophical discussions bordering on downright disagreements. In this column we're delving right into one of these "interesting discussions" by taking on the question of what a co-op is to do with that pesky money that is left at the end of the year -- if we're lucky and/or just doing our jobs right.

One school of thought has it that any and all assets of the co-op belong to the members, and therefore any money left over after conducting business on behalf of the members should be turned over to them immediately (if not before, in the form of overly generous discounts -- but that's another interesting discussion). We would agree that all assets of the co-op belong to the members, but not necessarily that any savings from operations should be immediately returned. Certainly any "surplus" of the co-op belongs to its members, just as assuredly as do the shelves and inventory. However, our role as co-op directors and staff is to use the assets entrusted to us in the best possible way to serve the membership.

Budgeting for a surplus will help your co-op remain flexible enough to take advantage of possibilities and fend off perils.

We would argue that often one of the poorest uses of member money is to hand it right back. The fact of the matter is that co-op members pool their assets because they have a dream that is larger than any one of them. They want to do something together that is different, bigger and better than what they could do as individual people.

One option we have is to run our stores hand to mouth, only making enough money to pay the bills. Members will get a little extra money in their pockets in the form of lower prices or bigger discounts, and that will make some your less far-sighted members happy. The trouble with this plan is that with no savings to speak of, when opportunity knocks at the co-op's door, nobody will be home. Or perhaps more importantly, when disaster strikes, the co-op won't have much more than a first aid kit. Some of us have felt the frustration of the first situation, and many of us have felt the despair of the second. These are not fun places to be.

A lack of sufficient equity, and in particular a lack of sufficient retained earnings (the cumulative savings or surpluses of years of operations) is a fundamental weakness in many consumer food cooperatives today. It makes us weak, it makes us vulnerable to competition, and most fundamentally, it makes us unable to serve our members as we should. Member investment makes a co-op strong. It cannot be stated too powerfully: The best thing you can do for your members today is to make sure that you are there for them tomorrow. And the day after that and the day after that.

Deliberately budgeting for a surplus will help your co-op remain flexible enough to take advantage of possibilities and fend off perils. Instead of sending everyone a check for $20 at the end of the year or giving them an extra 1% discount at the til that they won't even notice, why not save that money to expand your inventory, do a reset, replace that cooler, sponsor a series of nutrition classes, pay a staff member what she's truly worth, and then sock a portion away every year to save for the future? We would argue that the return to members of any one of these things -- including just saving the money -- far exceeds the value of their small individual allotment of "surplus." Much of the "value" comes simply from the fact of doing things together -- with each other and for each other.

How much surplus any one co-op should shoot for at the end of the year depends a lot on what the future holds for that store. A co-op planning for a future move will necessarily be looking to save a lot more money than a co-o with no such plans. A co-op facing the possibility of imminent competition may be spending more money on immediate store improvements and so may be saving less than the store planning a move. But they will be investing in their co-op just the same -- in the way that is most important to them. A store under no such threat of competition can afford to be a little more relaxed. As a general rule, a healthy target to shoot for is a pre-tax, pre-patronage net surplus of about 2% of sales.

Certainly members deserve some financial return for their investment, and a co-op with significant surpluses should implement a patronage rebate system to return some of that surplus to members. But if all your co-op is ever able to do is sock away a little money every year, you are still doing an important thing for your members. You are building the strength of the organization.

A co-op with sufficient retained earnings is a co-op with options. And a co-op with options stands a better chance of serving its members far into the future.

See other articles from this issue: #080 January - February - 1999