Analysis and use of selected financial ratios as guides to management policies and practices of Michigan cooperatives

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ANALYSIS AND USE OF SELECTED FINANCIAL RATIOS AS GUIDES TO MANAGEMENT POLICIES AND PRACTICES OF MICHIGAN COOPERATIVES

by Rex Malcolm King

A THESIS Subm itted t o th e School of Graduate S tu d ies o f M i c h i g a n S t a t e C o l l e g e o f A g r i c u l t u r e and A p p l i e d S c i e n c e in p a r t i a l f u l f i l l m e n t of th e req u ire m e n ts f o r th e degree of

DOCTOR OF PHILOSOPHY

Departm ent o f A g r i c u l t u r a l Economics

1950

ProQ uest Number: 10008352

All rights reserved INFO RM ATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a com plete m anuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion.

uest. ProQuest 10008352 Published by ProQ uest LLC (2016). Copyright of the Dissertation is held by the Author. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code M icroform Edition © ProQ uest LLC. ProQ uest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 4 8 1 0 6 -1 3 4 6

ACKNOWLEDGEMENT S p e c i f i c m e n t i o n o f t h e names of a l l t h o s e who h a v e c o n t r i b u t e d t i m e , s k i l l an d a d v i c e t o t h e d e v e l o p m e n t o f t h i s s t u d y would e n t a i l c o n s i d e r a b l y more s p a c e t h a n i t ileg e.

is

p r a c t i c a l to devote to t h i s

p riv­

Th e a u t h o r , t h e r e f o r e , s i m p l y a c k n o w l e d g e s h i s d e b t t o t h e

many p e r s o n s who h a v e t h u s c o n t r i b u t e d * Among t h e p e r s o n s who, by r e a s o n o f u n u s u a l a s s i s t a n c e must be m e n t i o n e d by name a r e Mr. B. P. P a t t i s on , F i e l d R e p r e s e n t a t i v e o f t h e M i c h i g a n A s s o c i a t i o n o f F a r m e r C o o p e r a t i v e s , who p r o v i d e d much o f t h e o r i g i n a l d a t a u s e d i n t h e s t u d y and who p r o m o t e d and p u b l i c i z e d t h e p r o je c t t o t h e lo c a l c o o p e ra tiv e a s s o c ia ti o n s throughout t h e s t a t e . A l s o of g r e a t h e l p was t h e a d v i c e o f Mr* Lee T r u m b l e , Farm B u r e a u S e r v i c e s A u d i t o r , who h e l p e d t o c l a r i f y many p o i n t s r e g a r d i n g f i n a n ­ c i a l r a t i o s a nd t h e i r i n t e r p r e t a t i o n . Mr. A r t h u r How la nd, E x t e n s i o n E c o n o m i s t o f M i c h i g a n S t a t e C o l l e g e a l s o made many v e r y h e l p f u l s u g g e s t i o n s i n t h e c o u r s e o f t h e s t u d y r e l a t i n g t o t h e u s e and i n t e r p r e t a t i o n o f f i n a n c i a l r a t i o s . S p e c i a l t h a n k s a r e due t o t h e s e c r e t a r i e s

i n t h e d e p a r t m e n t who

so g e n e r o u s l y a s s i s t e d i n numerous t y p i n g a n d m a i l i n g a c t i v i t i e s a s s o c i a t e d w i t h t h e p r o j e c t , and t o Mrs. L o r a i n e B e i e r whose c a r e f u l and conscientious

p r e p a r a t i o n of t h e completed m a n u s c rip t speaks for

itse lf. F i n a l l y I w i s h t o t h a n k my D o c t o r a l C o m m i t t e e , D r . L. W* W i t t , C h a i r m a n , D r . 0 . U l r e y , D r . C. C. K i 1 l i n g s w o r t h , D r . W. R. F e e , G rad ­ u a t e C o u n c i l R e p r e s e n t a t i v e and Dr* He nry E. L a r z e l e r e , f o r t h e i r

v e r y c o n s i d e r a t e a d v i c e a n d g u i d a n c e t h r o u g h o u t my D o c t o r a l program* And t o Dr* L a r z e l e r e who s u p e r v i s e d t h i s s t u d y I w i s h t o e x p r e s s my a p p r e c i a t i o n f o r h i s e x c e l l e n t g u i d a n c e and f o r h i s c o n s i s t e n t e n c o u r a g e m e n t o f ray e f f o r t s t o p e r s o n a l l y i n i t i a t e m e th o d s a nd p r o ­ cedures in t h e conduct of th e p ro je c t*

CONTENTS

Preface C hapter I E v a l u a t i o n of R a t i o s P e rio d I Data (1947-48) S e le c tio n of Ratios D i s c u s s i o n of R a t i o s S u p p l e m e n t a r y Comments

Page 1 3 4 6 20

C hapter I I D e v e lo p m e n t o f R a t i o T e c h n i q u e s The " A v e r a g e " T e s t The " T h i r d s " T e c h n i q u e P e r i o d I I Data (194 8 -4 9 ) The P rim ary R a t i o s A n a l y s i s The Key R a t i o s A n a l y s i s

25 26 30 32 35

Chapter I I I A n a ly s is of R a tio s as Trend I n d i c a t o r s The Q u e s t i o n Trend R a tio s T e s t I n d i v i d u a l Records A n a ly sis C onclusions

39 39 43 51

C h a p t e r IV A p p l i c a b i l i t y o f S t a n d a r d s t o D i f f e r e n t Ty pe s o f C o o p e r a t i v e s The Q u e s t i o n A p p l i c a b i l i t y a s B et we en Y e a r s i n a A s s o c i a t i o n A p p l i c a b i l i t y t o D i f f e r e n t Type s o f C o o p e r a t i v e s A n a ly s is of V a ria n ce T e s ts L i m i t a t i o n s Im po se d by A n a l y s e s

53 53 55 56 60

Chapter V R a t i o E v a l u a t i o n by C o o p e r a t i v e A u d i t o r s The S u b j e c t R atios Q u e stio n n aire R atio R atings Comments o f A u d i t o r s O ther R a tio s Suggested G e n e r a l C r i t i c i s m s of R a t i o s D i s c u s s i o n of C r i t i c i s m s Use of R a t i o s by R e g i o n a l A s s o c i a t i o n s

62 62 63 64 65 70 71 72

C h a p t e r VI T echniques f o r F u r th e r Study

76

C h a p t e r VII Summary C o n c l u s i o n s

86

Appendix A Appendix B Appendix C B ibliography

page 89 100 106 108

1 PREFACE The b e l i e f t h a t m a n a g e rs a nd d i r e c t o r s o f c o o p e r a t i v e a s s o c i a t ­ i o n s c o u l d more e f f e c t i v e l y m e a s u r e t h e o p e r a t i n g e f f i c i e n c y and t h e f in a n c ia l c o n d itio n of t h e i r o rg a n iz a tio n s i f they understood th e use of r a t i o a n a ly s is

led to th e p re sen t study.

This b e l i e f , to g e th e r

w i t h t h e p r e m i s e t h a t a r e l a t i v e l y few r a t i o s p r o p e r l y u s e d would p e r m i t s u c h f i n a n c i a l a n a l y s i s , s u p p l i e d t h e f o u n d a t i o n up on w h ic h t h e s t u d y was b a s e d . The m a j o r o b j e c t i v e s o f t h e p r o j e c t we re ( a ) t o d e t e r m i n e what r a t i o s would b e s t s e r v e t h e p u r p o s e , ( b ) t o d e v e l o p a t e c h n i q u e f o r u s i n g t h e s e r a t i o s , and ( c ) t o d e t e r m i n e how many and wh at t y p e s o f c o o p e r a t i v e a s s o c i a t i o n s m i g h t be s u b j e c t e d t o t h e same s t a n d a r d s * The u s e o f r a t i o s i s a l o n g - r e c o g n i z e d p r a c t i c e i n b u s i n e s s analysis*

R a t i o s c o n v e r t u n c o m p a r a b l e f i g u r e s t o t h e common denom­

i n a t o r o f p e r c e n t a g e r e l a t i o n s h i p s w h i c h c a n t h e n b e compared a s between c o o p e r a tiv e s or as between a c c o u n tin g p e r io d s f o r a s i n g l e cooperative• One r a t i o ,

c u r r e n t a s s e t s t o c u r r e n t l i a b i l i t i e s , o b t a i n e d by

d i v i d i n g t h e f o r m e r by t h e l a t t e r

f i g u r e , f o r e x a m p l e , has l o n g

b e e n u s e d by b u s i n e s s men t o i n d i c a t e t h e a b i l i t y pay i t s

c u r r e n t d e b t s and e x p e n s e s .

of a business to

Subject to c e r ta in in h e re n t l i m i t ­

a t i o n s , t h i s r a t i o i s v e r y u s e f u l and i s e q u a l l y a p p l i c a b l e r e g a r d ­ l e s s o f t h e s i z e or n a t u r e o f t h e b u s i n e s s b e i n g a n a l y s e d * r a t i o , however, t e l l s

only a s m a ll p a r t o f t h e s to r y *

This

What a r e n e e d e d

a r e s e v e r a l r a t i o s w h i c h t o g e t h e r c a n be r e l i e d upon n o t o n l y t o t e l l t h e r e s u l t s o f f i n a n c i a l management p r a c t i c e s o f a g i v e n p a s t p e r i o d

2

b u t a l s o t o f o r e c a s t f o r tomorrow t h e r e s u l t o f t o d a y ' s p r a c t i c e s . R a t i o s which t o a l a r g e e x t e n t a c h ie v e t h i s and s e g r e g a t e d i n t h i s s t u d y .

g o a l ha v e b e e n t e s t e d

In Chapter I th e r a t i o s

use in t h i s study are discussed in d e t a i l ;

selec ted for

in Chapter I I th e o r ig in a l

d a t a w h ic h were u s e d i n t h e s t u d y and t h e t e s t s w h i c h w e r e made t o develop th e r a t i o a n a ly s is te c h n iq u e a re p re s e n te d ; Chapter I I I d e s ­ c r i b e s t h e v a lu e o f t h e r a t i o s as i n d i c a t o r s o f t r e n d s i n t h e o p e r a t ­ i n g p r a c t i c e s and t h e f i n a n c i a l c o n d i t i o n s o f t h e a s s o c i a t i o n s . C h a p t e r IV d e s c r i b e s t h e t e s t s w h i c h w e r e made t o d e t e r m i n e t o what e x t e n t t h e same r a t i o s t a n d a r d s c a n be a p p l i e d t o d i f f e r e n t t y p e s o f c o o p e r a t i v e s ; C h a p t e r V r e p o r t s on a q u e s t i o n n a i r e s u r v e y o f c o o p e r a t i v e a u d i t o r s r e g a r d i n g t h e i r u s e and e v a l u a t i o n o f s p e c i f i c r a t i o s ; a n d C h a p t e r VI d e s c r i b e s a p o s s i b l e t e c h n i q u e f o r c o n t i n u i n g t h i s

study

f o r r e s e a r c h p u r p o s e s and a s a s e r v i c e t o c o o p e r a t i v e a s s o c i a t i o n s .

3 CHAPTER I . E v alu atio n of R atios P e r io d I D a ta — (1947-48) The M i c h i g a n A s s o c i a t i o n o f Farm C o o p e r a t i v e s became i n t e r ­ e s t e d i n t h i s s t u d y and t h e r e f o r e o f f e r e d i t s way t h e y m i g h t be need ed *

s e r v i c e s i n whatever

The f i r s t r e q u i r e m e n t o f t h e p r o j e c t

was t o o b t a i n f i n a n c i a l s t a t e m e n t s from l o c a l c o o p e r a t i v e a s s o c i a ­ tio n s.

The A s s o c i a t i o n p r o v i d e d n e a r l y f i f t y s t a t e m e n t s and a

few a d d i t i o n a l one s w e r e o b t a i n e d fr om o t h e r s o u r c e s . was made t o

No a t t e m p t

g e t a random s a m p l e o f M i c h i g a n c o o p e r a t i v e s *

Rather

t h e p r o b l e m was t o o b t a i n en ou gh s a m p l e s o f t h e v a r i o u s t y p e s of c o o p e ra tiv e s t o provide a re a so n a b ly adequate s e le c tio n * Of t h e f i f t y - o d d s t a t e m e n t s c o l l e c t e d t h i r t y - n i n e w e r e found usable*

The r e s t wer e e i t h e r i n c o m p l e t e , wer e f o r a n

a c c o u n t i n g p e r i o d n o t a p p l i c a b l e t o t h e s t u d y or were c r e a m e r y associations*

The l a t t e r wer e n o t i n c l u d e d b e c a u s e t h e y d i f f e r

t o o much i n t y p e o f b u s i n e s s from t h e g e n e r a l s u p p l y t y p e s u s e d i n t h e study*

The e n d i n g d a t e s o f t h e a c c o u n t i n g p e r i o d s

of the

t h i r t y - n i n e c o o p e r a t i v e s r a n g e from A u g u s t 3 1 , 19 47, t o J u l y 31, 1948. The P e r i o d I a s s o c i a t i o n s cooperative a s s o c ia tio n s .

c o n sis te d o f d i f f e r e n t types of

They w e r e :

o il cooperatives, general

f a r m s u p p l i e s c o o p e r a t i v e s w i t h m a r k e t i n g income n o t e x c e e d i n g th irty

per cent o f t o t a l s a le s ,

and g e n e r a l f a r m s u p p l i e s c o ­

o p e r a t i v e s i n w h i c h m a r k e t i n g inco me a c c o u n t e d f o r more t h a n

4

t h i r t y per cent but le s s th a n s ix ty per cent of th e t o t a l d o l l a r sales.

Se e p a g e 6 1 .

A l t h o u g h t h e r e c o r d s d i d n o t r e p r e s e n t a random s a m p l e i t was b e l i e v e d t h a t t h e y w e r e enough r e p r e s e n t a t i v e o f M i c h i g a n c o o p e r ­ a t i v e s t o serv e a d e q u a te ly th e purpose of t h i s stu d y . S e le c tio n of R atios A d o z e n r a t i o s w ere s e l e c t e d f o r t h e s t u d y a f t e r d i s c u s s i o n w i t h c o l l e g e e x t e n s i o n men and a u d i t o r s h a v i n g kn ow le dg e o f op­ erations

o f c o o p e r a t i v e o r g a n i z a t i o n s and a f t e r e x a m i n a t i o n o f

s e v e r a l b u l l e t i n s and y e a r bo oks d e a l i n g w i t h f i n a n c i a l r a t i o s . T h e r e was some d e g r e e o f a r b i t r a r i n e s s i n t h i s r a t i o s e l e c t ­ i o n and C h a p t e r V w i l l be composed o f an e v a l u a t i o n o f t h e s e r a t i o s b y c o o p e r a t i v e a u d i t o r s a s w e l l a s c o n s i d e r a t i o n o f some a l t e r n a t i v e ratio s.

The m a j o r p r o b l e m o f t h i s s t u d y i s n o t t o f o r c e a g i v e n

s e t o f r a t i o s up on t h e r e a d e r a s t h e s o l e g u i d e s t o t h e e f f i c i e n t management o f a c o o p e r a t i v e b u t t o u s e t h e s e r a t i o s , most o f w h i c h a r e v e ry im p o rta n t f o r such u s e , as t h e t o o l s f o r d e v e lo p in g t h e m u ltip le r a t i o tech n iq u e.

What a r e t h e s e r a t i o s and what a r e t h e i r

r e s p e c t i v e v a l u e s and l i m i t a t i o n s ? P a r t i c u l a r t y p e s o f c o o p e r a t i v e s must a lw a y s u s e c e r t a i n r a t i o s o r r e l a t i o n s h i p s unique t o t h e i r ty p e o f b u s i n e s s , such as leakage ratio s

for o il cooperatives,

fo r example.

What a r e o f i n t e r e s t

i n t h e p r e s e n t s t u d y a r e r a t i o s w h ic h can be a p p l i e d t o any t y p e o f cooperative b u sin ess.

A l l b u s i n e s s e s h a v e g r o s s and n e t m a r g i n s ,

f i x e d and c u r r e n t a s s e t s ,

l i a b i l i t i e s and n e t w o r t h .

Such f a c t o r s

5 l e n d t h e m s e l v e s t o r a t i o a n a l y s i s and r a t i o a n a l y s i s i s a much s im p le r te c h n iq u e th a n i s t h e study of a d e t a i l e d a u d it f o r de­ t e r m i n i n g t h e o p e r a t i n g e f f i c i e n c y and t h e f i n a n c i a l c o n d i t i o n o f an a s s o c i a t i o n *

Thus i t

c a n r e a s o n a b l y be e x p e c t e d t h a t t h e

a v e r a g e c o o p e r a t i v e m a n a g e r o r b o a r d member once h a v i n g d i s c o v e r e d t h e t e c h n i q u e w i l l be more i n c l i n e d t o a n a l y z e h i s c o o p e r a t i v e ' s o p e r a t i n g e f f i c i e n c y and f i n a n c i a l c o n d i t i o n t h a n i f he h a s t o

follow

t h e more l a b o r i o u s p r o c e s s o f s t u d y i n g t h e f i n a n c i a l s t a t e m e n t s them selves.

T h i s s i m p l e r r a t i o t e c h n i q u e may a l s o s t i m u l a t e t h e

m a n a g e r o r d i r e c t o r t o p u r s u e a more d e t a i l e d a n a l y s i s once he i s aware o f t h e phase o f t h e o p e r a t i o n t h a t i s out of l i n e as r e v e a l e d by h i s use o f t h e s e r a t i o s . The r a t i o

f i g u r e s w h ic h w i l l be u s e d i n t h i s and f o l l o w i n g

c h a p t e r s a r e computed a s f o l l o w s . first

The f i g u r e r e p r e s e n t i n g t h e

f a c t o r i s d i v i d e d by t h e f i g u r e r e p r e s e n t i n g t h e s e c o n d

facto r.

Thus f o r t h e c u r r e n t a s s e t s t o c u r r e n t l i a b i l i t i e s r a t i o

i f c u r r e n t a s s e t s e q u a l $ 2 0 , 0 0 0 and i f c u r r e n t l i a b i l i t i e s

equal

$ 1 0 , 0 0 0 t h e f o r m e r d i v i d e d by t h e l a t t e r e q u a l s 2 : 1 - $2 i n c u r r e n t assets

f o r e v e r y $1 o f c u r r e n t l i a b i l i t i e s *

Follow ing is a l i s t

o f t h e r a t i o s vihich w i l l b e d i s c u s s e d i n t h e s u c c e e d i n g p a g e s . Net M a r g i n t o Net S a l e s O p e r a t i n g E x p e n s e s t o Net S a l e s G r o s s M a r g in t o Net S a l e s C o s t of Goods S o l d t o M e r c h a n d i s e I n v e n t o r y S u p p li e s S a le s t o Accounts R e c e iv a b le S a l a r i e s and Wages t o Net S a l e s C urrent A ssets t o C urrent L i a b i l i t i e s C a p i t a l S t o c k and P a t r o n s ' E q u i t i e s t o T o t a l A s s e t s Fixed A ssets t o T o t a l A ssets Net S a l e s t o T o t a l A s s e t s

6 Net M a r g i n t o T o t a l A s s e t s Net M a r g i n t o C u r r e n t L i a b i l i t i e s D i s c u s s i o n of R a t i o s The n e t m a r g i n t o n e t s a l e s r a t i o t e l l s s i m p l y w h e t h e r t h e a s s o c i a t i o n s a v e d o r l o s t money f o r ' i t s p a t r o n s i n t h e p e r i o d b e in g considered*

I t a n s w e r s t h e most o b v i o u s q u e s t i o n r e g a r d ­

i n g t h e c o o p e r a t i v e ’ s b u s i n e s s ( D i d t h e c o o p e r a t i v e s a v e money o r l o s e money?) b u t i t d o e s not a l w a y s a n s w e r i t n e t m argin, or sav in g s,

exactly*

The

i s t h a t amount shown on t h e o p e r a t i n g

s t a t e m e n t a f t e r t h e a s s o c i a t i o n ' s inc om e from a l l s o u r c e s h a s b e e n i n c l u d e d a nd a f t e r a l l t h e a s s o c i a t i o n ' s b een deducted therefrom *

o p e r a t i n g e x p e n s e s have

I t i s t h e n a book f i g u r e *

n e c e s s a r i l y r e p r e s e n t c a s h or o t h e r m a t e r i a l a s s e t s .

I t does n o t It

can be

p a r t i a l l y made up o f a c c o u n t s or n o t e s r e c e i v a b l e from p a t r o n s . W h e t h e r or not a b a d d e b t r e s e r v e i s a p p l i e d a g a i n s t t h e s e r e c e i v ­ a b l e s , an y t h a t a r e d e f a u l t e d r e d u c e by t h a t much t h e s a v i n g s

for

t h e year*

could

I n t h e c a s e o f a v e r y low n e t m a rg in - s u c h d e f a u l t s

r e s u l t i n a n e g a t i v e n e t margin f o r t h e year*

The n e t m a r g i n

r a t i o by i t s e l f , t h e r e f o r e , i s no t a d e q u a t e t o t e l l t h e s t o r y o f a c o o p e ra tiv e 's f in a n c i a l c o n d itio n , but i t

is very u s e f u l .

I t was p o i n t e d out i n t h e P r e f a c e t h a t r a t i o s r e d u c e uncomp­ arable

f i g u r e s t o t h e common d e n o m i n a t o r o f p e r c e n t a g e s .

d i s c u s s i o n o f t h e r a t i o s , however, i t i s n e c e s s a r y t o o f t h e f a c t o r s m ak in g up t h e r a t i o s *

In th e

speak a l s o

C ar e w i l l be e x e r c i s e d t o

m e n t i o n t h e word r a t i o w h e n e v e r i t i s t h e r a t i o b e i n g c o u s i d e r e d * / I t a l s o s h o u l d be m e n t i o n e d t h a t t h e t e r m n e t s a l e s , a s u s e d i n

7 t h i s p a p e r , r e f e r s t o t o t a l s a l e s r e c e i p t s minu s r e b a t e s f o r un ­ s a t i s f a c t o r y goods# The r a t i o

o p e r a t i n g e x p e n s e s t o n e t s a l e s i n d i c a t e s what

percentage of th e t o t a l sale s re c e ip ts e x p e n s e s i n c l u d i n g s a l a r i e s a n d wages# pense r a t i o

goes t o p a y o p e r a t i n g The a v e r a g e o p e r a t i n g e x ­

from P e r i o d I was # 1 1 2 , t h a t i s 11*2 p e r c e n t o f t o t a l

s a l e s w e re u s e d t o p a y t h e o p e r a t i n g e x p e n s e s *

I t i s e asy t o say

c a t e g o r i c a l l y t h a t th e lower th e expenses th e b e t t e r # one must make c e r t a i n r e s e r v a t i o n s .

How eve r,

Inadequate, poorly lo c a te d ,

o r d e l a p i d a t e d f a c i l i t i e s may h e l p t o k e e p o v e r h e a d e x p e n s e s low b u t i m p r o v e d f a c i l i t i e s m i g h t w e l l r e s u l t i n en oug h more p a t r o n a g e t o more t h a n o f f s e t t h e i n c r e a s e d d e p r e c i a t i o n an d i n t e r e s t c h a r g e s # Economy may so m et im es be f a l s e and c a r e must be e x e r c i s e d i n o r d e r t o p re v e n t su ch developments* be a d o p t e d .

A l s o a l o n g r a n g e v ie w must o f t e n

A h i g h e r o p e r a t i n g e x p e n s e f o r a few y e a r s due t o

i m p r o v e d f a c i l i t i e s may pay o f f i n l o w e r e x p e n s e s i n l a t e r y e a r s # The a u t h o r c o n s i d e r s t h e o p e r a t i n g e x p e n s e r a t i o t o be t h e most im p o r ta n t s i n g l e r a t i o a v a i l a b l e as an o v e r - a l l i n d i c a t o r o f a c o o p e ra tiv e ’ s f in a n c ia l operations#

Support of t h i s b e l i e f i s

g i v e n l a t e r i n t h i s c h a p t e r a nd a l s o i n C h a p t e r I I # O perating expenses a re a l s o very im portant i n d eterm in in g th e n e t m a r g i n f i g u r e , b u t t h e i r e f f e c t i s o f t e n v e r y much m o d i f i e d by t h e g r o s s m a r g i n .

The f o r m e r c a n n o t be a d e q u a t e l y a n a l y z e d w i t h ­

out r e f e r e n c e to t h e l a t t e r . The g r o s s

rg in to net sales r a t i o in d ic a tes th e d ifferen ce

8 b e t w e e n t h e c o s t o f goods o r p r o d u c e h a n d l e d and t h e inc ome d e ­ rived

from t h e m .

was . 1 1 4 .

The a v e r a g e g r o s s m a r g i n r a t i o f o r P e r i o d I d a t a

A c o o p e r a t i v e a s s o c i a t i o n may be o p e r a t e d on a lo w -

r a a r g i n p o l i c y and t h u s k e e p n e t m a r g i n s and c o n s e q u e n t l y r e f u n d s lo w , o r i t may o p e r a t e on a p o l i c y o f h i g h e r m a r g i n s and l a r g e patronage re fu n d s . sometimes i t

Some tim es t h e p o l i c y i s d i c t a t e d by c o m p e t i t i o n ;

i s s i m p l y an i d e o l o g i c a l o r a n h a b i t u a l p o l i c y .

e i t h e r event,

In

s t r i c t a d h e r e n c e t o t h e g i v e n p o l i c y ca n r e s u l t i n

d e f i n i t e problem s.

A l o w - m a r g i n p o l i c y , f o r e x a m p l e , may i n t i m e s

o f f a l l i n g p ric e s r e s u l t in a n e g a tiv e net m argin. margin i s r a r e l y i f ever d e s i r a b l e

A negative net

for a cooperative.

Even a t

t h e c o s t o f some p a t r o n a g e l o s s a h i g h e r p r i c e l e v e l i s d e s i r a b l e i n s u c h c i r c u m s t a n c e s , i f c o s t s c a n n o t be l o w e r e d . ratio ,

The g r o s s m a r g i n

o f c o u r s e , r e f l e c t s a f a c t o r which i s r e l a t i v e l y e a s i l y s u b j e c t

t o v a r i a t i o n - t h a t i s t h e g r o s s m a r g i n may be v a r i e d by c h a n g i n g p ricing p o lic ie s. too g re a t.

The v a r i a t i o n h a s r e p e r c u s s i o n s , h o w e v e r , i f

High p r i c e s t e n d t o r e d u c e p a t r o n a g e w h e r e a s low p r i c e s

narrow t h e o p e r a tin g m argin.

Which i s most d e s i r a b l e i n a g i v e n

c i r c u m s t a n c e d e p e n d s upon t h e p a r t i c u l a r c o n d i t i o n s . These t h r e e r a t i o s - t h e net m argin r a t i o , t h e g ro ss margin ratio ,

and t h e o p e r a t i n g e x p e n s e r a t i o — n e e d t o b e c o n s i d e r e d

mo re o r l e s s as a g r o u p .

I t i s d i f f i c u l t t o adequately analyze

a n y one o r tw o w i t h o u t r e f e r e n c e t o a l l

o f them.

However, even

as a group t h e s e t h r e e r a t i o s a r e not s u f f i c i e n t to p le te analysis

p r o v i d e a com­

of the c o o p e ra tiv e 's fin a n c ia l c o n d itio n .

Why a r e

9 o p e r a t i n g expenses high i n a given i n s t a n c e ; o p e r a t i v e o p e r a t e on so low a m a r g i n ?

o r how c a n t h e c o ­

Answers t o t h e s e q u e s t i o n s

may b e f o u n d by e x a m i n i n g o t h e r r a t i o s .

One r a t i o w h ic h c a n be

u s e d f o r t h i s p u r p o s e i s t h e r a t i o c o s t o f goods s o l d t o m e r c h a n d ­ is e inventory.

This r a t i o in d i c a t e s th e

general r a te o f tu rn o v e r

o f t h e a s s o c i a t i o n ' s m e r c h a n d i s e a nd p r o d u c e .

I t i s a measure o f

t h e amount o f c a p i t a l t i e d up i n i n v e n t o r y , o r e x p r e s s e d d i f f e r ­ e n t l y , i t m e a s u r e s t h e number o f t i m e s p e r y e a r t h a t t h e i n v e n t o r y d o lla r is used. uable i t

The o f t e n e r i t

is to the association.

i s u s e d , o f c o u r s e , t h e more v a l ­ The a v e r a g e t u r n o v e r f o r t h e P e r i o d

I a s s o c i a t i o n s was 1 1 . 9 4 t i m e s p e r y e a r . C e r t a i n p o i n t s s h o u l d be reme mbe red r e g a r d i n g t h e i n v e n t o r y turnover ra tio n

Namely; ( l )

not a l l cooperatives carry t h e i r i n ­

v e n t o r y a t c o s t ; some v a l u e t h e i r i n v e n t o r y a t t h e r e t a i l p r i c e . F o r t h e s e t h e t u r n o v e r r a t i o must be c a l c u l a t e d d i f f e r e n t l y ; t h a t i s t h e i n v e n t o r y s h o u l d be r e l a t e d t o s a l e s r a t h e r t h a n t o c o s t o f goods s o l d .

( 2 ) t h e m e r c h a n d i s e t u r n o v e r may be a s i n g l e

i n v e n t o r y t a k e n a t t h e end o f t h e a c c o u n t i n g p e r i o d or i t may be an a v e r a g e o f a d o z e n m o n t h l y i n v e n t o r i e s , of in v en to ries.

or an y o t h e r c o m b i n a t i o n

I f th e inventory fig u re re p re se n ts

end i n v e n t o r y i t may be q u i t e m i s l e a d i n g .

only t h e y e a r -

A o n c e —y e a r l y i n v e n t ­

o r y may be s m a l l e r t h a n an a v e r a g e i n v e n t o r y and t h u s i n d i c a t e a f a s t e r tu r n o v e r th a n a c t u a l l y occurred*

Monthly i n v e n t o r i e s a r e

more l i k e l y t o be r e p r e s e n t a t i v e , i n a s m u c h a s i t

is d i f f i c u l t to

r e d u c e t h e i n v e n t o r y t o a minimum t w e l v e t i m e s a y e a r .

A ls o i n

a s e a s o n a l b u s i n e s s , a o n c e - a - y e a r i n v e n t o r y can be ev en more

10 m i s l e a d i n g due t o t h e s t i l l

g r e a t e r i n v e n t o r y needed d u r in g t h e

p eak s e a s o n t h a n i s r e q u i r e d d u r i n g t h e p e r i o d i n w h i c h t h e i n ­ ventory is tak en . The r a t e

of inventory turnover d i r e c tly a f f e c ts operating

e x p e n s e s a nd t h e g r o s s m a r g i n .

For example, a p ro d u ct w ith a

s l o w t u r n o v e r mus t ha v e a h i g h e r g r o s s m a r g i n r a t i o t h a n one w i t h a f a s t t u r n o v e r b e c a u s e a s l o w t u r n o v e r means h i g h e r o v e r h e a d c o s t p e r commodity i t e m . lines

It is

fo r t h i s reason th a t d i f f e r e n t

o f goods r e q u i r e d i f f e r e n t p r i c i n g p o l i c i e s .

I t would be

u n w i s e , f o r e x a m p l e , t o e x p e c t t o t a k e t h e same g r o s s m a r g i n fro m feed th a t is

o b t a i n e d fro m f a r m m a c h i n e r y .

The c o o p e r a t i v e t h a t

h a n d l e s b o t h i t e m s must make p r o p e r a l l o w a n c e f o r t h e d i f f e r e n t rates

o f t u r n o v e r o f t h e s e tw o t y p e s o f i t e m s .

The i m p o r t a n t t h i n g

i s t o s o h a n d l e t h i s p r o b l e m t h a t t h e w e i g h t e d a v e r a g e t u r n o v e r as r e f l e c t e d by t h e i n v e n t o r y r a t i o i s a d e q u a t e f o r e f f i c i e n t

operations.

S u p p l i e s s a l e s t o a c c o u n t s r e c e i v a b l e i s a v e r y i m p o r t a n t op­ e r a t i n g r a t i o and m e a s u r e s t h e amount o f c r e d i t w hic h t h e c o o p e r a t i v e extends t o i t s

p a t r o n members p e r d o l l a r o f s a l e s t o t h e m .

As

m entioned i n c o n n e c tio n w ith t h e net m argin, th e accounts r e c e i v ­ a b l e may be s u c h a s t o make a n o t h e r w i s e s a f e n e t m a r g i n u n s a f e . W ith t h e r e c e i v a b l e s as w ith th e m erc h an d ise i n v e n t o r y , t h e oncea - y e a r f i g u r e may be m i s l e a d i n g as co mp ar ed w i t h an a v e r a g e of sev eral receivables fig u re s . P e r i o d I was 3 3 . 7 5 .

Th e a c c o u n t s r e c e i v a b l e s a v e r a g e f o r

T hat i s , $33.75 i n s u p p l i e s s a l e s p e r d o l l a r

of c re d it outstanding. C r e d i t s a l e s a r e n e c e s s a r y t o most f a r m s u p p l y c o o p e r a t i v e s

11

f o r com petitive purposes.

The p r o b l e m f a c i n g a ny g i v e n a s s o c i a t i o n

i s t o d e t e r m i n e how much c r e d i t i t b asis,

can a f f o r d t o e x t e n d and on what

L a r z e l e r e and M a c P h e r s o n ^ / f o u n d i n a s t u d y o f c r e d i t e x ­

t e n s i o n t h a t "Wh ile t h e l i b e r a l u s e o f c r e d i t may e xp and t h e v o l ­ ume o f s a l e s ,

its

effect is

f o u n d t o be a c c o m p a n i e d b y a r e d u c t i o n

in the net earnings of th e a s s o c ia tio n s concerned," The a g i n g o f a c c o u n t s i s a l s o a v e r y i m p o r t a n t p r o c e d u r e a n d one w h i c h i s a n e c e s s a r y c o r o l l a r y t o t h e a c c o u n t s r e c e i v a b l e measurement.

It

i s not only th e r a t i o ,

receivables to supplies

s a l e s t h a t i s needed b u t a l s o th e age o f t h e v a rio u s a c c o u n ts . T h i s f i g u r e can o n l y be o b t a i n e d by a s t u d y o f t h e i n d i v i d u a l accounts*

D i v i d i n g t h e t o t a l w o r k i n g da ys i n t h e p e r i o d by t h e

r e c e i v a b l e s r a t i o w i l l g i v e t h e a v e r a g e number o f days* s a l e s o u ts ta n d in g as r e c e i v a b l e s , an o th er u s e f u l r e l a t i o n s h i p .

It

may a l s o be h e l p f u l t o know t h e number o f bad a c c o u n t s c h a r g e d o f f i n a ny g i v e n p e r i o d .

The t o t a l c o s t o f s u c h l o s s e s would be

i n c l u d e d i n t h e o p e r a t i n g e x p e n s e s an d would be r e f l e c t e d i n t h e o p e r a t i n g expense r a t i o . The most i m p o r t a n t c r i t e r i o n i n d e t e r m i n i n g w h e t h e r t h e a c c o u n t s r e c e i v a b l e r a t i o i s c o r r e c t o r n o t w ou ld p r o b a b l y be t h e r e l a t i o n s h i p b e t w e e n t h e a c c o u n t s r e c e i v a b l e r a t i o and t h e i n v e n t ­ o r y r a t i o . T h a t i s , i f t h e a c c o u n t s r e c e i v a b l e r a t i o i s low - i f 1 / L a r z e l e r e , H. E . , and M a c P h e r s o n , D. D . , " C o s t s o f C r e d i t E x t e n ­ s i o n i n t h e S a l e o f Farm S u p p l i e s by C o o p e r a t i v e A s s o c i a t i o n s ” , r e p r i n t e d fro m M i c h i g a n A g r i . Exp. S t a t i o n Q u a r t e r l y B u l l e t i n , V o l . 2 2 , No. 2 , Nov. 1 9 3 9 , p . 8

12 8 g r e a t d e a l o f c r e d i t i s b e i n g e x t e n d e d — i t may b e t h e e x p l a n a ­ t i o n fo r a high in v e n to ry tu rn o v e r.

Turnover gained a t th e expense

o f high c r e d i t s a le s i s not n e c e s s a r i l y b e n e f i c i a l .

T h e r e f o r e , when

t h e i n v e n t o r y r a t i o i s h i g h , one s h o u l d t a k e a l o o k a t t h e a c c o u n t s r e c e i v a b l e r a t i o t o s ee i f t h a t is s im u l t a n e o u s l y low. event th a t

it

is,

In th e

s te p s sh o uld be ta k e n t o red u c e th e c r e d i t e x te n ­

s i o n and s t i l l m a i n t a i n , i f p o s s i b l e , t h e i n v e n t o r y t u r n o v e r . S a l a r i e s and w a ge s t o n e t s a l e s s h o u l d be i n c l u d e d among t h e p re lim in a ry o p e ra tin g r a t i o s analyzed because i t

c o n s t i t u t e s so

la rg e a p ro p o r tio n of th e o p e ra tin g expense r a t i o . aries

W it h t h e s a l ­

and wages r a t i o a s w i t h t h e o p e r a t i n g r a t i o , t h e l o w e r t h e

f i g u r e t h e more f a v o r a b l e one e x p e c t s i t however.

to be.

I t can b e t o o low ,

F o r t h e s h o r t r u n , a low wage s c h e d u l e may p a y o u t b u t

e x c e p t i n u n u s u a l c i r c u m s t a n c e s low wages do n o t b u i l d l o y a l t y or e n c o u r a g e c o n t i n u e d a nd e f f i c i e n t s e r v i c e on t h e p a r t o f t h e em­ ployees • A p r a c t i c a l use o f t h i s r a t i o i s i n h e lp in g t o d e c id e , fo r i n s t a n c e , w h e t h e r o r n o t t o add more e m p l o y e e s .

If,

f o r example,

t h e r a t i o i s 6 s l a n a d d e d employee s h o u l d n o r m a l l y be e x p e c t e d t o p r o v i d e en ough more g r o s s s a l e s t h r o u g h t h e p e r f o r m a n c e o f h i s d u tie s to m aintain,

or n e a rly m aintain, t h i s

ratio .

I n t h e s a l a r i e s a n d wages f i g u r e s u s e d i n t h i s s t u d y , comm­ i s s i o n s and bonuses have been in c lu d e d .

A l s o w he re t h e a s s o c i a ­

t i o n h a s p a i d a management f e e t o t h e Farm B u r e a u S e r v i c e s , t h a t fe e has been in c lu d e d as a p a rt W ith t h e s e s i x r a t i o s

o f t h e s a l a r i e s and wages f i g u r e .

a c o o p e r a t i v e m a n a g e r o r b o a r d member

13 i s a b l e t o d e t e r m i n e i f h i s a s s o c i a t i o n i s a c t u a l l y s a v i n g money and d o in g i t e f f i c i e n t l y *

T h i s i s a n i m p o r t a n t a nd n e c e s s a r y t h i n g

t o know, b u t i t i s n o t enough*

What i s t h e a c t u a l c o n d i t i o n o f t h e

c o o p e r a t i v e be yon d i t s i m m e d i a t e o p e r a t i n g m e t h o d s ?

I t is not

e n o u g h t o know t h a t t h e a s s o c i a t i o n o p e r a t e d w e l l l a p t y e a r ; one a l s o n e e d s t o know i f t h e c o n d i t i o n i s s u c h t h a t t h e s e o p e r a t i o n s a r e s u f f i c i e n t t o c o n t i n u e o r im p r ove t h e of th e asso ciatio n * less,

or f i r e ,

general fin a n c ia l h e alth

Can a n o r g a n i z a t i o n w i t h s t a n d an i n v e n t o r y

or a y e a r o f l e s s e f f i c i e n t management?

The a n s w e r s

t o th e s e questions c a l l fo r balance sh eet ra tio s* Current a s s e ts t o c u rre n t l i a b i l i t i e s ance s h e e t r a tio *

It

i s t h e most common b a l ­

i s t h e r a t i o u s e d by a l l k i n d s o f b u s i n e s s e s ,

and c r e d i t o r s n o r m a l l y r e f e r t o i t b e f o r e m a kin g a b u s i n e s s l o a n * T h i s r a t i o , i n f a c t , i s s o e a s i l y d e t e r m i n e d a n d so o b v i o u s t h a t i t may p o s s i b l y h a v e r e c e i v e d u n m e r i t e d w e i g h t a s a n i n d i c a t i o n of th e fin a n c ia l condition of a business.

The a v e r a g e c u r r e n t

r a t i o i n P e r i o d I was $3*85 i n c u r r e n t a s s e t s p e r d o l l a r o f c u r r e n t liab ilities* An e x a m i n a t i o n o f t h e r a t i o f i g u r e s i n c h a r t s 1 and 3, Ap pendix A, w i l l show many i n s t a n c e s o f a p o o r c u r r e n t r a t i o a s s o c i a t e d w i t h l a r g e l y f a v o r a b l e r a t i o f i g u r e s ; o r more commonly a h i g h l y " f a v o r a b l e " c u r r e n t r a t i o a s s o c i a t e d w ith l a r g e l y u n favorable fig u re s *

Favorable

i s u s e d i n q u o t e s i n t h e abo ve s e n t e n c e f o r t h e r e a s o n t h a t a h i g h c u r r e n t r a t i o may n o t a l w a y s b e e n t i r e l y f a v o r a b l e fr om an o v e r - a l l f i n a n c i a l standpoint*

E x p la n a tio n of th e l a s t sta te m e n t i s b e s t

14

made t h r o u g h a p o i n t - b y - p o i n t a n a l y s i s o f t h e t h r e e m a j o r f a c t o r s m a k i n g up t h e c u r r e n t a s s e t s , n a m e l y ; c a s h , a c c o u n t s r e c e i v a b l e , a nd inventory* Cash on han d o r i n b a n k s i s t h e most l i q u i d a s s e t t h a t a c o ­ o p e r a t i v e a s s o c i a t i o n c a n own, b u t a c o o p e r a t i v e c a n own t o o much cash.

C as h b e y o n d t h a t n e c e s s a r y f o r r e a s o n a b l e e x p e n s e s and a n t i ­

c ip a te d c a p it a l requirem ents i s superfluous*

On d e p o s i t i n a b a n k ,

c a s h w i l l d r a w a l i m i t e d i n t e r e s t , b u t i n t h e form o f m e r c h a n d i s e i t may e a r n more*

As a s s o c i a t i o n w h ic h c a r r i e s a t o p h e a v y l o a d of

c a s h i s m isusing c a p i t a l investm ent* t h e board o f d i r e c t o r s c ap ital assets

Too much c a s h may a l s o t e m p t

or t h e m a n ag e r t o i n v e s t t o o h e a v i l y i n

or i n inventory*

I n c o o p e r a t i v e s w h i c h ha ve a h i g h l y s e a s o n a l c a s h demand t h e r e is

a t e n d e n c y t o c a r r y o v e r en ou gh c a s h t o meet t h e peak n e e d s .

T h i s means t h a t d u r i n g a good s h a r e o f t h e y e a r , more c a s h i s k e p t in the current a sse ts th an

is

n e e d e d f o r an y r e a s o n a b l e r e s e r v e *

I t may o f t e n be much more e f f i c i e n t t o p l a n t o b or r ow t h e e x t r a c a s h t h a t i s n e e d e d d u r i n g t h e s e peak p e r i o d s t h a n t o h o l d t h e cash throughout th e y e ar. A c c o u n t s r e c e i v a b l e may a l s o become o v e r b u r d e n s o m e *

C redit

e x t e n d e d f o r c o m p e t i t i v e r e a s o n s and f o r s e n s i b l e a m ou nts may w e l l p r o v e b e n e f i c i a l t o t h e a s s o c i a t i o n i n t h e fo r m o f g r e a t e r volume a nd g r e a t e r member l o y a l t y t h a n would o t h e r w i s e be o b t a i n e d ; b u t c r e d i t a l l o w e d s i m p l y a s a c o n v e n i e n c e t o t h e p a t r o n s and s o l e l y a s a b r i b e f o r c o n t i n u e d p a t r o n a g e may q u i c k l y become d e t r i m e n t a l

15

to the cooperative.

C redit ex ten sio n re q u ire s a c a re fu lly -d e sig n e d

a nd i n t e l l i g e n t l y - e x e c u t e d p o l i c y .

C redit re q u ire s c a p it a l th a t

may b e u s e d more e f f i c i e n t l y o t h e r w i s e , and i t a l s o t e m p t s some p a t r o n s t o abuse t h e p r i v i l e g e a t t h e expense o f o t h e r s . M e r c h a n d i s e i n v e n t o r y i s a n i m p o r t a n t and u s u a l l y t h e l a r g e s t of the current a sse ts item s.

T h i s i t e m a l s o r e q u i r e s c a r e f u l and

i n t e l l i g e n t management and c a n be t h e r u i n o f an a s s o c i a t i o n i f it

gets out o f c o n t r o l .

The m e r c h a n d i s e i n v e n t o r y must be k e p t

l a r g e eno ug h t o a v o i d r u n n i n g o u t o f s u p p l i e s b e t w e e n r e g u l a r d e l i v e r ie s but i t

s h o u l d n o t become so l a r g e t h a t i t i s u m ^ i e l d y .

P h y s i c a l i n v e n t o r y l o s s e s and p r i c e d r o p s i n m e r c h a n d i s e i n s t o c k a r e common.

An o v e r l a r g e i n v e n t o r y i s

o f th e se types of in v e n to ry l o s s e s . in v e n to rie s is th a t of sto rag e.

e x tr a s u s c e p t i b l e t o both

A fu r th e r cost of oversized

A ll of th e se fa c to rs in c re a se

the u n d e sira b ility of to o -larg e in v e n to rie s. A h i g h c u r r e n t r a t i o may be due t o t o o much o f a ny one o r more o f th e s e t h r e e major ite m s .

In event t h a t such i s t h e c a s e , a l ­

t h o u g h t h e c o o p e r a t i v e may be w e l l a b l e t o pa y i t s ities

it

s t i l l m i g h t be weak i n o t h e r r e s p e c t s .

current l i a b i li ti e s

is

o n l y one o f t h e c r i t e r i a ,

A b i l i t y t o pay even t h o u g h a

very im p o rta n t one, f o r a fa v o ra b le c u rre n t r a t i o . criteria

current l i a b i l ­

i s w h e th e r o r n o t c a p i t a l i s b e i n g wasted*

The o t h e r A high cash,

r e c e i v a b l e s , or i n v e n t o r y i t e m r e p r e s e n t s m i s u s e d or un e m pl o ye d cap ital.

I n summary, t h e c u r r e n t a s s e t s r a t i o c a n n o t be a d e q u a t e l y

a n a l y z e d u n t i l t h e s e t h r e e m a j o r f a c t o r s have b e e n i n v e s t i g a t e d .

16

One a d d i t i o n a l f a c t o r w h ic h c a n c a u s e a v e r y h i g h c u r r e n t r a t i o is a situ a tio n of l i t t l e m i g h t a ss um e t e r r i f i c

o r no c u r r e n t l i a b i l i t i e s *

The r a t i o

p r o p o r t i o n s even th o u g h c a s h , r e c e i v a b l e s

a nd i n v e n t o r y a r e v e r y r e a s o n a b l e * Who owns t h e c o o p e r a t i v e - i t s p a t r o n members o r i t s

creditors?

The r a t io c a p i t a l s t o c k and p a t r o n s 1 e q u i t i e s t o t o t a l a s s e t s p r o ­ v id e s t h e answer. a nd p a t r o n s *

Som et ime s c a l l e d n e t w o r t h , t h e c a p i t a l s t o c k

equities

f i g u r e m e a s u r e s t h e amount o f i n v e s t m e n t h e l d

i n t h e c o o p e r a t i v e i n t h e fo r m o f c a p i t a l s t o c k , m e m b e r s h i p , r e ­ v o lv in g fund c e r t i f i c a t e s , a l l o c a t e d but u n d i s t r i b u t e d p a tro n a g e r e f u n d s , u n a l l o c a t e d r e s e r v e s and s u r p l u s .

The a v e r a g e member-

p a t r o n o w n e r s h i p f o r P e r i o d I was 6 6 . 6 p e r c e n t o f t o t a l a s s e t s . I t i s w ell t o note a t t h i s

p o i n t t h a t t h e v a r i o u s forms o f s t o c k

and e q u i t i e s a r e h e l d i n v a r y i n g for ms and c o m b i n a t i o n s by b o t h m e m b e r - p a t r o n s a nd i n some i n s t a n c e s by p e r s o n s who a r e n e i t h e r members n o r p a t r o n s . ities

C ooperatives g e n e r a lly co n sid er such l i a b i l ­

a s owed t o m e m b e rs , h o w e v e r , and t h i s a s s u m p t i o n i s a c c e p t e d

as v a lid .

A h i g h d e g r e e o f membersthip-owned c a p i t a l i s d e s i r a b l e .

Of c o u r s e i n a new a s s o c i a t i o n , o r i n a n a s s o c i a t i o n w h ic h i s u n d e r g o i n g c o n s i d e r a b l e e x p a n s i o n , t h e p e r c e n t a g e o f member-owned c a p i t a l or member-owned a s s e t s w i l l be c o n s i d e r a b l y l o w e r t h a n i n an e s t a b l i s h e d a s s o c i a t i o n which i s not u n d e rg o in g e x p a n s io n .

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2

C o o p e r a t i v e League ©f t h e USA

The

recommends a t l e a s t t w o - t h i r d s member

2 / R e a d i n g Betwee n t h e L i n e s , S t u d y - A c t i o n P a m p h l e t No. 4 3 , p . 10

17 ow nership-

3/ F. A. H a r p e r s u g g e s t s i n a C o r n e l l b u l l e t i n t h a t

’' F o r

r e a s o n a b l e s a f e t y a c o o p e r a t i v e s h o u l d ha v e a t l e a s t one h a l f o f its

t o t a l a s s e t s f i n a n c e d by m e m b e r 's i n v e s t m e n t s " One o f t h e d a n g e r s o f a h e a v y d e b t t o o u t s i d e c r e d i t o r s i s

t h a t t h o s e c r e d i t o r s may become i n f l u e n t i a l i n s e t t i n g management p o l i c i e s and p r a c t i c e s o f t h e c o o p e r a t i v e -

T h i s c o u l d be d e t r i ­

m e n t a l t o t h e c o o p e r a t i v e from t h e s t a n d p o i n t o f c o n t r o l and s e r ­ v i c e f o r membersNo f i n a n c i a l a n a l y s i s i s c o m p l e t e w i t h o u t t h i s member e q u i t y ratio -

I t r e f l e c t s n o t o n l y t h e i n t e r e s t and l o y a l t y o f t h e mem­

b e r patrons but a ls o th e a b i l i t y o f th e a s s o c ia tio n t o w eather a n e con om ic s t o r m -

A c o o p e r a t i v e w i t h a h i g h member e q u i t y r a t i o

i s n o r m a l l y much b e t t e r a b l e t o c a r r y t h r o u g h a p e r i o d o f misman­ a g e m e n t o r bad l u c k t h a n i s a c o o p e r a t i v e l a r g e l y owned by c r e d i t o r s R e f e r r in g t o e a r l i e r d i s c u s s io n o f c u r r e n t a s s e t s ; i n th e event t h a t a h igh cash b a lan c e i s c o r r e l a t e d w ith a high degree o f r e v o lv ­ i n g fu n d s e c u r i t i e s o f v a r i o u s s o r t s ,

one v e r y good u s e o f t h i s

e x t r a c a s h fund would be t h e p a y i n g o f f o f some o f t h e s e r e v o l v i n g secu rities-

P o l i c y and management d e c i s i o n s r e g a r d i n g o p e r a t i n g

p r a c t i c e s must be b a s e d on s u c h f a c t o r s a s t h e s e i f t h e y a r e t o b e i n t e l l i g e n t l y made. A nother im portant r a t i o i s t h a t of fix e d a s s e ts t o t o t a l a s s e t s . *£he P e r i o d I a v e r a g e was * 26 9, w hic h means n e t f i x e d a s s e t s e q u a l e d 26.9 p er cent of t h e t o t a l a s s e t s . A c o o p e r a tiv e a s s o c i a t i o n can 3 / H a r p e r , F. A. , C o o p e r a t i v e P u r c h a s i n g , and M a r k e t i n g Org an i z a t i o n s i n New York S t a t e , C o r n e l l B u l l e t i n 5 4 4 , Oct* 1 9 3 2 , p* 40

18 h a v e b o t h t o o much

yr t o o l i t t l e

c a p ita l in v ested in fixed a s s e ts .

Too many f i x e d a s s e t s r e s u l t i n u n u s e d c a p a c i t y and a h i g h o v e r h e a d cost.

Too few f i x e d a s s e t s p r e v e n t e f f i c i e n t

p o t e n t i a l volume.

o p e r a t i o n s and l o s e

I n e i t h e r e v e n t , o p e r a t i n g e x p e n s e s may be h i g h e r

t h a n th e y need to b e.

The amount o f f i x e d a s s e t s i n r e l a t i o n t o

t o t a l a s s e t s v a r i e s by t h e t y p e o f b u s i n e s s b u t n o t g r e a t l y b e t w e e n v a r i o u s t y p e s o f o r g a n i z a t i o n s i n c l u d e d i n t h i s s t u d y , as w i l l b e shown i n C h a p t e r IV . Adequate f i n a n c i a l a n a l y s i s w i l l t a k e c o g n iza n c e o f t h e f i x e d a s s e t s r a t i o i n d e t e r m i n i n g t h e c o n d i t i o n and o p e r a t i n g e f f i c i e n c y of the cooperative.

Fixed a s s e t s used i n t h i s stu d y are net f ix e d

asse ts a f te r depreciation. th at

I t i s b e l i e v e d by some s p e c i a l i s t s

f i x e d a s s e t s s h o u l d be f i g u r e d a t c o s t f o r t h e p u r p o s e s o f

t h i s r a t i o a s b e i n g more n e a r l y r e p r e s e n t a t i v e o f t h e r e p l a c e m e n t e x p e n s e o f t h e f a c i l i t i e s - and a s r e f l e c t i n g t h e d e p r e c i a t i o n and m a i n t e n a n c e e x p e n s e o f a g i v e n amount o f f a c i l i t i e s . n e t f i x e d a s s e t s and t o t a l

fixed a ssets ( a t cost)

B o th

r a t i o s m ig h t

w e l l be u s e d f o r a more c o m p l e t e a n a l y s i s . The r a t i o n e t s a l e s t o t o t a l a s s e t s c an be o f much u s e i n c o n s id e rin g expansion,

f o r example.

C r e d i t may be a v a i l a b l e f o r

a g i v e n amount o f e x p a n s i o n b u t b e f o r e t h e e x p a n s i o n t a k e s p l a c e t h e c o o p e r a t i v e ' s B oar d o f D i r e c t o r s must be s u r e t h a t t h e n e t s a l e s r e s u l t i n g t h e r e f r o m w i l l be s u f f i c i e n t t o j u s t i f y t h e e x ­ pansion of t o t a l a s s e t s . Net m a r g i n t o t o t a l a s s e t s i s ,

l i k e t h e n e t s a 1es t o t o t a 1

a s s e t s r a t i o , a means o f m e a s u r i n g t h e p r o d u c t i v e n e s s o f t h e c a p -

19 i t a l investm ent.

The n e t m a r g i n t o t o t a l a s s e t s r a t i o f o r P e r i o d I

was 1 1 . 4 p e r c e n t o f t h e t o t a l a s s e t s . r a t i o was 4 . 1 1 t i m e s t o t a l a s s e t s . th a t they rep resen t the e ffe c t

The n e t s a l e s t o t o t a l a s s e t s

These a r e r e s u l t a n t r a t i o s i n

of operations.

The r a t i o n e t m a r g i n t o c u r r e n t l i a b i l i t i e s l i a b i l i t i e s may b e p a i d from t h e n e t m a r g i n . r a t i o was 1 . 1 5 t o 1 f o r P e r i o d I .

im plies t h a t cu rren t

The a v e r a g e f o r t h i s

T h i s r a t i o p r o v i d e s some i n d i c a t ­

i o n o f t h e c o o p e r a t i v e ' s a b i l i t y t o pay i t s

liab ilities.

The r e ­

t u r n s o f t h e a u d i t o r s a s r e p o r t e d i n C h a p t e r V i n d i c a t e d t h a t most a u d i t o r s r a t e t h i s p a r t i c u l a r r a t i o n e a r t h e bottom o f t h e l i s t or s p e c i f i c a l l y excluded i t .

For t h i s r e a s o n , t h e r a t i o i s not

s tr e s s e d in th e present study. I t s h o u l d be s p e c i f i c a l l y n o t e d t h a t t r e n d s i n f i n a n c i a l c o n d itio n o f a c o o p e ra tiv e or t r e n d s i n a given r a t i o , o r down, a r e e x t r e m e l y i m p o r t a n t .

e i t h e r up

A c o o p e r a t i v e p r o g r e s s e s fro m

b a d t o good o r i n t h e o p p o s i t e d i r e c t i o n by s t a g e s .

R a re ly does

an a s s o c i a t i o n o b ta in success or f a i l u r e com pletely i n a s in g le y e a r , and t h e p r o g r e s s i o n o f t h e v a r i o u s f i n a n c i a l r a t i o s i n e i t h e r a f a v o r a b l e o r an u n f a v o r a b l e d i r e c t i o n i s i n e v i t a b l e .

Thus a

c o o p e r a t i v e w i t h a number o f f a i r and u n f a v o r a b l e r a t i o s s h o u l d n o t be t o o h a s t i l y condemned u n t i l t h e r a t i o s o f p a s t y e a r s ha v e be en examined.

I f previous r a t i o s are w orse, th e l a t e s t r a t i o s

may s t i l l m e r i t a p p l a u s e by r e a s o n o f t h e i r i m p r o v e m e n t .

Of c o u r s e ,

no m a t t e r how much im pr ove me nt h a s b e e n made, s o l o n g a s a g r e a t d e a l o f imp ro ve m e nt i s s t i l l

n e e d e d t h e r e i s no r e a s o n f o r r e l a x ­

a t i o n , and i n f a c t e ve n t h e b e s t o f c o n d i t i o n s d o e s n o t p e r m i t of relaxation.

S u p p l e m e n t a r y Comments F# A- H a r p e r ' s b u l l e t i n C o o p e r a t i v e P u r c h a s i n g a nd M a r k e t i n g O r g a n i z a t i o n s i n New York S t a t e d p u b l i s h e d i n 1932 by C o r n e l l U n i v ­ e r s i t y i n c l u d e s a n e x t e n s i v e s e c t i o n on f i n a n c i a l r a t i o s and r e l a t ­ ionships#

The s e c t i o n c o n t a i n s much v a l u a b l e m a t e r i a l a n d many

in te r e s t in g tables*

I t seems w o r t h w h i l e a t t h i s

p o i n t t o s um m a ri z e

some o f t h e s a l i e n t c o n c l u s i o n s d r a w n by H a rp er # I n h i s s e c t i o n on s u p p l y c o o p e r a t i v e s H a r p e r makes u s e o f t h e f o l l o w i n g r a t i o s and r e l a t i o n s h i p s s C urrent a s s e ts to cu rren t l i a b i l i t i e s P e r cen t o f t o t a l a s s e t s i n n o tes payable Gross m argin as p e rc e n ta g e o f n e t s a l e s Net o p e r a t i n g p r o f i t a s p e r c e n t a g e o f n e t s a l e s T o t a l c o st as p e rc e n ta g e o f net s a l e s S a l a r i e s and wages a s p e r c e n t a g e o f n e t s a l e s S a l e s p e r e mp loy ee Average days s a l e s o u t s t a n d in g i n r e c e i v a b l e s I n v e n t o r y t u r n o v e r ( c o s t o f goods s o l d t o a v e r a g e i n v e n t o r y ) Turnover o f fix ed a s s e ts ( f i x e d a s s e ts t o net s a le s ) Turnover o f t o t a l a s s e ts ( t o t a l a s s e ts to net s a le s ) H a r p e r was c o n c e r n e d w i t h two m a j o r t y p e s o f i n f o r m a t i o n #

1# T h a t

w h i c h c o u l d be u s e d a s " m e a s u r e s o f s u c c e s s " an d 2# T h a t w h i c h c o u l d be u s e d t o d e t e r m i n e e f f i c i e n c y #

As m e a s u r e s o f s u c c e s s he u s e d

m a r g i n s , n e t p r o f i t s and d i v i d e n d s and t r e n d s i n t h e amount o f business#

He gave c o n s i d e r a t i o n t o g r o s s a n d n e t m a r g i n s a n d r e ­

f u n d s b u t c o n c l u d e d t h a t t h e s u b j e c t i v e e l e m e n t of p o l i c y i n v o l v ­ ed made t h e s e i n a d e q u a t e m e a s u r e s .

"The t r e n d s i n t h e amount

o f b u s i n e s s o f l o c a l c o o p e r a t i v e s " he s u g g e s t s , " a r e one o f t h e b e s t measures o f s u c c e s s . I f t h e t r e n d s i n b u s i n e s s of a c o o p e r a 4 / H a r p e r , op. c i t #, pp. 39-64

21

t i v e o f one t y p e h a v e b e e n c o n s i s t e n t l y upward i t would seem s a f e t o a ss u m e t h a t i n g e n e r a l t h e s e c o o p e r a t i v e s w e re o p e r a t i n g e f f i c 5/ ien tly ". By t r e n d s o f b u s i n e s s i s mean t e i t h e r t h e c h an ge i n d o l l a r o r phys ica l.v olu me o v e r a p e r i o d o f y e a r s * g iv e n t o t h i s measurement i n C h a p te r I I I

Some c o n s i d e r a t i o n was in connection w ith th e

i n d i v i d u a l a n a l y s i s o f sample c o o p e r a t i v e s * H arper r e c o g n iz e s t h e l i m i t a t i o n s o f t h i s ty p e o f measure i n c l u d i n g g e n e r a l p r i c e c h a n g e s and t h e amount o f b u s i n e s s a v a i l ­ a b l e i n t h e a r e a ; and he a d d s a n o t h e r s u c c e s s m e a s u r e - c o s t o f doing busin ess* " C o o p e r a t i v e p u r c h a s i n g a s s o c i a t i o n s c a n n o t be s a i d t o be s u c c e s s f u l i f t h e i r c o s t o f o p e r a t i o n s a r e c o n ­ s i d e r a b l y i n e x c e s s o f t h o s e o f o t h e r c o m p e t i n g forms of business o rg a n iz a tio n s. I t i s then in t o t a l cost o f d o in g b u s in e s s t h a t th e b e s t s i n g l e measure of th e s u c c e s s f u l c o o p e r a t i v e b u s i n e s s i s fo und" * / I n C h a p t e r IV o f t h i s p a p e r t h e o p e r a t i n g e x p e n s e r a t i o i s used as th e c o n tr o l f a c t o r in d eterm in in g th e a p p l i c a b i l i t y of c e r t a i n sta n d a rd s t o d i f f e r e n t ty p e s of supply c o o p e r a tiv e s . a s w i l l be s t a t e d ,

This,

i s b e c a u s e t h e o p e r a t i n g e x p e n s e r a t i o seems t o

be t h e b e s t s i n g l e g u i d e t o a c o o p e r a t i v e ’ s o p e r a t i n g e f f i c i e n c y * H arper’ s conclusion supports t h i s b e l i e f . Factors in flu e n c in g e f fic ie n c y re c eiv e considerable a tt e n t i o n in th e C ornell b u l l e t i n .

The b u l l e t i n s t a t e s

"the f a c t o r s a f f e c t ­

i n g t o t a l c o s t a r e c o n s e q u e n t l y more i m p o r t a n t i n t h e s t u d y o f c o o p e r a t i v e s t h a n t h o s e a f f e c t i n g t h e m a r g i n s r e c e i v e d on t h e goods"* 5 / H a r p e r , o p * c i t . , p . 47 6 / H a r p e r , i b i d * , p . 49 7 / H a r p e r , i b i d * , p . 55

7/

I n t h e p r e s e n t s t u d y , e m p h a s i s w i l l be on t h e f a c t o r s a f f e c t i n g t h e m argins as w ell as th o s e a f f e c t i n g th e t o t a l c o s t .

I t i s be­

l i e v e d t h a t t h e tw o c o n s i d e r a t i o n s c a n n o t f e a s i b l y be s e p a r a t e d . G r o s s and n e t m a r g i n s a r e t h e r e s u l t o f b o t h p o l i c y and e f f i c i e n c y . Lack o f e f f i c i e n c y may f o r c e a c h a n g e o f p o l i c y , t h u s m a k in g p o l i c y d e p e n d on e f f i c i e n c y .

I n a s m u c h a s members o f s u p p l y c o o p e r a t i v e s

o f t e n c o n s i d e r b o t h p a t r o n a g e r e f u n d s and low p r i c e s a s e v i d e n c e s o f s u c c e s s no c o o p e r a t i v e c a n a f f o r d t o i g n o r e e i t h e r .

In f a c t,

i f p r i c e s a r e n o t n o t i c e a b l y l o w e r a t t h e c o o p e r a t i v e t h a n i n com­ p e t i n g s t o r e s , a n e v e n h i g h e r - m a r g i n p o l i c y t o g e t h e r w i t h a pub ­ l i c i z e d and s u b s t a n t i a l p a t r o n a g e r e f u n d m ig h t be a d v a n t a g e o u s . T h a t i s t o s a y "a g o i n g m a r k e t p r i c e " p o l i c y , i f a c c o m p a n i e d by little

o r no m a r g i n f o r p a t r o n a g e r e f u n d , a l l o w s t h e p a t r o n member

t o a s k h i m s e l f wh at b e n e f i t he i s d e r i v i n g fr om h i s p a t r o n a g e . E i t h e r a f a v o r a b l e p r i c e s i t u a t i o n or a s i z a b l e r e fu n d p r o v id e s t h e a s s o c i a t i o n w ith a good s e l l i n g p o i n t . A l l t h i s i s t o s a y t h a t b o t h m a r g i n and c o s t a r e i m p o r t a n t in cooperative fin a n c ia l a n a ly s is .

Add t o t h e s e a t l e a s t t h o s e

b a l a n c e s h e e t r a t i o s recommended i n t h e p r e s e n t s t u d y and a n a d ­ e q u a t e a n a l y s i s c a n b e made o f n e a r l y an y t y p e o f c o o p e r a t i v e asso ciatio n . tratio n , thesis

I . W. Du gg a n, G o v e r n o r o f t h e Farm C r e d i t A d m i n i s ­

provides a su p p o rtin g statem ent fo r th e m u ltip le a n a ly s is

i n a n a r t i c l e e n t i t l e d " S t u d y Your Coop’ s B a l a n c e S h e e t "

i n t h e M arch, 1 9 4 9 , News f o r F a r m e r C o o p e r a t i v e s he s a y s , a balance sheet i t

"In studying

i s a l s o w e l l t o s t u d y t h e p r o f i t and l o s s

23

s t a t e m e n t f o r t h e y e a r , b u t you s h o u l d n e v e r s t u d y t h e p r o f i t and l o s s s t a t e m e n t w i t h o u t a t t h e same t i m e s t u d y i n g t h e b a l a n c e s h e e t b e c a u s e t h e n e t amount shown by t h e p r o f i t and l o s s s t a t e m e n t c a n o n ly be i n t e r p r e t e d th ro u g h t h e b a la n c e s h e e t " * ^

' ^ D u g g a n , I . W. , " S t u d y Your C o - o p ’ s B a l a n c e S h e e t " , News f o r F a r m e r C o o p e r a t i v e s , March 1 9 4 9 , p# 4

24 CHAPTER I I D ev el o p m e n t o f R a t i o T e c h n i q u e s I n C h a p t e r I t h e r a t i o s t o be used, i n t h e c u r r e n t s t u d y w e r e d e f i n e d and d i s c u s s e d *

A l s o , t h e s o u r c e and n a t u r e o f t h e

d a t a i n P e r i o d I was e x p l a i n e d .

original

The n e x t l o g i c a l s t e p was t o a p p l y

t h e s e l e c t e d r a t i o s t o an a n a l y s i s o f t h e P e r i o d I I d a t a *

T h i s would

e n t a i l p r a c t i c a l u s e o f t h e m u l t i p l e r a t i o t e c h n i q u e and would s i m u l ­ ta n e o u s ly i n d i c a t e th e advantages of t h e m u ltip le r a t i o tech n iq u e over sin g le r a t i o a n a ly s is . I n o r d e r t o a n a l y s e t h e P e r i o d I d a t a , i t was f i r s t n e c e s s a r y to classify i t

i n some f a s h i o n *

As t h e f i r s t

s t e p , t h e tw elve r a t i o

f i g u r e s wer e co mp ut ed f o r e a c h o f t h e t h i r t y - n i n e a s s o c i a t i o n s .

Then

t a k i n g one r a t i o a t a t i m e , t h e t h i r t y - n i n e f i g u r e s f o r t h a t r a t i o w e r e a r r a y e d i n o r d e r fr om t h e most f a v o r a b l e one t o t h e 9/

able o n e / ities

least

favor-

Thus, i n t h e case o f th e c u rre n t a s s e t s to c u r r e n t l i a b i l ­

r a t i o , f o r e x a m p l e , t h e "most f a v o r a b l e " f i g u r e was 3 5 : 1 ( $ 3 5

i n c u r r e n t a s s e t s t o e a c h $1 o f c u r r e n t l i a b i l i t i e s ; )

the le ast favor­

a b l e was . 5 7 : 1 ( f i f t y - s e v e n c e n t s i n c u r r e n t a s s e t s

for each d o l l a r

of c u rre n t l i a b i l i t i e s ) .

N ote s

See A p p e n d ix A, T a b l e 1 .

some q u e s t i o n a s t o w h e t h e r a c u r r e n t r a t i o

o f 3 5 :1 i s

There i s

favorable*

I f i t i s due, as m entioned i n C hapter I , t o very s m a ll c u r r e n t l i a ­ b ilities,

it is

f a v o r a b l e ; b u t i f i t i s due t o e x t r a

large cash,

r e c e i v a b l e or i n v e n t o r y i t may be s u b j e c t t o c o n s i d e r a b l e m e r i t e d 9 / The "m os t f a v o r a b l e " f i g u r e was n o t a l w a y s t h e l a r g e s t f i g u r e . In t h e c ase o f t h e o p e r a t i n g expense r a t i o ; f o r example, t h e l a r ­ g e s t f i g u r e s w er e u n f a v o r a b l e .

W i t h t h e r a t i o f i g u r e s comp ute d a n d a r r a y e d , t h e n e x t p r o b l e m was t o d e v e l o p s t a n d a r d s from t h e d a t a .

The mos t o b v i o u s s t a n d a r d

p r e s e n t i n g i t s e l f was t h e " a v e r a g e 1* m e a s u r e . i n Table 4 o f t h i s

chapter.

The a v e r a g e s l i s t e d

-r;

T h e s e a v e r a g e s were w e i g h t e d by t h e

e x t r e m e s i n e a c h a r r a y , and i n t h e c a s e o f t h e c u r r e n t r a t i o a v e r ­ age,

f o r i n s t a n c e , t h e 3 5 : 1 r a t i o was q u i t e d i s t o r t i n g i n i t s

effect.

So i n a n a t t e m p t t o d e v e l o p a s t a n d a r d m e a s u r e w h ic h would r e f l e c t s o u n d a n d r e a s o n a b l e a v e r a g e s , t h e s e v e n most f a v o r a b l e and t h e s e v e n least

favorable r a t i o

f i g u r e s were d r o p p e d from e a c h a r r a y .

m aining tw e n ty -fiv e r a t i o ratio s.

The r e ­

f i g u r e s wer e a v e r a g e d f o r e a c h o f t h e t w e l v e

T a b l e 1 b e l o w l i s t s t h e s e a v e r a g e s a s w e l l a s t h e most f a v o r ­

a b l e and t h e l e a s t

f a v o r a b l e f i g u r e s f o r e a c h r a n g e of t w e n t y - f i v e

records•

R atio C urrent a s s e ts to current lia b ilities Net m a r g i n t o c u r r e n t l i a b i l i t i e s Net m a r g i n t o n e t s a l e s C o s t o f goods s o l d t o m e r c h a n d i s e inventory S u p p lies s a l e s to accounts receivable S a l a r i e s and wages t o n e t s a l e s O p e ra tin g expenses t o net s a l e s Gros s m a r g i n t o n e t s a l e s Fixed a s s e t s t o t o t a l a s s e t s C a p ita l sto c k & patrons* e q u i t i e s to to ta l assets Gross s a l e s t o t o t a l a s s e t s Net m a r g i n t o t o t a l a s s e t s 1

/

m i- »

J. a - - - -

tt«M /V m4>

A m m Vk 1

aII

m 4A rt

Most / favorable '

Average

Least favorable

5.26:1 1.73:1 .049:1

2.45:1 .660:1 .032:1

1.22:1 .073:1 .0 1 0 :1

18.45:1

11.08:1

6.07:1

45.13:1 .046:1 .082:1 .082:1 .16 5 :1

29.34:1 .062:1 .106:1 .109:1 .253:1

15.69:1 .076:1 .129:1 .138:1 .3 2 4 :1

.867:1 5.72:1 .216:1

.670:1 4.12:1 .113:1

.467:1 3.14:1 .017:1

t l 1 4— »o

n 4

"Pm

m

r e f e r sim p ly t o t h e f i g u r e s i n t h i s group o f d a t a . T h e i r a p p l i c a t ­ i o n t o o t h e r d a t a w i l l be e x p l a i n e d i n a l a t e r s e c t i o n .

26 The “T h i r d s ” T e c h n i q u e L a r z e l e r e i n h i s b u l l e t i n , F i n a n c i a I Management A n a l y s i s o f F a r m e r s 1 C o o p e r a t i v e s I n M i c h i g a n ^ Q/made u s e o f e l e v e n r a t i o s , and he s e p a r a te d each r a t i o i n t o t h i r d s

f o r comparison p u rp o s e s .

The

t h e o r y h e r e h o l d s t h a t i n a s m u c h a s t h e r e i s no a c c e p t e d s t a n d a r d f o r t h e s e v a r i o u s r a t i o s , t h e d i v i s i o n i n t o f a v o r a b l e , u n f a v o r a b l e a nd m iddle t h i r d s aries. of its

offers a s a ti s f a c to r ily flexible

d e l i n e a t i o n of bound­

T h u s , t h e c o o p e r a t i v e b o a r d o f d i r e c t o r s w hic h f i n d s t h a t most asso ciatio n s ratio

fig u r e s f a l l w ith in th e ranges

f a v o r a b l e t h i r d has r e a s o n t o f e e l t h a t i t s c o m p a r a t i v e l y i n good c o n d i t i o n .

of t h e

organization is at le a s t

T his does not ig n o re t h e f a c t ,

w h i c h w i l l be c o n s i d e r e d l a t e r , t h a t t h e r a n g e s may v a r y s i g n i f i c a n t l y from y e a r t o y e a r . I n l i n e w i t h t h i s t h e o r y , t h e t h i r t y - n i n e f i g u r e s f o r e a c h of t h e t w e l v e r a t i o s wer e d i v i d e d i n t o e q u a l t h i r d s c o n t a i n i n g t h i r t e e n figures

each.

each t h i r d

The r a n g e s w e r e t h e n d e f i n e d b e t w e e n t h e

f o r use l a t e r i n t h e s t u d y .

extrem es in

Table 2 p r e s e n ts t h e s e r e s u l t s .

P r a c t i c a l a p p l i c a t i o n o f t h e r a n g e s d e f i n e d i n T a b l e 2 was made as fo ll o w s :

Two r a t i o s , n e t m a r g i n t o n e t s a l e s and o p e r a t i n g e x ­

p e n s e s t o n e t s a l e s were s e l e c t e d a s c o n t r o l f a c t o r s t o t e s t t h e d e g r e e o f r e l a t i o n s h i p among t h e v a r i o u s r a t i o s .

The n e t m a r g i n r a t i o

was s e l e c t e d a s b e i n g t h e b e s t i n d i c a t o r o f t h e s u c c e s s o f a c o o p e r a ­ tiv e 's

o p e r a t i o n s fr o m t h e s t a n d p o i n t o f f i n a l r e s u l t s .

The o p e r a t i n g

e x p e n s e r a t i o was s e l e c t e d a s b e i n g t h e r e f l e c t o r o f t h e v e r y i m p o r t a n t causal f a c t o r , operating expenses. l o / L a r z e l e r e , H. L . , F i n a n c i a I Management A n a l y s i s o f F a r m e r s ' C o o p e r a t i v e s i n M i c h i g a n , S p e c i a l B u l l e t i n 3 1 5 , May 1942, p . 62

27

T a b le 2t

_______ Ranges o f T h i r d s f o r P e r i o d I R a t i o F i g u r e s most least R a t i o ____________________________ f a v o r a b l e average f avorable

C urrent a s s e ts C urrent l i a b i l i t i e s

2.90

& up

2.89-1.50

1.49

&l e s s

Net m a r g i n C urrent l i a b i l i t i e s

.964

& up

.96 3 -.1 6 4

.163

&l e s s

Net m a r g i n Net s a l e s

.0 4 5

& up

.044-.016

.015

&l e s s

C o s t o f go od s s o l d M erchandise in v e n to ry

1 5 . 0 9 & up

15.08-7*48

S upplies s a le s Accounts r e c e i v a b l e

3 3 . 5 8 & up

33.57-22.30

S a l a r i e s an d wages Net s a l e s

.052 & l e s s

.053-.066

7.47 & l e s s 22.29 & l e s s .0 6 7 & up

O p e ratin g expenses Net s a l e s

.099

&l e s s .0 9 8 -.1 2 5

.124

&up

Cross m argin Net s a l e s

.098

& l e s s *099—.1 2 6

.127

& up

Fixed a s s e t 3 T otal assets

.217

&l e s s

.218-.286

.2 8 7

&up

.817

& up

. 8 1 6 —.5 7 9

.578

&l e s s

4.37

& up

4 . 3 6 —3 . 4 7

3.46

&l e s s

C a p i t a l s to c k & patrons* T otal assets Gross s a l e s T otal a sse ts Ne t m a r g i n Total a sse ts

equities

• 170 & up

.169-.050

.049 & l e s s

28 U s i n g t h e n e t m a r g i n r a t i o f i r s t , t h e most f a v o r a b l e o f t h e t h i r t y - n i n e n e t m a r g i n f i g u r e s was f o u n d . ratio

Then a l l

of th e o th e r

f i g u r e s f o r t h e a s s o c i a t i o n h a v i n g t h a t n e t m a r g i n f i g u r e w e re

c h e c k e d t o d e t e r m i n e how many o f th e m a l s o we re i n t h e f a v o r a b l e t h i r d s o f t h e i r a r r a y s and how many were i n t h e m i d d l e and u n f a v o r ­ able th ir d s . An e x am p l e o f t h i s p r o c e d u r e f o l l o w s . had a net m argin r a t i o o f .049.

A s s o c i a t i o n number 37

Reference to Table 3 i n d i c a t e s t h a t

a n e t m a rgin above .0 4 4 i s f a v o r a b l e .

Of t h e o t h e r e l e v e n r a t i o

f i g u r e s f o r A s s o c i a t i o n number 3 7 , s e v e n w e r e l i k e w i s e f a v o r a b l e , t h r e e w e re i n t h e m i d d l e r a n g e , and o n e , t h e f i x e d a s s e t s t o t o t a l a s s e t s r a t i o was i n t h e u n f a v o r a b l e r a n g e .

Vlflhen t h e t h i r t e e n a s s o c ­

i a t i o n s h a v i n g f a v o r a b l e n e t m a r g i n r a t i o s wer e c h e c k e d , i t was f o u n d t h a t o u t o f t h e o t h e r o n e - h u n d r e d a nd f o r t y - t h r e e r a t i o

figures,

( e l e v e n r a t i o s t i m e s t h i r t e e n r e c o r d s ) s i x t y - t h r e e were i n t h e f a v o r ­ a b le ranges or t h i r d s ,

f o r t y - e i g h t wer e i n t h e m i d d l e t h i r d s a nd

t h i r t y - t w o were i n t h e u n f a v o r a b le t h i r d s . The t e c h n i q u e was f u r t h e r a p p l i e d u s i n g t h e t h i r t e e n a s s o c i a t ­ i o n s h a v i n g m i d d l e - r a n g e n e t m a r g i n f i g u r e s and u s i n g t h o s e h a v i n g un fav o rab le net m argins.

L a s t l y , t h e e n t i r e p r o c e d u r e was c o n d u c t e d

u s i n g t h e o p e r a t i n g expense r a t i o as th e c o n t r o l f a c t o r . a r e s u m m a r iz e d i n T a b l e 3 b e l o w .

The r e s u l t s

29 R e s u lt s of A g gregate Grouping T echnique Favorable M id d le Ne t m a r g i n t o n e t s a l e s th ird th ird

Favorable t h i r d Middle t h i r d U nfavorable t h i r d

44.1 34.3 23.1

%

^

%

______ U nfavorable th ird

!

T a b l e 3t

33 . 6 37.1 30.8

22.3 28.6 46.1

= =

100 100 100

23.1 38.0 36.4

22.4 29.6 49.6

= z “

100 100 100

O p eratin g expenses to net s a le s Favorable t h i r d M iddle t h i r d U nfavorable t h i r d

54.5 32.4 14.0

E x a m i n a t i o n o f T a b l e 3 i n d i c a t e s a r e l a t i o n s h i p b e t w e e n t h e op­ e r a t i n g e x p e n s e r a t i o and t h e o t h e r r a t i o s a s a g r o u p .

That i s ,

when t h e t h i r t e e n " f a v o r a b l e ' * o p e r a t i n g e x p e n s e r a t i o s a r e c o n s i d e r e d , 54.5 p e r cent o f th e f ig u r e s

for the other eleven r a t i o s

of those

t h i r t e e n a s s o c ia ti o n s a ls o occured in th e fa v o ra b le t h i r d s of t h e i r respective array s.

When t h e " u n f a v o r a b l e " n e t m a r g i n r a t i o s

a r e g r o u p e d , t h e p e r c e n t a g e of t h e o t h e r u n f a v o r a b l e r a t i o s i s 49.6. tro l

of t h e i r

figures

When t h e n e t m a r g i n t o n e t s a l e s r a t i o i s u s e d as t h e c o n ­

f a c t o r s t h e c o m p a r a b l e p e r c e n t a g e s a r e 4 4 . 1 and 4 6 . 1 , i n d i c a t i n g

t h a t t h e r e l a t i o n s h i p b e t w e e n t h e n e t m a r g i n r a t i o and t h e o t h e r eleven r a tio s

i s not as c l o s e as between t h e o p e r a t i n g expense r a t i o

and t h e o t h e r r a t i o s * The l a t t e r r e l a t i o n s h i p i s s u f f i c i e n t l y c l o s e t o i n d i c a t e t h a t t h e o p e r a t i n g e x p e n s e r a t i o doe s r e f l e c t somewhat t h e l e v e l o f t h e other r a t i o s .

The d i s c u s s i o n o f t h e r a t i o s i n C h a p t e r I showed some

o f t h e i n t e r r e l a t i o n s h i p s b e t w e e n and among r a t i o s .

Table 3 p la c e s

a r i t h m e t i c v a l u e s on c e r t a i n r e l a t i o n s h i p s , t h u s p r o v i d i n g a l e s s

30 su b je c tiv e p ic tu re of the re la tio n s h ip . The p r a c t i c a l i n t e r p r e t a t i o n o f t h e f o r e g o i n g t a b l e m i g h t be s t a t e d as f o ll o w s .

I f t h e o p e r a t i n g expense t o n e t s a l e s r a t i o i s

v e r y good f o r a g i v e n c o o p e r a t i v e , t h e c h a n c e s a r e t h a t a t

least

h a l f o f t h e o t h e r r a t i o s w i l l a l s o be v e r y go od, a nd t h a t a n o t h e r o n e - f i f t h t o o n e - f o u r t h o f t h e r a t i o s w i l l be f a i r . stated , the

Conversely

i f a number o f t h e r a t i o s a r e f a v o r a b l e o r c a n be i m p r o v e d ,

o p e r a t i n g e x p e n s e s i t u a t i o n c a n be e x p e c t e d t o be f a v o r a b l e or

t o be i n need o f i m p r o v e m e n t .

( I t s h o u l d be r e m e m ber ed , h o w e v e r ,

t h a t o n e - f i f t h t o o n e - f o u r t h o f t h e o t h e r r a t i o s a l s o may w e l l be q u ite unfavorable). or in dications

Even s u c c e s s f u l c o o p e r a t i v e s may h a v e w e a k n e s s e s

o f com ing w e a k n e s s .

A ll o f t h i s adds su p p o rt t o the

c o n t e n t i o n t h a t s e v e r a l r a t i o s must be c o n s u l t e d i n o r d e r t o a c h i e v e a n a d e q u a t e f i n a n c i a l a n a l y s i s o f a ny g i v e n c o o p e r a t i v e . P e r i o d I I D a ta - - ( 1948-49) H a v i n g made t h e s e p r e l i m i n a r y t e s t s

o f o r i g i n a l d a t a , i t was

n e c e s s a r y t o ex amine f u r t h e r t h e o r i g i n a l t h e s i s an d t h e

conclusions

d ra w n t h u s f a r by t e s t i n g t h e m a g a i n s t a new s e t o f d a t a .

An a t t e m p t

was made t o

get th e fo llo w in g y e a r 's f i n a n c i a l s tatem e n ts f o r th e

th irty -n in e

a sso ciatio n s in the

w e re o b t a i n e d .

f i r s t period.

T h i r t y - o n e of t h e s e

N ineteen o th e r c o o p e r a tiv e s a ls o s u p p lie d complete

f i n a n c i a l s t a t e m e n t s , m a ki ng a t o t a l

of fifty

records.

The t w e l v e

r a t i o s were co mp ute d f o r e a c h o f t h e r e c o r d s a n d a v e r a g e s wer e c a l ­ culated.

( S e e Ap pen dix A, T a b l e 3 . )

I t was m e n t i o n e d e a r l i e r t h a t t h e r a n g e s o f r a t i o s m i g h t v a r y

31

sig n ifican tly

fr om y e a r t o y e a r *

Some i n d i c a t i o n of t h i s

is

given

i n t h e t a b l e below, comparing t h e a v erag e s o f t h e v a rio u s r a t i o s

for

t h e two c o n s e c u t i v e a c c o u n t i n g p e r i o d s * T able 4: Period I 1 9 4 7 -4 8 39 r e c o r d s

R atios Net m a r g i n t o n e t s a l e s Gross m arg in t o n e t s a l e s O p e ra tin g expenses t o net s a l e s S a l a r i e s and wages t o n e t s a l e s C urrent a ss e ts to cu rrent l i a b i l i t i e s C o s t o f goods s o l d t o m e r c h a n d i s e i n ­ ventory S u p p lies s a le s to accounts re c e iv a b le Ne t m a r g i n t o c u r r e n t l i a b i l i t i e s Fixed a s s e ts to t o t a l a ss e ts C a p i t a l s t o c k &. p a t r o n s ' e q u i t i e s to t o t a l assets Gross s a l e s t o t o t a l a s s e t s Net m a r g i n t o t o t a l a s s e t s

Period I I 1 9 48 -4 9 50 r e c o r d s

.033 .114 *112 .0 6 2 3.85

.0 10 .114 .128 .0 7 0 10.48

11.94 33.75 1.15 .2 69

14 .2 0 67.12 2.89 .296

.6 6 6 4.11 .114

.662 4.22 .0 6 6

The f a c t t h a t r a t i o a v e r a g e s can c han ge s o g r e a t l y fro m one a c c o u n t i n g p e r i o d t o t h e n e x t r e q u i r e s t h a t one e x e r c i s e c a u t i o n i n h i s u s e o f " f a v o r a b l e ” and " u n f a v o r a b l e 11 t e r m i n o l o g y * th a t is

favorable

A ratio

figure

one y e a r co mpared t o t h e r a n g e o f r a t i o f i g u r e s

f o r t h a t y e a r may be u n f a v o r a b l e t h e n e x t y e a r compared t o t h e second y e a r's

range of r a t i o fig u res*

However, t h e r a n g e s o f t h e r a t i o f i g u r e s i n P e r i o d I , a s g i v e n i n T a b l e 2 , h a v e b e e n t a k e n as t h e

standard fo r t h i s

study.

Only

t h r e e o f t h e t h i r t y - n i n e a s s o c i a t i o n s i n P e r i o d I had a n e g a t i v e n e t m a r g i n a n d a l l of t h e r a t i o a v e r a g e s were o f a r e a s o n a b l e n a t u r e b a s e d on o b s e r v a t i o n o f f i n a n c i a l l y sound c o o p e r a t i v e s .

T h u s , us e

o f t h e s e s t a n d a r d s w i t h due c o n s i d e r a t i o n f o r q u a l i f y i n g f a c t o r s p r e ­ s e n t i n an y g i v e n s i t u a t i o n i s , t h e a u t h o r b e l i e v e s , j u s t i f i e d .

The

32 ratio

a v e r a g e s o f t h e second p e rio d v a r i e d c o n s i d e r a b l y from t h o s e

of the f i r s t .

M e r c h a n d i s e or i n v e n t o r y t u r n o v e r was b e t t e r a s a l s o

was t h e a c c o u n t s r e c e i v a b l e r a t i o .

Net m a r g i n s on t h e c o n t r a r y w e re

s m a l l and o p e r a t i n g e x p e n s e s and s a l a r i e s and w ages were r a t h e r h i g h . I t i s l o g i c a l t o assu me t h a t a n y b e n e f i c i a l e f f e c t b r o u g h t a b o u t by t h e im p r o v e m e n t i n t h e i n v e n t o r y and r e c e i v a b l e s

s i t u a t i o n was n e g a t e d

by t h e p o o r e r o p e r a t i n g e x p e n s e and s a l a r y and wage s i t u a t i o n . The s t u d y o f more d a t a o v e r a l o n g e r p e r i o d o f some

tim e might cau se

r e v i s i o n o f t h e s e P e r i o d I s t a n d a r d s , b u t u s e d w i t h ju d g m e n t

and a d ju stm e n t t o unique c ir c u m s t a n c e s , t h e y p ro v id e a r e a s o n a b ly a c c u r a t e base f o r com parison.

L ater th e procedure fo r u s in g th e s e

r a t i o s a nd r a t i o s t a n d a r d s i n a n a l y s i n g t h e f i n a n c i a l c o n d i t i o n s o f a g i v e n c o o p e r a t i v e w i l l be o u t l i n e d . U s i n g a d o z e n r a t i o s a s h a s b e e n s u g g e s t e d ha s d e f i n i t e p r a c t i c a l lim itatio n s.

Few c o o p e r a t i v e m a n a g e r s and b o a r d members a r e w i l l i n g

o r f e e l t h e y h a v e t h e t i m e t o u s e so many r a t i o s .

What t h e y wa nt

and n e e d a r e a few r a t i o s w h i c h w i l l t e l l th e m t h e a n s w e r s t o t h e i r questions.

I n an e f f o r t t o s a t i s f y t h i s

need p a r t i a l l y ( t h e r e i s

no c o m b i n a t i o n o f a " f e w ” r a t i o s w h i c h can a n sw e r a l l o f t h e q u e s t i o n s ) the

f o l l o w i n g p r o c e d u r e was e m p lo y e d .

The P r i m a r y R a t i o s A n a l y s i s The s e v e n r a t i o s l i s t e d be low whic h w i l l be d e s i g n a t e d by t h e term

" p r i m a r y ” w e re s e l e c t e d b e c a u s e t h e y seemed t o

r e f l e c t b e s t the

f i n a n c i a l p r a c t i c e s an d c o n d i t i o n s of c o o p e r a t i v e a s s o c i a t i o n s . Q u e s t i o n n a i r e r e t u r n s r e p o r t e d on i n C h a p t e r V o f t h i s

paper r a t e

t h e v a rio u s r a t i o s i n o rd e r of t h e i r im portance in t h e eyes o f coop-

33

e ra tiv e au d ito rs.

The s e v e n r a t i o s a s s e l e c t e d w e r e :

net margin

~fc° n e t s a l e s , o p e r a t i n g e x p e n s e s t o n e t s a l e s , g r o s s m a r g i n t o n e t s a l e s , s a l a r i e s and wa ges t o n e t s a l e s , c u r r e n t a s s e t s t o c u r r e n t l i a b i l i t i e s , c o s t o f goods s o l d t o m e r c h a n d i s e i n v e n t o r y , s u p p l i e s s a le s to accounts r e c e i v a b l e . The t h i r t y - n i n e r e c o r d s o f P e r i o d I w e r e d i v i d e d i n t o t h r e e groups.

The f a v o r a b l e g r o u p was composed o f t h o s e a s s o c i a t i o n s '

r e c o r d s ( t w e l v e ) i n w h i c h f o u r o r more o f t h e s e v e n r a t i o s w e re i n th e favorable c l a s s i f i c a t i o n .

The u n f a v o r a b l e

gro up c o n t a i n e d t h e

r e c o r d s ( e l e v e n ) h a v i n g f o u r o r more u n f a v o r a b l e r a t i o s . t e e n r e m a i n i n g r e c o r d s had e i t h e r ( a )

The s i x ­

f o u r o r more r a t i o s i n t h e

m i d d l e g r o u p , ( b ) a n e q u a l number o f r a t i o s i n t h e f a v o r a b l e a n d unfavorable c l a s s i f i c a t i o n s ,

o r ( c ) an e q u a l number i n t h e f a v o r a b l e

and m i d d l e g r o u p s . The f a v o r a b l e , m i d d l e and u n f a v o r a b l e g r o u p s t h u s formed were a v e r a g e d t o a s c e r t a i n t h e d i f f e r e n c e s among t h e i r r a t i o s .

The a v ­

e r a g e s a r e shown b e l o w i n T a b l e 5. T a b l e 5:

A v e r a g e s o f P r i m a r y R a t i o s f o r S p e c i f i e d P erio d I R e c o r d s 1 ______ C a t e g o r y ____________F a v o r a b l e M id dle _____ U n f a v o r a b l e Number o f r e c o r d s 12 16 11

/

Net m a r g i n Net s a l e s

.050

.0 29

.0 1 9

O p e ra tin g expenses Net s a l e s

.0 8 9

.1 0 9

.141

Gross m argin Net s a l e s

.108

.114

.121

S a l a r i e s a n d wages Net s a l e s

.050

.063

.072

34

T a b l e 5s ( c o n t . ) C ategory

F a v o r a b l e __________ M i d d l e _________ U n f a v o r a b l e

Current a s s e ts C urrent l i a b i l i t i e s

7.07

2.90

1.72

C o s t o f goods s o l d M erchandise in v e n to ry

15.46

11.37

8.94

Supplies s a le s A ccounts r e c e iv a b le

37 .3 9

31.91

32.45

l / See t e x t

f o r d e f i n i t i o n of c a te g o rie s

The a v e r a g e s o f t h e t h r e e g r o u p s shown i n T a b l e 5 a b o v e show the

l o g i c a l and e x p e c t e d p r o g r e s s i o n i n s i x o f t h e s e v e n r a t i o s . Page 2U. See f o o t n o t e 9 ^ a The one r a t i o w h i c h d o e s n o t f o l l o w t h i s p a t t e r n is

s u p p lie s s a le s t o accounts r e c e i v a b l e .

u n fa v o ra b le averages a re both r e l a t i v e l y

H e r e , t h e f a v o r a b l e and good and n o t t o o f a r a p a r t ,

w h i l e t h e a v e ra g e f o r t h e m iddle group i s s l i g h t l y s m a l l e r th a n th e average for th e unfavorable

group.

As a n a d d i t i o n a l c h ec k on t h e r e s u l t s

of Ta b l e 5 , t h e s e same

g r o u p s w e r e fo rm ed fro m t h e f i f t y r e c o r d s i n P e r i o d I I .

T heir av­

e r a g e s a p p e a r in Table 6. T a b le 6:

A v e r a g e s of P r i m a r y R a t i o s f o r S p e c i f i e d P e r i o d I I R e c o r d s

______ C a t e g o r y _____________ F a v o r a b l e Number o f r e c o r d s 11

M i d d l e _________ U n f a v o r a b l e 14 25

Net r a a r g i n G ross s a le s

.025

.0 1 8

-.011

O p e ra tin g expenses Gross s a l e s

.0 9 6

.1 1 8

.125

Gross margin Gross s a l e s

.084

.1 2 6

.164

3 a l a r i e s and wages Gross sales

.0 5 0

.072

.0 8 5

35 T a b l e 6t ( c o n t > ) Favorable

M iddle

C urrent a sse ts C urrent l i a b i l i t i e s

29.98

6 .2 7

2.70

C o s t o f goods s o l d M erchandise in v e n to ry

23.16

13.35

8.67

S upplies sale s Accounts r e c e i v a b l e

57.83

83.52

28.35

Unfavorable

I n Table 6 , as i n T a b le 5 , t h e e x p e c te d p a t t e r n a g a i n a p p e a r s , except fo r th e accounts re c e iv a b le r a t i o .

In t h i s case th e d if f e r e n c e

b e tv /e e n t h e f a v o r a b l e a n d u n f a v o r a b l e g ro u p a v e r a g e s was q u i t e l a r g e , w h i l e t h e m i d d l e g ro u p a v e r a g e was much l a r g e r t h a n e i t h e r o f t h e others. th is

No e x p l a n a t i o n c a n b e g i v e n by t h e a u t h o r t o a c c o u n t f o r

situ atio n . A few r e m a r k s may be made r e g a r d i n g f a c t o r s i n v o l v e d , h o w e v e r,

( a ) Many o f t h e situ atio n s.

c o o p e r a t i v e s h a v e r e l a t i v e l y good a c c o u n t s r e c e i v a b l e

( b ) The y e a r end f i g u r e f o r r e c e i v a b l e s do es n o t p r o v i d e

an a c c u r a t e m e a s u r e o f t h e o v e r a l l c r e d i t p r a c t i c e s ,

(c) A r e l a t i v e ­

l y l a r g e amount of t h e a c c o u n t s r e c e i v a o l e may h a v e b e e n c h a r g e d o f f as u n c o l l e c t i b l e . e r a tin g expenses,

S u c h am oun ts w o u l d , o f c o u r s e , a p p e a r as op ­

( d ) I t may be t h a t , a l t h o u g h t h e more s u c c e s s f u l

c o o p e r a t i v e s do p r a c t i c e s t r i c t c r e d i t p o l i c i e s and t h e l e s s s u c c e s s ­ f u l one s t e n d t o be more g e n e r o u s w i t h c r e d i t , t h a t t h o s e i n b e t w e e n n o rm a lly experim ent w ith c r e d i t t o d e term in e i t s

e f f e c t on t o t a l

op e ra ti ons• The Key R a t i o s A n a l y s i s A r e c o r d - b y - r e c o r d e x a m i n a t i o n o f t h e P e r i o d I I d a t a was made

36

n e x t i n a n a t t e m p t "to d e t e r m i n e how few r a t i o s to

c o u l d be used i n o r d e r

o b t a i n a q u i c k p r e l i m i n a r y p i c t u r e o f a n a s s o c i a t i o n * s management

p ractices.

As a r e s u l t ,

i t a o p e a r s t h a t two r a t i o s w h ic h may be

c a l l e d " k e y r a t i o s " , n e t m a r g i n t o n e t s a l e s a nd o p e r a t i n g to

n e t s a le s , when u s e d t o g e t h e r t e l l w h e t h e r t h e

practices p eriod.

expenses

o p e r a t i n g expense

o f t h e g i v e n c o o p e r a t i v e have b e e n sound f o r an y g i v e n T h i s c o u l d be d o n e m o n t h l y a s w e l l a s y e a r l y .

T h e s e two

k e y r a t i o s a l s o i n d i c a t e when t h e r e i s a ne ed t o i n v e s t i g a t e f u r t h e r , b u t t h e y w i l l n o t by t h e m s e l v e s t e l l w ha t i s w ro n g i n t h e e v e n t t h a t such an i n v e s t i g a t i o n i s i n d i c a t e d . I f t h e tw o r a t i o s : n e t m a r g i n t o n e t s a l e s and o p e r a t i n g e x p e n s e s t o n e t s a l e s a r e co mputed f o r a n y g i v e n c o o p e r a t i v e , a d e f i n i t e i n d i c ­ a t i o n o f t h e c o n d i t i o n o f t h e f i n a n c i a l o p e r a t i o n s w i l l be f o u n d . For example, i f b o th r a t i o s fined in t h i s

f a i l w ith in th e fa v o ra b le c ateg o ry as de­

study, the fin a n c ia l

—w i t h one q u a l i f i c a t i o n .

o p e r a t i o n s a r e c e r t a i n t o be sou nd

I f the r a tio fig u re s are a v ailab le for a

p e r i o d o f t w o o r more c o n s e c u t i v e y e a r s and t h e y a r e be co m in g l e s s f a v o r a b l e , a w e a k n e s s may be d e v e l o p i n g which n e e d s a t t e n t i o n .

O ther­

w i s e , h o w e v e r , f a v o r a b l e k e y r a t i o s mean good f i g u r e s f o r most o f the r a t i o s .

T h e r e s t i l l may be an u n f a v o r a b l e r a t i o

g r o u p , as i n d i c a t e d i n T a b l e 7 b e l o w . ratio

f ig u r e i n the

As e i t h e r or b o t h o f t h e key

f i g u r e s becomes l e s s f a v o r a b l e t h e r e i s a n i n d i c a t i o n of f u t u r e

t r o u b l e an d more a t t e n t i o n t o t h e o t h e r r a t i o s

i s d e s i r a b l e , as i n ­

c r e a s i n g l y more o f th e m a r e l i k e l y t o be u n f a v o r a b l e .

L ikew ise, i t

c o u l d be e x p e c t e d t h a t i f some o r a l l o f t h e o t h e r r a t i o s c o u l d be i m p r o v e d , b e t t e r n e t m a r g i n and e x p e n s e r a t i o s would r e s u l t .

37 The n e t m a r g i n r a t i o , a s e x p l a i n e d e a r l i e r i s a r e s u l t a n t r a t i o w h ile t h e o p e r a t i n g expense r a t i o i s a r e f l e c t i o n of im p o rtan t c a u s a l factors*

The n e t m a r g i n may b e n e g a t i v e s i m u l t a n e o u s l y w i t h a low

e x p e n s e r a t i o , i n c a s e o f a v e r y lo w g r o s s m a r g i n ; b u t n o r m a l l y a f a v o r a b l e n e t m a r g i n an d f a v o r a b l e e x p e n s e s move t o g e t h e r * T a b l e 7: Frequency of Occurrence o f R a tio F ig u res i n S p e c i f i e d C a te g o rie s ______________ a s R e l a t e d t o t h e Net M a r g i n a nd O p e r a t i n g E x p e n s e R a t i o _______ Key R a t i o s No. o f Cat e g o r i e s ________ R e c o r d s Favorable M id dle U nfavorable Total Both r a t i o s fa v o r a b le One f a v o r a b l e ; one fair Total P e r c e n t of t o t a l Both u n f a v o r a b le One u n f a v o r a b l e ; one fair T otal Percent of t o t a l Both f a i r P e r c e n t of t o t a l One f a v o r a b l e ; one unfavorable P e rc e n t of t o t a l

2

10

1

1

9

17 27 40 • 9

27 28 42.4

10 11 16*7

13

13

16

49

15

27 40 23.8

29 45 26.8

34 83 49.4

90 168 100

9

17 31.5

27 50.0

10 18.5

54 100

2

8 66.7

1 8.3

3 25.0

12 100

12 54 66 100 78

I n t h e ab ov e t a b l e , t w o - f i f t h s o f t h e r a t i o f i g u r e s f a l l i n t h e fa v o ra b le groups. one i s

When e i t h e r b o t h o f t h e k e y r a t i o s a r e f a v o r a b l e or

f a v o r a b l e a n d one i s i n t h e m i d d l e g r o u p , f o u r - f i f t h s o f t h e m

are in the

f a v o r a b l e and m i d d l e g r o u p s t o g e t h e r .

When b o t h o f t h e k e y

r a t i o s a r e " f a i r " —t h a t i s , a re in t h e middle group—h a l f of th e r a t i o f i g u r e s a r e i n t h e m i d d l e g ro u p and t h e r e s t a r e d i v i d e d a p p r o x i m a t e l y t h r e e t o tw o i n t h e f a v o r a b l e a nd u n f a v o r a b l e c a t e g o r i e s r e s p e c t i v e l y *

And when t h e k e y r a t i o s a r e e i t h e r b o t h u n f a v o r a b l e o r one i s u n f a v o r ­ a b l e and t h e

o th e r i s i n th e middle group, h a l f o f th e o th e r r a t i o

f i g u r e s a r e u n f a v o r a b l e and t h r e e - f o u r t h s a r e e i t h e r u n f a v o r a b l e o r i n th e middle group. There i s , t h e r e f o r e , a d e f i n i t e tendency fo r t h e rem ain in g four p r i m a r y r a t i o s t o g r o u p t h e m s e l v e s i n t h e c a t e g o r i e s r e p r e s e n t e d by t h e two k e y r a t i o s ( t h e s a l a r i e s and wages t o n e t s a l e s r a t i o was e l i m i n a t e d fr o m t h e p r i m a r y g ro u p b e c a u s e i t i s a component o f t h e o p e r a t i n g e x p e n s e s and i s n e e d e d o n l y a s a s e c o n d a r y r a t i o ) .

The

p r o b l e m o f d e g r e e i s a l w a y s p r e s e n t , b u t by f o l l o w i n g t h e r u l e s g i v e n a b o v e , t h e c o o p e r a t i v e m a n a g e r o r b o a r d member may n o t f e a r b e i n g m isled in t h i s resp ect*

The a u t h o r b e l i e v e s t h a t f o l l o w i n g t h i s

p r o c e s s o f t e s t i n g f i r s t t h e key r a t i o s , t h e n t h e f o u r o t h e r p r i m a r y r a t i o s a n d l a s t , t h e o t h e r more d e t a i l e d r a t i o s w i l l p r o v i d e a r e l a t ­ i v e l y s i m p l e y e t a c c u r a t e p r o c e d u r e f o r a n a l y s i n g t h e f i n a n c i a l manage­ ment p r a c t i c e s

of a cooperative.

t i o n w i t h a minimum o f e f f o r t *

I t w i l l g i v e a maximum o f i n f o r m a ­ I n t h e f o l l o w i n g c h a p t e r , an a n a l y s i s

o f t h e t r e n d s i n d i c a t e d by t h e p rim ary r a t i o s used in t h e s e s t u d i e s w i l l be p r e s e n t e d and t h e s t e p - b y - s t e p p r o c e d u r e f o r a n a l y s i n g t h e r a t i o s f o r a given c o o p e r a t i v e w i l l be i l l u s t r a t e d .

39

CHAPTER I I I A n a ly s is of R a tio s as Trend I n d i c a t o r s T h e Q u e s t i on I n C h a p t e r I I a number o f r a t i o s w e re d e s c r i b e d and a t e c h n i q u e f o r a p p l y i n g th e m was d e v e l o p e d w hic h p r o m i s e d t o be o f d e f i n i t e v a l u e i n a n a l y s i n g t h e g e n e ra l b u sin ess c o n d i t i o n of a c o o p erativ e *

A n e ed

was s t a t e d i n t h e P r e f a c e f o r a r a t i o a n a l y s i s t e c h n i q u e w h i c h c o u l d " f o r e c a s t f o r t o m o r r o w t h e r e s u l t o f t o d a y ' s p r a c t i c e s ' 1* b e d one ?

R atios a r e ,

S till,

seems l o g i c a l t h a t a r a t i o which r e s u l t e d fro m g i v e n p r a c t ­

it

of c o u rs e , r e f l e c t i o n s

Can t h i s

of p a st performance*

i c e s i n t h e p a s t , w i l l r e s u l t a g a i n from a c o n t i n u a t i o n o f t h e same p ractices.

Only a n e x a m i n a t i o n o f a c t u a l d a t a w i l l i n d i c a t e w h e t h e r

o r not t h i s assum ption i s v a l i d .

One d i s t i n c t i o n w h ic h s h o u l d be

k e p t c l e a r i n t h e p r e s e n t c h a p te r i s th e d i f f e r e n c e between t h e t r e n d of the

b u s i n e s s a nd t h e

f i n a n c i a l c o n d itio n of the c o o p e ra tiv e as

r e f l e c t e d by t h e r a t i o s , w h i c h i s t h e t o p i c u n d e r c o n s i d e r a t i o n ; and t h e t r e n d of i n d i v i d u a l r a t i o s , a very im p o rtan t f a c t o r i n a n a l y s i s of several years'

o p e ra tio n s of a given cooperative*

The l a t t e r

t r e n d s h o u l d be w a t c h e d when u s i n g t h e r a t i o s i n a n a l y s i n g t h e o p e r a t ­ i o n s and t h e f i n a n c i a l c o n d i t i o n o f t h e c o o p e r a t i v e *

Trend R a tio s T est T he n e t m a r g i n r a t i o i s a r e s u l t o f o p e r a t i o n a l p o l i c i e s and p ractices.

Two o f t h e most i m p o r t a n t f a c t o r s a f f e c t i n g t h i s r a t i o

a r e o p e r a t i n g e x p e n s e s and t h e

gross m argin.

O p e ratin g expenses

40

a r e i m p o r t a n t i n t h a t th e y a r e t h e s o l e f a c t o r r e d u c in g t h e fund f r o m w hic h t h e n e t m a r g i n i s d e r i v e d ; an d t h e g r o s s m a r g i n i s im ­ p o r ta n t because i t determ ines th e s i z e of th e i n g e xpen ses and t h e

net margin a r e t a k e n .

f u n d fr o m w h i c h o p e r a t ­

T h e s e t h r e e r a t i o s were

used to t e s t t h e t r e n d - i n d i c a t i n g a b i l i t y of r a t i o s .

The t h i r t y - o n e

p a i r s o f r a t i o s m entioned i n C hapter I I , t h a t i s , t h e r a t i o s f o r th e t h i r t y - o n e a s s o c i a t i o n s w h i c h a p p e a r e d i n b o t h P e r i o d I and P e r i o d I I , were c l a s s i f i e d i n t o t h e f o u r f o l l o w i n g groups a c c o r d i n g t o t h e d i ­ r e c t i o n o f c ha n g e o f t h e o p e r a t i n g e x p e n s e r a t i o and t h e g r o s s m a r g i n ratio . The f i r s t

g r o u p c o n s i s t e d o f s e v e n a s s o c i a t i o n s i n v/ hi c h b o t h

t h e o p e r a t i n g e x p e n s e r a t i o and t h e g r o s s m a r g i n r a t i o i n c r e a s e d from P e rio d I t o P e rio d I I .

Group two c o n s i s t e d o f t h e t e n a s s o c ­

i a t i o n s i n w h i c h b o t h o f t h e r a t i o s d e c r e a s e d fr o m P e r i o d I t o P e r i o d II.

The t h r e e a s s o c i a t i o n s i n gro up t h r e e r e p r e s e n t e d d e c r e a s i n g

o p e r a t i n g expense r a t i o s and i n c r e a s i n g g ro s s margin r a t i o s .

The

n i n e a s s o c i a t i o n s i n gro up f o u r h a d i n c r e a s e d o p e r a t i n g e x p e n s e r a t i o s and d e c re a se d g ro ss margin r a t i o s . The n e t c h a n g e i n t h e two r a t i o s combined was computed by a d d i n g or su b tra c tin g th e respective ra tio

figures.

An i n c r e a s e i n t h e

o p e r a t i n g e x p e n s e r a t i o r e d u c e s t h e n e t m a r g i n r a t i o , w h i l e an i n c r e a s e in th e

g r o s s m a r g i n r a t i o wo uld i n c r e a s e i t *

The n e t ch ang e would

a l w a y s e i t h e r i n c r e a s e or d e c r e a s e t h e n e t m a r g i n r a t i o .

The two

a s s o c i a t i o n s n o t a c c o u n t e d f o r i n t h e a b o v e f o u r gr ou ps h a d no n e t change. For each i n d i v i d u a l a s s o c i a t i o n t h e n e t change i n th e above tw o

41

r a t i o s was co mp ut ed and t h e a v e r a g e n e t c ha n g e was t h e n computed f o r a l l t h e o r g a n iz a tio n s in each group.

F o r e x a m p l e , i n Group 1 , i f t h e

e x p e n s e r a t i o i n c r e a s e d by .0 2 1 a nd t h e

gross margin r a t i o in c r e a s e d

by . 0 1 1 , t h e n e t c h a n g e would be - . 0 1 0 .

The minus s i g n i n t h i s i n ­

s t a n c e i n d i c a t e s t h a t t h e n e t c h a n g e was i n t h e d i r e c t i o n of a l o w e r n e t m a r g i n - - e x p e n s e s i n c r e a s e d more t h a n g r o s s m a r g i n .

The a v e r a g e

n e t c h a n g e f o r e a c h g r o u p and t h e a v e r a g e c h a n g e i n t h e n e t m a r g i n f o r t h e same r e c o r d s a r e l i s t e d

i n t h e t a b l e below*

T a b l e 8s R a t i o Trend A n a l y s i s o f T h i r ty - O n e P a i r s o f Records A v e r a g e Net Change i n Group Combined R a t i o s Net M a r g i n R a t i o 1. 2. 3. 4.

B o t h e x p e n s e a nd g r o s s margin r a t i o s in c r e a s e d

-.012

-.015

B o t h e x p e n s e and g r o s s m argin r a t i o s decreased

-.014

-.021

E x p e n s e r a t i o d e c r e a s e d and g ross margin r a t i o in c r e a s e d

.031

.017

E x p e n s e r a t i o i n c r e a s e d and g ro s s margin r a t i o d e c re a se d

-.025

-.034

T h i s t a b l e shows t h e e f f e c t o f c h a n g e s i n r a t i o s .

R e g a r d l e s s of

w h a t a s e t o f r a t i o s may be a t a g i v e n t i m e or f o r a g i v e n p a s t p e r i o d , t h e y may be c h an ge d f o r t h e b e t t e r o r f o r t h e w o r s e by a c h a n g e i n o p e r a t i n g c o n d i t i o n s , p o l i c i e s and p r a c t i c e s .

The l e s s o n w h i c h may be

l e a r n e d f r o m t h e f o r e g o i n g t a b l e i s t h a t when t h e manager or t h e d i ­ r e c t o r s c h a n g e o p e r a t i n g p o l i c i e s and p r a c t i c e s , i t c o n s i d e r a number of f a c t o r s .

is necessary to

I n Group 1 i t a p p e a r s t h a t t h e gen­

e r a l t e n d e n c y was t o i n c r e a s e t h e o p e r a t i n g e x p e n s e s more t h a n g r o s s m argins.

I n a s m u c h a s b o t h a r e shown h e r e as p e r c e n t a g e s o f n e t s a l e s ,

a n i n c r e a s e o f a g i v e n amount i n t h e f o r m e r w i l l e x a c t l y o f f - s e t an i n c r e a s e o f t h e same amount i n t h e l a t t e r a s s u m i n g no c ha n g e i n " o t h e income".

" O t h e r in c o m e " i s r e c e i p t s

trucking ,

g r i n d i n g a n d o t h e r s e r v i c e s , an d from i n t e r e s t , r e n t ,

v id e n d s , d is c o u n ts , patronage refunds o th e r m iscellaneous sources. n e t m argin.

from e x t r a s e r v i c e s i n c l u d i n g

fro m o t h e r c o o p e r a t i v e s and

An i n c r e a s e i n t h i s inc ome a d d s t o t h e

O u ts id e of t h i s f a c t o r , t h e n e t margin i s t h e d i r e c t

r e s u l t o f t h e c om bi ne d v a l u e s o f t h e o p e r a t i n g e x p e n s e s and t h e m argin.

d i­

L ater in t h i s

portance of th e

gross

c h a p t e r some i n d i c a t i o n of t h e r e l a t i v e im­

" o t h e r income " f a c t o r s w i l l be g i v e n .

I n Group t w o , t h e d e c r e a s e s i n o p e r a t i n g e x p e n s e s were n o t s u f f i ierrfc t o o f f - s e t t h e d e c r e a s e s i n t h e g r o s s m a r g i n .

The p e r i o d of

t i m e r e p r e s e n t e d b y t h e P e r i o d I I d a t a was a t i m e o f i n c r e a s i n g com­ p e t i t i o n and p r i c e d r o p s r e s u l t i n g i n i n a b i l i t y t o t a k e i n t e n d e d m a r g i n s on a l l i n v e n t o r y i t e m s .

The g e n e r a l t r e n d of o p e r a t i n g e x ­

p e n s e s t o s a l e s was u p w a r d s ; t h e t r e n d o f n e t m a r g i n s was downwards* A glance a t Table 4 i n t h e preceding chapter w i l l c o rro b o ra te t h i s statem ent.

S uc h c o n d i t i o n s r e q u i r e v e r y c a r e f u l a t t e n t i o n t o manage­

ment p r a c t i c e s .

A r e d u c t i o n i n g r o s s m a r g i n w i t h o u t a n a c c o m p a n y in g

r e d u c t i o n i n o p e r a t i n g e x p e n s e s , w h ic h m i g h t h a v e b e e n s a f e i n t h e first

p e r i o d , might i n t h e

s e c on d p e r i o d be v e r y d a n g e r o u s .

Changes

i n volu me o f b u s i n e s s , i n c r e a s e d c r e d i t d e f a u l t s and c l o s e r m a r g i n s c a n t u r n a " s u c c e s s f u l " c o o p e r a t i v e i n t o an " u n s u c c e s s f u l " one i n a y e a r 's tim e.

It is

p a r tly fo r th is reason t h a t a l a te r s e c tio n of

t h i s r e p o r t w i l l s e t up t h e p r o c e d u r e f o r a m o n t h - t o - m o n t h c h e c k up w h i c h can q u i c k l y r e v e a l t o t h e ma nag er and t h e b o a r d members t h e

43

d i r e c t i o n i n w h i c h t h e i r a s s o c i a t i o n ’ s f i n a n c i a l c o n d i t i o n i s m o v in g . I n Group 3, b o t h r a t i o s a r e g o i n g i n a f a v o r a b l e d i r e c t i o n * I n c r e a s e d g r o s s m a rg in s , o f c o u r s e , n o rm a lly r e f l e c t h ig h e r mark-ups (though not n e c e s s a r ily h ig h er p ric e s ) techniques.

o r im p r o v e d w h o l e s a l e b u y i n g

I f i n c r e a s e d p r i c e s a r e i n v o l v e d , volume must be c l o s e l y

w a t c h e d and t h e

c o o p e r a t i v e ' s p a t r o n members m ust be e n c o u r a g e d and

educated t o m ain tain t h e i r l o y a l t y . I n Group f o u r b o t h r a t i o s were mo vi ng i n an u n f a v o r a b l e d i r e c t ­ ion*

I t i s i n t e r e s t i n g t o n o t e i n Groups 1 , 2

and 4 t h a t t h e g r e a t e r

t h e a v e r a g e n e t c h a n g e i n a n u n f a v o r a b l e d i r e c t i o n o f t h e two r a t i o s , t h e g r e a t e r was t h e a v e r a g e r e d u c t i o n i n t h e n e t m a r g i n . the

T h u s , when

co mb ine d r a t i o s c h a n g e d a d v e r s e l y by . 0 1 2 , t h e n e t m a r g i n d e c r e a s e

was . 0 1 5 , when t h e co mb in ed n e t ch ange was . 0 1 4 , t h e n e t m a r g i n c h a n g e was . 0 2 1 ; and when t h e d e c r e a s e was *0 3 4 .

n e t combined d e c r e a s e was . 0 2 5 , t h e n e t m a r g i n

This i n d i c a t e s t h e h ig h c o r r e l a t i o n between t h e

c o m bin e d r a t i o s a nd t h e n e t m a r g i n r a t i o . The a b o v e c o m p a r i s o n s ha v e b e e n i n v e s t i g a t i o n s a s s o c i a t i o n s and of a v e r a g e s . "What a b o u t my c o - o p ?

o f g r o u p s of

The c o o p e r a t i v e manager may w e l l a s k ,

I c a n 't study i t

a s an ' a v e r a g e ' " .

An exam­

i n a t i o n a t t h i s p o i n t o f i n d i v i d u a l c o o p e r a t i v e s may h e l p t o i n d i c a t e t h e v a r i a t i o n s i n s i t u a t i o n s , r e q u i r e m e n t s and f a c t o r s t h a t e x i s t a n d s u g g e s t how t o i n t e r p r e t a nd d e a l w i t h t h e m .

I n d i v i d u a l Records Analysis, Below a r e t h e primary r u t i o s f o r a p a r t i c u l a r c o o p e r a t i v e a s s o c ­ iation .

44 A s s o c i a t i o n A*

I

Period II

id

Net m a r g i n t o n e t s a l e s

.070

.077

.07

O p e ratin g expenses to n et s a le s

.099

.107

-.008

Gross m argin t o n e t s a l e s

.1 20

.1 2 3

.0 0 8

C urrent a s s e ts to cu rrent l i a b i l i t i e s

2.90

4.57

1.67

C o s t o f goods s o l d t o m e r c h a n d i s e i n v e n t o r y

7.64

7 .0 9

-.55

26.12

30.9 2

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Supplies s a le s t o accounts re c e iv a b le

The i n c r e a s e i n o p e r a t i n g e x p e n s e s i n t h e ab o ve c a s e e x a c t l y o f f s e t t h e i n c r e a s e i n g r o s s m a rg in *

Net m a r g i n s t i l l i n c r e a s e d

due t o an i n c r e a s e o f *007 i n " o t h e r in c o m e 11 r e l a t i v e t o volume o f sales.

I n t h i s i n s t a n c e t h e m a na ge r would have b e e n s a f e i n u s i n g

h i s g ro s s m argin t o e f f e c t low er p r i c e s .

The s e v e n p e r c e n t n e t

m a r g i n a l l o w e d him a c o n s i d e r a b l e a r e a o f s a f e t y * ro se t h i r t e e n per cen t,

fro m $ 1 9 9 , 0 0 0 t o $ 2 2 4 , 0 0 0 .

H is n e t s a l e s Thus t h e s m a l l

r e d u c t i o n i n i n v e n t o r y t u r n o v e r was not a r e f l e c t i o n of low ered v o l ­ ume b u t was a s l i g h t l y i n c r e a s e d i n v e n t o r y r e l a t i v e t o t o t a l c o s t o f goods s o l d *

The i n c r e a s e o f t h e c u r r e n t a s s e t s r a t i o i s o b v i o u s l y

n o t du e t o c r e d i t s a l e s i n a s m u c h as a c c o u n t s r e c e i v a b l e we re r e l a t ­ i v e l y s m a l l e r t h a n in t h e p re v io u s year*

T h i s d o e s n o t mean t h a t

e i t h e r i n v e n t o r y t u r n o v e r or a c c o u n t s r e c e i v a b l e s h o u l d be i g n o r e d . The t u r n o v e r i s s t i l l

p r e t t y low an d p o s s i b l y s h o u l d be i n c r e a s e d .

The same may be s a i d of t h e a c c o u n t s r e c e i v a b l e . I t i s i n t e r e s t i n g to note b e fo re going f u r t h e r t h a t th e average d e c r e a s e i n n e t m argin f o r in e f i r s t t o t h e second p e r io d f o r th e

4:5

s e v e n c o o p e r a t i v e s w h i c h had a n e t m a r g i n 6‘f . 0 1 0 or l e s s t h e y e a r was #005*

first

T h ree of t h e s e v e n i n c r e a s e d t h e i r n e t margins*

Of

t h e n i n e a s s o c i a t i o n s h a v i n g n e t m a r g i n s b e t w e e n .0 1 1 and *030 t h e f i r s t y e a r , t h e a v e r a g e d e c r e a s e i n n e t m a r g i n was *018; and o f t h e f i f t e e n c o o p e r a t i v e s h a v i n g a f i r s t - y e a r n e t m a r g i n l a r g e r t h a n *030, t h e a v e r a g e d e c r e a s e was *026.

The a v e r a g e i n c r e a s e i n d o l l a r volume

o f s a l e s was 5 p e r c e n t f o r t h e f i r s t

group; f o r t h e second group

t h e a v e r a g e i n c r e a s e was 19 p e r c e n t ; a n d f o r t h e t h i r d

g ro u p t h e

a v e r a g e i n c r e a s e was 9 p e r c e n t * The c o o p e r a t i v e s , t h e n , w h ic h f e l l w i t h i n t h e l o w e s t r a n g e o f n e t m a r g i n r a t i o s t h e f i r s t y e a r had t h e l o w e s t a v e r a g e d e c l i n e i n r e l a t i v e n e t m argins t h e next y e a r , w hile t h e a s s o c i a t i o n s having t h e h i g h e s t n e t m a r g i n s t h e f i r s t y e a r had t h e h i g h e s t a v e r a g e n e t m argin d e c l i n e th e second year*

The a v e r a g e d e c r e a s e i n d o l l a r

volu me o f s a l e s was q u i t e s i m i l a r f o r t h e two gr ou ps*

I t thus ap­

p e a r e d t h a t t h e l o w - m a r g i n a s s o c i a t i o n s w e re more c o n c e r n e d w i t h t h e i r s i t u a t i o n ( a s t h e y had r e a s o n t o b e ) and t o o k s t e p s t o i m p r o v e t h e i r condition*

A c tu a ll y , t h r e e of th e seven a s s o c i a t i o n s i n t h i s

g r o u p made v e r y good i n c r e a s e s i n t h e i r n e t m a r g i n s w h i l e t h e o t h e r f o u r had d e c r e a s i n g m a rg in s .

Only one o f t h e f i f t e e n a s s o c i a t i o n s

i n t h e mo st f a v o r a b l e gr ou p i n c r e a s e d i t s n e t m a r g i n , h o w e v e r , and t h a t by o n l y *007* Managers an d b o a r d members o f c o o p e r a t i v e s may t a k e t h i s e v i ­ d e n c e a s a w a r n i n g t h a t a c u r r e n t l y good c o n d i t i o n d o e s n o t j u s t i f y relaxed v ig ila n c e .

F i n a n c i a l c o n d i t i o n i s h i g h l y c h a n g e a b l e an d

needs c o n s ta n t a t t e n t i o n .

Much c a n h a p p e n i n a month or two t o s a y

46 nothing of a year. D a t a f o r t h r e e c o n s e c u t i v e y e a r s were o b t a i n e d f o r e i g h t c o o p ­ erativ e asso c iatio n s. o f value*

E x a m i n a t i o n o f some o f t h e s e r e c o r d s may b e

The f o l l o w i n g gr oup w i l l s e r v e a s a n ex amples

A s s o c i a t i o n Bs Period I Net m a r g i n t o n e t s a l e s

II

III

-.015

.0 1 6

.0 0 9

O perating expenses to n et s a le s

.1 2 9

.119

.1 3 8

Gross m argin to n e t s a le s

.0 8 8

.1 1 1

.1 0 5

C urrent a s s e ts to c u rren t l i a b i l i t i e s

1.80

1.80

2.21

C o s t o f goods s o l d t o m e r c h a n d i s e inventory

7.21

7.58

7.81

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37.62

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S upplies s a le s to accounts re ceiv ab le

I n t h e f i r s t y e a r , compared w i t h t h e a v e r a g e s t h e n e t m a r g i n was lo w ; o p e r a t i n g e x p e n s e s were a l s o r e a s o n a b l e and g r o s s m a r g i n s we re l o w .

The m e r c h a n d i s e t u r n o v e r was f a i r an d a c c o u n t s r e c e i v a b l e

were v e r y good. done.

W i t h a n e g a t i v e n e t m a r g i n , s o m e t h i n g had t o be

The v e r y lo w g r o s s m a r g i n c o u l d p r o b a b l y be i n c r e a s e d w i t h o u t

s e r i o u s l y e n d a n g e r i n g c o m p e t i t i v e a d v a n t a g e and some r e d u c t i o n m igh t be made i n o p e r a t i n g e x p e n s e s .

T h e s e t h i n g s were d o n e .

The i n c r e a s e

i n t h e g r o s s m a r g i n was .0 2 3 a nd t h e d e c r e a s e i n o p e r a t i n g e x p e n s e s r a t i o was . 0 1 0 .

T h i s t o t a l c ha ng e i n f a v o r o f a h i g h e r n e t m a r g i n

e q u a l e d . 0 3 3 , . 0 0 2 more t h a n t h e . 0 3 1 i n c r e a s e i n t h e n e t m a r g i n . T h e r e was a . 0 0 1 d e c r e a s e i n " o t h e r in c o m e " w hich t o g e t h e r w i t h r o u n d i n g - o f f v a r i a t i o n s could account fo r th e

.002.

The a c c o u n t s

47

r e c e i v a b l e r a t i o d e c li n e d about f i f t y a l l dangerous.

p e r c e n t b u t d i d not become a t

Thus* t h e management o f t h e c o o p e r a t i v e b r o u g h t t h e

o r g a n i z a t i o n i n t o a much b e t t e r p o s i t i o n w i t h o u t p u t t i n g a ny r a t i o i n a bad c o n d itio n . At t h i s s t a g e of t h e th e lin e

game, i t would seem a w i s e p o l i c y t o h o l d

or t o t r y t o r e d u c e e x p e n s e s s t i l l

further.

A n e t m argin of

. 0 1 6 d o e s n o t l e a v e much room f o r r e d u c i n g t h e g r o s s m a r g i n u n l e s s t h e o p e r a t i n g expenses are a l s o red u ced . and t h e expense r a t i o "other

in c re a s e d .018.

G r o s s m a r g i n s were r e d u c e d . 0 0 6 Except f o r .017 i n c r e a s e i n

i n c o m e " , t h e c o o p e r a t i v e would ha v e b e e n back i n t h e r e d .

Thus, d e s p it e a fa v o ra b le tre n d i n tu r n o v e r,

e x p e n s e s i n c r e a s e d and

t h e a s s o c i a t i o n was a g a i n i n a none t o o f a v o r a b l e p o s i t i o n . The f o l l o w i n g s e t of r a t i o s sents a d if f e r e n t s o rt

for a cooperative a ss o c ia tio n pre­

of p ic tu re s

A s s o c i a t i o n C: Period I Net m a r g i n t o n e t s a l e s O p eratin g expenses to net Gross m a rg in t o

sales

net sales

C urrent a s s e ts t o

current l i a b i l i t i e s

C o s t o f goods s o l d t o m e r c h a n d i s e inventory Supplies s a le s to

accounts re c e iv a b le

II

III

.002

-.025

-.061

.1 2 0

.1 1 5

.175

.0 8 2

.066

.083

1.25

1.17

.7 9

6.31

9.05

9.99

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38.82

26 .9 9

In t h e f i r s t y e ar th e a s s o c i a t i o n j u s t squeezed th ro u g h with a low

march n ,

b o th

n e t a nd g r o s s , and w i t h a low m e r c h a n d i s e t u r n o v e r ,

48 And e v e n t h o u g h t h e a s s o c i a t i o n wer e f o l l o w i n g a l o w - g r o s s , l o w - n e t p o l i c y p r u d e n c e w o uld seem t o d i c t a t e a l a r g e r the

g r o s s m a rg in #

However,

g r o s s m a r g i n was d e c r e a s e d by .0 1 6 and e x p e n s e s w e r e d e c r e a s e d

.005 f o r a t o t a l n e t d e c re a se of .0 1 1 .

The d i f f e r e n c e b e t w e e n .0 1 1

a nd t h e n e t m a r g i n r a t i o d e c r e a s e o f . 0 2 7 was a c c o u n t e d f o r by t h e d e c r e a s e of .017 i n " o th e r incom e".

The r e s u l t was a n e g a t i v e n e t

m argin i n P e rio d I I . W i t h t h i s v e r y low g r o s s m a r g i n , and b e i n g i n t h e r e d , t h e a p ­ p a r e n t t h i n g t o do was t o i n c r e a s e t h e g r o s s m a r g i n and t r y t o h o l d e x p e n s e s down.

T h i s was done c a u t i o u s l y , b u t e x p e n s e s i n c r e a s e d s h a r p ­

l y a n d t h e r e s u l t was a s t i l l

f u r t h e r d e c r e a s e i n t h e n e t m a r g i n or

r a t h e r in c r e a s e in t h e n e g ativ e n e t m argin. may h a v e f o u n d i t

Of c o u r s e , t h e ma nager

im prudent to i n c r e a s e p r i c e s but i n view of th e

f a c t t h a t h i s s a l e s volume d r o p p e d from $ 2 8 5 , 0 0 0 t o $ 1 7 6 , 0 0 0 b e t w e e n th e

s e c o n d and t h i r d y e a r ’ anyway, i t

i s possible th a t a la rg e r in ­

c r e a s e i n t h e g r o s s m a r g i n would ha ve done more good t h a n h a rm . T r e n d s i n f i n a n c i a l r a t i o s o f t e n c a n be a l t e r e d by c h a n g e d c o ­ o p e r a t i v e management p r a c t i c e s and p o l i c i e s .

In a y e ar-b y -y e ar su r­

v e y , t r e n d s n o r m a l l y a p p e a r t o be o f s h o r t d u r a t i o n b e c a u s e a t w o y e a r t r e n d o f t e n r e a c h e s a n u l t i m a t e p o i n t i n t h a t l e n g t h of t i m e . That i s ,

a t w o - y e a r downward t r e n d i n g r o s s m a r g i n n o r m a l l y w i l l l o w e r

t h e r a t i o t o a l e v e l be yond w h ic h i t

cannot f e a s i b l y go.

Thus, i n

a n a l y s i n g y e a r l y d a t a , t h e m a n ag e r must o f t e n r e c o g n i z e t h e t r e n d a s a s i n g l e f i g u r e r a t h e r t h a n a s a s e r i e s of f i g u r e s .

For example,

i n t h e s e t o f f i n a n c i a l r a t i o s f o r A s s o c i a t i o n C, t h e m a n a g e r , l o o k ­ in g at the f i r s t y e a r's

f i g u r e s w ith o u t b e n e f i t of th e p re v io u s y e a r ' s

49 ratio s,

can re a so n as fo llo w s :

A .002 n e t m argin i s g e t t i n g v ery c l o s e t o th e b re a k -e v e n p o i n t . A s l i g h t i n c r e a s e i n expenses or a s l i g h t d e crea se i n n o n -o p e ra tin g in c o m e o r g r o s s m a r g i n c o u l d t h r o w t h e n e t m a r g i n f i g u r e i n t o t h e red.

O b v i o u s l y a n im p r o v em e n t i s n e e d e d . He s h o u l d t h e n i n v e s t i g a t e h i s o t h e r r a t i o s - - t h a t i s , t h e r e ­

m a in d e r o f t h e prim ary r a t i o s as w e l l as t h e sec o n d a ry ones, t o de­ t e r m i n e whe re t h e w e a k n e s s e s ha ve o r i g i n a t e d w h i c h have b r o u g h t h i s n e t m a r g i n so lo w .

B as e d on h i s f i n d i n g s , h i s s u b s e q u e n t p r a c t i c e s

w ould b e d i r e c t e d a t i m p r o v i n g t h e o v e r - a l l f i n a n c i a l c o n d i t i o n o f h is cooperative a s s o c ia tio n . ratio

He a c c e p t s a s i n g l e y e a r ’ s f i n a n c i a l

f i g u r e s a s i n d i c a t o r s o f a t r e n d — a s i n d i c a t o r s o f w h a t he may

e x p e c t w i t h t h e c o n t i n u a t i o n o f t h e same management p r a c t i c e s . One f i n a l exam pl e may be w o r t h a t t e n t i o n . p r o c e e d who h a d o n l y one y e a r ' s

How would t h e m a nag er

o p e r a t i o n s t o j u d g e by?

And how

v/ould he a p p l y a l l o f h i s r a t i o s t o t h e t a s k ? Period I

A s s o c i a t i o n Ds Net margin t o n e t s a l e s Operating expenses t o net s a l e s S a l a r i e s and wages t o n e t s a l e s Gross margin t o net s a l e s Cost o f goods s o l d t o merchandise i n v e n t o r y Su pp lies s a l e s to accounts r e c e iv a b le Current a s s e t s t o c u r r e n t l i a b i l i t i e s Fixed a s s e ts to t o t a l a s s e ts C a p ita l stock & patrons' e q u i t i e s to t o t a l assets Net s a l e s t o t o t a l a s s e t s Net m a r g i n t o t o t a l a s s e t s In t h e

first

.049 .074 .0 4 6 .107 20.70 67.22 1.92 .314 .965 5.84 .285

p l a c e , t h e m a nag e r must have some s o r t o f y a r d s t i c k

50

t o m e a s u r e b y , l a c k i n g p r e v i o u s d a t a t o i n d i c a t e d i r e c t i o n o f chang e* I f he u s e s t h e s t a n d a r d r a n g e s d e f i n e d i n T a b l e 2 , C h a p t e r I I o f t h i s p a p e r , h i s o v e r a l l i m p r e s s i o n must be one o f s a t i s f a c t i o n .

A net

s a v i n g s o f 4*9 c e n t s p e r d o l l a r o f s a l e s i s d e f i n i t e l y g o o d , e s p e c i a l l y when a s s o c i a t e d w i t h a r e a s o n a b l e g r o s s m a r g i n .

The l a t t e r was n e t

i n t h e f a v o r a b l e c a t e g o r y , b u t i t was n o t so h i g h a s t o r e f l e c t o v e r ­ pricing.

O p e r a t i n g e x p e n s e s we re v e r y low , a s were s a l a r i e s and wages

in r e l a t i o n to net s a le s .

The m e r c h a n d i s e t u r n o v e r was ov e r one and

a h a l f t i m e s p e r month and t h e r e c e i v a b l e s r a t i o was h i g h l y f a v o r a b l e . The c u r r e n t r a t i o i s n o t q u i t e so good. but th e standard c a lls

I t i s n e a r l y two t o on e ,

f o r 2.90s 1 t o get i n t o th e fa v o ra b le group.

The m a n a g e r s h o u l d c h e c k i n t o t h i s m a t t e r f u r t h e r . t h a t he had h i g h c u r r e n t l i a b i l i t i e s .

(He would d i s c o v e r

His c a s h p o s i t i o n , p l u s h i s

r e c e i v a b l e s would p r o b a b l y be s u f f i c i e n t t o t a k e c a r e o f t h e

lia b il­

i t i e s , a l t h o u g h h i s i n v e n t o r y i s q u i t e low and wo ul d need s u p p l e m e n t ­ a t i o n , w h i c h w ou ld r e q u i r e e i t h e r c a s h o r t h e i n c u r r i n g o f a d d i t i o n a l liab ilities). The a s s o c i a t i o n ’ s f i x e d a s s e t s r a t i o i s h i g h and u n f a v o r a b l e a c c o rd in g to th e s ta n d a rd .

I f t h e a s s o c i a t i o n i s ne w ly e s t a b l i s h e d

o r h a s j u s t c o m p l e t e d e x p a n s i o n a c t i v i t i e s , h o w e v e r , t h e r e i s no cause f o r concern.

O t h e r w i s e , c o n s i d e r a t i o n s h o u l d be g i v e n t o r e ­

medying t h e w eak n ess.

The p a t r o n s *

e q u i t y f i g u r e i s v e r y good, a s

a l s o a r e s a l e s t o t o t a l a s s e t s and n e t m a r g i n t o t o t a l a s s e t s . The m a n a g e r o r b o a r d o f d i r e c t o r s o f t h i s son t o

a s s o c i a t i o n have r e a ­

fe e l q u ite pleased w ith th e general p ic tu re .

t o improve t h e f i x e d a s s e t s , c u r r e n t r a t i o ,

They s h o u l d t r y

and p o s s i b l y t h e g r o s s

51 m a r g i n s i t u a t i o n s , a nd a b o v e a l l t h e y s h o u l d b e c a r e f u l n o t t o a l l o w them selves t o re la x t h e i r v igilan ce#

A sso c ia tio n s with th e b e st net

m a r g i n s , i t was shown e a r l i e r i n t h i s

c h a p te r, tend to s u s ta in the

g r e a t e s t r e d u c t i o n s i n n e t m a r g i n ; and one p o o r m a r g i n may r e f l e c t a c o n d i t i o n w h ic h w i l l r e s u l t i n s e v e r a l p o o r m a r g i n s i n a n o t h e r y e a r , i f a l l o w e d t o r e m a i n as i t

is#

C onclusions Th e d a t a p r e s e n t e d i n t h i s c h a p t e r and t h e a n a l y s e s o f t h a t d a t a we re d e s i g n e d t o d e t e r m i n e t o what e x t e n t f i n a n c i a l r a t i o s i n d i c a t e a trend#

Subject to th e lim ita tio n s

can

of outside f a c t o r s , i t

a p p e a r s t h a t t h e p r i m a r y r a t i o s d e f i n i t e l y c a n be p r o f i t a b l y exam­ in e d f o r i n d i c a t i o n s o f t r e n d s i n t h e o p e r a t i n g p r a c t i c e s and f i n a n ­ c i a l c o n d i t i o n o f an o rg a n iz a tio n #

They a r e , i n f a c t , t h e b e s t

m anageme nt r a t i o s w hi c h a r e a v a i l a b l e

f o r t h i s purpose#

There a re

o t h e r management r a t i o s a s w e l l as many b a l a n c e s h e e t r a t i o s w h ic h a l s o c a n be em ployed f o r t h e same use#

L i m i t e d a t t e n t i o n ha s b e e n

g i v e n t o m e r c h a n d i s e t u r n o v e r , a c c o u n t s r e c e i v a b l e and c u r r e n t r a t i o s in th is

chapter#

T h i s was n o t b e c a u s e t h e y a r e c o n s i d e r e d u n i m p o r t a n t

b u t , r a t h e r , b e c a u s e t h i s c h a p t e r has been c once rne d w ith c l a r i f y i n g t h e t e c h n i q u e o f t r e n d f o r e c a s t i n g a nd s i m p l i c i t y was t o b e g a i n e d by a l i m i t on number o f f a c t o r s used# I n C h a p t e r I I i t was m e n t i o n e d t h a t t h e r a n g e s o f t h i r d s ope d f r o m t h e P e r i o d I d a t a wo ul d be u s e d a s c r i t e r i a further data.

Two q u e s t i o n s a r i s e c o n c e r n i n g t h i s s

devel­

fo r judging (1)

Gan t h e

52 r a n g e s be f a i r l y a p p l i e d t o

o th e r years* data?

a p p l i e d t o any ty p e of c o o p e r a tiv e ?

( 2)

Can t h e y b e

The n e x t c h a p t e r w i l l be c o n ­

c e r n e d w i t h a d i s c u s s i o n a nd e x a m i n a t i o n o f t h e s e q u e s t i o n s #

53 CHAPTER IV A p p l i c a b i l i t y o f S t a n d a r d s t o D i f f e r e n t Types o f C o o p e r a t i v e s Th e Q u e s t i o n As s u g g e s t e d i n t h e p r e c e d i n g c h a p t e r * t h e q u e s t i o n must be a n s w e r e d a s t o w h e t h e r t h e same s t a n d a r d s may be a p p l i e d t o d i f f e r e n t years*

d a t a i n a g i v e n c o o p e r a t i v e ; and a l s o w h e t h e r t h e y may b e

a p p l i e d t o d i f f e r e n t t y p e s o f c o o p e r a t i v e s i n t h e same y e a r * As f a r a s t h e t e c h n i q u e o f r a t i o e v a l u a t i o n i s c o n c e r n e d , a s d ev elo p ed i n Chapter I I I , th e s e q u e stio n s a re not im portant*

This

t e c h n i q u e o f a n a l y s i n g a number o f r a t i o s as i n d i c a t o r s o f a c o o p ­ e ra tiv e 's tiv e*

f i n a n c i a l c o n d i t i o n c a n be u s e d w i t h any t y p e of c o o p e r a ­

But i f a r a n g e o f v a l u e s i s t o be u s e d t o c l a s s i f y r a t i o f i g ­

u r e s o r i f c o o p e r a t i v e s a r e t o be compared t o a s t a n d a r d o r a v e r a g e , i t i s i m p o r t a n t t o know what t h a t s t a n d a r d c a n c o v e r *

A p p l i c a b i l i t y a s Between Y e a rs i n a n A s s o c i a t i o n The a p p l i c a t i o n o f a s e t o f s t a n d a r d s t o r a t i o

f i g u r e s computed

f o r a g i v e n c o o p e r a t i v e i n c o n s e c u t i v e y e a r s must make a l l o w a n c e f o r c h a n g i n g e con om ic c o n d i t i o n s o u t s i d e of t h e o r g a n i z a t i o n . i n Chapter I I ,

Table 4

f o r example, i l l u s t r a t e s som ething o f t h i s m a t t e r .

The g e n e r a l l y c h a n g e d r a t i o s i n d i c a t e d i n t h i s c h a r t a r e a t l e a s t p a r t i a l l y t h e r e s u l t o f economic f o r c e s beyond t h e c o n t r o l o f t h e c o o p e r a t i v e s * m a n a g e m e n ts .

Thus, though a g a in t h e r a t i o a n a l y s i s

t e c h n i q u e i s v a l i d , one must i n q u i r e as t o t h e a p p l i c a b i l i t y o f t h e s t a n d a r d s used t o ju dge t h e s e r e s p e c t i v e s e t s of r a t i o s *

54 I n C h a p t e r I I i t was s t a t e d t h a t t h e r a n g e s o f t h i r d s , t a k e n f r o m t h e P e r i o d I d a t a , a n d a s d e f i n e d i n T a b l e 2 , were c o n s i d e r e d as r e a s o n a b l e s ta n d a r d s f o r a p p l i c a t i o n t o P e rio d I I d a t a . th e b asis

What was

fo r t h i s contention?

As m e n t i o n e d , t h e r e were t h r e e a s s o c i a t i o n s among t h e t h i r t y n i n e i n P e r i o d I w h i c h had n e g a t i v e n e t m a r g i n s .

S e v e r a l had h i g h

p o s i t i v e n e t m a r g i n s a nd t h e a v e r a g e was . 0 3 : 1 , o r t h r e e p e r c e n t savings.

T h is average as w e ll as th e av erages f o r th e o th e r r a t i o s

w e r e r e a s o n a b l y a d e q u a t e a n d w e l l - b a l a n c e d a s j u d g e d by t h e s u b j e c t ­ ive stan d ard s

o f e x p e r i e n c e and o b s e r v a t i o n .

T h e r e f o r e , i t was f e l t

t h a t t h e s e s t a n d a r d s c o u l d j u s t i f i a b l y be u s e d t o m e a s u r e t h e P e r i o d II data. By d e f i n i t i o n , t h e P e r i o d I d a t a f e l l i n t o e q u a l t h i r d s ratio .

f o r each

When t h e s e t h i r d s r a n g e s fr o m T a b l e 2 w e re a p p l i e d t o t h e

P e r i o d I I d a t a , a c o n s i d e r a b l y d i f f e r e n t d i s t r i b u t i o n was o b t a i n e d . The b u l k o f t h e r a t i o f i g u r e s

fo r th e Period I I data f e l l in to th e

m iddle and u n f a v o r a b l e g ro u p s . favorable range.

V e ry few c o u l d be c l a s s i f i e d i n t h e

C o m p a ri s o n o f t h e r a t i o s a v e r a g e s i n T a b l e 4 i l l ­

u s t r a t e s why t h i s s h o u l d be s o .

Whereas o n l y o n e - t h i r t e e n t h o f t h e

a s s o c i a t i o n s had n e g a ti v e n e t margins in P e rio d I ,

over o n e - f i f t h

o f t h e P e r i o d I I a s s o c i a t i o n s were s u s t a i n i n g o p e r a t i n g l o s s e s . I n t h e c a s e o f t h e P e r i o d I I d a t a , t h e n e t m a r g i n a v e r a g e was . 0 1 0 , o r a s a v i n g s o f one p e r c e n t .

A c o o p e r a t i v e w hic h h a d a n e t

m a r g i n o f .0 1 5 would l o o k r e l a t i v e l y f a v o r a b l e i n l i g h t o f t h a t a v ­ erage.

T h is com parison i s i m p o r ta n t, but i t i s not s u f f i c i e n t .

A lso needed i s a s t a n d a r d n e t m argin r a t i o which r e f l e c t s , as f a r

55 as a s i n g l e r a t i o i s a b l e ,

sound o p e r a t i o n a l p r a c t i c e s o r b u s i n e s s

c o n d i t i o n b a s e d on a l o n g - r u n v i e w .

It is

f o r t h i s re a so n t h a t an

a t t e m p t h a s b e e n made t o d e f i n e s u c h s t a n d a r d r a t i o v a l u e s . A p p l i c a b i l i t y t o D i f f e r e n t Types o f C o o p e r a t i v e s The P e r i o d I a s s o c i a t i o n s c o n s i s t e d o f f i v e d i f f e r e n t t y p e s o f co operatives.

They w e r e :

o il cooperatives,

f r u it cooperatives,

g e n e r a l f a r m s u p p l y c o o p e r a t i v e s i n w hic h s u p p l i e s s a l e s t o members and p a t r o n s a c c o u n te d f o r over s e v e n ty p e r cent of t o t a l s a l e s r e ­ ceip ts,

g e n e r a l farm s u p p l y - m a r k e t i n g c o o p e r a t i v e s i n which t h e r e ­

c e i p t s fr o m m a r k e t i n g a c t i v i t i e s

a c c o u n t e d f o r more t h a n t h i r t y p e r

c e n t b u t l e s s t h a n s e v e n t y p e r c e n t o f t o t a l s a l e s r e c e i p t s , and one a s s o c i a t i o n i n w hic h m a r k e t i n g r e t u r n s c o m p r i s e d s e v e n t y - f i v e p e r cent of t o t a l r e c e i p t s .

The P e r i o d I I a s s o c i a t i o n s c o m p r i s e d a t o t a l

of fiv e such c l a s s i f i c a t i o n s . iatio n s

The g r o u p s and t h e number of a s s o c ­

i n e a c h gr o u p f o r e a c h o f t h e p e r i o d s f o l l o w .

T a b l e 9: D i s t r i b u t i on o f P e r i o d I and I I As s o c i a t i o n s by Type o f B u s i n e s s Number o f A v e ra g e O p e r a t i n g ______Type o f B u s i n e s s ___________________ A s s o c i a t i o n s Expense R a t io Period II

Period I II /£ %

23

24

1 1 ,1

12*3

Purchasing-m arket!ng a s s o c ia tio n s r e c e i p t s from m a r k e t i n g more t h a n 30 p e r c e n t and l e s s t h a n 70 p e r cent of t o ta l re c e ip ts

8

17

9*1

11,8

O il a s s o c i a t i o n s

4

7

15,1

16*8

2

1

16,6

9,3

Purchasing asso c iatio n s-7 0 p e r c e n t t o 100 p e r c e n t o f t o t a l r e c e i p t s fro m s u p p l i e s s a l e s t o patrons

F ruit associations

^

I

56 T a b l e 9s ( c o n * t ) Period

1

9/ M arketing a s s o c ia tio n s - o v e r ' 70 p e r c e n t o f t o t a l r e c e i p t s from m a r k e tin g

Period

11 1 1 _____

1 7 .7

11 15.2

l / The f r u i t a s s o c i a t i o n s , i n a l l c a s e s would n o r m a l l y go i n t o t h e p u rch a sin g -m ark etin g c a te g o ry , but because of th e d iff e r e n c e in the t y p e o f commodity m a r k e t e d , t h e y were c l a s s i f i e d s e p a r a t e l y * 2 / The m a r k e t i n g a s s o c i a t i o n , t h e same o r g a n i z a t i o n b o t h y e a r s , r e ­ c e i v e d s e v e n t y - f i v e p e r c e n t o f t h e t o t a l r e c e i p t s fr o m m a r k e t i n g * Ana l y s i s

of V ariance T ests

How v a l i d i s t h e a p p l i c a t i o n o f t h e P e r i o d I s t a n d a r d s t o t h e P e r i o d I or P e r i o d I I d a t a ?

Is i t

either

j u s t i f i a b l e even t o t a k e a

s t a n d a r d fr o m a c o m p o s i t e g r o u p s u c h a s t h e t h i r t y - n i n e a s s o c i a t i o n s i n Period

I?

The a s s u m p t i o n t h u s f a r ha s b e e n t h a t t h e r a t i o d i f f e r ­

en ces betw een t h e groups in v o lv e d a re not s i g n i f i c a n t * n e e d s t o be t e s t e d t o d e t e r m i n e i t s

This assum ption

ju stifiab ility *

The s t a t i s t i c i a n ( s e e Note) c o n s u l t e d recommended t h e a n a l y s i s o f variance, th is

or F t e s t , as t h e a p p r o p r ia te te ch n iq u e f o r t h e s o l u t i o n of

pro ble m*

An a n a l y s i s o f v a r i a n c e w ould i n d i c a t e w h e t h e r or n e t

t h e d i f f e r e n c e s i n t h e r a t i o s a s b e t w e e n t h e g r o u p s were s i g n i f i c a n t l y g r e a t e r th a n th e d iff e r e n c e s e x is tin g w ith in th e groups.

I f the d i f f ­

e r e n c e s b e t w e e n t h e g r o u p s were n o t s i g n i f i c a n t l y g r e a t e r t h a n t h e d i f f e r e n c e s w i t h i n t h e g r o u p s , t h e same s t a n d a r d s t h a t w e r e a p p l i c a b l e t o a n y one o f t h e g r o u p s t e s t e d would a l s o be a p p l i c a b l e t o a l l

of th e

groups te ste d * The f i r s t t h r e e in itia l test* Not"es

g r o u p s i n t h e above T a b l e 9 wer e u s e d f o r t h e

The end v a l u e o b t a i n e d ( t h e F v a l u e ) was 3.53*

Accord-

"5r7 W. D. B a t e n , A g r i c u l t u r a l E x p e r i m e n t S t a t i o n S t a t i s t i c i a n d i r e c t e d t h e a n a l y s i s o f v a r i a n c e t e s t s and c h e c k e d t h e r e s u l t s and i n t e r p r e t s ! i o n o f t h o s e t e s t s

57

i n g t o t h e t a b l e o f v a lu e s f o r a n a l y s i s o f v a ria n c e as reproduced in t h e s t a t i s t i c a l t e x t f o o t n o t e d b e l o w ^ ' s i g n i f i c a n c e at t h e 5% l e v e l i n th is

i n s t a n c e would be 3 . 2 1 , w h i l e s i g n i f i c a n c e a t t h e 1% l e v e l would,

be 5.31.

( S e e A pp e nd ix B, Ta b l e l ) .

I n t e r p r e t a t i o n o f t h e s e r e s u l t s may be made a s f o l l o w s .

F irst,

t h e l a r g e r t h e F v a l u e d e r i v e d fr om any g i v e n s i t u a t i o n , t h e g r e a t e r t h e l i k e l i h o o d o f a s i g n i f i c a n t d i f f e r e n c e between g ro u p s.

That i s ,

t o quote B l a i r ; " I f t h e mean v a r i a n c e f o r a f a c t o r i s g r e a t e r t h a n t h a t w h ic h c o u l d be r e a s o n a b l y e x p e c t e d t o o c c u r from c han ce sam pling, th e d if f e r e n c e i s considered s ig n i f i c a n t . " S i g n i f i c a n t ” i n i t s u s e i n t h e s t a t i s t i c a l s e n s e means a d i f f e r e n c e sno l a r g e t h a t i t o c c u r s by c h an c e o n l y one t i m e o u t o f 2 0 , or o n l y i n 5% o f t h e c a s e s . "Highly s i g n i f i c a n t " i s a s t a t i s t i c a l te rm used to i n d i c a t e a d i f f e r e n c e s o g r e a t t h a t i t c o u l d o c c u r by c h a n c e o n l y one t i m e i n 1 0 0 , o r o n l y i n 1% o f t h e c a s e s " . H a / See a l s o , f o o tn o te l i b . A pplying t h i s d e f i n i t i o n to th e r e s u l t s it

of t h e f o r e g o i n g t e s t ,

c a n be c o n c l u d e d t h a t t h e r e i s a s i g n i f i c a n t ( b u t no t h i g h l y s i g ­

nifican t)

d i f f e r e n c e b e t w e e n t h e t h r e e g r o u p s a s r e g a r d s t h e i r op­

e r a t i n g expense r a t i o s .

A glance a t th e average r a t i o

figures for

t h e t h r e e g r o u p s as shown i n T a b l e 9 , i n d i c a t e s a c o n s i d e r a b l e s p r e a d b e t w e e n t h e a v e r a g e f o r t h e o i l a s s o c i a t i o n s , a s compared w i t h t h e a v e r a g e s f o r t h e p u r c h a s i n g an d p u r c h a s i n g - m a r k e t i n g g r o u p s * An a n a l y s i s of v a r i a n c e t e s t

o f t h e p u r c h a s i n g and p u r c h a s i n g -

m a r k e t i n g a s s o c i a t i o n s showed an F v a l u e o f . 1 2 1 , s i g n i f i c a n c e a t t h e 5% l e v e l w o uld r e q u i r e an F v a l u e

o f 251.

Therefore the operating

e x p e n s e r a t i o s o f t h e s e two gro ups d e f i n i t e l y ha ve no s i g n i f i c a n t 1 1 / B l a i r , M o r r i s M ., E l e m e n t a r y S t a t i s t i c s ; Henry H o l t & C o . , 19 4 4 , pp. 506-5 09 1 1 a / B l a i r , 0£ . c i t . , p . 524

58 d ifferen ce.

( S e e A p p e n d ix B, T a b l e 2 ) .

The l i m i t e d number o f c o o p e r a t i v e s i n some o f t h e s e g r o u p s r a i s e s th e q u e stio n of re p re s e n ta tiv e n e s s .

T h e r e i s no way i n whic h t h i s

q u e s t i o n c a n be a n s w e r e d w i t h t h e p r e s e n t l y a v a i l a b l e i n f o r m a t i o n . Only a l a r g e r and r a n d o m l y - s e l e c t e d s am p l e or a c o m p l e t e s am pl e of t h e u n iv e r s e could u n e q u iv o c a lly answer t h e q u e s ti o n .

I t i s believed

by t h e a u t h o r , however, t h a t t h e d a ta a re f a i r l y r e p r e s e n t a t i v e of t y p e a nd t h e f i n d i n g s w i l l be c o n s i d e r e d v a l i d f o r t h e p u r p o s e s o f th is

study. A s e c o n d s e t o f d a t a was t a k e n fr om t h e 1946 -19 47 Y e ar bo ok o f

C on su me rs C o o p e r a t i v e A s s o c i a t i o n o f K an sa s C i t y , I & s s o u r i . yearbook contained th e

This

o p e r a t i n g s t a t e m e n t and b a l a n c e s h e e t f i g u r e s

f o r over tw o-hundred i n d i v i d u a l c o o p e r a tiv e a s s o c i a t i o n s #

T h e s e w e re

1 1 b / B l a i r d e s c r i b e s v a r i a n c e f u r t h e r a s f o l l o w s l,. . . t h e p r o b l e m o f v a r i a n c e i s t o d e t e r m i n e ( 1 ) how much o f t h e t o t a l i s d u e t o w i t h i n c l a s s v a r i a t i o n , and ( 2 ) how much o f t h e t o t a l i s due t o between c l a s s v a r i a t i o n . T h i s c o m p u t a t i o n i s made by ( l ) a ssu m ­ i n g t h e n u l l h y p o t h e s i s of no d i f f e r e n c e among c l a s s e s and t h e n c o m p u t i n g t h e t o t a l v a r i a n c e o f a l l t h e d a t a o f a l l c l a s s e s from t h e i r common m e an , a nd t h e n ( 2 ) c o m p u t i n g t h e amount o f v a r i a t i o n b e t w e e n t h e c l a s s e s , and ( 3 ) s u b t r a c t i n g t h e sum o f b e t w e e n v a r i ­ a t i o n from t h e t o t a l v a r i a t i o n t o o b t a i n t h e w i t h i n v a r i a t i o n . The l a s t s t e p i s t o d i v i d e t h e mean b e t w e e n v a r i a t i o n by t h e mean w i t hi w v a r i a t i o n t o o b t a i n t h e r a t i o b e t w e e n t h e two p o r t i o n s o f th e to ta l variance. p

12/

V a ria n c e between group a v e rag e s V a r i a n c e w i t h i n gro up

I f t h i s r a t i o , F, i s l a r g e r t h a n could l o g i c a l l y be acc o u n te d f o r on t h e b a s i s o f c h a n c e s a m p l i n g , i t s h o u l d be c o n c l u d e d t h a t t h e s e p a r a t e c l a s s s a m p l e s a r e from d i f f e r e n t p o p u l a t i o n s . I f , on t h e o t h e r h a n d , t h i s r a t i o , F , i s so s m a l l t h a t t h e d i f f e r e n c e s among t h e c l a s s e s can be l o g i c a l l y a c c o u n t e d f o r on t h e b a s e s o f c h a n c e s a m p l i n g , i t s h o u l d be c o n c l u d e d t h a t t h e s a m p l e s a r e n o t s i g n i f i c a n t l y d i f f e r e n t , b u t m ig ht have a l l b e e n t a k e n from t h e same p o p u l a t i o n " . , 0£ . c i t . , p p . 510-5 11 " C o m p a r a t i v e R e p o r t " , 1 9 4 6 -4 7 Y e a r b o o k , Consumers C o o p e r a t i v e A s s o c i a t i o n , p p . 7 , 3 9 , 63 , 95

59 grouped i n t o ty p e s o f c o o p e r a tiv e s . analysis

f o r t h e purpose o f t h i s

The f o u r g r o u p s s e l e c t e d f o r

s t u d y we re " g e n e r a l merchandise**

( m o s t l y farm su p p ly c o o p e r a t i v e s ) ; " s t o r e " a s s o c i a t i o n s (m o s tly urban c o o p e r a t i v e g r o c e r i e s ) ; o i l a s s o c i a t i o n s w i t h y e a r l y volume u n d e r $ 5 0 , 0 0 0 a nd o i l a s s o c i a t i o n s w i t h y e a r l y volume o v e r $1 00 ,0 0 0 #

The

p u r p o s e o f t h e t e s t was t o d e t e r m i n e i f t h e d i f f e r e n c e s b e t w e e n t h e o p e r a t i n g expense r a t i o s of d i s s i m i l a r ty p e s of p u rch asin g co o p era­ t i v e s i n o t h e r s t a t e s w e re s i g n i f i c a n t * The F v a l u e d e r i v e d fr om t h e a n a l y s i s o f v a r i a n c e t e s t on t h i s d a t a was 1 2 . 3 3 #

T h i s was more t h a n t h r e e t i m e s a s l a r g e a s t h e r e ­

q u i r e d f i g u r e o f 3#94 - p l u s .

I n o t h e r w o r d s , t h e r e was a s i g n i f i c a n t

d i f f e r e n c e b e t w e e n t h e mean o p e r a t i n g e x p e n s e r a t i o s groups t e s t e d .

o f some o f t h e

( S e e A pp e n d ix B, T a b l e 3 ) .

The a v e r a g e o p e r a t i n g e x p e n s e r a t i o s

f o r t h e f o u r CCA gro up s

show a d e c i d e d s p r e a d b e t w e e n t h o s e f o r t h e s t o r e s and g e n e r a l mer­ c h a n d is e groups and th o s e f o r th e o i l a s s o c i a t i o n s .

So f o l l o w i n g

t h e p r o c e d u r e u s e d p r e v i o u s l y , a n o t h e r F t e s t was r u n f o r t h e s t o r e s and g e n e r a l m e r c h a n d i s e g r o u p s .

T he se two gro u p s p r o v e d v e r y compar­

a b l e , s h o w i n g an F v a l u e of # 02 5, w i t h 252 r e q u i r e d f o r s i g n i f i c a n c e a t t h e 5% l e v e l .

( S e e Ap pe nd ix B, T a b l e 3 ) .

The f a c t t h a t t h e o i l a s s o c i a t i o n s c a n n o t be s u b j e c t e d t o t h e same s t a n d a r d s whic h a r e a p p l i e d t o

o t h e r farm s u p p ly c o o p e r a t i v e s

d o e s not n e g a t e t h e a p p l i c a t i o n o f t h i s

study t o

o il associations#

I t means o n l y t h a t a s t a n d a r d mus t be d e v e l o p e d s o l e l y f o r o i l c o­ op eratives

i f such a s ta n d a r d i s d e s i r e d .

The r a t i o a n a l y s i s t e c h ­

n i q u e c a n be u s e d i n any e v e n t w i t h o i l c o o p e r a t i v e s as w e l l as w i t h

60

o th e r types

o f cooperatives*

The a p p l i c a t i o n o f s t a n d a r d s t o v a r i o u s

t y p e s o f c o o p e r a t i v e s s u c h as f r u i t a s s o c i a t i o n s a n d m a r k e t i n g a s s o c ­ i a t i o n s a n d o t h e r s r e q u i r e s o n l y a s t u d y o f s u f f i c i e n t numbers o f t h e s e t o d e t e r m i n e what r e a s o n a b l e s t a n d a r d s would be# A f i n a l a n a l y s i s of v a r i a n c e was r u n , u s i n g t h e co mb ine d sums o f t h e p u r c h a s i n g a n d t h e p u r c h a s i n g - m a r k e t i n g g r o u p s of t h e Mi chi gan d a t a a s one g r o u p , and t h e combined sums of t h e s t o r e s and g e n e r a l m e r c h a n d i s e g r o u o s o f t h e CCA d a t a a s a n o t h e r group# o b t a i n e d was #012# o f 253*

The F v a l u e

S i g n i f i c a n c e a t t h e 5% l e v e l r e q u i r e d a f i g u r e

( S e e A pp e nd ix B, T a b l e 4 ) #

T h erefore, a r a t i o standard

w h i c h i s a p p l i c a b l e t o t h e two M i c h i g a n g ro up s i s a l s o a p p l i c a b l e t o t h e s t o r e s and g e n e r a l m e r c h a n d i s e a s s o c i a t i o n s o f t h e CCA d a t a . I n a l l o f t h e s e t e s t s , t h e o p e r a t i n g expense r a t i o has been used as th e te s t

f a c t o r , b e c a u s e t h e e v i d e n c e p r e s e n t e d i n T a b l e 2 , A pp e nd ix

A, an d e l s e w h e r e i n d i c a t e s t h a t t h i s r a t i o i s t h e most a c c u r a t e s i n g l e m e a s u r e of a c o o p e r a t i v e ' s

operating e ffic ie n c y .

L i m i t a t i o n s Im p os e d by A n a l y s e s The a n a l y s e s o f v a r i a n c e r e p o r t e d i n t h i s

chapter place the

f o l l o w i n g v a l u a t i o n and l i m i t a t i o n s on t h e d a t a u s e d i n t h i s

study.

Only t h o s e t y p e s o f c o o p e r a t i v e s w h ic h ha ve b e e n u s e d i n t h e a n a l y s i s c a n be s u b j e c t e d t o t h e s t a n d a r d s s e t up u n t i l s u c h t i m e a s a d d i t i o n a l t y p e s o f a s s o c i a t i o n s ha ve b e e n t e s t e d .

A l s o , t h e s t a n d a r d s employed

may n o t be a p p l i e d t o c o o p e r a t i v e o i l a s s o c i a t i o n s . Th e t y p e s o f c o o p e r a t i v e a s s o c i a t i o n s i n M i c h i g a n t o w hi c h t h e s e s t a n d a r d s may be a p p l i e d w i t h c e r t a i n t y a r e t h e f i r s t two t y p e s l i s t e d

61

i n T a b l e 9 o f *this c h a p t e r ; n a m e l y , a s s o c i a t i o n s e n g a g e d i n l a r g e l y purchasing a c t i v i t i e s seed,

s e l l i n g g e n e r a l farm s u p p l i e s , f e e d ,

f e r t i l i z e r , h a r d w a r e , e t c . , a nd m a r k e t i n g g r a i n and l i v e s t o c k

p r o d u c t s i n w h i c h t h e m a r k e t i n g p h a s e d o e s n o t a c c o u n t f o r more t h a n s e v e n t y p e r c e n t of t h e d o l l a r volum e of b u s i n e s s , i ' c t e . T h i s d o e s no t mean t h a t t h e t e c h n i q u e of e v a l u a t i n g c o o p e r a t i v e s f i n a n c i a l c o n d i t i o n s a nd o p e r a t i n g e f f i c i e n c y a s o u t l i n e d i n t h e p r e v io u s c h a p t e r , i s not v a l i d . cooperative.

T h a t t e c h n i q u e i s v a l i d f o r any t y p e o f

The l i m i t a t i o n s o f t h e a n a l y s e s o f v a r i a n c e a r e s o l e l y

on t h e u s e o f t h e r a n g e s t a n d a r d s s e t f o r t h i n T a b l e 2 , C h a p t e r I . I t may w e l l be t h a t t h e s e s t a n d a r d s can be v a l i d l y a p p l i e d t o f r u i t c o o p e r a t i v e s an d p o s s i b l y e ven t o s t r i c t l y a l a r g e l y m a r k e t i n g cooperatives. ia tio n s,

But d ue t o t h e l i m i t e d numbers o f t h e s e t y p e s o f a s s o c

i t w ould be u n w i s e t o recommend t h a t t h e s e a s s o c i a t i o n s be

s u b j e c t e d t o t h i s s t a n d a r d u n t i l a d e q u a t e t e s t s hav e b e e n made. 9 shows t h e o p e r a t i n g e x p e n s e r a t i o

Tabl

f o r e a c h o f t h e s e two u n t e s t e d

a s s o c ia ti ons• What a b o u t t h e r a t i o s s e l e c t e d f o r us e i n t h i s cussed i n Chapter I? f o r e xa mp le?

p r o j e c t and d i s ­

Are t h e y a c c e p t a b l e t o c o o p e r a t i v e a u d i t o r s ,

C hapter V fo llo w in g , w i l l p re s e n t th e r e s u l t s of a

q u e stio n n a ire to cooperative a u d ito rs regarding th ese r a t i o s .

Notes

I t should be m entioned th a t some o f th e s e farm supply

era f i v e s a lso handle petroleum produ cts.

The o i l a s s a c U U i

in t h i s study h&ndtle on ly petroleum product;*, plus ’ora*

62

CHAPTER V R a t i o E v a l u a t i o n By C o o p e r a t i v e A u d i t o r s T he S u b j e c t In o r d e r t o b e t t e r e v a l u a t e h i s a p p ro a ch t o t h e problems o f th is

s tu d y t h e a u t h o r f e l t t h e need f o r an e x p r e s s i o n of o p in io n

b y o t h e r s r e g a r d i n g t h e u s e o f r a t i o s f o r a n a l y z i n g c o o p e r a t i v e op­ e r a t i o n s , and t h e g ro u p most f i t t e d t o

give t h i s o p in io n appeared

t o be a u d i t o r s o f c o o p e r a tiv e s # T h e r e i s bound t o be d i v e r g e n c e of o p i n i o n among a u d i t o r s as t o j u s t what r a t i o s a r e im p o r ta n t i n e v a l u a t i n g c o o p e r a t i v e f i n a n ­ c ia l conditions.

P a r t o f t h i s d i f f e r e n c e s tem s fro m d i s s i m i l a r i t i e s

i n t h e b u s i n e s s e s t h e m s e l v e s , i n t h e i r o r g a n i z a t i o n a l s t r u c t u r e and o p eratin g practices#

A nother p a r t o f t h e d i f f e r e n c e a r i s e s from

d i v e r s e e x p e r i e n c e a n d t r a i n i n g of i n d i v i d u a l a u d i t o r s .

In th e

=

c a s e o f t h e f o r m e r d i f f e r e n c e , t h e us e o f p a r t i c u l a r r a t i o s h a s a v a l i d and i m p o r t a n t b a s i s # relied

In t h e l a t t e r c a s e , although t h e r a t i o s

on may be v a l i d o f t h e m s e l v e s , t h e y o f t e n t i m e s a r e e x p e c t e d

t o r e p r e s e n t much more t h a n t h e i r n a t u r e p e r m i t s # current assets to current l i a b i l i t i e s r a tio .

An exam pl e i s t h e

A g r e a t d e a l o f undue

w e i g h t h a s o f t e n b e e n g i v e n t o t h i s r a t i o by b u s i n e s s m e n a s a n i n ­ d ic a t o r of the fin a n c ia l co n d itio n of a business e sp e c ia lly fo r c re ­ d i t r a t i n g purposes#

T h i s r a t i o was d i s c u s s e d i n d e t a i l i n C h a p t e r I .

R atios Q uestionnaire I n a n a t t e m p t t o o b t a i n some i d e a o f t h e f i n a n c i a l r a t i o s u s e d

63 by a u d i t o r s o f c o o p e r a t i v e s t h e q u e s t i o n n a i r e fo rm r e p r o d u c e d i n A p p e n d i x C, T ^ b l e 1 was m a i l e d t o a number o f a u d i t o r s .

P a r t of t h e

a u d i t o r s , a b o u t t w e n t y , wer e C e r t i f i e d P u b l i c A c c o u n t a n t s o p e r a t i n g a s p r i v a t e a g e n t s i n M i c h i g a n who w e re known t o have done c o n s i d e r ­ able

a u d itin g fo r cooperative asso ciatio n s*

A n o t h e r t w e n t y or so

q u e s t i o n n a i r e s w e re a d d r e s s e d t o t h e c h i e f a u d i t o r s o f r e g i o n a l co­ o p e ra tiv e a ss o c ia tio n s throughout th e n a tio n .

In c lu d in g a follow-up

l e t t e r , t h e q u e s t i o n n a i r e r e s u l t e d in tw enty-tw o r e t u r n s answering t h e q u e s t i o n s i n w hole o r i n p a r t *

F i v e o f t h e r e t u r n s we re fro m

p r i v a t e a u d i t o r s and s e v e n t e e n we re fr o m r e g i o n a l c o o p e r a t i v e o r g a n ­ izations* R atio Ratings Q u e s t i o n t h r e e on t h e for m a s k e d t h e r e s p o n d e n t t o r a t e t h e tw elve r a t i o s l i s t e d i n th e

o r d e r of t h e i r i m p o r t a n c e t o t h e r e s p o n d ­

e n t as f i n a n c i a l com parison r a t i o s . r a t e d th e r a t i o s as r e q u e s te d .

Twel ve o f t h e t w e n t y - t w o r e p l i e s

The r e s u l t s

o f t h e r a t i n g s a r e sum­

m a riz ed below . T a b l e 10:_________R a t i o R a t i n g s By C o o p e r a t i v e A u d i t o r s ___________ . R atio

Number o f t i m e s r a t e d i n t h e upper h a l f low er h a l f

C urrent a ss e ts to current l i a b i l i t i e s Net m a r g i n t o n e t s a l e s Gross m argin t o n e t s a l e s C o s t o f goods s o l d t o m e r c h a n d i s e t u r n o v e r S a l a r i e s and wages t o n e t s a l e s O p eratin g expenses t o net s a le s Supply s a l e s t o accounts r e c e i v a b l e 3 Fixed a s s e t s to t o t a l a s s e t s C a p i ta l sto ck & patrons* e q u i t i e s to to ta l assets

11 10 9 10 9 9 7 2 3

1

2 3 2 3 3 2 10 9

64 T a b l e 10 : ( c o n t * ) R atio

Number o f t i m e s r a t e d i n t h e upper h a l f low er h a l f

Gross s a l e s t o t o t a l a s s e ts V 2 Net m a r g i n t o t o t a l a s s e t s ' 2 , / Net m a r g i n t o c u r r e n t l i a b i l i t i e s ' 5 l /

1 1

10 9 6

I n d i c a t e s r a t i o s w h i c h w e r e n o t r a t e d by some r e s p o n d e n t s b e c a u s e t h e y d i d n o t c o n s i d e r t h e p a r t i c u l a r r a t i o t o be o f an y v a l u e * The t w e l v e r e p l i e s u s e d i n t h e above t a b l e i n c l u d e d two a n s w e r s

fro m p r i v a t e a u d i t o r s * auditors*

The o t h e r t e n were fr om r e g i o n a l c o o p e r a t i v e

The l i m i t e d number o f r e p l i e s r e c e i v e d d o e s n o t p e r m i t

of g e n e r a liz a tio n s but i t

i s w orth n o tin g t h a t the s ix r a t i o s s e l e c t ­

ed a s p r i m a r y r a t i o s i n C h a p t e r I I wer e i n c l u d e d i n t h e t o p s e v e n o f t h e t w e l v e by t h e r e s p o n d e n t s * Comments o f A u d i t o r s The g r e a t e s t v a l u e o f t h i s q u e s t i o n n a i r e p r o j e c t was n o t i n the ra tin g s

g iv e n i n answer t o q u e s t i o n t h r e e , b u t i n t h e

made by v a r i o u s r e s p o n d e n t s .

comments

S e v e ra l of th e r e p l i e s c o n tain ed very

p e r t i n e n t and h e l p f u l s u g g e s t i o n s a n d c r i t i c i s m s , n o t o n l y c o n c e r n i n g the sp ecific

ratios

l i s t e d on t h e q u e s t i o n n a i r e , b u t a l s o c o n c e r n i n g

t h e u s e o f r a t i 03 i n g e n e r a l *

The r e m a i n d e r o f t h i s c h a p t e r w i l l

b e g i v e n o v e r t o a d i s c u s s i o n and p a r t i a l q u o t i n g o f t h e s e s u g g e s t ­ io n s and c r i t i c i s m s * S e v e r a l a u d i t o r s p o in te d out th e a d v i s a b i l i t y of s e g r e g a t i n g f i n a n c i a l r a t i o s i n t e r m s o f b a l a n c e s h e e t r a t i o s and o p e r a t i n g r a t i o s . L a r z e l e r e made a s i m i l a r d i v i s i o n i n h i s b u l l e t i n on t h e management o f f a r m e r s *

cooperatives*

1 3 / L a r z e l e r e , o p * c i t . , p* 62

IS/

financial

' S u c h a d i v i s i o n i s u s e f u l so

65

lo n g a s b o th groups o f r a t i o s a r e u sed i n t h e c o u rse of an o v e r a l l f i n a n c i a l study#

As p o i n t e d o u t by one o f t h e r e s p o n d e n t s , some

r a t i o s a r e r e l a t e d t o a nd n e c e s s a r y t o b o t h g ro up s # s t u d y does n ot s e p a r a t e them because r a t i o s

The p r e s e n t

fr o m b o t h g r o u p s a r e

in c lu d e d i n th e prim ary r a t i o s used i n Chapter II#

A d i v i s i o n of th e

r a t i o s i n t o tw o o r t h r e e g r o u p s ( t h e t h i r d g ro u p f o r c o m b i n a t i o n r a t i o s ) wo uld u n n e c e s s a r i l y c o m p l i c a t e t h e p r e s e n t a t i o n #

N o r m a ll y

t h e m a n a g e r i s most c o n c e r n e d w i t h o p e r a t i n g r a t i o s , and t h e b o a r d o f d i r e c t o r s i s most c o n c e r n e d w i t h t h e b a l a n c e s h e e t r a t i o s #

But

i n t h e f i n a l a n a l y s i s , n e i t h e r g r o u p c an be s t u d i e d t o t h e c o m p l e t e e x c l u s i o n o f th e other# O ther R a tio s Suggested E i g h t o f t h e t w e n t y - o n e r e s p o n d i n g a u d i t o r s s u g g e s t e d one or more r a t i o s w h i c h were n o t i n c l u d e d among t h e t w e l v e l i s t e d q u e s t i o n n a i r e form#

on t h e

Most o f t h e s e a d de d r a t i o s w e r e j u s t i f i e d by

t h e a u d i t o r s , and i t seems w o r t h w h i l e t o l i s t t h e r a t i o s a nd t h e r e a s o n s f o r th e m a s g i v e n #

This stu d y i s concerned v ery im p o r ta n t­

l y w i t h t h e s e l e c t i o n o f r a t i o s , and o f c o u r s e t h e r e a r e many r a t i o s o t h e r t h a n t h e t w e l v e u s e d h e r e w hi c h a r e v a l u a b l e f o r a n a l y s i s p u r ­ poses • W# 0 . R i d d l e , C h i e f A u d i t o r ^ A n a l y s t o f Consumers C o o p e r a t i v e A s s o c i a t i o n 14^made a number o f i n t e r e s t i n g p o i n t s i n h i s r e p l y t o t h e q u e s t i o n n a i r e fo r m i n Ap pe nd ix C, T a b l e 1 . He s u g g e s t s t h a t 1 4 / Rid dle ", W. 0 # , C h i e f A u d i t or- Ana l y s t , Consumers C o o p e r a t i v e A s s o c i a t i o n , i n a l e t t e r o f F e b r u a r y 28 , 1950

66

f i n a n c i a l r a t i o s s h o u l d b e c l a s s i f i e d a s t o " o b j e c t i v e s t o be g a i n e d f r o m t h e i r u s e , n a m e l y : 1 . To a s c e r t a i n d e b t - p a y i n g c a p a c i t y , 2. To d e te rm in e o p e ra tin g efficiency**.

R iddle n o te s t h a t th e form er c l a s s ­

i f i c a t i o n i n c l u d e s b o t h b a l a n c e s h e e t and o p e r a t i n g r a t i o s , w h i l e th e l a t t e r req u ire s on ly operating ra tio s *

He f u r t h e r m a i n t a i n s t h a t

" t h e d i f f i c u l t y w ith u s in g o p e r a t i n g r a t i o s i s t h a t th e y v a ry w ith d i f f e r e n t t y p e s o f b u s i n e s s *•• . P e r c e n t a g e s a r e more u s e f u l i n g a u g ­ in g t h e o p e r a t i n g e f f i c i e n c y of a p u rc h a sin g co-op.

Margi ns p e r

u n i t o f commodity h a n d l e d a r e more d e s i r a b l e i n a m a r k e t i n g c o - o p . - - T h a t i s , m argins i n c e n ts p e r b u sh el of g r a i n , e t c . " A c o o p e r a t i v e d e a l i n g i n a wide v a r i e t y of p r o d u c t s , he b e l i e v e s , mu st r e l y l a r g e l y upon b a l a n c e s h e e t r a t i o s 1. 2. 3. 4. 5.

R atio R atio R atio R atio R atio

of of of of of

such as t h e f o l l o w i n g :

current a sse ts to current l i a b i l i t i e s members* e q u i t y t o t o t a l a s s e t s receivables to to ta l assets cash t o c u r r e n t l i a b i l i t i e s members* e q u i t y t o f i x e d a s s e t s

L a s t l y , R id d le enumerates t h e fo llo w in g items as u s e f u l i n a n a l y s i n g t h e o p e r a t i n g e f f i c i e n c y of a p u r c h a s i n g c o o p e r a t i v e d e a l ­ i n g p r i m a r i l y i n one co mmodity, e . g . a n o i l c o - o p . 1. 2. 3. 4. 5. 6. 7* 8.

% net savings to sale s % g ross of margins % expense t o s a l e s

^ net savings n e t savings s a l e s tim es receivables s a le s tim es

% % % %

t o t o t a l debt t o members* e q u i t y average inventory to sales fixed assets

R i d d l e ’ s a n a l y s i s o f t h e f i n a n c i a l r a t i o a p p r o a c h s t r o n g l y em­ phasizes th e d iff e r e n c e s

e x i s t i n g among t y p e s o f c o o p e r a t i v e s .

This

s t u d y was b e gun w i t h t h e a s s u m p t i o n , s t i l l v a l i d i n t h e a u t h o r ’ s o p i n i o n , t h a t c e r t a i n r a t i o s may be a p p l i e d t o any fa rm s u p p l y c o o p ­

67 erativ e.

The p o i n t s s u g g e s t e d a bove a r e v e r y g o o d , and h a v e t h i s

s p e c i a l v a lu e t h a t th e y s t r e s s t h e convenience of p e c u l i a r r a t i o s f o r given ty p e s o f c o o p e r a tiv e s as w ell a s t h e n e c e s s i t y f o r u s in g t h e s e p a r t i c u l a r r a t i o s i n a t h o r o u g h a n a l y s i s a s t o t h e whys an d w h e r e f o r e s of a given f i n a n c i a l c o n d i t i o n .

The p u r p o s e of t h e r a t i o s

u s ed i n t h i s s t u d y , as s t a t e d b e f o r e , i s n o t t o p ro v id e a l l to o ls

of the

f o r a complete a n a l y s i s , but t o develop a s e t of t h o s e r a t i o

g u i d e s w h ic h a r e a p p l i c a b l e t o most t y p e s o f c o o p e r a t i v e s .

Once

t h e s e s t a n d a r d r a t i o s h a v e b e e n a p p l i e d , t h e more p a r t i c u l a r i z e d r a t i o s may be n e e d e d i n c e r t a i n c a s e s t o a s c e r t a i n t h e u n d e r l y i n g c a u s e s a n d r e l a t i o n s h i p s c o n t r i b u t i n g t o a g iv e n f i n a n c i a l c o n d i t i o n . C h a r l e s E . Dykes o f t h e C o o p e r a t i v e Grange League F e d e r a t i o n 15 / Exchange a l s o s e p a r a t e s r a t i o s in t o (a ) f i n a n c i a l r a t i o s - t h o s e p e r t a i n i n g t o t h e b a l a n c e s h e e t , and ( b ) o p e r a t i n g r a t i o s - t h o s e p e rta in in g to th e operating statem ent.

Dykes l i s t s

the follow ing

r a t i o s and t h e a c c o m p a n y in g r e a s o n s a s r a t i o s w hic h he c o n s i d e r s of i m p o r t a n c e i n a d d i t i o n t o t h o s e w h i c h he r a t e d on t h e q u e s t i o n n a i r e . 1. 2. 3. 4. 5.

Current a s s e ts to t o t a l a s s e ts Net f i x e d a s s e t s t o t o t a l a s s e t s Long t e r m i n v e s t m e n t s t o t o t a l a s s e t s C urrent l i a b i l i t i e s to t o t a l assets Long t e r m l i a b i l i t i e s t o t o t a l a s s e t s

"T hese r a t i o s a lo n g w ith c a p i t a l sto c k and patrons*

equities

t o t o t a l a s s e t s reduce m ajor b a lan c e s h e e t item s t o f a c t o r s t h a t a r e com parable f o r any d a t a " . 1 5 / DykesT C h a r l e s E . , C o o p e r a t i v e Grange League F e d e r a t i o n , i n a l e t t e r o f F e b r u a r y 2 6 , 19 50

68

6* v. 8. •

Working c a p i t a l t o c a p i t a l s to c k Net f i x e d a s s e t s t o c a p i t a l s t o c k Long t e r m i n v e s t m e n t s t o c a p i t a l Long t e r m l i a b i l i t i e s t o c a p i t a l

and p a t r o n s * e q u i t i e s and p a t r o n s * e q u i t i e s s t o c k and p a t r o n s * e q u i t i e s s t o c k and p a t r o n s * e q u i t i e s

F a r m e r —member f u n d s i n r e l a t i o n t o t h e a b ove f o u r i t e m s i s im p o rtan t i n balanced f i n a n c i a l p lann ing ” . 10. 11 .

C a p i t a l s t o c k a nd p a t r o n s * e q u i t i e s t o n e t volume W o rk in g c a p i t a l t o n e t volume

”H e l p s t o m e a s u r e e f f i c i e n t u s e o f c a p i t a l ” . Used i n c o n j u n c t i o n w i t h t h e r a t i o s

on t h e q u e s t i o n n a i r e f o r m ,

t h e a b ov e r a t i o s would u n d o u b t e d l y p r o v i d e v a l u a b l e i n f o r m a t i o n r e ­ gard in g a c o o p e r a tiv e 's condition*

The e l e v e n r a t i o s s u g g e s t e d by

Dykes a r e more i n t h e n a t u r e o f w e i g h i n g t h e s i t u a t i o n a s o f a g i v e n moment, r a t h e r t h a n o f t h e t y p e a s p r o p o s e d by R i d d l e w hi c h would e x p l a i n why t h e f i n a n c i a l c o n d i t i o n i s a s L.

it

is.

A. Thom as, J r . , T r e a s u r e r - C o n t r o l l e r of t h e

Pennsylvania

16/

Farm B u r e a u C o o p e r a t i v e A s s n . f made a number o f comments r e g a r d i n g f i n a n c i a l r a t i o s whic h w i l l b e a r q u o t i n g . in a series

He f i r s t

p o i n t e d out t h a t

of t e n c o n f e r e n c e s w i t h b o a r d s o f d i r e c t o r s o f t w e n t y -

nine lo c a l a f f i l i a t e d c o o p erativ e s, th e re g io n a l a s s o c i a t i o n s d i ­ r e c t o r s o f e d u c a t i o n a n d f i e l d s e r v i c e s and Thomas c o n s o l i d a t e d t h e b a la n c e s h e e t item s i n t o e ig h t major c l a s s i f i c a t i o n s c o n s i s t i n g of: C ash, a c c o u n ts r e c e i v a b l e , merchandise in v e n to r y , t o t a l c u r r e n t a s s e t s , w a r e h o u s e a n d e q u i p m e n t , o t h e r a s s e t s , a c c o u n t s p a y a b l e and c a p i t a l s t o c k and p a t r o n s *

equities.

E a c h o f t h e e i g h t f a c t o r s were r e l a t e d

percent age-wise t o t o t a l

1 6 / T h o m a s , L. A . , J r . , T r e a s u r e r - C o n t r o l l e r , P e n n s y l v a n i a Farm B u r e a u C o o p e r a t i v e A s s ' n . , i n a l e t t e r o f t o r c h 1 , 1950

69

assets.

Some o f t h e r a t i o s w h ic h Thomas s u g g e s t e d and t h e i r f u n c t i o n s

are as follow s: He s u g g e s t e d r e l a t i n g n e t m a r g i n s t o l o n g t e r m d e b t o r r e v o l v i n g f u n d p r o g r a m s " s i n c e t h i s i s one o f t h e p r i n c i p l e s o u r c e s , o u t s i d e o f new c a p i t a l ,

fro m w hic h t h e s e o b l i g a t i o n s c a n be r e t i r e d ” .

He r e l a t e s t o t a l s a l e s t o f a c i l i t i e s , t h e l a t t e r i n c l u d i n g i n f e d e r a t e d l o c a l s , t h e i r in v estm en t in t h e w holesale o rg a n iz a tio n # P a t r o n a g e r e f u n d s fr om t h e w h o l e s a l e a r e s e g r e g a t e d fr o m l o c a l op­ erations

in o rd e r t o a p p ra is e th e o p e ra tio n s w ithout t h e in flu e n c e

of the refunds. The P e n n s y l v a n i a g r o u p h a s made a n e f f o r t t o s i m p l i f y f i n a n c i a l a n a l y s i s s o a s t o d e v e l o p more w i l l i n g n e s s on t h e p a r t o f b o a r d mem­ b ers t o in v e s tig a te f in a n c ia l conditions.

They a g a i n s t r e s s e d t h e

b a l a n c e s h e e t a n a l y s i s , d e p e n d i n g m a i n l y upon t h e

gross margin to

gross s a le s r a t i o to in d ic a te operating e ffic ie n c y . O t h e r r a t i o s s u g g e s t e d by r e s p o n d e n t s were e x p e n s e t o g r o s s p ro fit

s e e n o t e ) , c a p i t a l s to c k t o n e t w o r t h i / n e t margin t o

t e r m l i a b i l i t i e s « / e a . h and r e c e i v a b l e s t o c u r r e n t l i a b i l i t i e s

/

21 and s a le s t o co st of f a c i l i t i e s . 1 7 / M c P h e r s o n , H. C . , T r e a s u r e r , Fa rm e rs Union S t a t e E x c h a n g e , i n a l e t t e r o f F e b r u a r y 2 8 , 1950 1 8 / A s h c r a f t , 3 . H. , A u d i t o r , F a rm e rs C o o p e r a t i v e E x c h a n g e , i n a l e t t e r o f March 1 , 1950 1 9 / N i e l s e n , Ludwig C a r f i t z , C. P. A . , i n a l e t t e r o f March 1 6 , 1950 2 0 / M on ro e , L. S . , A u d i t o r , Farm B u r e a u S e r v i c e s , I n c . , i n a l e t t e r o f March 1 9 , 1950 2 1 / D i c k i n s o n , R. F . , C o n t r o l l e r , P a c i f i c S u p p ly C o o p e r a t i v e , i n a l e t t e r o f March 2 8 , 1950

N o t e : The u s e o f t h e word " p r o f i t ” a s w e l l as o t h e r t e r m s c o n n o t a t i v e o f t h e same t y p e o f b u s i n e s s o r g a n i z a t i o n , i s b e c o m i n g l e s s a c c e p t a b l e t o c o o p e r a tiv e people f o r reasons o f t a x a t i o n . The a u t h o r u s e s t h e word h e r e s t r i c t l y a s a q u o t a t i o n *

70 G eneral C ritic ism s

of Ratios

T h e r e w e re some c r i t i c i s m s of some o r a l l o f t h e r a t i o s

on t h e

q u e s t i o n n a i r e for m w hic h w i l l b e a r r e p e a t i n g h e r e . One o f t h e common g e n e r a l c r i t i c i s m s e n c o u n t e r e d was t o t h e e f f e c t t h a t r a t i o com parisons a r e m is le a d in g due t o d i f f e r e n c e s i n t y p e s o f o rganizational stru c tu re . tests

T h e r e i s m e r i t i n t h i s a r g u m e n t , and t h e

r e p o r t e d i n C h a p t e r IV w e r e d e s i g n e d t o d e f i n e t h e p r o p e r l i m i t s

in th is regard.

The b o u n d a r i e s d e s c r i b e d i n t h a t

s e c t i o n must be

a d h e r e d t© i f t h e d a n g e r o f t h i s t y p e o f e r r o r i s t o be a v o i d e d .

It

i s b e l i e v e d t h a t t h e a r e a o f a p p l i c a t i o n of t h e r a t i o s t a n d a r d s i n th is

s t u d y h a s been c i r c u m s c r i b e d s u f f i c i e n t l y t o e l i m i n a t e t h e l i k e ­

lih o o d of s u b j e c t i n g th e p re s e n t study t o t h i s charge. The s e c o n d most common g e n e r a l c r i t i c i s m h o l d s t h a t a c c o u n t i n g t e c h n i q u e s v a r y so much w i t h d i f f e r e n t a s s o c i a t i o n s t h a t r a t i o com­ p a r i s o n s t h u s become i n v a l i d . m erit. iatio n s,

It

A ga in t h e ar g u m e n t has c o n s i d e r a b l e

i s r a t h e r uncommon, i n f a c t , t o f i n d d i f f e r e n t l o c a l a s s o c ­

a u d i t e d by d i f f e r e n t a u d i t o r s , which u s e e x a c t l y t h e same

accounting techniques. v ariations

Many f a c t o r s v a r y .

include the p ra c tic e s ,

Some o f t h e more i m p o r t a n t

f o r e x am p l e, o f v a l u i n g i n v e n t o r y

a t t h e cost p r i c e or a t th e s e l l i n g p r ic e ; or th e p r a c t i c e s of t a k i n g i n v e n t o r y once a y e a r o r a v e r a g i n g m o n t h l y i n v e n t o r i e s . t e c h n i q u e s may v a r y , and d e f i n i t i o n s l i a b i l i t i e s may v a r y . ex ist.

D epreciation

o f c u r r e n t and f i x e d a s s e t s a nd

A l l t h e s e and o t h e r d i f f e r e n c e s c a n and do

Th ey a r e c e r t a i n l y w o r t h c o n s i d e r a t i o n .

71

D is c u s sio n of C ritic is m s No a t t e m p t w i l l be made t o s u g g e s t t h a t s u c h d i f f e r e n c e s do n o t e x i s t i n the d ata used in t h i s p r o j e c t . such d iff e r e n c e s .

Undoubtedly t h e r e a r e

One t e s t whic h wou Id be w e l l w ort h c o n d u c t i n g

i n t h i s r e s p e c t would be a n a l y s i s o f v a r i a n c e c o m p a r i n g t h e a v e r a g e in v en to ry turnover r a tio s

f o r a g r o u p o f r e c o r d s computed on a n

an n u al b a s i s w ith th e r a t i o s

f o r t h e same r e c o r d s computed on a

m onthly average b a s i s . A lthough such d a ta i s not a v a i l a b l e f o r t e s t i n g i n t h e p r e s e n t s tu d y , t h e a u th o r i s o f t h e b e l i e f t h a t such a cc o u n tin g d i f f e r e n c e s w o u ld p r o b a b l y n o t p r o d u c e s i g n i f i c a n t l y d i s s i m i l a r r e s u l t s i n a group com p ariso n .

The t e s t s h o u l d be made, ho w e v e r, t o e i t h e r p r o v e

or disprove th is b e lie f. B u t , e v e n t h o u g h t h e r e s h o u l d p ro v e t o be no s i g n i f i c a n t d i f f ­ e ren ce i n t h i s r e s p e c t , th e im p o s itio n of a s ta n d a rd range of v alu es l a b e l e d f a v o r a b l e , m i d d l e , and u n f a v o r a b l e d o e s c a l l f o r r e a s o n a b l e and s o u n d i n t e r p r e t a t i o n . A g i v e n c o o p e r a t i v e , t h a t i s , may have a v e r y h i g h m e r c h a n d i s e tu rn o v er, types

of say 65.1.

T h i s would be an a b n o r m a l s i t u a t i o n f o r t h e

of a s s o c i a t i o n s in c lu d e d i n t h i s s tu d y .a n d m ig h t, f o r example,

r e f l e c t an u n u s u a l l y low i n v e n t o r y a t t h e t i m e of t h e f i n a n c i a l a c c o u n t ­ in g .

C o n v e r s e l y , a v e r y low o r u n f a v o r a b l e t u r n o v e r m ig h t a l s o be

the re s u lt

o f a t e m p o r a r y and a b n o r m a l c o n d i t i o n .

The i m p o r t a n t

t h i n g f o r t h e manager t o r e c o g n iz e i s t h a t a c c o u n t i n g te c h n i q u e s s h o u l d be c o n s i s t e n t and i n k e e p i n g w i t h l o g i c a l and n o r m a l c o n d i t ions.

When t h e y a r e n o t , r e a s o n a b l e a l l o w a n c e s h o u l d be made t h e r e -

72

fore. L a s t l y , i t may be e m p h a s i z e d a g a i n , t h a t t h e e n t i r e b u r d e n o f r e p r e s e n t i n g t h e a s s o c i a t i o n ' s f i n a n c i a l c o n d itio n should not r e s t u p o n one o r two r a t i o s .

A minimum o f s i x o r e i g h t s h o u l d be r e q u i r e d

f o r a d e q u a t e a n a l y s i s , and w i t h t h i s many r a t i o s t h e p o s s i b i l i t y o f d i f f e r i n g a c c o u n t i n g t e c h n i q u e s i m p o r t a n t l y a f f e c t i n g a g i v e n com­ p a r i s o n i s v e r y much r e d u c e d . of its

im portance i n th e

A s i n g l e a b n o rm a l r a t i o l o s e s much

f a c e o f s i x or e i g h t o t h e r n o rm a l r a t i o s ,

s o l o n g a s t h e c o n d i t i o n s c a u s i n g t h e a b n o r m a l r a t i o a r e known an d ( co rrectib le)

a re allow ed f o r .

I t i s t r u e , n o n e th eless, t h a t v a r ia tio n s in accounting te c h ­ n i q u e s c a n c a u s e c o n s i d e r a b l e q u e s t i o n and c o n j e c t u r e i n a n y k i n d o f com parative f i n a n c i a l a n a ly s is .

Many c o o p e r a t i v e a u d i t o r s ha v e e x ­

p r e s s e d t h e d e s i r a b i l i t y o f d e v e l o p i n g more u n i f o r m a c c o u n t i n g t e c h ­ niques.

S e v e r a l r e g i o n a l c o o p e r a tiv e s i n t h e United S t a t e s p ro v id e

an a u d i t i n g s e r v i c e f o r t h e i r l o c a l c o o p e ra tiv e a f f i l i a t e s . c a s e s , a high degree of accounting uniform ity i s there

In th e s e

o b ta in e d —though

e x i s t c o n s i d e r a b l e d i f f e r e n c e s between r e g i o n a l s .

Use o f R a t i o s by R e g i o n a l A s s o c i a t i o n s I t s h o u l d be o f i n t e r e s t a t t h i s p o i n t t o compare t h e f i n a n c i a l r a t i o s u s e d by some r e g i o n a l c o o p e r a t i v e s i n a n a l y s i n g a n d c o m p a r in g the

o p e r a t i o n s and c o n d i t i o n s o f t h e i r l o c a l members. The C o o p e r a t i v e A u d i t i n g S e r v i c e , I n c . o f M i n n e a p o l i s , an a u d i t ­

i n g o r g a n i z a t i o n s e r v i n g t h e l o c a l members of t h e M id la nd C o o p e r a t i v e Y /holesale, I n c . , used th e follow ing f i n a n c ia l r a t i o s in i t s

1946-47

73 report In ven tory turnover

C urrent a s s e ts to current R a t i o oT c a p i t a l t o f i x e d R atio o f c a p i t a l to t o t a l A v e r a g e number o f d a y s o f

lia b ilities assets assets accounts re c e iv a b le

The Consumers C o o p e r a t i v e A s s o c i a t i o n ' s 1946-4 7 C o m p a r a t i v e Report used th e fo llo w in g f in a n c ia l r a t i o s ^ / C urrent a sse ts to cu rrent l i a b i l i t i e s s a le s charged Number o f d a y s o f c h a r g e d s a l e s i n r e c e i v a b l e s Charged s a l e s t o c u r r e n t re c e iv a b le s T o t a l a c c o u n t s r e c e i v a b l e o v e r 30 d a ys o l d % c u rre n t a s s e ts in re c e iv a b le s Sales t o average in v en to ry S ales to fix ed a s s e ts ( o r i g i n a l co st) Members* e q u i t y t o n e t f i x e d a s s e t s Members* e q u i t y i n /£ o f t o t a l a s s e t s % retail

The a u d i t i n g d e p a r t m e n t o f t h e I n d i a n a Farm B u re a u C o o p e r a t i v e A ss o c ia tio n included th e follow ing r a tio s

in i t s

1947 C o m p a r a t i v e

B u s i n e s s Ana l y s i s P e r c en t of c u r r e n t a s s e t s i n cash P er c en t of c u r r e n t a s s e t s to c u r r e n t l i a b i l i t i e s Per cent of c u rre n t a s s e ts in inventory R a tio of cash t o c u r r e n t l i a b i l i t i e s R atio of current a sse ts to current l i a b i l i t i e s R atio o f c u rre n t a s s e ts to t o t a l l i a b i l i t i e s R a tio o f n e t worth t o fix e d a s s e t s R a tio of n e t worth to f ix e d a s s e t s and in v e stm en ts Ratio of s a le s to fix e d a s s e ts Inventory turnover Number o f d a y s s a l e s i n r e c e i v a b l e s Number o f d a y s p u r c h a s e s i n a c c o u n t s p a y a b l e C e n t r a l C o o p e r a t i v e Y /h o le sa le o f S u p e r i o r , W i s c o n s i n i n c l u d e d th e se r a tio s in i t s

1949 Y earbook

2 2 / ”Summary o f C o m p a r a t i v e C o s t s o f O p e r a t i o n " , 1 9 4 6 - 4 7 R e p o r t o f C o o p e r a t i v e A u d i t i n g S e r v i c e , l n c « , p« 21 2 3 / "C om parative R e p o r t " , op» c i t . , p . 9 2 4 / " C o m p a r a t i v e B u s i n e s s A n a l y s i s " , 1947 R e p o r t of I n d i a n a Farm B u r e a u C o o p e r a t i v e A s s ' n . , p» 29 2 5 / Y e a r b o o k , 1949 R e p o r t o f C e n t r a l C o o p e r a t i v e W h o l e s a l e , pp. 11 & 21

74 Members* e q u i t i e s t o l i a b i l i t i e s C urrent r a t i o Days* s a l e s i n r e c e i v a b l e s Gross m a rg in to n e t s a l e s S a l a r i e s and. wages t o n e t s a l e s Other expenses to n e t s a l e s T o t a l expenses to n e t s a l e s O p e r a t i n g income t o n e t s a l e s Stock t u r n In v e n to ry in c re a s e or d e c r e a se (p e r c e n t) R e c e i v a b l e s i n c r e a s e or d e c r e a s e ( p e r c e n t ) The C o m p a r a t i v e B u s i n e s s A n a l y s i s f o r 1947 of t h e P a c i f i c S u p p l y C o o p erativ e uses th e fo llo w in g r a t i o s . * ^ / Per c e n t of cash t o c u r r e n t a s s e t s Days* s a l e s i n r e c e i v a b l e s Inventory turnover Current a s s e ts to cu rren t l i a b i l i t i e s Sales to cost o f f a c i l i t i e s Per cent of e q u itie s to t o t a l assets Gross margins to s a l e s Expenses t o s a l e s Net s a v i n g s t o s a l e s The f o r e g o i n g ex am ple s i l l u s t r a t e t h e d i v e r s i t i e s a s w e l l a s t h e s i m i l a r i t i e s f o u n d i n t h e us e o f f i n a n c i a l r a t i o s by c o o p e r a t i v e regionals.

The c u r r e n t a s s e t s t o c u r r e n t l i a b i l i t i e s

r a t i o was u s e d

by a l l f o u r o r g a n i z a t i o n s , a s a l s o was t h e i n v e n t o r y or s t o c k t u r n r e l a t i o n s h i p ; and t h e "days'

s a le s in receivables" ratio *

Consumers C o o p e r a t i v e A s s o c i a t i o n p u t a g r e a t d e a l of e m pha si s on c r e d i t s a l e s and r e c e i v a b l e s , d e v o t i n g f i v e o f t h e i r e l e v e n r a t i o s to th is

problem.

C e n t r a l C o o p e r a t i v e W h o l e s a l e and P a c i f i c S u p p l y

C o o p e r a t i v e w e re t h e o n l y ones o f t h e f i v e t o u s e more t h a n one r a t i o r e l a t i n g s o le ly to the operating statem en t.

The I n d i a n a r a t i o s wer e

a l l p rim a rily balance sheet r a t i o s . 2 6 / " C o m p a r a t i v e B u s i n e s s A n a l y s i s " , 1947 R e p o r t of P a c i f i c S u p p l y C o o p e r a t i v e , p p . 1-5

75

Balance s h e e t r a t i o s , in th e a u t h o r 's o p in io n , a re a b s o lu t e l y n e c e s s a r y t o an a d e q u a te p r e s e n t a t i o n o f a c o o p e r a t i v e ' s f i n a n c i a l condition.

But t h e y c a n n o t t e l l what f a c t o r s o r c a u s e s u n d e r l i e t h e

c o n d i t i o n as found.

Only a p r o p e r b a l a n c e o f t h e two t y p e s o f r a t i o s

w i l l p ro v id e a complete and a d eq u a te a n a l y s i s .

76

CHAPTER VI

TECHNIQUES FOR FURTHER STUDY The i n f o r m a t i o n d e r i v e d from t h e p r e s e n t s t u d y i s somewhat l i m i t e d as t o covered.

s c o p e o f a s s o c i a t i o n s a nd as t o t h e t i m e p e r i o d s

D a t a fro m more c o o p e r a t i v e s o f e a c h o f t h e m a j o r t y p e s

f o r s e v e r a l s u c c e s s i v e y e a r s would p e r m i t a more t h o r o u g h a n a l y s i s th a n has been p o s s i b l e t o d a te*

F o r t h i s r e a s o n i t i s deemed d e ­

s i r a b l e t o s u g g e s t how t h i s s t u d y m i g h t be c o n t i n u e d b o t h a s a r e s e a r c h p r o j e c t and a s a s e r v i c e t o M ic h i g an f a r m e r s a n d t h e i r cooperative a sso c ia tio n s. Thus f a r t h e d a t a h a s been o b t a i n e d i n t h e form o f a u d i t r e ­ ports

from w h i c h t h e p e r t i n e n t i n f o r m a t i o n h a s b e e n t a k e n .

Some

o f t h e r e p o r t s we re m a i l e d t o t h e c o l l e g e by t h e c o o p e r a t i v e s th e m ­ s e l v e s a n d some, t h e m a j o r i t y o f t h e m , were m a i l e d t o t h e M i c h i g a n A s s o c i a t i o n o f F a rm e r C o o p e r a t i v e s o r wer e p r e p a r e d by t h e Farm Bureau S e rv ic e s and s e n t to th e c o l l e g e .

Any c o n t i n u a t i o n o f t h e

s e r v i c e w i l l u s e a l l o f t h e s e s o u r c e s o f c o u r s e , b u t t h e MAFC h a s b e e n t h e most e f f e c t i v e c o l l e c t o r o f a u d i t s f o r t h i s s t u d y .

Most

o f t h e f a r m s u p p l y c o o p e r a t i v e s i n t h e lo w e r p e n i n s u l a o f M i c h i g a n and some o f t h o s e i n t h e u p p e r p e n i n s u l a b e l o n g t o t h e MAFC a s do many s t r i c t l y m a r k e t i n g c o o p e r a t i v e s .

The e x p a n s i o n o f t h e s t u d y

t o i n c l u d e m a r k e t i n g o r g a n i z a t i o n s w i l l be p r o b a b l y g r e a t l y a i d e d by c o n t a c t and c o o p e r a t i o n w i t h s u c h r e g i o n a l m a r k e t i n g a s s o c i a t ­ i o n s a s t h e M i c h i g a n P o t a t o Growers* E x c h a n g e , t h e M i c h i g a n L i v e ­

77

s t o c k E x c h a n g e , a nd Midwest P r o d u c e r s C r e a m e r i e s # W i t h t h e vi e w t o s i m p l i f y i n g t h e p r o c e d u r e a f o r m c o u l d b e d e ­ v i s e d w h i c h c o u l d be s e n t t o e v e r y i n t e r e s t e d l o c a l c o o p e r a t i v e . The c o o p e r a t i v e * s a u d i t o r t h e n c o u l d f i l l

in th e d e sire d inform ation

on t h e for m a t t h e t i m e o f t h e a u d i t a n a t h e for m c o u l d be r e t u r n e d for incorporation in the a n aly sis.

(T h e same i n f o r m a t i o n a l s o would

b e a v a i l a b l e t o t h e m a n a g e r and b o a r d o f d i r e c t o r s f o r t h e i r i m m e d ia te use) • The m a j o r dr a w b a c k t o t h e a b o v e m e th o d , beyond t h a t o f g e t t i n g the

cooperatives to f i l l

o u t t h e fo r m w ould be t h a t i t would a l l o w

f o r more v a r i a t i o n i n t h e h a n d l i n g o f d a t a .

Of c o u r s e e v e n a u d i t

r e p o r t s w i t h d i f f e r e n t t e r m i n o l o g y and forms a r e d i f f i c u l t t o i n t e r ­ p r e t a c c u r a t e l y b u t c e r t a i n r e l a t i o n s h i p s show up i n t h e d e t a i l t h a t w o u ld n o t be d i s c e r n i b l e on a more summarized f o r m . What s u c h a fo r m would r e q u i r e would be a c a r e f u l d e f i n i t i o n o f what e a c h f a c t o r s h o u l d i n c l u d e and a s p e c i f i c r e q u e s t f o r n o t e s r e g a r d i n g d e v i a t i o n s from a n y o f t h e d e f i n i t i o n s . i s a n e x am pl e o f what m i g h t be u s e d .

Form A f o l l o w i n g

" D e f i n i t i o n s and I n s t r u c t i o n s "

c o u l d be mim e og ra ph e d on t h e r e v e r s e s i d e of t h e f o r m t o a i d t h e a u d i t o r i n f i l l i n g out Form A* An a d d i t i o n a l v a l u e of u s i n g a form f i l l e d o u t by t h e l o c a l c o o p e r a t i v e ’ s a u d i t o r l i e s i n t h e o p p o r t u n i t y i t would o f f e r f o r d e v e l o p i n g more u n i f o r m i t y i n s e t t i n g up a u d i t s t a t e m e n t s .

Of c o u r s e

t h e r e a r e bound t o be d i f f e r e n c e s b e t w e e n a u d i t o r s a s t o p r o p e r for m b u t a s e r v i c e p r o j e c t i n which t h e c o o p e r a t i v e s were i n t e r e s t e d would l e n d i t s e l f a d m i r a b l y t o t h e t a s k o f a t t a i n i n g somewhat more u n i f o r m

78 F orm As

In fo rm a tio n Sheet fo r R atio A nalysis S ervice

Name o f Ass*n*

Address

'

Ye ar E n d i n g

Patrons* Purchases ~~ Produce Marketed T o t a l Volume _________________ L esss Cost o f Patrons* P u rch a ses L e s s : A dvance on P r o d u c e M a r k e t e d _________________ T o t a l C o s t o f Goods S o l d _____ G r o s s M a r g i n on P a t r o n s * P u r c h a s e s _________________ G r o s s M a r g i n on P r o d u c e M a r k e t e d _________________ Gross Margin s____ O th e r Revenues _________________ P a t r o n a g e Refunds Earned _________________ O t h e r In co me ____________________________________ _________________ T o t a l O t h e r Revenue _________________ T o t a l Gross Margin _____ O p e r a t i n g E x p e n s e __________________________________ _________________ S a l a r i e s a n d Wages_____________________________ _________________ O t h e r E x p e n s e s --------------------------------------------------- ------------------------T o t a l E x p e n s e s ________________________________________________ _____ Net M a r g in ------------------------------------------------------------------------------- -------Balance Sheet A ssets C ash on h a n d a nd i n Banks Month Q u a r t e r Annual Net r e c e i v a b l e s ---------------------------------------------------M e r c h a n d i s e I n v e n t o r y ---------------------- .---------------Other c u r r e n t a s s e t s ----------------------------_---------T o t a l C u rre n t A ssets C o s t D e p r e c i a t i o n Net Land-------------------------------- ---------------------- --------------B uildings —---------M a c h i n e r y & E q u i p m e n t ------------------------- ----------T o t a l Fixed A ssets T o ta l oth er A ssets T o tal A ssets L i a b i l i t i e s and P a t r o n s * E q u i t i e s T o t a l Cur r e n t L i a b i l i t i e s T o ta l Fixed L i a b i l i t i e s T o t a l C a p i t a l Stock Issued Net m a r g i n s t o be d i s t r i b u t e d C a p i t a l Reserves Other P a t r o n s * E q u i t i e s T otal P a tro n s* E quities

79 Form A ( c o n t * ) C a p i t a l S to c k and Patrons* E q u i t i e s A llo c a te d Reserves U n a l l o c a t e d R e s e r v e s and S u r p l u s L i a b i l i t i e s » Patrons* Members* E q u i t i e s P e r c e n t of T o t a l S a l e s M a r k e t i n g ________________ Purchasing ______

Type o f b u s i n e s s :

M ajor commodities handled*

l/

Produce

P e r c e n t a g e f i g u r e s h o u l d be p e r c e n t of t o t a l p r o d u c e s a l e s and p ercent o f t o t a l supplies resp ectiv ely *

80

Form A - ( R e v e r s e S i d e )

D e f i n i t i o n s and I n s t r u c t i o n s

T o t a l Volume — Net s a l e s o f s u p p l i e s an d p r o d u c e Patrons*

Purchases - (S u p p lie s s a le s to Patrons*)

G r o s s M a r g i n s - d i f f e r e n c e b e t w e e n s a l e s and c o s t s o f goods s o l d t o p a t r o n s a n d / o r a d v a n c e s on p r o d u c e s o l d P a tro n a g e re fu n d s earned - re fu n d s paid to th e a s s o c i a t i o n fo r p u r­ c h a s e s fr om or s a l e s t o o t h e r c o o p e r a t i v e o r g a n i z a t i ons O t h e r in co me - income fro m s o u r c e s n o t p r e v i o u s l y n o t e d

Net R e c e i v a b l e s - t h e t o t a l a c c o u n t s and n o t e s owed t o t h e a s s o c ­ i a t i o n a f t e r d ed u ctio n for d o u b tfu l accounts M erch a n d ise I n v e n t o r y - check w hether monthly a v e r a g e , q u a r t e r l y average or annual (year-end) f i g u r e - i f in v e n to r y i s not fig u r e d a t w h o lesale c o s t , i n d i c a t e how f i g u r e d i n comments* Net F i x e d A s s e t s - A l l f i x e d a s s e t s minus d e p r e c i a t i o n - i n d i c a t e i n Comments i f d e p r e c i a t i o n i s u n u s u a l f o r an y reason. I n m a jo r commodities h a n d l e d - p e r c e n t a g e s r e f e r t o p e rc e n ta g e of t o t a l vo lu m e .

Commentss

81

term inology*

F u r t h e r a i d t o t h i s end would be t h e d e v e l o p m e n t o f

a m o n t h l y o r q u a r t e r l y p r o g r e s s s h e e t w h i c h would e n c o u r a g e more f r e q u e n t c h e c k u p s ; s u c h a s h e e t m i g h t be s e t up a s Form B f o l l o w i n g * T h i s s a m p l e p r o g r e s s s h e e t ( F o r m B) c a n be u s e d m o n t h l y , b i ­ m o n t h l y , q u a r t e r l y o r h o w e ve r i t

i s d e s i r e d t o use i t *

I t could

a l s o be u s e d as a y e a r l y s h e e t by s u b s t i t u t i n g y e a r s f o r m o n t h s , on t h e h o r iz o n ta l axis*

The l i n e drawn a c r o s s t h e g r a p h a t t h e v a l u e

o f 1 0 .6 r e p r e s e n t s t h e a v e r a g e o f t h e c o o p e r a t i v e s u s e d a s a c r i t e r i a for t h i s

study*

The m a n a g e r or b o o k k e e p e r would s i m p l y p l o t t h e

v a l u e s f o r t h e o p e r a t i n g expense r a t i o

fo r h is co o p erativ e a t each

p e r i o d i n w h ic h t h e i n f o r m a t i o n was c o m p u te d .

The l i n e a d j o i n i n g

t h e p o i n t s would t h e n i n d i c a t e t h e d i r e c t i o n o f t r e n d a n d t h e amount of flu c tu a tio n of the ra tio

figure.

O t h e r s i m i l a r g r a p h s c o u l d be

d e v i s e d f o r a s many r a t i o s as i t was d e s i r e d t o f o l l o w * By k e e p i n g m o n t h l y o r q u a r t e r l y p r o g r e s s s h e e t s a c o o p e r a t i v e m a n a g e r i s t h e n a b l e t o c h e c k more c l o s e l y t h e e f f e c t o f o p e r a t i n g p r a c t i c e s an d p o L i c i e s , and t o make a d j u s t m e n t s more r a p i d l y i n t h e case o f u n s a t i s f a c t o r y developm ents.

Mo nthly o r q u a r t e r l y d a t a wo uld

h e l p t o im p r o v e t h e a c c u r a c y o f s u c h i t e m s a s m e r c h a n d i s e i n v e n t o r y and a c c o u n t s r e c e i v a b l e t h u s mak ing f o r more r e p r e s e n t a t i v e and uniform r a t i o s .

W h e th e r or n o t t h e m o n th ly p r o g r e s s s h e e t s a r e

s u f f i c i e n t l y f e a s i b l e t o j u s t i f y t h e i r u s e by most l o c a l a s s o c i a t ­ i o n s , t h i s t y p e o f s e r v i c e c a n be v e r y h e l p f u l and can u n d o u b t e d l y p r o v e q u i t e p o p u l a r w i t h c o o p e r a t i v e p e r s o n n e l a s s oo n a s t h e y have l e a r n e d w ha t i t ha s t o

offer.

I n any e v e n t t h e r e s e a r c h p h a s e o f

82 Form B s

Progress Sheet f o r R atio A nalysis O p e r a t i n g E x p e n s e s D i v i d e d by Net S a l e s

25*0 24.0 23.0 22.0 21.0 20.0 18.0 17.0 16.0 15.0 1 4 r# 0

13.0 12.0 11.0 10.0

Instructions* D ivide t h e o p e r a t i n g expenses f i g u r e of your c o o p e r­ a t i v e f o r t h e g i v e n month o r q u a r t e r by t h e n e t s a l e s f o r t h e same p e r i o d . T h e n p u t a d o t on t h e g r a p h d i r e c t l y a b o v e t h e month or q u a r t ­ e r f o r w h i c h t h e r a t i o was f i g u r e d and d i r e c t l y a c r o s s fro m t h e c o r r e s ­ p o n d i n g v a l u e marke d on t h e l e f t - h a n d s i d e o f t h e g r a p h . As e a c h new d o t i s a d d e d , month by m on th , or q u a r t e r by q u a r t e r , t h e d o t s can b e c o n n e c t e d by means o f c o n t i n u o u s s t r a i g h t l i n e s , t h u s i n d i c a t i n g t h e d i r e c t i o n o r t r e n d of your c o o p e r a t i v e 's o p e r a t i n g expense r a t i o . The l i n e d ra w n a c r o s s t h e g r a p h i s an a p p r o x i m a t e s t a n d a r d w h ic h i s c o n s i d e r e d t o be a good r a t i o u n d e r most c i r c u m s t a n c e s .

83

th is

s t u d y c o u l d be c a r r i e d on r e g a r d l e s s o f t h e method of o b t a i n i n g

b a sic data* The p r o c e d u r e s w hic h ha ve b e e n u s e d i n t h i s s t u d y a s o u t l i n e d i n t h i s c h a p t e r c o u l d be u s e d i n a f u r t h e r e x t e n s i o n o f t h e p r o j e c t . Thus f a r t h e m ajor q u e s ti o n has been t o determ ine w hether m u l t i p l e r a t i o a n a ly s is i s su p erio r to sin g le r a t i o analysis* h a s b e e n a n s w e r e d beyond a d o u b t .

This q u e stio n

M ultiple r a t i o a n a ly s is is d e f­

i n i t e l y s u p e r i o r ; and n o t o n l y i s s u p e r i o r , b u t i t i s n e c e s s a r y t o s c i e n t i f i c m a n ag e m e n t.

a r e some o f t h e o t h e r t h i n g s t h a t need

t o be known? An a t t e m p t was made i n t h e p r e s e n t s t u d y t o s e t up a s t a n d a r d o f r a t i o values.

A f u r t h e r a t t e m p t was made t o d e t e r m i n e i f a n y s i g ­

n ific a n t differences

e x i s t between average r a t i o s in d i f f e r e n t ty p e s

o f c o o p e r a t i v e s , and l a s t l y a n a t t e m p t was made t o d e t e r m i n e wh at relationships iatio n s.

e x i s t between r a t i o s i n s u c c e s s iv e y e a rs in given a s s o c ­

C e r t a i n c o n c l u s i o n s were dra w n from t h e s e t e s t s ,

d a t a was l i m i t e d *

but th e

A l l o f t h e above t e s t s need t o be r e p e a t e d on a

l a r g e r s c a l e a nd w i t h more u n i f o r m g r o u p s o f d a t a . The e v i d e n c e o b t a i n e d s u g g e s t s t h a t most t y p e s o f s u p p l y co o p ­ erativ es

i n M i c h i g a n c a n be s u b j e c t e d t o t h e same s t a n d a r d s .

I t would

b e u n s c i e n t i f i c t o a c c e p t t h e e v i d e n c e w i t h o u t f u r t h e r and more ex­ te n s iv e study.

W i t h t h o u s a n d s o f M ich ig an f a r m e r s i n v e s t i n g money

a n d t i m e i n c o o p e r a t i v e o r g a n i z a t i o n s and w i t h c o l l e g e e x t e n s i o n men a nd r e g i o n a l c o o p e r a t i v e e x p e r t s s p e n d i n g t i m e e n c o u r a g i n g and g u i d ­ ing th e se organizations, i t

i s c l e a r l y a w orthw hile p ro je c t t o develop

84

s t a n d a r d s by w h ic h t h e s e c o o p e r a t i v e o r g a n i z a t i o n s may be more e f f i c ­ i e n t l y and more u s e f u l l y o p e r a t e d . As a r e s e a r c h p r o j e c t a c o n t i n u a t i o n o f t h i s s t u d y would p r o ­ v i d e much i n f o r m a t i o n w h ic h w ou ld be o f a i d t o c o o p e r a t i v e s t h r o u g h ­ out t h e n a t i o n as w ell as in M ichigan. little

h a s b e e n done i n t h i s

in previous chapters*

field

To t h e kn ow le dg e o f t h e a u t h o r ,

other than the stu d ie s r e f e r r e d to

No o t h e r r e s e a r c h e r , a s f a r a s i s known, ha s

endeavored t o t e s t t h e d i f f e r e n c e s between ty p e s of c o o p e r a t i v e s . The a s s u m p tio n has b een , a c c o r d i n g t o t h e evidence o f a l l b u l l e t i n s and c o m p a r a t i v e a n a l y s e s e x a m i n e d , t h a t f o r c o m p a r i s o n p u r p o s e s c o ­ o p e r a t i v e s must be s e g r e g a t e d b o t h by t y p e o f b u s i n e s s and by volume of business.

The a n a l y s i s o f v a r i a n c e i n C h a p t e r IV s u g g e s t e d t h a t

s u c h s e g r e g a t i o n i s n o t n e e d e d t o t h e e x t e n t t h a t i t h a s b e e n employ­ ed.

F u r t h e r a n d more c o m p r e h e n s i v e t e s t s s h o u l d be made t o e i t h e r

v e r i f y or d i s p r o v e t h e i n f e r e n c e s drawn from t h e p r e s e n t t e s t s . T h i s and o t h e r q u e s t i o n s make f o r a p r o b l e m l a r g e enough and i m p o r t ­ a n t eno ug h t o j u s t i f y a c o n t i n u a t i o n o f t h i s r e s e a r c h p r o j e c t . As a s e r v i c e p r o j e c t t h i s s t u d y c o u l d p r o v e h i g h l y b e n e f i c i a l ; e v e n i n t h e a b s e n c e o f c e r t a i n s u r e s t a n d a r d s or c r i t e r i a u r i n g s u c c e s s or f a i l u r e .

f o r meas­

Th e s i m p l e p r o c e s s o f g a t h e r i n g t h e d a t a

a n d a n a l y s i n g a nd a v e r a g i n g t h e r a t i o f i g u r e s and p u b l i s h i n g t h e r e ­ s u l t s t o t h e c o o p e r a t i n g a s s o c i a t i o n s w ould a i d i n p r e s e n t i n g much n e e d e d i n f o r m a t i o n t o t h e a s s o c i a t i o n s * ma na ge rs and b o a r d s o f d i ­ recto rs.

T h a t i s , e v e n t h o u g h one wer e t o a c c e p t t h e s t a n d a r d s d e ­

v e l o p e d i n t h e p r e s e n t s t u d y and p u b l i c i z e th,em as p e r m a n e n t i n d i c e s

35

f o r c o o p e r a t i v e m a n a g e r s and d i r e c t o r s ,

i t would s t i l l be o f v a l u e

t o know e a c h y e a r t h e a v e r a g e s and r a n g e s o f t h e group a s a who le f o r t h a t year*

I t i s i m p o r t a n t t o know n o t o n l y o n e ' s r e l a t i v e

p o s i t i o n a s co mpared t o a f i x e d s t a n d a r d b u t a l s o o n e ' s p o s i t i o n r e l a t i v e l y t o t h a t o f o t h e r s i n t h e same t y p e o f a c t i v i t y # w o u ld h e l p t o d e v e l o p i n t h e o f f i c i a l s

I t also

of these o rg an izatio n s the

a p p r e c i a t i o n o f and i n t e r e s t i n c a r e f u l f i n a n c i a l a n a l y s i s which i s an e s s e n t i a l re q u ire m e n t f o r continuous s u c c e s s f u l c o o p e r a tiv e o p e r a t­ ions* F o r t h e s e r e a s o n s t h e for ms h a v e b e e n dra wn up and t h e g e n e r a l approach o u tlin e d fo r c o n tin u a tio n of th e present study. e n o u g h ha s b e e n l e a r n e d t o j u s t i f y

fu rth er investigations#

C ertainly

86

CHAPTER V II Summary C o n c l u s i o n s What a r e t h e c o n c l u s i o n s t h a t c a n b e dra wn from t h i s s t u d y ? What v a l u e do t h e y h a v e a n d how may t h e y be u s e d ? The c o n c l u s i o n s may be sum m a riz ed c h a p t e r by c h a p t e r a s f o l l o w s : I*

The d i s c u s s i o n o f t h e r a t i o s i n C h a p t e r I s u g g e s t s t h a t t h e i r

i n t e r r e l a t i o n s h i p s make n e c e s s a r y t h e u s e of s e v e r a l r a t i o s quate a n a ly s is .

II.

fo r ade­

T h ere i s a d e f i n i t e r e l a t i o n s h i p between c e r t a i n

k e y r a t i o s t a k e n s i n g l y a nd t h e o t h e r r a t i o s as a g r o u p .

This r e l a t ­

i o n s h i p i s c l o s e enough t o i n d i c a t e t h e i n t e r r e l a t i o n s h i p o f r a t i o s b u t n o t s o c l o s e a s t o a l l o w t h e u s e of any s i n g l e r a t i o a s t h e a n s w e r t o th e qu estio n of a c o o p e ra tiv e 's fin a n c ia l condition. s u p p o r t s t h e e v i d e n c e o f C h a p t e r I#

III.

This fu r th e r

C areful exam ination o f a

few r a t i o s c a n i n d i c a t e t h e t r e n d o f t h e f i n a n c i a l c o n d i t i o n o f a given cooperative. a s s o c ia tio n 's

( T r e n d d e f i n e d a s t h e d i r e c t i o n i n w h ic h t h e

f i n a n c i a l c o n d i t i o n w i l l l i k e l y move a s s u m i n g a c on­

t i n u a t i o n o f t h e management p r a c t i c e s a n d p o l i c i e s a s employed d u r i n g t h e p e r i o d r e p r e s e n t e d by t h e r a t i o s . ) th e ra tio

IV .

The d i f f e r e n c e s b e t w e e n

fig u re s of th e types of cooperative a ss o c ia tio n s included

i n t h i s s t u d y a r e n o t a s g r e a t on t h e a v e r a g e a s t h e d i f f e r e n c e s b e ­ tw e e n t h e i n d i v i d u a l a s s o c i a t i o n s w i t h i n t h e v a r io u s groups w i t h t h e exception of the o il a ss o c ia tio n s.

Thus, s i m i l a r r a t i o s ta n d a r d s

c a n be a p p l i e d t o t h e v a r i o u s t y p e s o f c o o p e r a t i v e s i n c l u d e d i n t h e study o th er than th e o il c o o p erativ e s-th a t i s , a ss o c ia tio n s receiving f r o m t w e n t y t o one h u n d r e d p e r c e n t of t h e i r d o l l a r volume of b u s i n e s s

fro m s u p p l i e s s a l e s "to members. A test

of th e data a g a in st c e r t a i n types of o rg an izatio n s a f f i l ­

i a t e d w i t h Consumers C o o p e r a t i v e A s s o c i a t i o n shows t h a t t h e a bo ve c o n c l u s i o n m i g h t a p p l y t o t h e same t y p e s o f p u r c h a s i n g - m a r k e t i n g and p u r c h a s i n g c o o p e r a t i v e s o u t s i d e of Michigan* A p p l i c a t i o n o f u n i f o r m s t a n d a r d s t h e r e f o r e , must b e r e s e r v e d t o t h e t y p e s i n d i c a t e d u n t i l f u r t h e r t e s t s e i t h e r l i m i t or e x t e n d t h e range o f a p p lic a tio n * d ic a te s that founded*

V*

A survey of au d ito rs of cooperatives in ­

o u r c h o i c e o f s i x p r i m a r y r a t i o s i n C h a p t e r I I was w e l l

Of t w e l v e r a t i o s l i s t e d

f o r r a t i n g by t h e a u d i t o r s , t h e s i x

p r i m a r y r a t i o s p l a c e d among t h e f i r s t The r e t u r n s

s e v e n s e l e c t e d by t h e a u d i t o r s *

fro m t h e q u e s t i o n n a i r e s i n d i c a t e d c o n s i d e r a b l e a g r e e m e n t /

a s t o w h i c h a r e t h e i m p o r t a n t r a t i o s and a l s o i n d i c a t e d c o n s i d e r a b l e d i f f e r e n c e s between a u d i t o r s as to s p e c i f i c r a t i o s n o rm a lly used. VI*

C o n tin u a tio n of th e p re s e n t stu d y b o th f o r r e s e a r c h purposes

a n d t o d e v e l o p a n a n a l y s i s s e r v i c e f o r M ic h i g a n c o o p e r a t i v e s , would be d e f i n i t e l y w orthw hile* What v a l u e do t h e s e c o n c l u s i o n s h a v e ? u s e a r e synonymous a nd t h e y a r e t w o f o l d , a n d may be u s e d a s a b a s i s

T h e i r v a lu e and t h e i r ( l ) They a r e v a l u a b l e f o r

f o r an e x t e n s i o n and e n l a r g e m e n t o f t h e

s t u d y , and ( 2 ) t h e y a r e v a l u a b l e f o r and may be u s e d , w i t h t h e l i m i t ­ a t i o n s i n d i c a t e d i n t h e c o u r s e of t h e i r d e r i v a t i o n , as a f o u n d a t i o n f o r p r a c t i c a l a p p l i c a t i o n t o Michigan c o o p e r a tiv e s * S u m m a r i z i n g t h e e n t i r e s t u d y much more s u c c i n c t l y ; m u l t i p l e r a t i o a n a l y s is i s n e ce ssa ry fo r adequate f i n a n c ia l a p p r a i s a l of a c o o p e ra tiv e

88

and a s i n g l e s e t o f s t a n d a r d s c a n be d e v i s e d f o r a p p l i c a t i o n e q u a l l y t o s e v e ra l ty p es of coop erativ e purchasing a s s o c ia tio n s .

The p r o b l e m

r e m a i n i n g i s t o d e t e r m i n e more a d e q u a t e l y wh at t h e s t a n d a r d s s h o u l d b e and t o j u s t wh at t y p e s o f c o o p e r a t i v e s t h e y may be a p p l i e d .

89 Ap p en di x A; T a b l e 1* In d iv id u a l R atio Figures fo r Cooperative A ssociations I n c l u d e d i n P e r i o d I - 19U7-U8Code Number

Net M a r g i n Net S a l e s

Gross Margin Net S a l e s

39 4 30 34 19 25 7 35 32 36 24 40 17 14 18 41 27 28 13 3 15 26 12 16 10 42 6 11 43 8 37 29 22 2 21 33 9 5 38

.046 .014 .0 1 0 - .0 0 2 .0 0 0 .023 .070 .0 2 1 >633 .0 5 9 .0 1 2 .028 .0 0 0 .0 0 2 .0 1 1 .046 .003 .0 4 3 .003 .0 2 1 -.015 -.009 .0 5 0 .040 .0 2 7 .048 .074 .0 7 5 .045 .047 .049 .074 .035 .042 .039 .045 .058 .044 .013

.1 36 .153 .148 .115 .103 .140 .1 2 0 .126 .0 8 8 .1 1 0 .0 5 9 .084 .1 1 3 .0 8 2 .1 0 7 .098 .0 7 5 .1 5 1 .0 7 5 .17 9 .088 .0 8 6 .1 5 1 .119 .068 .1 3 5 .1 0 1 .18 0 .136 .0 9 7 .107 .138 .124 .127 .1 2 2 .0 9 2 .136 .119 .0 60

O p e ra tin g Expenses Net S a l e s .126 .1 6 0 .151 .125 .1 29 .130 .09 9 .1 1 1 .1 0 7 .084 .1 1 1 .059 .1 5 2 .1 2 0 .130 .079 .0 8 2 .1 2 4 .0 77 .1 6 2 .129 .118 .1 15 .1 1 2 .0 6 2 .105 .085 .2 2 1 .0 9 8 .099 .0 7 4 .124 .135 .1 0 8 .1 2 0 .066 .096 .1 0 0 .0 7 7

S a l a r i e s & Wages Net S a l e s .080 .0 8 1 .0 8 7 .065 .071 .0 6 7 .058 .086 .0 5 9 .039 .0 6 4 .038 .0 7 6 .0 6 7 . 066 .0 5 0 .062 .04 1 .0 7 4 .0 76 .0 6 1 .078 .0 6 7 .03 8 .054 .039 .0 9 1 .0 5 8 .051 .046 .058 .0 7 1 — .0 7 1 .044 .0 5 2 .059 .0 4 0

90 Ap p en di x A; T a b le U ( c o n ' t ) Code Number

39 4 30 34 19 25 7 35 32 36 24 40 17 14 18 41 27 28 13 3 15 26 12 16 10 42

"

6

11 43 8 37 29 22 2 21 33 9 5 38-

C urrent A ssets Current b i l i t i es 11,76 .90 1.32 . 1 . 66 1.32 1.14 2.90 .57 3.12 5.01 1.49 35.50 1 .0 2 1.25 1 .2 2 2.64 2.83 1. 65 1.62 1.64 1.80 1.35 5. 1 5 5. 26 .84 2.07 1.14 5. 86 1.04 6 .8 6 1.92 1.53 2* 65 8.38 4 . 23 8.39 5.58 2.84 2.72

C o st o f Goods S o l d M erchandise Inventory 8.35 14.67 12 .1 7 5.74 8.28 16.19 7.64 5.72 1 2 .8 1 9.77 15 .0 9 2 4 .6 2 4.65 6.31 6.07 19.43 23.13 8.36 18.45 15.31 7.21 7.47 4.86 7.83 20.07 9.53 26.474.56 4 . 84 12.18 2 0 .7 0 4.29 7.18 12.44 6 .1 1 19.77 1 3. 81 18.33 15.30

S u p p lies Sales A c co u n ts R eceivable 24.61 33.10 2 2.2 9 3 3.4 7 42. 78 31.3 0 26.12 34.96 3 0 .1 8 14 .12 16.2184.26 44.02 2 7 .7 2 32.20 22.72 30.84 20.43 74.26 1 5. 69 79.73 58.31 15.18 30.23 17.36 3 0. 93 27 .3 7 13 .3 1 14 .41 19.66 67.22 3 3 .5 8 71.08 12.24 55.53 14.03 40.70 45.13 8.92

Net Mar gin Current L iab ilities 2.51' .067 .100 -.017 .0 1 1 .246 .8 4 5 .517 1.200 1.640 .1 3 1 1 1 .4 50 ♦ 000 .012 .0 7 1 .759 .0 9 2 .4 6 3 .072 .235 -.163 -.073 .964 1.520 .247 .785 .8 1 1 1.900 .151 2.640 .8 9 1 .414 • 649 1.760 .984 5.54$ 2.870 1.736.3 46

91 A p p en d ix A; T a b l e 1: ( c o n ’ t )

Code Number

Fixed A ssets T o ta l Assets

39 4 30 34 19 25 7 35 32 36 24 40 17 14 18 41 27 28 13 3 15 26 12 16 10 42 6 11 43 8 37 29 22 2 21 33 9 5 38

.245 .217 .187 .257 .219 .259 .2 0 2 .1 4 7 .2 2 0 .1 1 3 .2 61 .3 11 .1 8 7 .1 9 1 .047 .1 0 0 .324 .2 4 5 .4 1 7 .321 .2 8 0 .1 0 8 .234 .2 8 7 .1 6 5 .7 2 9 .4 5 1 .644 .294 .3 5 8 .314 .2 7 2 .2 7 8 .0 9 8 .2 7 1 .394 .2 8 0 .4 1 8 .1 4 8

C a p i t a l S t o c k and Patrons* E q u itie s T o tal Assets .9 4 3 .359 .582 .5 7 0 .6 2 3 .4 7 5 .744 .840 .8 1 8 .8 6 8 .629 .4 4 9 .425 .3 6 5 .4 0 8 .6 9 7 .817 .594 .7 1 8 .527 .5 9 3 .484 .8 6 7 .8 3 2 .5 78 .476 .6 7 6 .654 .468 .7 0 3 .96 5 .520 .6 1 4 .918 .929 .953 .8 9 8 .8 62 .726

G rc s s S a l e s Net Margin T o tal A ssets T otal Assets 3.14 3. 59 4.02 4.19 4.19 5.7 2 3.11 3.98 5.7 9 3.68 3.9 9 7.39 2.59 3.23 3.72 4.86 6 .6 6 4.37 5.99 3.36 3.91 4.21 2.51 3.28 3.85 1.81 3.55 1.18 1.78 3. 63 5.84 2.19 3.23 3.46 4.71 5.77 5.22 5.47 7.03

. 144 .0 4 3 .042 -.007 .0 0 4 .129 .216 .083 .2 18 .216 .049 .206 .0 0 0 .0 0 7 .0 42 .2 2 3 .0 17 .188 .020 .070 -.059 -.038 .126 .1 3 2 .104 .087 .2 6 8 .089 .0 8 0 .170 .2 8 5 .1 6 3 .11 3 .144 .185 .258 .301 .238 .0 9 5

92 Appendix A 5 T a b le 2as D i s t r i b u t i o n o f R a t i o s Among T h i r d s G ro u ps By I n d i v i d u a l Records^*/ Number o f R a t i o s i n V a r i o u s Groups R e c o r d Number Favorable T h ird 36 40 41 27 13 10 6

43 8 37 33 9 38 Middle T h i r d 7 35 32 24 14 28 26 12 16 42 2 21 5 U nfavorable Third 39 4 30 34 19 25 17 18 3 15 11 29 22

rorable

M iddle

U nfavorable

7 8 8 6 1 5 5 4 0 6 7 9 8 5 78

3 1 3 1 2 3 5 3 3 3 0 2 4 33

1 2 0 4 4 3 2 8 2 1 2 1 2 32

4 3 6 2 2 2 3 4 3 1 4 6 6 46

6 5 5 5 1 7 2 2 5 6 3 3 4 54

1 3 0 4 8 2 6 5 3 4 3 2 1 42

4 4 3 1 3 7 1 2 8 0 6 5 1 5 5 2 5 4 2 1 8 0 4 7 1 4 6 2 4 5 3 2 6 2 5 4 1 7 3 20 52 71 1 / T h i s d i s t r i b u t i o n i s b a s e d on t h e o p e r a t i n g e x p e n s e t o g r o s s s a l e s ratio

93 A pp en di x A; T a b le 2b: D i s t r i b u t i o n o f R a t i o s Among T h i r d s Groups by I n d i v i d u a l R e c o r d s ^ Number of R a t i o s i n V a r i o u s Groups R e c o r d Number Favorable Third 39 7 36 41 12 42 6 11 8 37 29 33 9 Middle T h i r d 25 35 32 40 28 3 16 10 43 22 2 21 5 U nfavorable Third 4 30 34 19 24 17 14 18 27 13 15 26 38

Favorable 3 3 7 8 4 0 4 2 6 8 1 9 J8 63 2 3 6 9 2 1 3 6 1 1 4 6 5 49

M idd le 5 7 3 3 3 7 5 2 3 3 5 0 J3 48 4 5 5 0 8 4 5 3 2 6 3 3 5 53

Unfavorable 3 1 1 0 4 4 2 7 2 0 5 2 1 32 5 3 0 2 1 6 3 2 8 4 4 2 1 41

7 1 3 7 3 1 6 5 0 5 5 1 3 6 2 8 1 2 7 2 2 7 4 0 3 1 7 3 Z 6 5 4 2 5 3 3 1 4 6 66 44 33 2 / T h i s ” d I i t r i b u t i o n i s b a s e d on t h e n e t m a r g i n t o g r o s s s a l e s r a t i o

94 A pp end ix A; Table 3: I n d i v i d u a l R atio F ig u res fo r C ooperative A sso c ia tio n s . I n c l u d e d i n P e r i o d I I «= 191*3 Code Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 13 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

Net M a r g i n G r o s s Marg i n Net S a l e s Net S a l e s .046 .045 .007 .015 .0 4 9 .0 2 7 -.002 -.039 .0 2 3 .0 1 5 .0 3 6 -.005 -.025 -.002 .916 .006 .013 .040 .024 .020 .0 1 5 .012 -.025 .005 *038 -.012 .014 .0 3 9 .020 -.170 .030 -.013 .010 -.0 5 8 .077 -.031 .004 .0 1 8 .022 •008

.129 .118 .0 8 9 .0 8 3 .1 3 9 .1 5 2 .0 67 .1 1 3 .090 .088 .1 3 8 .1 2 6 .066 .085 .1 1 1 .119 .130 .1 29 .150 .150 .106 *095 .081 .1 09 *133 *084 .0 6 8 .137 .107 .1 2 5 .1 4 6 .155 .141 *071 .128 .105 .1 5 9 .1 2 2 *084 .0 9 2

Ope O p e rrat a t i n gg EExp x p eennsseess Net Sa l e s .08 7 .07 7 .0 8 3 .103 .114 .1 28 .114 .184 .109 .074 .1 1 1 .1 4 4 .1 1 5 .1 5 2 .119 .1 2 6 .1 2 7 .1 1 1 .137 .1 40 .108 .109 .1 51 .1 32 .1 1 8 .1 2 0 .071 .116 .097 .2 95 .1 26 .21 9 .1 82 .156 .1 0 7 .140 .18 5 .132 .0 8 3 .0 9 3

& Wages SSaallaarriieess & Net Sa 1 es .052 .046 .0 5 6 .0 5 3 .074 .0 8 1 .053 .087 .0 4 8 .0 4 7 .0 6 3 .0 8 9 .067 .087 .073 .068 .0 8 1 .0 6 7 .0 7 5 .0 8 3 .0 67 .0 6 7 .0 8 2 .0 6 0 .075 .058 .0 4 5 .065 .0 5 6 .0 8 8 .104 .1 15 .109 .081 .0 66 .0 7 4 .0 9 5 .0 7 1 .0 4 7 .048

95

Appendix A 5 T a b l e 3: ( c o n ' t ) Code Number

Net M a r g in N et S a l e s

41 42 43 44 45 46 47 48 49 50

.0 0 1 .026 -.0 2 6 .0 2 0 .018 .038 .028 .006 .039 .0 2 9

Gross M argin Net S a l e s .0 9 7 • 142 .084 .1 7 2 .1 5 2 .128 .1 07 .093 .093 .0 9 7

O p e ra tin g Expenses Net Sa l e s .103 .1 3 2 .2 7 7 .158 • 144 .1 0 6 .082 .1 2 0 .077 .088

S alaries & Net Sa l e s • 068 .0 7 1 .0 9 3 .079 .085 .0 7 1 .060 .0 6 9 .050 .051

96 Appendix A 5 T abl e 3: ( e o n ' t ) Code Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

C u rren t A ssets Current L iab ilities 23.66 3.52 19.99 4.42 4.32 8.07 2.90 .9 6 4.92 3. 32 2.97 1.62 1.17 1.29 1.80 .90 1 .1 2 3 .8 3 2.97 3 .8 9 1.37 4.04 1.15 3.79 4.94 1.06 1 .0 1 2.79 3.15 .4 8 2.55 1 .0 2 .62 1 .0 1 4.57 1.16 9.31 2.51 248.81 2. 30

Cost o f Goods S o l d M erchandise Invent ory 22.34 15.89 21.56 14.37 8.94 10.35 24.19 5 .0 9 21.75 17.63 1 0 .0 5 23.25 9.05 10.24 7.58 14.96 2 3 .7 1 67.56 8.14 13.64 1 1 .4 2 10.14 7.74 5 .4 0 5.34 7.54 28.50 7.41 12.95 1.82 21.90 4.35 6.24 8 .6 0 7.09 14 .5 7 6.14 6.77 64.37 10.71

S upplies Sales Acco unts Receivable 4 7 .2 9 48.59 45.05 19.25 85.67 8.65 21.61 24.86 89.46 19.00 74.51 2 9 .0 6 38.82 10 3 .9 0 37.62 7 1 .8 8 27 .1 1 83.45 21.92 616.73 85.28 33.10 31 .27 33.49 15.68 9.02 85.79 23.25 14 .6 4 10.89 32.88 10 .7 1 1 1 .8 8 34.18 30.92 39 .00 11.26 104.88 38.72 9.07

Net Margin Current L iab ilities 13.320 1.641 1 .5 2 1 .5 6 2 1 .1 6 3 1.196 -.081 -.155 1.098 .5 7 8 1.013 -.093 -.238 -.015 .188 .064 .164 2.002 .4 8 3 1.197 .199 .4 1 0 -.191 .0 4 8 .7 8 5 -.057 .269 .704 .404 -.126 .8 38 -.042 .0 2 6 -.426 1.886 -.304 .166 .3 0 5 91.362 .1 47

97 App en dix A; T a b le 3s ( c o n ' t ) Code Number 41 42 43 44 45 45 47 48 49 50

C u rre n t A ssets Current L iab ilities

Cost o f Goods Sold Merchandis e Inventory

Supplies Sales A cco unt s Receivable

3.15 3.94 .97 23.95 2.43 70.98 4.84 1.26 2.81 14.54

4.37 8.69 8.69 13.03 9.34 6.88 15.94 7.65 18.18 17.94

32.71 12.77 5.43 7 0 8 .5 7 57.62 21.93 173.53 38.58 12.43 6 7 .1 8

Net M ar g in Current L iab ilities .0 2 0 .536 -.0 1 0 2.034 .3 3 6 13.042 2.022 .054 .690 3.910

98 A pp end ix A; Table 3* ( c o n * t )

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