The Second Leg of the Triple Bottom Line: Financial Return
Phil Kenkel
Bill Fitzwater Cooperative Chair
In my cooperative version of the “Triple Bottom Line” the first leg was ownership. Members value
ownership, but cooperative membership by itself doesn’t pay the bills. That is where the second leg
of the cooperative value package comes in: financial return. A cooperative member’s financial
return comes from cash patronage, less tax liability and retained patronage when it is redeemed. A
member’s financial return is simply their share of the cooperative’s profits. Profits are generated by
efficiency, cost control, and good strategic planning. Some luck with Mother Nature doesn’t hurt.
The value of profits to the members depends on the cash patronage rate and the equity revolving
period.
In a past newsletter I discussed the Goodwin formula which determines the return on equity that the
cooperative must generate to support a given revolving period and asset growth rate. Dr. Jeff Royer
(University of Nebraska) developed a similar model which also considers the rate of cash patronage.
The table below illustrates the return on equity required to maintain various cash patronage and
revolving periods. Higher rates of cash patronage and shorter revolving period require higher
profits. Cooperative boards and management must analyze whether they are generating sufficient
financial return at the member level and whether they can obtain the profitability needed to support
higher levels.
Patronage returns are a vital part of the cooperative triple bottom line. At times the patronage
returns that a cooperative can afford to distribute are not enough to satisfy their member/owners.
That’s where the third and final leg of the cooperative triple bottom line comes in. I’ll discuss it in
my next newsletter.
Cash
Revolving Period-Years
20
15
10
5
20%
10%
12%
16%
29%
30%
11%
14%
19%
33%
40%
13%
16%
22%
39%
*Assumes a growth rate of 5% with
constant capital structure
July 7, 2010