Got Enough Retained Savings?
By: Dave Thomsen, Partner | email
In the early days of cooperatives, the normal practice was to operate at break-even, and if you made a profit, the member business portion of that profit was allocated back to members. Little, if any, was retained. But if you ask a banker today, he’ll say, “you can never have enough retained savings.”
There has to be a happy medium.
Over the years we have seen cooperatives with allocation policies in place that led from little being retained, to retained amounts equal to regional investments– until the Farmland write down when everyone realized that if all regional equities were lost, all retained savings would be lost as well. The next goal was to increase retained savings to an amount equal to regional investments plus an “additional amount.” That’s basically where we are today. So, now we contemplate what that “additional amount” should be.
There may not be an easy answer to that question. You could do a complete turnaround and start allocating a higher percentage of your earnings, but that could have a negative impact on your balance sheet by reducing working capital and increasing cash requirements for future equity redemptions. Then again, you could continue on your present course and see where it leads.
Some of you have said you can’t divide up that concrete elevator you built, so retained savings should grow to an amount equal to regional investments plus fixed assets. We’ve also brought up the topic of non-qualified patronage dividends with many of you, whereas the balance sheet will basically remain intact while some of the non-allocated retained savings become allocated. But, you must then decide what to do with that equity as a part of your equity redemption policies– redeem or permanently hold? As we said, there is no easy answer; however, it may be time to start some serious discussion on the issue.
From new clients, to those we have been serving for over forty years, we have worked with you to build your balance sheets, including building retained savings. This will continue to be our goal as we continue to work together to answer the question “How much retained savings is enough?”
