Two Men Talking By Silos

Tax reform has raised many questions for cooperatives. Cash flow modeling can guide in-depth conversations that can help boards make strong strategic decisions.


Cash Flow Modeling Helps Cooperative Boards Manage Equities

  • Rebecca Smith
  • Jim Halvorsen
  • 4/9/2018

Many factors can trigger a review of how you manage your cooperative’s equity. Major acquisitions or dispositions, changes in strategic objectives, or adjusting growth plans might all raise questions that will demand some investigation in order to get answers. Cash flow modeling can guide the in-depth conversations that can help a board make strong strategic decisions. As the economic landscape changes, boards should assess the impacts on the cooperative.

Ask the right questions

Tax reform has raised a wide variety of issues for cooperatives, and although some are unsettling and confusing, it is healthy to have discussions about these topics. The following questions can help guide these conversations with leadership, board members, and the cooperative community.

  • What is the makeup of our cooperative — consumers or producers? How does this impact our patronage distribution philosophy?
  • What is the current objective of our equity management policy? Does this still hold true or do we need to update this based on recent changes in the cooperative or the industry?
  • What will our cooperative look like in the next 5 years, 10 years, or even 15 years? What are the capital needs, and will those needs be funded with debt or equity? What is the ideal relationship between patron equity and long-term debt?
  • How is patronage allocated and distributed? Do we use all qualified equities, nonqualified equities, or some combination of the two? For the qualified portion, how much is paid in cash to patrons? (The IRS requires a minimum of 20 percent.)
  • In what manner do we redeem equities: revolving fund, percent of all equities, or age of patron? Is the redemption period appropriate, or do we want to adjust it?
  • How much unallocated equities does our cooperative require?
  • Does a flat 21 percent tax rate impact any of these issues? Should we consider nonqualified stock? Can this improve cash flow?

Cash flow modeling can provide answers

Cash flow modeling provides you with a better understanding of the equity needs of your cooperative over time, and will help you make decisions today that are beneficial to your cooperative and patrons in the long term. Modeling should consider profitability, capital needs, interest rate, the cooperatives capital redemption policy, future acquisitions and dispositions, and the impact of tax reform (particularly tax rates and bonus depreciation). The benefit of cash flow modeling is that you can project the impact of today’s decisions into the future. Without it, decisions tend to be made with a shorter time frame in mind.

How we can help

One of the duties of a cooperative’s board is to make informed decisions regarding the direction of the cooperative. When discussing capital management, we keep cooperative principles in mind, in particular that the economic benefits of a cooperative should be returned to the owners, reinvested in the cooperative, or used to provide owner services. Ultimately, it is the board of directors that determines the strategic mix of this equity allocation, but with our experience in the industry and our modeling tools, CLA can help.

Cash flow modeling may seem like a monumental project, but it can improve your cooperative’s long-term vitality. CLA can help by performing or assisting you with cash flow modeling. We can then have strategic discussions with your board of directors and management based on your goals and our understanding of the industry.