The purpose of a cooperative is to provide and distribute benefits to members based on their use of the services of the cooperative. Co-op benefits may include better prices for goods, improved services, a new market for goods, or a better source of inputs. These benefits also include receiving patronage refunds (also commonly referred to as patronage dividends), which is the distribution of net profits of the business based upon the use of the co-op’s services. The patronage refund may be in the form of payment or a written notice of allocation to the member’s equity account in the co-op.
At the end of the co-op’s fiscal year, the co-op’s board of directors calculates net profits for the year and decides how much to allocate to members as patronage refunds and the amount, if any, to retain as unallocated equity—this is often the amount of net profit attributed to business with nonmembers. The board also decides how much of the patronage refunds to distribute to members as cash payments and how much to retain as allocated equity. Because the co-op will need capital for operating expenses, unexpected events, and future growth, on average, only 30-40 percent of net profits are paid out as cash patronage refunds. The patronage refund amount for an individual member of a co-op is based upon the amount of business they have conducted with the co-op.
Here is an example to help illustrate the allocation of net profits and calculation of patronage refunds. In 2019, Cabbage Co-Op earned a net profit of $100,000. 90% of the cabbage marketed in 2019 was from members (owners) of Cabbage Co-Op. Cabbage Co-Op’s board of directors decided to allocate 90% of the net profits as patronage refunds to its members (retaining 10% as unallocated equity), and the board decided to pay 20% of the patronage refunds as cash and allocate the remaining amount. Samuel Culper marketed 5% of the total amount of cabbage marketed by members. Below is a calculation of patronage refunds for Cabbage Co-Op and Samuel Culper, and a chart to illustrate.
Total Patronage Refunds for Co-Op = 90% of $100,000 = $90,000
Total Cash Patronage Refunds for Co-Op = 20% of $90,000 = $18,000
Total Patronage Refund for Samuel Culper = 5% of $90,000 = $4,500
Cash Patronage Refund for Samuel Culper = 20% of $4,500 = $900
Total Allocated Samuel Culper’s Equity Account = 80% of $4,500 = $3,600
For assistance in developing a cooperative or questions about calculating patronage refunds for your cooperative, give us a call at 859-550-3972 or email us at kcard@kcard.info.