Figure 1. The Relationship of Financial Indicators as
Observed Among Cooperatives (A: Total receivables and gross income; B:
total asset and net surplus; C: Total asset and Total equity/capital; D:
Paid up shares from members and number of members; and E: paid up shares
from members and retained earnings)
Figure 1 presents that there were few observed cooperatives with high
level of gross income and high level of receivables. Majority of the
cooperative have low level of gross income and low level of receivables.
This means that majority of the cooperatives tend to adopt a restrictive
policy in terms of granting credit to their members which also leads to
lower patronage of the members. As a result, the cooperatives operation
is minimized that often results to low generation of income. This
supports some literatures such as the findings of Ikechukwu and Nwakaego
(2015) and Mbula et al. (2016) that receivables have a positive effect
on firm’s financial performance and profitability which means that when
firms grant credit and implements good credit management strategy, the
firms generate profit. In this case, most of the cooperatives have low
level of gross income because they only grant low level of receivables.
This may indicate that the cooperatives tend to limit selling their
goods on credit or they restrict granting loans to their members
resulting to lower patronage from members and as a result they would
have low gross income. This could have happened because the management
could have been less innovative and they have strong risk aversion
(Lyani Sindani et al., 2016) which hinders them from granting credit or
loans to the cooperative members. Further, the result could also mean
that the cooperatives were not efficient in the management of their cost
of goods sold or cost of services which reduced their gross profit. This
could have been also a result of weak implementation of credit risk
management strategies that increased the cost of delinquent debt
resulting to higher cost of services and lower gross income (Lyani
Sindani et al., 2016). Also, the revenue or sales of the cooperatives
could not yield reasonable margin or profitability where the
cooperatives were not able to determine appropriate mark-ups or target
sales to cover the cost of goods sold or cost of services.
As stewards, the board of directors and the management tend to restrict
granting of credit or loans in which the principal (i.e members) could
not maximize the benefit of availing the services from their
cooperatives and the gross profit which can cover other expenses and
which could increase the net surplus/ income of the cooperative becomes
minimal. The stewards (i.e board of directors and management) may tend
to discourage their members to patronize their cooperative because they
tend to be restrictive in selling their goods in credit or in granting
loans to their members. The result does not affirm what Attom (2016) had
pointed out that the board of directors and the management can sell on
credit or grant loans while ensuring liquidity because it can improve
sales. Also, it does not affirm what Olando et al. (2013) had pointed
out that loan disbursement can positively influence growth of
cooperatives. In this sense, the cooperative stewards were not able to
meet the cooperatives financial objective such as increasing the gross
income by encouraging the members to avail of the credit services of the
cooperatives.
On the cooperatives’ net surplus/income and total asset, the result
presents that there were only few cooperatives with high level of net
surplus/income and total asset and most of the cooperatives have low
level of net surplus/income and total asset. The result manifest that
most of the cooperatives were not able to manage their resources
effectively resulting to lower level of profitability that were
generated from the utilization of the cooperatives assets. This
relationship could be explained by the study of Nadeem, et al. (2015)
and Burja (2011) stating that the financial performance of firms could
be expressed through return generated from the management of available
resources. Further, it can be observed that most cooperatives have low
level of total assets that can be utilized to generate greater net
surplus/ income. The result affirms the findings of Andarsari et al.
(2016) that the size of cooperatives have significant positive effect on
profitability. The result also indicates that the cooperatives were not
able to use financial strategies such as using debt or capital to
increase the cooperatives’ assets which may enable them generate higher
net surplus/income. The result does not conform to what Salawu (2009)
had pointed out that firms can utilize debt or equity to increase their
assets to generate greater profitability since it was found that there
is positive correlation between profitability with short-term debt and
equity. In this case, the stewards were not able to utilize effectively
the cooperatives’ assets to generate profitability. They maintained low
level of assets which only yielded minimal profit/surplus. They were not
able to procure more assets by implementing financial strategies such as
using debt or equity to generate funds for procuring more assets.
In terms of total asset and total capital/equity, there were only few
observed cooperatives with high level of total asset and total
capital/equity and it can be observed that most of the cooperatives have
low level of total asset and total capital/ equity indicating that most
of the cooperatives have slow growth. The result may indicate that the
cooperatives are not maximizing the use of the invested equity/capital
of the members to procure more assets for the member-shareholders’
benefit. The cooperatives may not have an optimal capital structure
(utilizing debt and equity) for the total asset to increase (Basit &
Hassan, 2017) and to improve their performance (Nadeem, et al., 2015).
Further, the result manifests the proportion of assets being utilized to
serve the member-shareholders is limited. As stewards, the board of
directors and the management did not implement financial strategies to
increase the cooperatives’ assets for them to provide greater services
to the members. For instance, they did not identify appropriate capital
structure in order to accumulate greater funds for the cooperatives’
assets to increase and for them to provide greater services to the
members. Moreover, the members are not being encouraged to pay more
capital for the cooperative to pool greater amount of funds for
procurement of more assets that are needed by the members. Ideally, if
members could reap greater benefits from their cooperative, it
corresponds that they would contribute more equity to manifest their
support to their stewards. However, the result reveals that the members
do not fully support their stewards and they are not willing to entrust
their resources thus they tend to limit their capital contribution. The
result may not adhere to the findings of Asratie (2014) that the
members’ perception on the economic benefits and asset creation must be
maximized and enhanced since it also determines the contribution amount
of the members.
In terms of paid-up shares from members and the number of members, it
can be observed that there were few cooperatives whose members are
paying high level of paid-up shares and most of the cooperatives have
low level of paid-up shares in spite that they have increasing number of
members. This means that the members are not willing to pay higher
amount of equity/capital and they tend only to contribute limited amount
because they are not confident to the management of their respective
cooperatives. Most of the members would take seriously the payment of
their subscribed share if they can observe increased benefits from their
cooperatives such as greater dividends, higher profitability, growth in
assets, and growth in equity. The board of directors and the management
can attract members when the members feel financial security and growth.
Further, when the members are involved in their cooperative, they become
dedicated and they would participate (contribute capital) in the
cooperative. Thus, the cooperative must encourage members’ cooperation
as owners and customers wherein the members support the cooperatives’
management through capitalization and to benefit from the services
offered by the cooperative (Soemodipoero, 2017). As stewards, the board
of directors and the management are not fully committed to pursue the
overall interest of the members which resulted to weak commitment of the
members to pay their paid-up shares. The members may not fully support
how the cooperatives are being run by their stewards thus they limit
their investment to their cooperative. This could result to the
cooperatives’ difficulty in accumulating funds to support its
procurement of assets and in sustaining business operation. This could
hinder the cooperatives growth and longevity since members’
participation is essential in an autonomous organization such as
cooperatives.
In terms of retained earnings and total equity/capital, the result
reveals that there were few cooperatives with high retained earnings and
high level of total equity/capital and most of the cooperatives have low
level of retained earnings and low level of total equity/capital. The
result may indicate that the cooperatives cannot maintain high retained
earnings because they lack effectiveness in their operation which
affirms the findings of Chalomklang (2010) that low retained indicate
lacking effectiveness in operation which causes loss or decrease in the
capital. The low retained earnings could also hinder the growth of
cooperatives since they were not able to generate additional source of
financing that are internally generated. The cooperatives may loss
opportunity to achieve growth because portions of the earnings of the
cooperatives are not being utilized for reinvestment. The result does
not adhere to what Thirumalaisamy (2013) have found that internally
generated funds in the form of retained earnings have enormously
contributed to financing growth of firms and it benefits existing
shareholders from the earnings generated from the reinvested profit of
the firm. Also, it negates what Andarsari et al. (2016) have stressed
that retained earnings are the main reserve to be used when the company
will make an investment for business development. As stewards, the board
of directors and the management were not able to utilize a portion of
the earnings of the cooperatives for reinvestment to accrue greater
wealth for the members. Also, they were not able to create value to the
shareholders in the form of book value because all of the profits were
distributed as dividend or they were not able to generate profit to be
reinvested. The result negates what Robb (2012) have pointed out that
the management must create value for the shareholders so that when they
move out from their cooperative, they could receive greater value.