CCST OF CRED’T EXTENSI N ZN
REI’RESEATAT EYE MICHIGAN 7
AGREC ULTLRAL CC‘OPERAT WES

N‘esis {or ihe Degree 0f M' A

MICHLGAN STATE COLLEGE
Donavon DMaCPherson
1940

WNWIIIHHIIUWHII”WWWWill/Hill

14173 _;

 

 

 

COST OF CREDIT EXTENSION IN REPREENTATIVE

MICHIGAN AGRICULTURAL COOPERATIVE

Cost of Credit Extension in Representative

Michigan Agricultural CooPeratives

A Thesis

SMDmitted to the Faculty of the Nflchigan
State College in partial fulfillment of

the requirements for the Degree of

master of Arts

Michigan.Stste College

by

Donavon Dale maoPherson

1940

LCKNOILEDGMENT

The author wishes to express his indebtedness to Professor
R. V} Gunn, Mr. Arthur Bewland, and mr. Gifford Patch, Jr. of
the Extension Section of the Economics Department, who aided in
the planning of the study; to the managers and bookkeepers of
the c00paratives who gave invaluable aid in securing the data
of the individual associations; to Dr. Henry Larzelere and Dr.
Harald S. Patton of the Economics Department who read the manu-
script and offered many valuable criticisms and suggestions; and
to the. muchigan State Farm.Bureau whose special graduate fellowship,
granted to the writer, during the academic year of 1937-1938, pro-

vided the financial assistance for this investigation.

TABLE OF Cm
P889
INTRODUCTION............................ 1
CHAPTER I. am DESCRIPTION OF COOPERATIVE . . . . . . . . . . 3
CW II. THEIWORTANCEOFCREITEXTENSION . . . . . . . . . . 8
Relationship of Credit Sales to Total Sales . . . . . . . . . . . 8
Factors Influencing Credit Extension . . . . . . . . . . . . . . 10
Nature of the Agricultural Income . . . . . . . . . . . . . . 10
Competition from Other Retailers . . . . . . . . . . . . . . . 21
CreditExtansionPractices . . . . . . . . . . . . . . . . . . . 25
Cash and Credit Sales to Members and Non-Members . . . . . . . 25
Assignments on Produce Marketed Through the COOperatives . . . 28
CollectionPractices ......................30
StatementsofAccount ....................30
mnagersEfforta.......................32
Converting Accounts Receivable into Negotiable Form . . . . .7 32
Assignments on Produce Marketed Through the CooPeratives . . . 34
The Effects of Credit and Collection Practices on Borrowing . . . 55
Conclusion on Credit Extension and Collection Practices . . . . . 37
CHAPTER III. COMPUTABIB COSTS OFEXTENDINGCREDIT. . . . . . . . . 39
Total Credit Coats '. . . . . . . . . . . . . . . . . . . . . . . 39
BachcountsIosses'.......................42
Imputed Interest on Receivables Outstanding . . . . . . . . . . . 46
Rate of Turnover of Accounts Receivable . . . . . . . . . . . 49

“eOfIndifidual‘ccountseeeesooeoooooeooe050

1V0

TIBLB OF CONTENTS (Continued)

Credit Administration Expenses . . . . . . . . . . . . . . . . .
Office Supply materials . . . . . . . . . . . . . . . . . .
Cost of Personnel Salaries . . . . . . . . . . . . . . . . .

Relationship of the Various Costs . . . . . . . . . . . . . . .

Comparison‘Iith Costs Reported in Other Studies . . . . . . . .

CHIPTER IV. CREDIT EXTENSION IN RELATION TO PROFIT MIRGIN AND
VOEUME OF'SALES . . . . e . . . . . . . . . . . . . .

Effects of Computable Credit Costs on Net margin . . . . . . . .
Indirect Costs and Disadvantages of Extending Credit . . . . . .
Low Patronage Dividends . . . . . . . . . . . . . . . . . .

- Disagreements and Dissatisfaction Because of Accounts . . .
Higher Costs of Good Purchased by the COOperatives . . . . .
General Handicaps of Excessive Credit . . . . . . . . . . .

Practicability of Changing to a Strictly Cash or Restricted
Credit P011cy O o O s o o e o e e e o o e e e o e e e a e O

Sumary of Effects of Extending Credit . . . . . . . . . . .

CHAPTER V. PmSIBILITIm OF ELIMINLTING OR MINIMIZING CREDIT
EXTENSION OF COOPERATIVES . . e . . . e . . . . . . . .

Strictly Cash Sales . . . . . . . . . . . . . . . . . . . .
Restr1Ctive Credit Praeticefl o e s o e e e e o o e e a o o o

Adherence to a Definite Credit Policy . .

O
o
o
e
o
o
O
O

Definite Responsibility for Credit Sales . . . . . . . .

Inducements for Cash Payments and Short Credit Periods .

Page
53
53
55
58

60

64
64
65
65
66
67

68

69

71

75
74
74
75
76

78

Table

1.

2.
3.

4.

5.

6.

7.

8.

9.

10.

12.

13.

14.

15.

16.

LIST OF TABLES

Sales of Farm.Products and Supplies by Sileichigan
COOperative Associations . . . . . . . . . . . . . . . . . .

Relationship of Credit Sales to Total Sales . . . . . . . .
Cash and Credit Sales to Members and Nan-Members . . . . . .

Relationship of Number of Statements of.Accounts to Number
of Credit customers 0 e e e a s e e e e s e e e o e o e o 0

Relationship of Credit Sales and Collections on Accounts to
Borrowing e e o e e o e e o e o o e e o o e e e e e e e e 0

Relationship of Credit Costs to Total and Credit Sales . . .

Relationship of Costs of Bad Accounts to Total and Credit

Sales 0 O O O O O O O O O 0 O O O O O O O O O O O O O C O 0

Relationship of Interest Costs on Receivables Outstanding
t0 TOtal and Credit $8198 0 e e o o e o e e e e e s e o o 0

Variation of Monthly Interest Costs at Nfllburg and Palmouth.
Average Age of Accounts Receivable . . . . . . . . . . . . .

Period of Unpaid Balances for’Sample of 100 Customers in
EQCh COOPGrative a e o s e o e s o e e e e e o o e e e e s 0

Relationship of Cost of Office Supplies to Total Sales and
Credit 38108 e e e a e e o o e e e e o e e . e e e s s o e 0

Personnel Time and Costs . . . . . . . . . . . . . . . . . .

Relationship of Personnel Costs to Total Sales and Credit

3819. o s o e e o e e o e e e o o e o e e e e e e e e e e a

Credit Costs Per 3100 of Total Sales and Credit Sales . . .

Comparison of’Studies on Credit Costs . . . . . . . . . . .

V1.

Page

26

51

55

4O

43

49

49

51

54

56

57
59

61

Figure
l.

2.

5.

4.

5.

6.

7.

8.

9.

LIST OF CHARTS AND GRAPES

Trading A3683 Of COOpBratives Studied e e o s e e e e e e e

Mbnthly Variations of Accounts Receivable at the Fruit
marketing COOperatives During 1937 . . . . . . . . . . . .

variations of Average Menthly Supply Sales by the Fruit
marketing COOPeratIVOB (1937) e e e e o a e e o e e e . o .

monthly variations of Accounts Receivable at the Potato
marketing Cooperative During 1937 . . . . . . . . . . . . .

Variations of Average Menthly Supply Sales by the Potato
marketing COOperatives (1937) e e o s e e e e e e e e . o o

Mbnthly Variations of.Accounts Receivable at the Grain and
reed COOperatives During l937 . . . . . . . . . . . . . . .

Variations of Average Mbnthly Supply'Sales by the Grain and
Fde Cooperatives (1937) o e a a o a o e e e e e e o e e a

Credit Costa (Dollars) Per 3100 of Total Sales . . . . . .

Credit Costs (Dollars) Per $100 of Credit Sales . . . . . .

vii.

page

12

l5

15

16

18

19
41

41

INTRODUCTION

In Michigan, more than 200 farmer-owned cooperative associations
are now selling farm supplies to their members and patrons according
to a study made in 1937 by the Farm Credit Administration. These co-
Operatives sold more than $14,000,000 worth of farm.supplies during the
preceding year. On the basis of sample investigation, it can be estie
mated that about 60% of these sales were for credit. As a result of
these credit sales, cooperatives carried about $2,000,000 in accounts
receivable.

Extending credit and collecting accounts bring about many problems
and often cause a great deal of trouble for managers and boards of dir-
ectors of cOOperatives. In fact, complete failure of many c00peratives
can undoubtedly be traced to unsound credit practices.

This study was undertaken in an attempt to clarify the credit pro-
blems by analysis of the credit practices of representative farmers'
cOOperative associations in Michigan. This method of investigation was
chosen because it was thought that a detailed and intimate analysis of
the credit situation of a few representative coOperatives would be more
informative and suggestive than a statistical survey of the credit Oper-
ations of Ruchigan cOOperatives in general.

The associations studied were chosen to represent organizations
operating in the principal farming areas in the state. The following
were selected: two neighboring fruit cooperatives in the fruit belt

of southwestern Michigan; two members of the Michigan Potato Growers

Exchange operating in the potato, hay, and cattle area in the north-
western part of the lower peninsula; and two grain and feed c00perativee
Operating in the southeastern part of the state in the general farming
area which borders on the Detroit milk shed.

All of the data used in this study were obtained by visits to the
associations concerned. An average period of two weeks was spent at
each association in compiling the data from the records and financial
statements and in interviews with managers and clerical employees.

In the following chapters the subject matter of the study is pre-
sented in three parts. Chapters One and Two are concerned with an
examination of the nature of the credit problems and the practices
followed by the respective associations. In Chapter Three an attempt
is made to measure the cost of extending credit in the coOperativee
studied. Finally, in Chapters Four and Five attention is given to the
feasibility of alternative sales policies and practices designed to

minimize the credit problems.

cm I
GENERAL DESCRIPTION OF THE COOPERATIVE

All of the six cooperatives included in this survey were organized
primarily as marketing agencies for fanners' produce; they later took
on the selling of farm supplies as a sideline. In recent years, how-
ever, the farm supply business has become increasingly more important.
In four of the six c00peratives, during the period studied, the value
of the farm supplies sold exceeded the value of the farmers' produce
marketed as indicated in Table 1.

The Dexter COOperative Company is located in Dexter, Iashtenaw
County. In its trading area, which is in the central Michigan general
farming area and partially in the Detroit milk shed, fem income is
principally from dairying supplemented by corn, wheat, beef cattle,
sheep, etc. During the fiscal year of 1937, this association did a
total net business of $125,644 of which $110,881 or 88%, was retail
sales of supplies and $14,763, or 12% was wholesale sales of grain.

In additionvto the patronsf grain which was marketed the cooperative
purchased approximately $3,100 worth of other grain which was sold at
retail as feed and seed.7 The association, therefore, acted as a local
market for about $17,900 worth of farmers' produce.

The Howell Cooperative Company is located in Howell, Livingston
County. The agricultural income in its trading area is similar to that

of the Dexter c00perative in that it is from dairying and from general

5

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Michigan State College , Exte nsion Bulletin l:;, are :bsr, l;;.,
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farming. During the twelve-month period of December 1, 1936 to November
30, 1957 this cooperative did a total net business of $212,752 of which
$l48,553 or 70%, was retail sales of supplies, and $64,219 or 30%, was
wholesale sales of flour. The flour sold to wholesalers was from the
cooperative's own flour mill which is the only cooperative milling plant
in the State of Michigan. These sales do not represent the actual value
of the farm produce marketed since the total cost of the wheat was less
than the sales value of the flour. Some grains were purchased locally

for feed and seed supplies.

Table 1. Sales‘ of Farm Products and Supplies by
Six Michigan Cooperative Associations

.A‘

 

Cooperative Sales of Farm Products Retail Sales Per Cent Total

 

Fruit Potatoes Grain of Supplies Sales
Colour: 8124 ,319 8108, 001 46 .5 $232 , 320
Nhlburg 86,416 82,406 48.8 168,822
Ellsworth $17,551 $522 55,926 74.9 71,979
ralmouth '31,671 2,874 163,092 82.6 197,557
Dexter 14,763 110,881 88.0 126,644
waell _ 64,219 148,583 70.0 212,752

 

 

* Sales rcpresent the volume of business for the fiscal year of each
association.
The Falmouth CoOperative Company is located in Falmouth, Missaukee
County. In its scale of Operations this association is different from

the other-five studied. Each of the others Operates a single place of

business while ralnnuth.0perates two branches at McBain and.Mbrrit in
addition to the central station. The McBain branch was obtained recently
by the purchase of the assets of the bankrupt McBain Cooperative Company.
It is Operated as a regular branch of the Palmouth COOperative and carries
on all of the lines of business of the main organization. The merrit
branch was acquired smmewhat earlier than the MhBain branch. Its business
is principally in hardware supplies. Potatoes, hay and cattle are the
principal sources of farm income in the cOOperative's trading area. In
the period of July 1, 1937 to June so, 1938, the total sales of the three
stations was $197,537 of which $163,092 or 82.6% was retail sales of farm
supplies, $31,571 or 16% was sales of potatoes marketed and $2,874 or
1.4% was sales of beans:marketed. The farm produce was sold primarily
through the.Michigan Potato Growers Exchange.

The Ellsworth Farmers Exchange is located in Ellsworth, Antrim County.
In its trading area potatoes are the principal source of farm income;
other income is from the sales of cherries, dairy products, beans and
cattle. During the fiscal year, July 1, 1937 to June 30, 1938, the total
sales were $71,979 of which $53,936 or 74.9% was retail sales of supplies
and $17,531 or 24.4% and $52 or 0.7% was sales of potatoes and beans
respectively. As with the Falmouth association, the farm produce was
sold largely through the Michigan Potato Growers Exchange.

The mulburg Growers Exchange is located at mulburg Station, Benton
Harbor, in Berrien County. In its trading area fruits, melons and
tomatoes are the important sources of agricultural income. During the

calendar year of 1937 total sales were #168,822, of which $82,406 or

or 48.8% was retail sales of supplies and $86,416 or 51.2% was whole-
sale salesof apples, peaches and melons. .111 farm produce was sold
directly to wholesalers and canners.

The Coloma Fruit Exchange is located ianoloma, Berrien County.
As with the Milburg cooperative, fruits, melons and tomatoes are the
important sources of farm income. Por the calendar year of 1937 total
sales were #232,320 of which $108,001 or 46.5% was retail sales of
supplies and $124,319 or 53.5% was wholesale sales of fruits and melons.
hpples, peaches and melons were sold directly to wholesalers and canners.

The farm supplies sold by the individual cOOperatives varied con-
siderably as a result of the needs of the farmers in the cOOperatives'
trading areas. For the Howell and Dexter cOOperatives, feeds, fertilizers,
coal and building materials were the most important supplies sold. For
Palmouth and Ellsworth, feeds, fertilizers, coal and petroleum products
had the greatest sales volume. Milburg and Colonm.sold principally
fertilizers, spray materials, fruit packages and feeds. All six of the
cOOperatives are active members of the Michigan Farm Bureau Services
and consequently purchase a considerable prOportion of their supplies
from that organization; in addition to the Farm Bureau products each of
the cOOperatives handle other lines of supplies. Howell, Palmouth and

Milburg sell farm machinery.

CHKPTER II
THE IMPORTANCE OF CREDIT EXEENSION
Relationship of Credit Sales to Total Sales

The importance of credit extension to the six cOOperatives is
indicated by the fact that they made an average of 64.4% of all supply
sales on credit, varying in individual cases from.48.7% to 76.4%.as
shown in Table 2. The items, total sales, cash sales, and credit sales
as used here and in the balance of this thesis refer only to sales of

supplies; they do not include the sales of farmbproduce marketed.

Table 2. Relationship of Credit Sales to Total Sales

 

 

 

 

COOperative Tbtal Sales Credit Sales Ratio of Credit
Sales to Tetal
Sales
Coloma 3 108,001 852,600 48.7%
Milburg 82,406 48,323 58.6
Ellsworth 53,926 29,395 54.5
Falmouth 163,092 108,345 66.4
Dexter 110,881 84,676 76.4
Howell 148,533 106,126 71.4
Average $‘ 111,140 $ 71,577 64.4 :3

 

Apparently the extension of credit had some effect upon the volume
_of sales. The Coloma, Hulburg and Ellsworth cooperatives had both
credit sales ratios and sales volumes below the averages of the six
cOOperatives. 0n the other hand the Falmeuth, Dexter and Howell cOOper-
atives had credit sales ratios and sales volumes above the averages.
However, even though there was a relationship between sales volume and
the percentage of sales made on credit for the six associations as a
whole, this relationship was not of great importance for the individual
associations. For example: The Coloma cOOperative had a credit sales
ratio of only 48.7% and a total sales volume of $108,001; while the
Dexter cOOperative had a much higher credit ratio of 76.4% and only a
slightly larger sales volume of $110,677. The Milburg cOOperative had
a credit sales ratio of 58.6% and a sales volume of $82,406; while the
Ellsworth cOOperative had a slightly smaller sales ratio of 54.5% but

a much smaller sales volume of $53,926. This point may be illustrated
in another way. The Falmouth cOOperative had the largest volume of sales,
$163,092, with a credit ratio of 66.4% which was slightly more than the
average credit ratio of 64.4%; while the Coloma cOOperative, which had

a sales volume Just below average of $111,140, had the lowest credit
ratio of 48.7%.

These differences do not nullify the managers' conclusions that the
ratio of sales made on credit affects the total volume of sales. The
differences do indicate that while there was a general relationship be-
tween the volumes of sales and the ratios of credit sales in the six
cOOperatives, the individual sales volumes were not prOportional to
the credit ratio. Evidently there was no direct correlation between the
percentage of sales made on credit and the total volume of sales for each

individual cooperative.

10

From the above contrasts and.examp1es, it may be seen that factors
other than sales volume must be considered if the credit situation is to
be understood. These factors are the nature of the agricultural income
in the cOOperative's trading areas, competition from other retailers,
and the cOOperatives' credit extension and collection practices. They

are discussed in detail in the following sections.
Factors Influencing Credit Extension

Nature of the Agricultural Income

 

Types of farm supplies sold and the nature of the agricultural income
in the cOOperatives' trading area were generally accepted as causes of
the credit situations in the various cOOperatives. The managers of four
of the six associations maintained that these factors peculiar to their
own organizations were the important causes of the high ratios of credit
sales. Analysis of the statistics of the various associations indicate
that while these factors were important, they were not the deciding fac-
tors in bringing about the particular credit conditions in the individual
associations.

Fruit marketing Cooperatives. The business of the fruit marketing
cOOperatives was based upon two main characteristics. 0n the one hand,
apples, peaches, cherries, melons and tomatoes were the only important
sources of cash income for the farmers in their trading areas. This
income was highly seasonal, realized almost entirely in the five months
fromrhugust through the following January. Income from the fruit sales

was realized principally during the months of December and January.

11

0n the other hand, the farm supplies of spray materials, fertilizers,
and fruit packages needed for producing and marketing these products were
purchased entirely in the seven months of April through October. These
three commodities combined with feeds constituted about 80% of the total
sales of the fruit exchanges during the period studied. Figure 3 shows
the variations in sales of these principal commodities. Sales of feeds
were rather evenly distributed throughout the entire year, being heaviest
in the months preceding harvest. Fertilizer sales were greatest during
March,.hpril and may, and some sales of fertilizer were made during the
summer months. Spray material sales which began in march, were greatest
in May, and continued in decreasing volume until late in September. Sales
followed the seasonal nature of fruit farming. Sales of fruit packages
were large during the period of June through October when the bulk of
the fruit and produce crOpe were harvested.

Menthly variation in sales on credit show that the fruit farmer's
requirements for supplies were the heaviest during the months of march
through August when he had little income. Reference to Figures 2 and 3
indicatetthat balances of receivables varied directly as the credit sales.
It would be logical to conclude on the basis of the seasonal income of
the farmers and the seasonal sales of supplies that the percentage of
credit sales would be very high in the fruit marketing cOOperatives.
However, a study of the data shows that the Coloma and Milburg asso-
ciations made only 48.7% and 58.4% respectively of their sales of farm
supplies on credit. These percentages were considerably below average
of 64.4% for all six cOOperatives. The cause of this will be explained

in a later section.

12

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14

Potato marketing,Cogperatives. The business of the potato marketing
cOOperatives was comparable to that of the fruit marketing cOOperatives
in that the important source of income for the farmers was from.the sale
of a seasonal product-~in this case, potatoes. Other income was from.the
sale of cherries, beans, dairy products and cattle. Here, as with the
patrons of the fruit marketing cOOperatives, farm.income was largely
limited to the relatively short period of the year when the principal
crOp was marketed. 9

Feeds, fertilizers, petroleum products, and coal were the principal
supplies sold by the potato associations. Together they accounted for
about 75% of the total credit sales. ubnthly sales of‘these commodities
are indicated in Figure 5. A significant point shown by this chart as
compared to that for the fruit cOOperatives is that total credit sales
of the potato cOOperatives were more evenly distributed throughout the
year because the principal commodities had varying and.more or less
complementary seasonal demands.

Feed sales did not fluctuate to any large extent during the year.
Fertilizer sales were made from April to September with the greatest
sales in may. Sales of petroleum.products were comparatively even through-
out the year with greatest volumes in the threshing months of August,
September and October, and smallest volume in the winter months. Sales
Of coal were made almost entirely during the period of September through
February when there was need of fuel for heating; the large volume of
sales began in September because customers were purchasing part or all

of a winter's supply at that time.

15

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17

These varying seasonal sales tended to keep credit sales and the
accounts receivable fairly even throughout the year. Considering the
seasonal nature of the farmers' income and the fact that the two co-
Operatives do a very comparable type of business, it would be concluded
that credit sales would be high and about equal. Yet Falmouth made
66.4% of its commodity sales on credit, while Ellsworth made only 54.5%
of its commodity sales on credit. Falmouth was near, and’Ellsworth
below the average of 64.4%.

Grain and Feed Cooperatives. The business of the grain and feed
cOOperatives was based on the agriculture of their trading area. Dairy
products and general farming products such as wheat, corn, potatoes,
beets, cattle and sheep were the nmportant sources of income for the
farmers. Since dairy products were the most important, most of the
farmers had a fairly steady income in the form.of semiemonthly or monthly
Hulk checks.

Feeds, coal, building materials and fertilizer were the principal
commodities sold by the two grain and feed cOOperatives. Together, these
commodities accounted for about 76% of the total credit sales. Figure 7
indicates that in the feed and grain cooperatives, as in the potato
marketing cooperatives, seasonal demand of the four main commodities
were at different periods of the year and tended to keep total credit
sales rather evenly distributed throughout the year.

Feed sales were greatest in the winter and spring months reflecting
the need to suppliment home grown feeds until spring pastures could be
used. Coal sales were high during the fall and winter months and low
during the spring and summer months, following the seasonal need for

heating fuel. Building materials sales were largest in the late spring

18

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19

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20

and early fall, and smallest during the winter. Increased sales in
October were caused probably by the fact that farmers had more time

to build during that month. Fertilizer sales were high in the spring
and fall months; the large purchases in September being associated with
fall plowing.

These four principal types of supplies did not have the same seasonal
fluctuations in demand. Coal and feed sales were generally greatest in
the fell and winter months; and building materials and fertilizer sales
were generally greatest in the spring and summer months. The result
was that total credit sales were rather evenly distributed throughout
the year. This situation tended to keep accounts receivable from vary-
ing greatly at different times of the year as indicated in Figure 6.

Considering the relatively stable income of the farmers, it would
be expected that the percentage of sales made on credit would be rather
low. Here.as in the fruit marketing coOperatives, the reverse was true.
Dexter made 76.4% of its sales on credit; Howell made 71.4% of its sales
on credit. These percentages were much higher than the average of 64.4%.

The conclusions on the relationship of the nature of the agricultural
income and credit sales can be smsrized as follows: the percentages of
credit sales in the fruit marketing cOOperatives and the grain and feed
cooperatives were the opposite from.that which would be eXpected consider-
ing the flow of agricultural income in the trading areas. The percentage
sales on credit by the two potato exchanges varied nearly 12%, while the
nature of the agriculture in their trading area was almost identical.-

Therefore, if these six cOOperatives are representative, the nature and

21

seasonality of the agricultural income in their trading areas would not

appear in itself to be a deciding factor in determining credit practices.
Competition From Other Retailers

‘1 second factor considered of importance in determining credit prac-
tices of the cooperatives was the competition from.other retailers of
similar farm.supplies. The effect of competition upon credit extension
could not be determined by statistical analysis and so had to be largely
based upon the Opinions of the several managers. .Lll six cOOperatives
had.competitors and most of the managers recognized competition as a
reason for extending credit.

managers tended to look upon their specific credit practices as some-
thing forced upon them by their competitors. Whether or not this was
true is a controversial subject. The cooperatives may have been instru-
mental in establishing the credit practices of all retailers of farm
supplies in their respective trading areas. Under such circumstances
the manager would not be justified in maintaining that liberal credit was
forced upon his association. In no instance would any manager of any
of the six cooperatives admit that his cooperative took the lead in
granting liberal credit, yet in their efforts to maintain sales volume,
cooperatives may have granted liberal credit terms. If this was true,
the response of competitors to the coOperatives credit policy would be
to grant even more liberal credit.

In some instances credit practices were not determined by either
the coOperative or its competitors, but were rather the result of the

credit habits of the customers. In other words, credit in many localities

to

was more or less a custom--credit extension was accepted by customers as
a right and necessity. Under these circumstances it would have been nec-
essary to offer unusual cash inducements or to re-educate the customers
before the present credit situation could be corrected.

These generalizations applied.more or less to all six cOOperatives
studied. There were, in addition, certain factors that applied to the
individual associations.

Fruit Mbrketing_Cooperatives. Coloma and Milburg, the two fruit
marketing cOOperatives, had competition not only from private dealers
but also from other fruit marketing cOOperatives such as those at Benton
Center, Sodus and Watervliet. In fact, since the two cOOperatives are
but six miles apart, they were competitors of each other. The importance
of competition was lessened in these associations by a characteristic
of their business. The fruit cooperatives were organized primarily as
fruit-marketing associations and not as retailers of farm supplies;~
fruit marketing was the most important phase of their business. To the
farmers who sold fruit through the association, this marketing function
was of great importance and tied them very closely to the association.
FUrthermore, members were penmitted to buy farm supplies against their
fruit delivery accounts.1 These factors made the cooperatives less sus-
ceptible to competition from other retailers. To non-members, who could
not market produce through the cooperative and who did not receive pat-
ronage dividends, the cooperatives sold supplies on the same basis as

would any other retailer. In the fruit cOOperatives, competition can be

 

1
See pp. 28-89

considered as an important factor in determining credit practices toward
non-members, but cannot be so considered for members who market their pro-
duce through the same organization.

Potato Marketing Cooperatives. The Ellsworth association had direct

 

competition from one other retailer of general farm supplies and several
other retailers of petroleum products. In addition there was some com-
petition from cOOperatives and private retailers in neighboring towns,
Here, as in the fruit cOOperatives, the cOOperative had a competitive
advantage in that it provided the service of marketing of the farmers'
produceo-in this case, potatoes and beans. This marketing service was
offered to all farmers on an outright purchase and resale basis. Within
the immediate trading area, competition usually had considerable effect
upon prices. However, it has not governed credit practices since the
Ellsworth association went on a restricted credit basis in the year fol-
lowing this study while its competitors continued to sell on liberal
credit terms. '

Competition at Falmouth was different from.that of any of the other
cOOperatives. This association operated two branches in addition to the
central station. These branches were Operated almost entirely independently
of the central station and so followed different credit practices. At
Falmouth and the merrit branch there was no direct competition from.pri-
vate retailers who sold farm supplies and offered potato marketing service
to the farmers. At McBain there were two competitive dealers who sold
all the kinds of the farm.supplies handled by the cooperative and offered

the same marketing services; there were also two other dealers in petroleum

products who operated delivery trucks. The competition at McBain was
strong and was a factor in determining credit practices. This was not
the case at Palmouth and Msrrit.

Grain and Feed COOperatives. At the Howell and Dexter associations
competition was stronger than.at the other cooperatives. Both had several
competitive private retailers in their trading areas selling farm sup-
plies, coal and building materials. This situation was particularly
noticeable at the Dexter association because of competitive sales of
coal and building materials in Ann Arbor and other even more distant
places. To these associations, competition was a real problem.and had
a definite effect upon their credit practices. Credit, as granted by
the cooperatives, may have been more or less liberal than that of the
private retailers. However, fear of loss of business to competitors
has a considerable effect upon the associations' terms for credit.

The importance of the competitive factor is indicated by the per-
centages of total sales that were made on credit. The Coloma and Milburg
and Ellsworth cooperatives, which were not strongly affected by come
petition, had the lowest prOportion of credit sales. The Dexter and
Howell cooperatives, which had strong competition, had the‘highest pro-
portion of credit sales. .Lt the Falmouth association the competitive
factor apparently did not govern the extension of credit.

MOst important of all factors controlling credit practices in all
six cOOperatives was the managers' Opinions of what constituted a safe
credit risk. This factor is discussed in further detail in the follow-

ing section on credit practices of the various associations.

25

Credit Extension Practices

The six cOOperatives did not follow a definite, practical set of
rules and regulations to govern all credit sales. In the actual ex-
tension of credit, however, there were some limitations which were ap-
plied in varying degrees to all patrons. Credit extension, as mentioned
previously, was based principally upon the manager's estimation of the
credit rating of each individual purchaser.2 Since this limitation was

necessarily a matter of Opinion, wide variations of credit practices

appeared in the individual associations.
Cash and Credit Sales to Members and Non-Members

Credit sales were not limited by amount or time to either members
or nonemembers although, generally, credit terms to members were more
liberal than to non-members. managers expressed the Opinion that be-
cause members had an active and financial interest in the cOOperative
they were less likely to abuse the credit privilege by allowing accounts
to become too large or to remain unpaid for too long. In short, members
were considered to be better credit risks than non-members.3

Credit sales to nondmembers were generally limited on the same basis

that a private retailer would limit sales to his customers. managers

 

v

2 The Howell cOOperative belonged to the local Credit Bureau but granted
credit to farmers with low credit ratings when the manager thought
they were safe risks.

3 This conclusion was borne out. In the study there was but one instance
of a bad debt loss from.a member's account.

25

explain this as a result of the fact that non—members had no direct
interest in the cOOperative and were not particularly concerned with

its success or failure. The principal reason that non-member patrons
purchased from the COOperative rather than private retailers was that

the COOperative offered lower prices in the form of patronage dividends.4

Because of this factor the non-members were considered to be less secure

credit risks than the members.

Table 5. Cash and Credit Sales to Members and Non-members

 

 

 

COOperative Members Non-Eembers

Cash Credit Ratio of Cash Credit Ratio of

Sales Sales Credit Sales Sales Sales Credit Sales

to Cash Sales to Cash Sales
Coloma $20,514 321,705 1.1 : 1 $34,887 350,895 0.9 : l
Kilburg 7,854 29,077 3.7 : 1 26,229 19,246 0.7 ; l
Ellsworth 7,146 6,550 0.9 : 1 17,585 22,845 1.5 : 1
Falmouth 25,116 54,057 1.4 : 1 29,581 74,5C8 2.5 : 1
Dexter 5,901 15,276 2.6 : 1 20,504 69,400 5.4 : 1
Howell 29,607 47,515 1.6 : 1 12,800 58,611 4.6 ; 1

 

Average $16,051 $25,693 1.6

O.
3..
=6;-
(\D
01
‘
01
01
1.4

$45,884 1.9

H

 

 

Table 5 shows the variations of cash and credit purchases of both

members and non-members. The significant figures in this table are not

 

4 Even this did not apply to all of the COOperatives. The fruit COOper-
atives have a closed membership and do not pay patronage dividends to
non-members.

27

only the volume of sales given in columns 2, 5, 5 and 6 but also the
ratio of credit sales to cash sales given in columns 4 and 7.

Fruit MarketiégfiCOOperatives. As indicated above the two fruit
marketing cOOperatives sold similar farm supplies and marketed similar
farm produce.5 The Coloma cooperative sold to members $21,705 worth
of farm supplies on credit and $20,514 worth of farm supplies for cash.
The ratio of credit sales to cash sales was 1.1 to l. The 1111ng
cOOperative sold to member $29,077 worth of farm supplies on credit
and $7,854 worth of farm supplies for cash. The ratio of credit sales
to cash sales was 3.7 to l. The difference in the ratios of 1.1 and
5.4 indicate that much more liberal credit was given to members at
Milburg than at Coloma. For non-members the ratios of credit sales to
cash sales were 0.9 to l and 0.7 to l at Coloma and Milburg respectively.
This indicates that there was little difference in the practices of extending
credit to the non-members.

Potato Marketing Cooperatives. The Ellsworth and Falmouth cOOper-
atives although located at a considerable distance from each other sold
the same types of fam supplies and marketed the same types of farm pro-
duce.6 The ratios of credit sales to cash sales at Ellsworth were 0.9 to
1 for member and 1.3 to l for non-members; at Falmouth these ratios were
1.4 to l for members and 2.5 to 1 for non-members. This indicates that
the extension of credit at ralmouth was more liberal to both members and
non-members than it was at Ellsworth. These figures also indicate that

in both associations the credit privilege was more freely used by non-members

than by members.

5 See pp. 6-7
6 See pp. 5-6-7

28

Food and Grain cOOperatives. The Dexter and Howell cOOperatives
sold the same general types of supplies with the exception that Dexter
sold relatively more building supplies.7 For Dexter the ratio of credit
sales to cash sales was 2.6 to 1 for members and 3.4 to l for non-members.
For Howell these ratios were 1.6 to l for members and 4.6 to l for non-
members. These ratios indicate that nmch more liberal credit was granted
to members at Dexter than at Howell, but more liberal credit was extended
to non-members by Howell. They also indicate that at both associations

a smaller percentage of purchases on credit was made by members than by

non-members.
Assignments on Produce Marketed Through the cOOperatives

The use of assignments on fem produce marketed also had a direct
effect upon the credit practices of the fruit marketing associations and
an indirect effect upon those of the potato marketing associations.

At the fruit marketing associations many of the members' accounts
were very large during the spring and winter months. These associations
allowed this condition because all fruit marketed through the cooperatives
was handled on a definite assignment basis. Under this system the cOOper-
ative had and exercised the right of deducting from the income for the
sale of fruit the amount owed to the cOOperative by the grower. Only the
members who marketed fruit on this basis were allowed to purchase large

amounts on credit. Since the ratio of credit sales to cash sales for

309 pp. 3-4-7

members was 3.4 at Milburg and only 1.1 at Coloma, it is apparent that
this practice was followed to a greater extent at Milburg than at Coloma.
The fact that the ratios of credit sales to cash sales for non-members
varied only 0.2 indicates that credit terms were much the same for those
who did not market fruit through the cOOperatives.

The potato marketing cooperatives did not use direct assignments on
the potatoes marketed for members and non-members. However, their market-
ing activities affected their credit practices because producers made
verbal agreements to settle accounts out of income from the sales of
potatoes. In addition, the managers of both cOOperatives made active
efforts to encourage other patrons to settle accounts in this way. Since

these associations handled potatoes for both members and now-members,8

the marketing Operations affected the extension of credit to both groups.
In spite of the use of this method of collecting accounts, payments from
sales of potatoes were of minor importance. Proof of this fact is in

the ratios of credit sales to cash sales which indicate that more liberal
credit was granted to both member and non-members at Palmouth than at
Ellsworth.

Marketing Operations at Dexter and Howell were of minor importance
in determining credit practices because these associations were of a more
strictly producer-consumer type in their relation to patrons. They did
act as a marketing agent to same extentby purchasing grain from farmers
to be used for flour manufacturing at Howell and for feed supplies at

both associations. In addition, each of the cOOperatives marketed some

.7—

8 Potatoes were marketed for non-members whenever storage space was adequate.

 

30

wheat.9 These grains, however, were secured by outright purchase and were
very small in dollar volume and importance to the farmers as compared to
the marketing functions of the fruit and potato marketing cOOperatives. In
some instances farmers who sold to Dexter and Howell cOOperatives did
settle their accounts by book transaction but as a whole marketing had

little influence on credit practices.
Collection Practices

The collection practices of the six cOOperatives were comparable to
those for extending credit in that there was no set of rules and regul-
ations that applied to all patrons. Three general methods were commonly
used for collecting accounts: sending statements Of account to patrons,
active collection efforts of the managers, and converting accounts re-
ceivable into negotiable form. In addition to these three general col-
lection practices, the fruit marketing cOOperatives used direct assign-

ments on fruit handled for the patrons.
Statements of Account

Statements of account in widely varying numbers were used by all six
cOOperatives as a collection device. In five associations they were sent
only to those purchasers whose accounts were considered delinquent or
likely to become delinquent in the near future. Table 4 shows that an
average of about three statements per year were sent to purchasers who
bought on credit.‘ Ellsworth, Falmouth and Howell sent less than three,

while Dexter, Coloma, and MHlburg sent more than three.

 

9 See pp. 3-5

Only the Dexter cOOperative sent statements each month to all
purchasers that had unpaid balances. Actually only about eight state-
ments per year were sent to each credit purchaser by this organization
because some customers did not have balances payable to the cOOperative

at the end of each.month.

Table 4. Relationship of’Number of‘Statements of
Accounts to Number of Credit Customers

 

 

 

 

COOperative Number of Number of Statements Number of Statements
Credit Rendered During per Credit Customer
Customers the YearAA (Average)
Coloma 800 2610 3.3
.Milburg 350 1750 5.0
Ellsworth 391 1050 2.7
Palmouth 1950 4520 2.3
Dexter 308 2540 8.3
noun 910 . 5075 5.4
Average 755 2591 5.3

 

44.__ _.

The other cOOperatives sent fewer statements because they did not
notify all customers who had unpaid balances and, perhaps, because the
average customer had unpaid balances over a shorter period of the year.
The figures in column two of Table 4 are for all customers and patrons
who made credit purchases during the year whether they had balances at

the end of one or all months. For example, the Milburg association,

32

which rendered an average of five statements per credit customer per
year, sent out nearly 300 during the months of may and June and mailed
less than 75 during January and February. Statements were therefore,
sent each month to nearly all customers with unpaid balances. Only a
record of the number of statements and number of active accounts for each

month would show the exact ratio of statements to accounts receivable.

manager Efforts

 

The second method of collecting accounts that was used by all six
cOOperatives consisted of the efforts of the manager to collect overdue
accounts by personal contacts. Managers of five associations estimated
that they spent the equivalent of one to three days each month away from
the office making collections. The Dexter association's manager spent no
time away from the Office but actually he spent more time collecting
accounts than did any other manager. Several evenings of each week, on
his own time, and at his own expense, he contacted a number of customers
whose accounts were overdue. His total time spent in this way exceeded
four full days each month. In addition to these contacts made away from
the office, each of the managers made active efforts to collect accounts
:receivable from those customers who came into the Office.

managers were, in many instances, able to collect accounts from
Ixatrons who paid little or no attention to statements of accounts. They

Inaintained that their efforts were the most effective of all the collection

Practices.
.Sgpnverting Accounts Receivable into Negotiable Form

‘A third collection practice used somewhat by the cOOperatives was

33

the converting of accounts receivable into negotiable forms. The most
commonly used practice was that of converting accounts receivable into
notes receivable. This is a sound business practice. It reduces the
implicit interest cost of carrying accounts through lowered balances of
accounts receivable; the purchaser, under these circumstances, rightly
pays for the use of the cooperative's capital. The notes can be dis-
counted at financial institutions thus releasing working capital from
receivables and making it available for other purposes such as replen-
ishing inventories or expanding capital facilities. Further, in cases
of dispute, notes give the association more right to legal action to
force payment.

The Ellsworth and Falmouth managers were the most active in using
this collection method. On June 30, 1938, at Ellsworth, notes receivable
including those discounted at banks were $4,927.26 or 36.18% of the total
receivables of $13,610.84. On June 18, 1938, at Falmouth, notes receiv-
able including those discounted at banks were $7,818.09 or 36.35% of the
total receivables of $21,493.38. The percentage of total receivables
in the form of notes was much lower in the four other associations.

The Howell and Dexter managers did not actively encourage patrons
to convert accounts into notes. A few accounts were so converted but
the relative amount of capital involved was small. On December 31, 1937,
all notes receivable at Dexter were only $669.55 or 3.72% of the total
receivables of $18,010.87. Lt Howell, the percentage of receivables in
notes was about the same as at Dexter.

The Coloma association made no active effort to convert accounts into

notes. The Milburg association encouraged this practice but held only

a very few of’the notes. many of its accounts receivable were converted
into cash directly through the banks in the following way: the patron

gave his personal note directly to a bank and the bank credited the account
of the association. The cOOperative was in effect encouraging the farmer
to borrow from.a regular financial institution to settle his account; in
this way the association released its capital from accounts without in-
curring a contingent liability. The Ellsworth cOOperative was the only
other association to encourage borrowing from.a regular financial insti-
tution. The manager assisted the patrons in obtaining Production Credit
Association Loans to finance production so they would not need to use the

capital of the cOOperative.
[Assignments on Produce marketed Through the Cooperativgs

The fourth method of collecting accounts was the use of assignments
on proceeds from.produce sold through the cOOperative. This method was
used only by the Coloma and Milburg associations.10 This was one of the
important factors in determining all credit and collection practices of
these cOOperatives, since payment for goods sold on credit was practi-
cally assured under these circumstances. Such a practice applied only
to active members since non-members could not market fruit through the
association. I

The potato exchanges, Ellsworth and Falmbuth, did not use assign-
ments but their managers did encourage patrons to settle accounts out

of the proceeds received from.the sale of potatoes marketed through the

association.

 

10
See pp. 28-89

The Effects of Credit and Collection Practices on Borrowing,

Each of the cOOperatives studied were dependent upon borrowed funds

for Operating their business. In four associations, borrowing was largely

the result of the credit extension and collection practices. In fact,

borrowing from.banks, members, and employees, was in some instances a

direct result of extending credit. The cOOperatives were therefore, bor-

rowing and paying interest so they could sell on credit.

1
Relationship of Credit Sales and Col-
lections on.Accounts to Borrowing
.rf_ ,_.

Table 5.

 

 

Cooperative Period 2 Excess Excess Funds Payments on
of Years of Credit of Col- Borrowed Borrowed
Sales over lections Funds
Collections on Accounts
Accounts over Credit
Sales
Coloma Jan.-Mar. 3 x 3 273 $ 4,000 3
Apr.-June , 13,637 _ 6,500
July-Sept. 6,062 7,500
0ct.~Dec. 4,897 1,600
Nfilburg Jan.-Nbr. 2,587 2,000
Lpr.-June 16,428 3,000
July~Sept. 7,664 5,000
Gets-Deco 13,784
Dexter July-Sept. 898 3,500
0ct.-Dec. 2,067 4,500
Jan.-March 1,712 5,500
Lpr.-June 5,441 2,450
Howell Dec.-Feb. 3,194 ‘
mar.-May 1,632 4,000
Juneehug. 5,506 500
Sept.~Nov. 1,648 500

1 No Data is given for cOOperatives at Ellsworth and Falmouth, who did
little borrowing during period studied.

2

Periods used are for fiscal year studied.

 

The relationship of credit sales and collections on accounts to
borrowing was most significant at Coloma; borrowing correlated very
closely with credit sales, while payments on borrowed capital corre-
lated with collections on accounts. During the period of January through
March, when collections exceeded credit sales, 34,000 was borrowed to
finance expansion of the inventory for anticipated credit sales during
the spring and summer months. In the April to June period, when credit
sales exceeded collections, $6,500 was borrowed. In the July to Septem-
ber and October to December period, when collections on accounts exceeded
credit sales, payments were made on borrowed capital.

At Milburg credit sales exceeded collections on accounts during the
months of January to march and April to June. Funds were borrowed during
these periods. In the July to September period when collections exceeded
credit sales, the borrowed funds were repaid.

1t Dexter credit sales exceeded collections on accounts during every
period of the year. Reference to Table 5 shows that $4,500 was paid on
borrowed funds during the October to December period; this payment, com-
ing at a time when there was an excess of credit sales over collections,
necessitated borrowing $5,500 in the January to march period when the
excess of credit sales was only $1,712. For the year as a whole, funds
borrowed increased $6,950 and accounts receivable increased slightly more
than $10,000 indicating that the borrowing was the result of credit sales.

At the Howell association funds were borrowed during three periods

of the year. The largest amount borrowed was $4,000 in the march to may

37

periods when credit sales had the greatest excess over the collections

on accounts. Funds borrowed during the June to August and September to
November periods were apparently for some other purpose since collections
on accounts exceeded credit sales.

The excesses of credit sales over collections were considerably
greater than the amounts of funds borrowed. This indicates that most of
the burden of financing credit sales was upon the cooperatives' own
capital; it does not reduce the importance of the relationship of ex-
tending credit and borrowing funds, since the four cooperatives in Table
5 all apparently borrowed to finance credit sales. The figures in this
table do not show a direct relationship of credit extension and borrowing
funds but a correlation. Credit sales depletes working capital which in

turn may mean borrowing to maintain inventories, etc.

Conclusion on Credit Extension and Collection Practices

The extent to which credit was granted in these six cOOperatives was
dependent upon several factors. In order of importance these factors
were: (1) The managers' Opinion of a safe credit risk was the actual
controlling factor in spite of the fact that he may have been subject to
pressure from the board of directors and the members. (2) Competition
from other retailers of commodities handled by the cooperatives directly
or indirectly affected the terms and amounts of credit. (3) The nature
of the agriculture in the cOOperatives trading area, especially for the
associations in areas where farmers have a highly seasonal income, had
considerable effect on the seasonal demands for retail credit. This

factor was not of great importance in determining the percentage of sales

for the entire year. (4) The credit habits of patrons hindered any
change of policy but did not eliminate the possibilities of change.

Collection practices used by the coOperatives were: (1) Use of
statements of accounts to patrons kept the customer informed of his
account and was generally effective for collecting accounts. It was
used in varying degrees by all six associations. (2) managers' efforts
to collect accounts as in the extension of credit, was the most important
factor. His efforts were the most effective method of collecting accounts.
(3) Converting accounts receivable into negotiable forms reduced the
amount of capital tied up in receivables. It was a sound business practice
that could have been used.much more than it was. (4).Lssignments on pro-
duce, for the cOOperative that markets farmers' produce, were almost a
form.of insurance for every producer's account. It greatly reduced losses
caused by overdue accounts.

The seasonal extension of credit and collection of accounts was
closely corrleated with borrowing. This was particularly true in the fruit
associations. In four of the six associations, extension of credit dur-
ing some seasons of the year necessitated borrowing to keep up inventories

and carrying on other phases of the business.

CHAPTER III
COLLPUTLBIE COSTS OF EXTENDING CEEDIT

In Chapters I and II the extent of credit extension and the factors
having a bearing on credit practices in the six cOOperatives have been
discussed. The reasons for the amount and significance of credit extension
are based to some extent upon the circumstances in the trading area of each
cOOperative. Hewever, the importance of credit extension is determined
more exactly by the actual effects of certain credit practices upon the
individual associations. These effects may be analyzed by the costs of
extending credit under the conditions at the time the study was made. The
costs of extending credit consist of the following three items: (1) bad
account losses (2) imputed interest on receivables (3) credit adminis-
tration expenses including (a) cost of accounting forms and postage nec-
essary for a credit business (b) allowance for the time of bookkeepers and
managers spent on credit problems. These costs will be discussed first as

a unit and later as separate items.

Total Credit Costs

 

The average total cost of extending credit in the six cOOperatives

l
was 82.12 per $100 of total sales and $3.29 per $100 of credit sales.

 

l The word average as used here and throughout this section on costs

means the weighted average rather than the simple average. The
averages are computed by dividing the aggregate of credit costs by

the aggregate of sales. Therefore, the figures of the cOOperatives
that had a large volume of sales would have more effect on the average
than would those of the cOOperatives with a small volume of sales.
This explains why, in terms of credit sales, only one association had
costs below average while five had costs above average.

39

40

The credit costs for the individual associations, however, varied con-
siderably from.the average. measured in terms of $100 of total sales,
Coloma, Fhlmouth and Milburg with costs of $1.65, $1.74 and $1.97 res-
pectively were below average; Howell, Ellsworth and Dexter with costs
of $2.39, $2.56 and $2.67 were above average. Measured by credit sales
only, Falmouth with costs of $2.62 was below average; Howell, mulburg,
Coloma, Dexter and Ellsworth with costs of $3.33, $3.35, $3.38, $3.50

and 34.70 respectively, were above average.

Table 6. Relationship of Credit Costs to Total and Credit Sales

 

 

CoOperative Credit Percentage Total Costs per Costs per $100

 

 

Sales of Total Credit $100 of of Credit
Sales Costs Total Sales Sales

Coloma $52,600 48.7 $1,777 $ 1.65 $ 3.38
Mhlburg 48,323 58.6 1,621 1.96 3.36
Ellsworth 29,395 54.5 1,382 2.56 4.70
Falmouth 108,345 66.4 2,835 1.74 2.61
Dexter 84,676 76.4 2,964 2.67 3.50
Howell 106,126 71.4 3,534 2.38 3.33
Average $771,577 64.4 $2,352 2.11 $3.29

 

 

As indicated in Table 6, credit costs did not vary according to the
volume of credit sales or total sales; nor did they vary in prOportion to
the percentage of sales made on credit. For examples, Ellsworth with the

smallest sales volume, had the greatest credit costs per $100 of total

Coloma

M 1m
Ellsworth
Falmouth

Dexter

Howell

Average

Coloma
l‘Ei lburg

Ellsworth

Falmouth

Dexter
Howell

Average

41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

) 4

 

 

 

 

 

 

 

 

 

Figure 8 - Credit Caste {Dollars} For $100 of Total Sales

2

Figure 9 - Credit C =ts (Dollars) per $100 of Credit Sales

sales; Falmouth with the third highest percentage of sales on credit,

had the lowest credit costs per $100 of credit sales. The credit costs

of the other four associations varied more directly with the percentage

of sales made on credit. Actually, the credit costs in terms of credit
sales were relatively higher in those associations with a low percentage
of credit sales than in those with a high percentage of credit sales
because the credit costs were charged against a smaller percentage of the
total sales. The factors causing these variations are discussed in detail

in the following sections.

Bad Accounts Losses

 

Bad accounts losses were recognized by all six cOOperatives as an
actual cost of extending credit since it was included as a regular part
of their accounting procedure. The losses caused by bad accounts repre-
sented the amounts written off as uncollectible, less the collections during
the succeeding year on accounts previously written off. For all associations
the data on bad accounts were taken directly from the annual financial state-
ments. (

The bad account losses when computed by the above method were subject
to two modifying considerations. First, most of the accounts written off
during the period studied were from.aales made during preceding years.
Second, some of the collections were on accounts that had been written off
in years preceding the year studied. However, these two factors in theme
selves tended to correct one another in this way; some accounts arising
from sales made during the year studied will be written off in succeeding
years and some collections will be made later on the accounts written off

in that year. Therefore, the net loss because of bad accounts would remain

43

about the same even if these adjustments were to be taken into account.

Reference to Table 7 shows that bad accounts losses, per $100 of

total sales, varied from $0.12 to $1.07 with an average of $0.58, while

per $100 of credit sales they varied from.$0.26 to $1.49 with an average

of $0.91. In terms of both of these ratios, the costs of Coloma, Milburg,

Falmouth and Dexter were below average, and the costs of Ellsworth and

Howell were above average.

 

 

 

 

Table 7. Relationship of Costs of Bad Accounts
to Total and Credit Sales
COOperative Bad Accounts Cost per $100 Cost per 3100
Costs of Total Sales of Credit Sales
Coloma $135 $0.12 $0.26
Ellsworth 420 . 0.78 1.43 '
Falmouth 899 0.55 0.83
Dexter 568 0.51 0.67
waell 1,583 1.07 1.49
Average $548 - $0.58 $0.91

 

 

Bad account losses at Coloma and Milburg, the two fruit marketing

cooperatives, were much lower than the average costs because of several

factors: first, their practices permitted the extension of large amounts

of credit only to those members who sold fruit through the associations,

44

the proceeds of which were applied against outstanding accounts; second,
the farmers in the fruit areas seemed generally more prosperous than those
in the other areas studied.3 This last point was borne out by the fact
that in the two fruit associations there was only one instance of a grower's
account being charged off as uncollectible.4 In all other instances, the
accounts charged off were the results of small purchases of non-members.
For the two potato marketing cOOperatives, bad accounts losses were
considerably higher at Ellsworth than at Falmouth. This was because the
Ellsworth cooperative changed to a restricted credit basis at the end of
the year studied. Because of this change of policy many accounts were
~charged off as uncollectible that would otherwise have been carried in

5
the accounts receivable. It is quite probable that many of these accounts

 

3 This was perhaps because of the greater managerial skill needed to
Operate a fruit farm, because of the generally better market for fruit
products, and because of the better protection of a greater investment
in the farm itself as shown by the following figures on land values
per acre:-

 

 

COOperative County .1935 Cooperative County .1235
Coloma Berrien $100 Falmouth Missaukee $19
Milburg Berrien 100 Dexter Washtenaw 60
Ellsworth Antrim 20 Howell Livingston 67

Source: United States Census of Agriculture, 1935, v01. 1, pp. 172-179

The one grower's account charged off as uncollectible was the Milburg
Cooperative charitable contribution to the widow of a farmer who died
during 1937.

many accounts receivable were converted into notes receivable. All
remaining accounts were charged off if there was any question of
collectibility.

45

were collected at a later date and bad accounts losses of the association
were reduced in the subsequent year. Falmouth had low bad account losses
primarily because a large staff very capably handled and checked all credit
sales.

Bad account losses were low at Dexter primarily because of the manager's
persistent efforts to collect slow and delinquent accounts. he explained
on page 32, he spent several evenings of each week, on his own time, con-
tacting patrons whose accounts were overdue. [A second factor was that this
association sent statements of account every month to each purchaser who
had a balance payable. These two practices kept the bad accounts losses
low in spite of the fact that the association sold over 70% of its farm
supplies for credit. In contrast to Dexter's bad accounts loss of $0.67
for every $100 of credit sales, Howell, with a slightly smaller percentage
of credit sales, had bad accounts losses of $1.49 for every $100 of credit
sales. This difference occurred probably because Howell handled a large
volume of sales from a single central store and had but three responsible
employees including the manager to take care of all office work. A.small
number of employees at Howell may have meant a saving in salaries but
apparently at the expense of Operating efficiency. The credit business had
grown beyond the point where it could be efficiently supervised by the
office staff, thus resulting in the extension of a certain amount of un-
sound credit. This does not imply inefficiency on the part of any one
member of the present staff, but rather inefficiency for the staff as a

whole because of overwork.

46

lggmted Interest on Receivables Outstanding

 

The second of the computable costs of credit was imputed interest
on the capital tied up in accounts receivable. This cost was not recognized
as a cost of extending credit by any of the six associations. Furthermore,
because of its implicit nature, it was not a part of their regular account-
ing procedure. The interest cost of carrying accounts was considered a
regular part of the merchandising service. Including imputed interest as
a cost of extending credit is justified by the fact that the customer who
purchased on credit was using the working capital of the cOOperative until
the final payment was made. If the customer had financed his purchases
through any regular financial institution, he would have been forced to

pay interest.

Table 8. Relationship of Interest Costs on Receivables

Outstanding to Total Sales and Credit Sales

 

Cooperative Interest Cost Cost per $100 Cost per $100
on Receivables of Total Sales of Credit Sales
for Year

Coloma $538 $ .50 3 1.02
Milburg 775 I .94 1.60
Ellsworth 490 .91 1.67
Fallonth 828 .51 .76
Dexter 1,234 1.11 1.46
Howell 847 .57 .80

 

Average s 785 3 .71 8 1.10

 

 

47

This cost was computed at an interest rate of 6% per annum (0.5%
per month) on the balance of receivables on record at the end of each
month because this represented the average rate of interest charged by
banks in the vicinities of the cOOperatives studied. It was considered
prOper therefore, to use this rate in computing the imputed interest on
receivables held by the cOOperatives.

Interest at 0.5% per month on monthly balances was used rather than
6% on the balance at the end of the year because accounts receivable
varied greatly during the year. For this reason, the monthly balances
presented a truer picture of the credit situations in the cOOperatives;
particularly since the management usually put additional efforts into
collecting accounts during the month preceding the annual audit in order
to present a more favorable balance sheet. In the individual association
interest costs for different months varied considerably. This was parti-
cularly true in the fruit marketing cOOperatives. 0f the six associations,
Milburg had the greatest and Falmouth the least variations as shown in
Table 9. Imputed interest at Mhlburg varied from $14.68 in January 1937
to $120.89 in July, while at Falmouth it varied only from $62.22 in June
1938 to $80.59 in may 1938. Interest by months at Coloma, the other fruit
cOOperative, followed the same general pattern as at Milburg, but with a
smaller degree of variation. Interest by months at Ellsworth, Howell and
Dexter followed the pattern of Falmouth but with a somewhat greater degrees
Of variation. These variations of interest in the different associations
were the results of fluctations in accounts receivable which were discussed
on pages 10-18.

The average annual imputed interest cost on receivables per $100 of

48

Table 9. variations of monthly Interest

Costs at Milburg and.Fa1mouth

 

 

 

 

 

Hulburg Falmouth
month Receivables Interest Cost* Receivables Interest Cost"I
January 1937 3 2,936 2 14.68 3 6
February ' 3,119 15.59
March - 5,629 28.19
April 7 12,678 63.46
may ' 17,269 86.37
June ' 22,118 110.60
July ' 24,175 120.89 13,820 69.12
August 9 20,214 101.10 15,025 75.17
September ' 17,694 88.47 12,924 64.64
‘October ' 14,633 73.19 12,778 63.92
November ' 10,470 52.38 12,977 64.91
December * 3,910 19.59 12,547 62.77
January 1938 13,488 67.46
February “ 13,412 67.08
march ' 14,146 70.77
April ' 15,818 79.09
May " 16,114 80.59
June I 12,439 62.22
Averages $ 12,909 $ 64.54 3 13,776 3 68.88

 

 

" At .054 per month

49

total sales was $0.71. Coloma, Falmouth and Howell with interest costs
of $0.50, $0.51 and $0.57 respectively, were below average. Ellsworth,
Milburg and Dexter with costs of $0.91, $0.94, 31.11 respectively, were
above average. Measured in costs per $100 of credit sales, the average
interest cost of receivables was $1.10, ranging for individual associations

from $0.76 to $1.67.

Rate of Turnover of Accounts Receivable

In addition to the monthly variations in receivables another factor
that had a direct effect upon the interest cost of receivables was the
average length of time that credit was extended to customers, or in other

words, the rate or period of turnover of accounts receivable.

Table 10. Average Age of Accounts Receivable

 

 

 

COOperative Average Balance Average Daily Average Age
of Accounts Sales on of Accounts
Receivable Credit
Coloma 3 9,830 3 172.46 57 days
Milburg 12,925 158.44 - 82 *
Ellsworth 8,162 96.38 84 '
Falmouth 13,791 - 355.23 39 9
Dexter 20,980 277.63 76 ”
Howell 14,122 347.95 41 "

 

Average $ 13,302 3 234.68 57 "

 

 

The rate of turnover of receivables was computed by dividing the
average balance of receivables by the average daily sales on credit.
This method may be simply illustrated as follows: Assume the average
balance of receivables of an association is $1,000 and the average daily
credit sales is $20: dividing the balance by the daily credit sales gives
a turnover of once every 50 days. If the average daily credit sales were
the same, that is, $20, but the average balance of receivables had been
only $800, the turnover would be once every 40 days. Therefore, the
shorter the period of turnover of accounts receivable, the smaller the
amount of capital that will be tied up in receivables in relation to
credit sales. Reference to Table 10 shows the validity of this conclusion.
For example, Falmouth had an average balance of receivables of less than
twice as large as Ellsworth but had daily credit sales nearly four times
larger. This indicates that the period of turnover of receivables was
much shorter at Falmouth than at Ellsworth. Because of this slower turn-
over, the interest cost of capital tied up in receivables per $100 of
credit sales was much higher at Ellsworth than at Falmouth.

The average period of turnover of accounts receivable in the six co-
Operatives was 57 days. For the individual associations, the rates of
turnover were as follows: Coloma, 57 days; Milburg, 82 days; Ellsworth,

84 days; Falmouth, 39 days; Dexter, 76 days; Howell, 41 days.

Age of Individual Accounts. The turnover of receivables indicates
the average period for which all accounts were carried in each association.
The importance of this factor may be further shown by indicating the period

of credit for a sample number of individual accounts. Table 11 gives this

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.HH..Hnee

52

information for a sample of 100 customers in each association. These
figures indicate a static situation true only for the audit date and for
the sample studied. The data on the table is further limited in that it
does not represent the amount of the accounts on the cOOperatives' records
at the audit date, but rather the period during which the customers ac-
count has not been paid in full.

Table 11 indicates the extent to which the cOOperatives granted semi-
continuous credit to some of their customers. of the sample of 100 patrons
selected in each association, the number of patrons still in debt to the
organizations at the end of the fiscal year ranged from 21 at lilburg to
71 at Howell. However, the various periods that accounts had been out-
standing was of more significance than the total number of accounts that
had not been paid. At Hulburg 11 of the 21 accounts had been outstanding for
over six months; at Howell only 24 of the 71 accounts or about one-third had
been outstanding as long as this. or the 66 accounts outstanding at 1:11--
worth 42 or about 65% had been carried for more than six months and 30 or
nearly one-half had been carried over a full year. It is these slow accounts
that increase the amount of interest computed on receivables, the credit ad-
ministration expense and the probability of bad debt losses.

The probability of an account becoming a loss increases and the credit
administrative costs also increase as the account becomes older. The patrons
who paid cash or who paid their accounts promptly were indirectly ferced to
share these credit expenses since increased costs reduced the amount of net
earnings available for patronage dividends. '

One individual example will indicate the cost of slow accounts carried

by the coOperatives. One customer at Ellsworth had a continuous balance of

more than $100 for over 4 years. Careful investigation showed the average
balance of this customer to be $200; the cost to the cOOperative for carry-
ing this account was $12.00 a year with implicit interest at 6% per annum.
Other direct credit costs rasied this amount to at least $24.00 each year.
Using 3% as the average net margin on sales this customer would have had
to make purchases of $800 each year before the cOOperative earned enough
on his business to equal the cost of carrying the account. many other
similar examples could be given to show that the accounts of slow paying
customers who had large, long-running balances paid little or no return

to the cooperative; in fact, such accounts were often handled at a net.
loss. In contrast, Milburg had no unpaid balances running over 19 months
and nearly all of the accounts outstanding for a long tine were for very
small amounts. This association saved much interest eXpense by using
assignments on produce to assure collections of accounts in full within a

relatively short period.

Credit Administration Expenses

A. Office Supply materials

 

The third cost of extending credit was the eXpense of office supply
materials necessary for carrying on a credit business. This cost consisted
6
of stationery and postage for sending statements of account, bookkeeping

supplies, and other general office supplies for recording credit transactions.

 

6
For a more detailed discussion of sending statements see pp. 30-32 under
Collection Practices.

54

It did not include the stenographer's salary for time spent on preparing
statements which is a personnel expense, or the general office supplies
which were needed by the cooperative for carrying on other regular business
Operations. Since all office supply expenses were kept in a single account
in the associations' records, it was necessary to use the stenographsra'
estimates of the part of the eXpense that should be charged directly against

the credit Operations.

Table 12. Relationship of Cost of Office Supplies

to Total Sales and Credit Sales

 

 

 

 

COOperative Cost of . Cost of Office Cost per Cost per
Statement Bookkeep- Supply 3100 of $100 of
of.Account ing Sup- Cost Total Credit

plies Sales Sales

Coloma $104 $30 $134 $0.12 80.26
mulburg 75 10 85 0.10 0.18
Ellsworth 42 5 47 0.09 0.16
Falmouth ' 181 50 231 0.14 0.21
Dexter 102 150 252 0.23 0.30
Howell 123 10 133 0.09 0.13
Average t 104 3 43 3 147 $ 0.13 t 0.21

 

 

The average expense of office supplies for all six associations was
30.13 per $100 of total sales. Coloma, Milburg, Ellsworth and Howell had

costs of $0.12, $0.10, $0.09 and $0.09 respectively, which were below average.

55

Falmouth and Dexter had costs of $0.14 and $0.23, respectively, which were
above average. The average cost per $100 of credit sales was $0.21.

The variations in costs of bookkeeping supplies were the results of
varying degrees of completeness and efficiency of the association records,
the particular types of materials used, and the volume of sales made on
credit. To illustrate, supply costs at Coloma and Milburg were $30 and
310 respectively. This difference was caused by the more expensive type
of sales ticket, the larger number of customers, and the greater volume of
sales at Coloma. There was little, if any, difference in the completeness
and efficiency of the records. Ellsworth and Falmouth had material costs
of $5.00 and $50.00 respectively. This variation was caused by the more
eXpensive and complete sales records, and the much larger volume of sales
at Falmouth. Dexter and Howell had material costs of $150 and $10 res-
pectively, even though Howell had the greater volume of sales.. This dif-

ference was the result of the more complete and efficient sales records
7

used at Dexter.

B. Costs of’Personnel Salaries

The fourth cost of extending credit was the salary expense chargeable
to credit transactions. This cost was from two sources; first, the time
spent by the bookkeeper for the recording of credit transactions and for
the preparing of statements of accounts; second, the time spent away from

8
the office by the manager for collecting slow accounts.

 

7 The efficiency of the associations' accounting systems in terms of benefits

to the cOOperatives will be discussed later under “Relationship of Various
Credit Costs.”

r.

8 See p. 38 under “Collection Practices“ for a more complete discussion of
manager's time spent collecting accounts.

Bookkeepers spent the equivalent of from 140 to 305 days of the
period studied on work directly resulting from.the cOOperatives' credit
extension and collection practices. At Ellsworth, the equivalent of 140
days represented about 45% of the bookkeeper's time. Hewever, this figure
was not low compared with other associations, because of the much smaller
volume of business. ,At Falmouth the two bookkeepers together spent 305
days or the equivalent of more than one full year on various phases of
the credit business.

The percentage of their total time spent by the bookkeeper and manager
on credit work was applied to the salary of each to determine the actual
cost. The salary value of the bookkeeper's time varied from 5300,t° $910.
These variations were the result of the time and wage differentials. Sal-
aries paid to bookkeepers varied from.$l4 per week at Ellsworth to $35 per

week at Coloma.

Table 13. Personnel Time and Costs

 

 

 

 

COOperative Bookkeepers' Time Managers' Time Total Cost
(Days) ,Cost (Days) - Cost
Coloma 150 ' $780- 26 $190 $970
Milburg 150 400 10 ‘ 77 477
Ellsworth 140 500 26 125 425
ralmouth 505 717 26 160 877
Dexter ~ 210 910 * * 910
Howell 205 781 f 24 190 971
Average 195 a 54s . 22 t 148 t 772

‘ No Data available

 

 

anagers' time used for collecting accounts represented only the
time spent away from the office. It did not include time spent at the
office for various phases of the credit and collection business. No cost
was given for Dexter because the manager collected accounts on his own

9
time and did not, therefore, use any time away from the office.

Table 14. Relationship of Personnel Costs

to Total Sales and Credit Sales

 

 

COOperative Personnel Cost Cost per $100 Cost per $100
of Total Sales , of Credit Sales

 

 

Coloma $970 $0.91 $1.84
Milburg 477 0.58 0.99
Ellsworth 425 0.78 1.44
Falmouth 877 0.54 0.81
Dexter 910 0.82 1.07
Howell 971 0.65 0.91

.Average $772 $0.69 $1.08

 

 

In terms of costs per $100 of total sales, the average total personnel

expense was $0.69. As shown in Table 14, Milburg, Falmouth, Ellsworth and

 

9 There was undoubtedly an expense in collecting accounts in this way

but it was the manager's personal expense. The manager did not take
time off from the office. Consequently, the time was not considered

a part of the coOperative's expenses which were the basis of the costs
computed here.

and Dexter were more than average. The variation in the volumes of bus-
iness, in the salaries paid to bookkeepers and in the collection efforts

of the managers caused the differences in the personnel costs.

Relationships of the Various Credit Costs

The limited number of associations in this study does not provide suf-
ficient evidence to permit drawing general conclusions regarding the relation-
ships of the various credit costs in all cOOperatives. Examination of the
costs, however, does show indications of certain relationships that may be
applicable to many cOOperative organizations.

Iithin each of the three types of coOperatives the expenditures for
sending statements of accounts and for bookkeeping supplies apparently
limited bad debt losses and reduced interest expense. To illustrate, per
$100 of credit sales, Coloma had office supply expenses of $0.26 and bad
debt losses of $0.26, while atIMilburg these costs were $0.18 and $0.59.
The relationship of these two costs are the same in the potato marketing
and the feed and grain associations. These comparisons indicate that
expenditures for reminding customers of their debts and for keeping an
efficient accounting system more than pay for themselves in reducing bad
debt losses. In the fruit marketing and potato marketing associations the
same relationship exists between the cost of office supplies and the cost
of implicit interest on receivables. This relationship did not exist in
the feed and grain cOOperatives, perhaps because of other influencing
factors, one of which.was that the manager at Dexter did not have complete

control of the credit sales policy.

 

 

I

 

 

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modem 04.30.00 was modem Hence no 00.3 hem oanoo $30.00 on." 0.309

60

Reference to Table 15 shows that in the fruit marketing and.feed and
grain cooperatives,credit administrative expenses also tend to be Justified
in that they reduce bad debt losses. This was not true in the two potato
marketing associations because the personnel at Falmouth was organized more
efficiently than at Ellsworth, and because Ellsworth showed large bad debt
losses resulting from changing its credit policy.

Other comparable relationships could be deducted from the figures, but
would be difficult to substantiate, not only because of the number of asso-
ciations was small, but also because the other factors that affected the
credit situation in the individual associations could not be evaluated. Those
other factors, which have been discussed in the first chapter, had consider-

able influence on circumstances of credit extension, collection, etc.

Comparison with Costs Reported in Other Studies

The costs of extending credit for the coOperatives in this study were
relatively low as compared with the costs shown by similar studies made in
other states. In these other studies costs were computed on the seas basis
as used here. Names given to the costs were in some cases different, but
they were made up of the same four items as defined in this study, namely,
bad debt losses, implicit interest on receivables, office supplies for cre-
dit transactions, and an allowance for the time spent by bookkeepers and
managers in connection with credit Operations.

Leland.8pencer's study, made in l924 of rural store credit in New york

10
State gave the following results: costs of extending credit for the

 

10
An Economic Study of Rural Store Credit in New York, Cornell university

Experiment Station metin No. ’43'0',‘ 19521, Ithaca, N. Y.

61

Table 16. Comparison of Studies on Credit Costs

 

 

Study Credit Cost per Credit Costs per
$100 of Total Sales 3100 of Credit Sales

 

New York Study-Spencer $3.85 3 ....0
Iowa Study-Robotka 3.99 -0.-.

New York Studyiuaughan

Farm Supply Stores 7.50 ----’

Feed Stores 4.00 ----*
Kansas-Nebraska Study-Knapp 2.00 3.89
Nflchigan Study 2.11" 3.2.9“I

‘ Data not available

‘* .For figures on individual associations in Michigan study see Table 15

 

 

sixteen farmpsupply stores surveyed was $3.85 per $100 of total sales. This
was $1.741more than the average cost of $2.11 for the six cooperatives in
this study. It was in fact, higher than the costs in any one of the six
Ndchigan cooperatives. \

Frank Robotka's study, made in 1929, included ninety-three Iowa co-
Operative elevators selling farmsupplies.11 The average cost to these
ninety-three associations for extending credit was $3.99 per $100 of total

sales. This cost was $1.88 greater than the average cost to the associations

in the present study. ”Although in Robotka's study interest cost of

 

Retail Credit_;n Iowa Farmers' Elevators, Iowa State College
Agricultural Experiment Station Bulletin NO. 285, 1931, Ames, Iowa

62

receivables was computed on the basis of 7% instead of the 6% used here,
this difference in itself has added not more than $120 to the total credit
costs, and would not have increased the cost per $100 of total sales by
more than $0.20.

Orlo H. naughan's study, made in 1931-32 in 311 stores in New Yerk,
included 43 farm supply and 62 feed stores.12 The average costs of ex-
tending credit per $100 of credit sales was $7.50 and 84.00 respectively,
for these two types of stores. These costs were larger by $4.21 and $.71
'per 8100 of credit sales than the similar average costs in the six Michigan
associations studied. The costs here, as in the other studies, were computed
on comparable bases.

Joseph C. Khapp's study was made in 1937 in 24 cOOperatives which were
affiliated with the Consumers Cooperative.Lssociation of Nbrth Kansas City,
Missouri.13 These cOOperatives sold petroleum.products to farmers in
Kansas and.Nebraska. The average cost of extending credit was $2.00 for
every 3100 of total sales and $3.80 for every $100 of credit sales as com-
pared to $2.11 and $3.29 for the cOOperatives in this study. Credit ex-
tension was, therefore, less expensive for these petroleum.c00peratives on
the basis of total sales and more expensive on the basis of credit sales.

Another finding in Knapp's study was that the petroleum cOOperatives made

only 50% of their sales on credit, while the cOOperatives in the Huchigan

 

12
The Cost of Store Credit, Cornell University
Cornell Extension Bulletin No. 349, 1936, Ithaca, N. Y.

3 Joseph G. Knapp, 'Credit Extension Influences Efficiency', News for
Farmer Cooperatives, January 1939, pp. 9, 10, & 19, Farm Cre
Administration, Washington, D. C.

65

study made 63% of their sales on credit. Credit costs were, therefore,
relatively higher when computed on credit sales than when computed on
total sales.

In summary, the cost of credit extension in the six cOOperatives
in this study was in terms of total sales less than the costs indicated
in the studies made by Spencer, Robotka and.Meughan, and in terms of credit
sales less than those indicated in Knapp's study. Credit costs in the six
Huchigan cooperatives were generally lower perhaps because they represented
better than the average.lichigan cooperative and because -twO-of the six

were primarily marketing rather than farm supply organizations.

CHIPTER IV
CREDIT EXTENSION IN RELATION TO

PROFIT MIRGIN.6ND VOLUME OF'SLLIB

The credit problems of the six cOOperatives has thus far been analyzed
in regard to the condition influencing the use of credit and the computable
credit costs during the period studied. In this chapter, the computable
and non-computable costs of credit extension will be considered in relation

to their effects upon the net earnings and upon the volume of sales..

‘Effects of Computable Credit Costs on Net margin

The importance of the computable credit costs can be best indicated
by their effects upon the net margin of the cOOperatives. For the six
associations the average cost of goods sold and general expenses was 96.4%
of sales; of this 1.40% was bad debt losses and credit administrative ex-
pense. Adding to the 96.24%, the computed interest cost of 0.71% would
make a total expense of 97.35% and would leave 2.65% as the average net
margin for these associations.

If we assume a separation of the sales of supplies on credit and those
for cash, the total credit costs may be charged against the credit sales.
For the sales for cash the net margin would now be 4.76%. tor sales on
credit, the credit costs of 3.29% added to other costs of 95.24% would make

a total cost of 98.53%, leaving a net margin of but 1.47%,

64

65

Indirect Costs and Disadvantages of Extending Credit

In addition to the computable costs of extending credit discussed
in Chapter III there were several non-computable costs. These costs were
of such a nature that they could not be computed in dollars and cents value
but they did nevertheless have definite effects upon the business of the
cOOperatives. These non-computable costs to be considered here are: (1)
low patronage dividends, (2) dissatisfaction and disagreements over accounts,
(3) higher cost of goods purchased by the cooperatives, and (4) general
handicaps. All these had the general effect of decreasing the volume of

581980

Low Patronage Dividends

The first of these non-computable costs was the effect of liberal cre-
dit extension in reducing the net margin of profit. Low profit margins
meant small or no patronage dividends. Low patronage dividends, in turn,
meant smaller volume of sales. In spite of the altruistic spirit of many
cOOperative leaders, patronage dividends are one of the strongest factors
for bringing customers to a cOOperative organization; they are, in effect,
a form of sales discount that is paid on the basis of the net earnings of
the association. Customers purchased from.the cOOperative for this anti-
cipated saving. If the cOOperative had noother advantage over its private
competitors, and if the customer knew from.his own past experience or that
of his neighbors that the anticipated patronage dividend was low or non-
existent, he had no particular incentive for purchasing from.the cOOperative.
Had these cOOperatives had.made all of their sales for cash and if the volume

of sales had been the same, the net margin would have been 4.76%, thus

66

enabling them to pay a larger patronage dividend. This undoubtedly would
have drawn some additional business to the associations from.a greater
number of cash customers.

It is probable of course that on a cash basis the cOOperatives would
have lost some of the business of their credit customers. Whether or not
this loss would have been greater than the gain in cash customers will be
discussed later. lat any rate, the higher patronage dividends probably
would be a decided incentive for more customers to purchase from the co-

Operatives.

Disaggeements and Dissatisfaction Because of Accounts

Since credit extension required complicated recordings of sales and
payments on accounts, disagreements sometimes arose over the standing of
individual accounts. Ihen no satisfactory adjustment was worked out the
customers often transferred their business to a competitor. Furthermore,
such customers sometimes refused to pay the account in question. When
such conditions arose, the cOOperatives lost the patronage of some customers
and in addition some of the accounts receivable. This decreased the volume
of sales and increased the bad debt losses.

Credit extension often caused customers to become dissatisfied with
the cOOperative. Regardless of the laxity of the associations! credit
policy, managers were forced to make certain limitations. Inrths majority
of cOOperatives, managers controlled the credit sales and necessarily
limited the amount of credit granted to customers that were considered

poor credit risks. Since no person considerered himself a poor debtor,

customers to whomlsales were restricted, often felt that the managers

67

were discriminating aginst theme ‘Usually, such customers transferred all of

their business to other dealers.

Higher Cost of Goods Purchased by the cOOperatives

Credit practices of some of the cOOperatives reduced their earnings
by increasing the cost of goods sold. This came about in the following way:
excessive sales on credit, slow collections, etc., increased the amount of
accounts receivable carried by the association. Or, in other words, in-
creased the amount of capital tied up in receivables. During some seasons
of the year so much capital was tied up in receivables that there was not
enough left for other normal business Operations. In a very direct way
this increased the cost of goods purchased by the cooperatives. ‘lhsn the
cOOperative did not have enough money on hand it could not take the cash
discounts offered by wholesalers. This added cost of the goods was absorbed
directly by the association, or was passed on to the customers in the form
of higher prices. Either way the association lost. In the first way, by
decreased earnings and lost business because of decreased or non-existent
patronage dividends, in the second way by decreased business because of
higher prices. If all discounts had been taken the patrons would have gained
by lower prices or higher patronage dividends. One of the six associations
in this study lost some of its cash discounts and three associations were
forced to borrow during part of the year in order to take advantage of the

discounts.

 

1
See pp. 35-37 on the relationship of borrowing to seasonal sales.

68

General Handicaps of Excessive Credit

Excessive amounts of capital tied up in receivables affected the
COOperatives in other less direct ways. When the working capital of the
cOOperatives was used for financing accounts and notes receivable, it
was not available for other purposes. Using the working capital in this
way hindered the cOOperative from.making improvements that would increase
the efficiency of the organization as a whole.

Among the ways that capital could have been used advantageously by
the majority of the cooperatives was for expanding into new lines of business
and for improving the fixed assets. These improvements would have enabled
the cooperative to provide more and better services for its members and
through increased efficiency would have increased the percentage of net
profit. The members of these associations strongly favored such improve-
ments. 0f the six cooperatives in this study, managers of four stated
that improved equipment would have increased the efficiency of the entire
business. managers of two stated that there was a definite need and de-
sire for entering new lines of business. In each instance the reason for
delaying these improvements was lack of capital.

The problem.was not necessarily one of inadequate but of wrong use
of capital. The coOperatives were not organized as credit institutions,
yet they had a large percentage of their capital in receivables. On their
audit dates, the receivables of the six cOOperatives averaged 48% of current
assets and 22% of total assets. Had the funds so used been available the
associations would have been able to carry out some of the needed improve-
ments in their business such as eXpanding inventories and improving fixed

assets.

69

Practicahility of Changing to a Strictly Cash or Restricted Credit Policy

The managers Of the cOOperative organizations maintained that, tO
keep up the volume Of sales, it was necessary to extend credit. Consider-
ing competition, the nature of the farm income in their trade territories,
credit buying habits of the customers and other factors, this contention
was true in some instances. Even though such.was the case, the cOOperatives
in many instances could have made as much, if not more, profit on a smaller
volume Of sales, if restricted credit practices would have eliminated the
accounts Of the least desirable group Of credit customers. In this study
the net profit on credit sales was only 1.47% while costs of credit sales
was 3.29%. From.these figures it any be concluded that a large number Of
credit accounts not only did not bring any net profit to the associations,
but were actually handled at a loss after deducting credit costs. This
was particularly true of all accounts written Off as uncollectible and all
slow accounts.2

Furthermore, it is rather doubtful that credit extension as practiced
by the cOOperatives was necessary for maintaining or building the volume
of sales. 'There are in.muchigan, as well as elsewhere, numerous examples
Of highly successful cOOperatives Operating on a strictly cash or restricted
credit basis. Ellsworth, one Of the cOOperatives in this study, in July
1938, changed from.a liberal to a very restricted credit policy and the

manager and members are well satisfied with the results. Knapp, in his

study states, “sales volume depended.more upon other factors than on the

 

See pp. 49-53 for a more detailed discussion Of costs of slow accounts.

7O

extent Of sales on credit.-----Some large associations had a relatively
small percentage Of credit sales, while many small associations had a very
large percentage of credit sales."3 The number of cOOperatives in this
study was too small for drawing this general conclusion. Hewever, there
was little relationship between percentage Of sales on credit and the
volume of business.4

Undoubtedly, a cOOperative that made a sudden change from a liberal
credit policy to a strictly cash or restricted credit policy would lose
the business Of'some customers. s.carefully prepared change, however, would
not necessarily decrease the volume Of sales. The cOOperative would lose
the business Of the permanent ‘slowbpaysrs'. This would, however, involve
no loss because the accounts Of these customers should be avoided regard-
less Of sales policy; Such accounts bring no net income to the cOOperatives.
In spite Of losing these accounts, the increases in sales from.the advan-
tagss of the new policy would probably bring a net increase in total sales.
Under a restricted credit policy the measurable and imeasurable costs Of
extending credit would be decreased. Higher patronage dividends would re-
sult in additional business from the regular customers and from new custo-
mere. Definite, restricted credit terms or strictly cash terms would de-
crease or eliminate all costs of credit. Therefore, such policies would
actually tend tO increase the net earnings.

It may be maintained that certain credit costs such as managers' and

 

3 Joseph G. Knapp, “Credit Extension Influences Efficiency,‘ News for

Farm.COOperatives, January 1939, p. 10. Term.Credit.sdministration,
lashington, D. C.

4 See pp. 8-10 and Table 2 for relationship Of percentage Of sales made
on credit and volume Of sales.

71

bookkeepers' salary expenses can not be eliminated under any sales policy,

because the personnel work is essential to the successful Operation of

the cOOperatives. Under a restricted credit policy, however, the managers

and other employees could devote more Of their time fer other activities,

such as increasing the efficiency of the records, carrying on educational

and promotional programs, contacting better sources of supplies and pursuing

numerous other activities which would be definitely advantageous tO the

organization.

Sumary Of Effects Of Extending Credit

In summary it may be stated that extending credit may have many effects

upon the cOOperatives studied. These effects were as follows:

1.

2.

3.

4.

5.

6.

Credit was a definite cost. In the six cooperatives studied
the computable cost averaged $3.29 for every $100 of credit sales.
Credit costs reduced the net earnings Of the cOOperatives by
increasing the Operating expenses.

Credit costs tended to reduce the volume Of sales by decreasing
patronage dividends.

Disagreements over accounts many times caused the cOOperative
to lose customers.

Discrimination Of the manager in granting credit caused dis-
satisfaction and resulted in lost customers.

Capital used for financing receivables during certain seasons
Of the year was not available fer taking advantage of cash dis-
counts Offered by wholesalers._ This raised the cost of goods

purchased by the cOOperative.

7. Capital used for permanently financing receivables was not
available for other needs such as expansion into new lines
Of business or improving the fixed assets.
All Of these tangible and intangible costs of extending credit had
a vital effect upon the entire financial status and business Operations
of the cooperatives. The effects were so wide-reaching that they cons-
tituted a powerful incentive for selling on some other basis that would
eliminate most Of these costs. There are two general solutions: first,
to sell on a strictly cash basis; second, to carefully restrict all

extension Of credit.

72

CHAPTER V

POSSIBILITIES 0F ELIMINATIHG 0R MINIMIZING
CREDIT EXTENSION BY COOPERATIVES

Numerous methods have been used to eliminate or minimize the dif-
ficulties arising from extending credit. Whatever the method used, the
purpose has been the same. managers, boards of directors, and members
of organizations have become convinced that the costs and problems
resulting from sales on credit were sufficient reason for departing
from a policy of extending liberal credit. In some instances cOOperatives
have been forced to change their policies to avoid bankruptcy or obtain
new financing. In others, failures of other COOperatives have brought
to mind the need for change.

Many arguments are offered against restricting credit sales. Most
common of the arguments advanced is that credit is necessary to maintain
the volume of sales. This aSpect was discussed above, and it was indi-
cated that restricting credit may be justified even though sales volume
is decreased to some extent. If the manager of a cOOperative wishes to
change its credit policy, the greatest obstacles to be overcome are ex-
perienced in convincing the board of directors and members of the cosper-
ative of the advantages of a sound credit policy. Members of the board
are Often the worst violators of the privilege of buying on credit; they
often have large balances and are slow payers. In cases of this sort, it
would be necessary to convince the members of the board that they are
elected to office to promote the cOOperative rather than their own private

interests. Long continued liberal credit has often tended to establish

73

'74

among the members of a cOOperative the attitude that credit is a right
rather than a Special privilege. Pointing out the costs of credit would
do much toward re-educating these members.

Regardless of the difficulties to be overcome, many cOOperatives
can correct their credit problems by some procedure that has been tried
and found successful by other COOperatives. These procedures fall under
two general headings; first, sales on a strictly cash basis; second,

sales on a restricted credit basis.

Strictly Cash Sales

 

Sales on a strictly cash basis is the best of all methods Of avoiding
the evils of credit. The payment of larger patronage dividends would
provide a strong incentive for increased business from present, as well
as new, patrons. All computable costs, with resulting disagreements,
lost customers, etc., would thus be eliminated.

Despite all arguments that might be presented against a strictly
cash sales policy, it may be pointed out that many cOOperatives have
adepted this policy and most of them have succeeded. They have left
credit problems and worries to their competitors and have taken over
the business of the better cash customers in their communities. Among
the Michigan cOOperatives that have succeeded on a cash basis are:
Gratiot Farmers Supply Company, Breckenridge Oil Company, Holland CO-

Operative Company and Constantine Co-Op, Inc.

Restrictive Credit Practices

 

While a strictly cash basis for sales is the best method of correct-
ing all credit problems, the change to a cash policy from one of liberal

credit is a definite break that is not always possible. For those

75

COOperatives that cannot make such a change, restricting credit sales
is the most lOgical method of avoiding the credit problems.
Restricting credit may follow several different practices all of
which are aimed at reducing the costs of credit. Such practices have
been used by cOOperatives in all sections of the country and have
proved effective. They are as follows: (1) adhering to a definite
credit policy, (2) placing responsibility for all credit sales, and
(3) Offering inducements for cash purchases and short credit periods.
The first practice directly controls credit sales, while the other two
indirectly control credit sales by increasing the prOportion of cash

881660

Adherence to a Definite Credit Policy

If a COOperative has large credit costs and many credit problems
and cannot change to a strictly cash basis, the first step toward im-
proving conditions is to establish and to adhere to a definite credit
policy. The second part is the more important because most cOOperatives
already have declared a definite policy but few have adhered thereto.

In a definite credit policy, two limitations should be established
for all credit sales, First, the length of the credit period should be
short, ranging from ten to sixty days. A period Of less than ten days
would be too short to be Of any advantage to the patrons, yet the co-
Operative would still have the task of recording credit sales and pay-
ments on accounts. A period of over sixty days would be too long to be
considered a restricted credit policy. The exact period to be used must
depend largely upon the nature of the agriculture in the cOOperatives'

trading area. For example, the fruit associations would be more justified

76

in setting a long credit period, such as 30-60 days, than would the
associations in general farnung areas. The farmers in the fruit areas
have a highly seasonal income, while those in the general farming areas
have a rather steady monthly income. Credit periods for various commo-
dities may vary. Credit for fertilizers and seeds, which are seasonal
production goods, may be extended for a longer period than for coal and
flour, which.are consumption goods. Second, the amount of credit that
will be extended to each customer should be definitely limited. The
amount can vary according to needs of the farmers and, meat important,
.according to the total amount of capital the cooperative can wisely
have tied up in receivables. The amount should be conservatively set
to leave available funds for emergency purposes. Fer individual custo-
here, the most commonly used limit is $100. Occasionally the limit for
members is higher than for nonemembers. The ammunt can also be limited
in terms of the percentage of the total purchases that are made by the
individual customer rather than by an absolute amount.

Whatever the terms of credit may be, they should be adhered to with
no exceptions. The manager or the board of directors should have no
authority to permdt anyone, directors included, to exceed these limits.
Purchasers whose accounts have reached the limit should not be alloaed
to make any further credit purchases until payment is received. This
point is most important for, although most cOOperatives have limitations
of some type, continued exceptions eventually become the regular practice.
If a policy of restricted credit sales is to succeed, there must be no

exceptions to the established terms of credit.

Definite Regponsibility_for Credit Sales

Among the practices that have proved very effective for reducing

77

credit costs is that of placing definite responsibility for all credit
sales. This practice is, briefly, intended to eliminate bad debt losses
by making some one individual responsible for any losses that may ensue
from any credit sale. The responsibility is placed upon the individual
who gives permission for the sale. In actual practice, the plan works
as follows. members of the board should have no authority to overrule
the manager's decision as to whom is to be allowed to purchase on credit.
If, however, they do have this authority, they are required to deposit a
certain amount of their own money in a special fund for bad debts. .L
portion of the salaries of the manager and other members of the personnel
are withheld each month until a certain amount is deposited for each in
the special fund. till credit sales are on a permissive basis. When an
account is Judged worthless an equivalent amount is taken from.the re-
serve of the person who gave the authority for the sale. That person
is then required to build up the reserve to the amount needed by making
another deposit or by further salary deductions. As long as there are
no bad debt losses, the members of the board need make no additional
deposits and the members of the personnel receive their full salaries.
This practice accomplishes more than the reduction of bad debt
losses. It puts the managerial authority into the hands of the manager,
where it rightfully belongs. members of the board will hesitate about
overruling the manager's decisions if they know in advance that the res-
ponsibility for any loss rests entirely with them. Furthermore, clerks
and other employees will not attempt to assume some of the managerial

duties under these circumstances.

:1 1.:

78

1
Many objections are offered against this practice to the effect
that it makes the manager too conservative in granting credit. victually,

most of the objections can be reduced to the fact that the members of

the board and personnel do not wish to assume the responsibility that

preparly belongs to them.as the directors and operators of the cOOperative's
business. Farmers' Union COOperatives in Minnesota and the Dakotas fol-

low this practice and have found that it is highly effective in reducing

bad debt losses and increasing the net income of the associations.

inducements for Cash Payments and Short Credit Periods

' Credit costs may be reduced by offering an incentive to customers to
pay cash and by penalizing those customers who abuse the privilege of
purchasing on credit. This is accomplished in three ways; offering cash
discounts, charging interest on over-due accounts, and encouraging patrons
to finance their purchases through credit unions and production credit
unions and Production Credit.Lssociations.

Cash discounts are not widely used by cOOperatives. 0f the six
associations in this study, four offered cash discounts, but only on
fertilizer sales. Discounts, if they are to be effective must be on all
psales, and must be large enough to encourage the customer to pay cash.
This practice of offering a discount to the customer who pays cash cuts
down credit costs and by reducing the capital tied up in receivables,
provides the cooperative with more available working capital which.may
be used for other purposes. This practice would reduce the effective
margin available for patronage dividends but since the cash customer

receives a discount, only the credit customer would be penalized.

79

Charging interest on overdue accounts and encouraging loans from
regular credit institutions forces the customer to pay his own credit
costs. Under such practices the individual pays the costs that are
ordinarily paid by the cOOperative. In this study, only one association
charged interest on accounts and only three encouraged borrowing from
credit institutions. Interest can be charged on all accounts that are
outstanding longer than the established credit period. With a definite
credit period of 30 days, for example, interest can be charged on all
accounts that exceed that period. An interest rate of 1% per month would
be very effective in encouraging customers to pay promptly. If this rate
appears to be too high, it may be pointed out that 1% a month is less than
the carrying charges many private retailers add to the cost of goods sold
on credit and is less than the rate of most small loan institutions. En-
couraging the customers to finance their business through regular credit
institutions may be accomplished by establishing a credit union or by
aiding the customers in receiving Production Credit Association loans.
Either procedure gives the business of financing to a regular institution
established for that purpose. Merchandising cOOperatives are organized
to sell commodities but not to sell financing service.

All of the above practices are Justified by the following facts.

At present most credit costs are borne by all patrons of the cOOperative.
under a practice of restricted credit that will be effective the customer
who purchases on credit and is a slow payer is forced to bear the expense.
The cash customers are not penalized because cash discounts are equivalent
to a premium at the time of the purchase. On the other hand, charging

interest on overdue accounts and encouraging borrowing from financial

80

institutions increases the net income of the cOOperative by eliminating
credit costs. The credit customers pay their own credit costs and all
patrons stand to receive larger patronage dividends.

Such measures not only reward the good customers and penalize the
poor customer, but also help the organization as a whole. The financial
and business conditions are improved and the cOOperative builds up good-
will with those customers whose trade is the most worthwhile.

These measures for reducing credit problems and costs are not appli-
cable to all cooperatives. However, some form of many of the measures
can help those associations that now have credit difficulties. The de-
finite practices to be used.must be determined by the members themselves

according to the specific credit problem.of their cooperative.

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