Uneven and Unpredictable Liabilities

Internal capital accounts along with the agreement for the cooperative to pay them out upon member departure creates an unstable financial structure. It means a worker cooperative is continually faced with uneven and unpredictable liabilities.

Uneven liabilities result from basing profit distributions to members (patronage) on coop earnings. With a rolling payout model, retained earnings are held by the coop for a period. If there are no losses during that period the earnings are paid out to the members in full, otherwise the losses are debited before the earnings are paid. This has the potential to create cash flow issues under normal business cycles occur. A period of high profit, followed by a period of lower loss, may leave a coop liable to pay out past earnings at a time when the coop is losing money. At least in this case the payout is predictable, as the coop knows it will have to pay out the earnings when the holding period expires.

The situation is exacerbated if the member leaves the coop after the profitable period. Then no losses can be deducted from the member’s earnings, because that person is no longer a member. The coop still has to pay out the members past earnings, despite a negative current income stream.

Member departure also triggers a liability, the repayment of the internal capital account. This includes the initial buy-in and retained earning. The internal capital account is usually recorded as equity on the balance sheet, not a liability. When a member leaves the internal capital account equity of that member becomes a liability of the coop. Members may decide to leave the coop unilaterally. This makes membership reduction inherently unpredictable. And each time a member leaves, their portion of equity in on the coops books immediately becomes a liability.

When retained earnings are relatively small, the buy-in can be the most significant part of the internal capital account. This liability can create a financial shock from correlations in member departure. The unpredictable nature of the internal capital account payouts, created by departing members, poses a risk for worker coops.

Paying out the internal capital accounts is not a problem, so long as coop membership always increases. The issue arises when net membership declines. A substantial reduction in coop membership can becomes fatal, due to the payouts. While no one wishes for membership of any coop to decline, a structure that can only withstand mild membership declines, is not robust. It is possible that coop membership levels may decline substantially when subject to economic shocks. Coop structures should to allow membership to fluctuate significantly both up and down, without catastrophic financial consequences.