Agricultural Producer Organization (AgPrO) Reference Manual

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1 Agricultural Producer Organization (AgPrO) Reference Manual FROM FIRST STEPS TO PROFITIBILITY AND GROWTH A Field Practitioner s Guide to Cooperative Development

2 2009, first edition, Land O Lakes International Development; second edition, This report is made possible by the support of the American people through the United States Agency for International Development (USAID). The contents of this report are the sole responsibility of Land O Lakes International Development and do not necessarily reflect the views of USAID or the United States Government.

3 AgPrO Reference Manual Table of Contents Training Module 1: Selecting Producer Groups...1 Preface...3 Section 1: Producer Group Overview...4 Section 2: Process to Identify Existing and/or Form New Producer Groups...8 Section 3: Sample Dairy Value Chain Milk Shed Analysis Annex A: Sample Questionnaire Training Module 2: Developing Partnership Agreements Preface Section 1: Partnership Agreement Checklist Annex 1: Sample Partnership Agreement Template Annex 2: Sample Agreement with a Cooperative Annex 3: Sample Agreement with a Development Partner Annex 4: Sample Agreement with a Government Agency Training Module 3: The CLARITY Principles for Cooperative Law Preface Section 1: The Purpose and Objective of Clarity Section 2: Clarity Principles for Legal and Regulatory Enabling Environments Section 3: Clarity Scorecard for Cooperative Law Annex A: Clarity Scorecard Training Module 4: Reviewing and Selecting a Business Form Preface Section 1: Review of Business Forms Section 2: Determine the Current Legal Status of a Producer Group Training Module 5: Cooperative Formation, Governance and Structure Preface Section 1: Steps to Form a Cooperative Section 2: Cooperative Governance and Structure Section 3: Cooperative Bylaws Section 4: Sample Bylaws from Uganda Section 5: Sample Bylaws from Zambia Training Module 6: Setting up an Office and a Recordkeeping System Preface Section 1: Steps to Set Up an Office Section 2: Components of a Good Recordkeeping System i

4 Training Module 7A: Preparing a Basic Business Plan Preface Section 1: Introduction to Basic Business Planning Section 2: Basic Business Plan Development Section 3: Molako Dairy Cooperative: Case Study in Business Planning Section 4: Basic Business Plan Template Training Module 7B: Preparing a Strategic Business Plan Preface Section 1: Definition and Uses of a Strategic Business Plan Section 2: The Components of a Strategic Business Plan Section 3: Deciding Who Should Prepare a Strategic Business Plan Section 4: Using The Strategic Business Plan as an Organizational Tool Training Module 8: Technical Operations Preface Section 1: Procurement Section 2: Supply Chain Management Section 3: Technical Support Section 4: Quality Control Section 5: Marketing Training Module 9A: Financial Management Level I: Bookkeeping Preface Section 1: Bookkeeping Overview Section 2: Identifying Business Activities Section 3: Source Documents and their Controls Section 4: Recording Revenue and Expenses Section 5: Recording Assets and Liabilities Section 6: Putting It All Together: The Trial Balance Annex A: Milk Reception Register Annex B: Example Farmer Payment Schedule Annex C: Chart of Accounts Annex D: Depreciation Schedule Annex E: Cash Book Sheet Annex F: Ledger Card Annex G: Bookkeeping Sheet Annex H: Guide to Making Cash and Bank Reconciliations Annex I: Trial Balance ii Agricultural Producer Organization (AgPrO) Manual

5 AgPrO Reference Manual Training Module 9B: Financial Management Level II: Financial Statements Preface Section 1: Period End Statements: The P/L and B/S Section 2: Understanding the Numbers: Ratio Analysis Section 3: The Cash Flow Budget Section 4: Finding The Answers: a Group Exercise Training Module 10: Growing the Business Preface Section 1: Business Growth Models Section 2: Making The Decision to Integrate Section 3: Financing Growth Training Module 11: Workbook Training Module 12: Resource Guide Preface Gender Resources Enterprise and Economic Strengthening Resources Training Module 13: Developing an Exit Strategy Preface Section 1: Exit Strategy Overview Section 2: Types of Exit Strategies Training Module Exercises Module Module Module Module Module Module Module 7A Module 7B Module 9A Module 9B Module Module Module iii

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7 AgPrO Training Module 1: Selecting Producer Groups Training Module 1 Selecting Producer Groups Agricultural Producer Organization (AgPrO) Manual Prepared by Land O Lakes International Development Funded by The United States Agency for International Development 1

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9 AgPrO Training Module 1: Selecting Producer Groups Preface Training Module 1: Selecting Producer Groups contains three sections. Section 1 provides an overview of the group identification, evaluation and selection process. Section 2 details the selection processes of working with existing and new producer groups. Section 3 presents a sample dairy value chain analysis. The target audiences for this module are: Land O Lakes program and field managers, cooperative and business development specialists and extension officers Government cooperative development officers Cooperatives and other producer groups Other development partners, including government agencies, nongovernmental organizations and private sector partners. 3

10 Section 1: Producer Group Overview As one of the largest agricultural cooperatives in the U.S., Land O Lakes has intimate experience, knowledge and skills in forming and developing business-oriented farmer-based organizations. Many of our projects capitalize on this expertise to help farmer organizations become more member-oriented, service-driven and business-minded. Aggregating smallholder demand for services and modern technology including agricultural inputs has proven to be the most effective and cost efficient method to get productivity-enhancing technology into the hands of widely dispersed, poor farmers. Aggregating production whether raw milk or fresh horticultural produce or staple crops has also been shown to be an effectual method to link smallholders with consumers through participation in commodity value chains. Farmer-based organizations are successful in helping smallholders add value to their product, thereby increasing their incomes and creating additional rural employment opportunities. Our approach to developing and strengthening farmer-based organizations capitalizes on the economies of scale that can be achieved through aggregating supply and demand. Aggregation attracts both buyers and service providers, facilitates smallholder farmer access to input and output markets, and enhances smallholder bargaining power, driving down costs and increasing profits. Aggregation also facilitates broad participation and communication in a wide variety of activities covering a range of issues. For example, producer groups can serve as an entry point to engage community members in HIV/ AIDS awareness activities or post-conflict reconciliation efforts. Our work with producer groups has demonstrated that Our work with producer groups has demonstrated that well-managed cooperative businesses can create sustainable economic opportunities, engender trust between members, and form a foundation for democratic participation. well-managed cooperative businesses can create sustainable economic opportunities, engender trust between members, and form a foundation for democratic participation. This module provides an overview of the group identification, evaluation and selection process. Following this process increases the likelihood that groups will improve their business performance and grow into profitable, sustainable farmer-owned enterprises. However, the group selection process does not occur in a vacuum. It is one step in a broader beneficiary targeting process. This process can be represented as a funnel, starting with a rather wide scope at a national level and narrowing down to the identification of specific groups in particular communities within the country. 4 Agricultural Producer Organization (AgPrO) Manual

11 AgPrO Training Module 1: Selecting Producer Groups Figure 1: Producer Group Selection Validating Project Components Typically, prior to or immediately after project start-up Land O Lakes and the funder will identify and agree upon a number of project variables, including: commodity/value-chain selection (e.g., dairy, maize, high-value horticulture); geographic focus of the project (e.g., national, regional, district); criteria for beneficiary targeting and selection (e.g., smallholder farmers, vulnerable populations, existing producer groups); and the results to be achieved when the project ends (e.g., increase household income, employment generation, increase profitability of groups and businesses). 5

12 This information is typically presented in the form of a program description (the proposed activities) and results framework and/or performance monitoring plan (PMP, the anticipated impact of implementing the proposed activities). A budget identifies the resources available to implement the project. The program description, results framework/pmp, and the budget provide the operating guidelines for the project. During project start-up it is important that the chief of party, in collaboration with project staff, review and validate the assumptions underlying the original project design to make sure they are still applicable. (The time between project design, approval and funding, and start-up can be significant sometimes one year or even longer.) It is important to ground-truth the assumptions underlying design as conditions in a country or region may have changed (e.g., donor/government priorities, political/social unrest, market dynamics such as pricing and demand, climatic conditions such as drought or flooding). Many donors require projects to complete a baseline survey, develop a detailed annual work plan and/or submit a revised PMP during the initial start-up phase. All three of these activities enable the project team, led by the chief of party or project manager, to validate the original project design including: target beneficiaries, geographic focus, development needs, proposed activities and results objectives. A few examples of elements the project should validate during project start-up include: Market demand for the proposed commodity(s) The ability of target beneficiaries to access markets The production potential of target beneficiaries (e.g., can they produce sufficient quantity and quality to meet market demand?) Infrastructure to support achievement of results (e.g., roads, power, access to inputs and services) Willingness of stakeholders to participate in program. Identifying Priority Focus Areas One of the first steps during the start-up phrase is to identify geographic focus areas and beneficiaries for the project. The project team can utilize the tools below to identify priority focus areas: Sector analysis: Provides a broad, macro-level view that addresses the legal, regulatory and competitive environment of a specific economic sector s current and future state. Value-chain analysis: A look at the business system and value-generating activities within the system primarily bringing a product to the final customer. The analysis focuses on the different actors (e.g., private, public and other) and the inter-relationships that influence the performance of an industry. A basic view of an agricultural value chain would look at input suppliers, producers, manufacturers/processors, buyers and consumers as well supporting market providers such as financial services, information systems and businesses that are sector specific. 6 Agricultural Producer Organization (AgPrO) Manual

13 AgPrO Training Module 1: Selecting Producer Groups Spatial mapping: Analysis and mapping of the specific proximity and geographic locations of different value chain actors. Participatory assessments: Assessments of different actors and intended beneficiaries of the development effort. The assessments can be performed using a variety of tools including surveys, interviews, questionnaires and/or focus group discussions. Stakeholder consultations: Discussions to solidify input from key collaborators and stakeholders (both private and public) in the value chain. Each project has its own unique indicators. Both geographic and beneficiary targeting should be undertaken with a view of achieving project goals and result targets. Keep in mind that one of the variables that may be assessed in these analyses is the presence of existing producer groups. Achieving Project Results: Geographic and Beneficiary Targeting With one exception, this module will not delve into these various analytic tools. For agricultural and economic development projects, the objective of geographic targeting is to maximize return on project resource investments. Returns are typically defined in terms of the project results indicators outlined in the PMP. For example: Increased household income for participating farmers Increased employment opportunities Increased yield per animal/hectare Increased volume and value of commodity (e.g., milk, meat, crop) produced and/or marketed Increased revenue and profitability of participating enterprises Increased volume and value of exports. Given our focus on dairy development programming, an overview of a milkshed analysis process is provided in Section 3. It is recommended that a milkshed analysis be carried out after conducting a value chain analysis and before one starts to identify specific producer groups. 7

14 Section 2: Process to Identify Existing and/or Form New Producer Groups Once you have decided where to work, the next step is to determine with whom to work. A typical Land O Lakes agricultural development project may include beneficiaries such as farmers, producer groups, traders, transporters, processors, input and service providers, retailers and exporters. The remainder of this module will focus on the process of identifying, evaluating and selecting existing and/or potential farmer producer and marketing groups that will receive technical assistance from the project. Based on a review and validation of the program description and PMP, you should know the following about your project: geographic area, production and market potential, farming practices, profile of target beneficiaries, whether farmers are already organized, infrastructure, support services, government engagement, challenges (e.g., disease), other stakeholders, area development plans and priorities, investment opportunities and priorities, and political landscape. The project may end up focusing work on areas where a number of groups already exist and have a high potential for further growth and development. Alternatively, activities may be concentrated in areas that have high agricultural potential, but where farmers are not organized into groups. Depending on the nature of your project, you may be asked to target existing groups with members who are already engaged in production and/or marketing (such as a milk producers group). However, some projects may target self-help groups or support groups of people living with HIV/ AIDS who have the potential to engage in commodity production and/or marketing but have not fully realized this potential. Two different selection processes are outlined below based on the current composition and objectives of the existing groups. A third selection process is outlined for entering a community where no or few groups exist. Selection Process 1: Production and/or market-oriented groups exist Used to identify, evaluate and select groups of farmers already engaged in some level of commodity production (and potentially marketing). Selection Process 2: Socially-oriented groups exist Used with projects that focus on groups that are not currently engaged in commodity production but have the capacity and interest to become involved. It is also important to consider whether the project has sufficient resources to build these assets. Selection Process 3: Farmers are not organized into groups Used to bring together individuals with common business and economic objectives to form new producer groups and cooperatives. 8 Agricultural Producer Organization (AgPrO) Manual

15 AgPrO Training Module 1: Selecting Producer Groups Selection Process 1: Production and/or Market-oriented Groups Exist Step 1: Identify Existing Groups Enter community to identify existing organized groups that meet project targeting requirements. Utilize government agents (production or commercial officer), NGOs, private sector input providers/buyers, to help map the presence of existing groups (whether formal or informal) and develop an initial list. Collect general information about the group s capacity and performance, but don t make decisions based on these initial perceptions; you will need to validate this for yourself. Step 2: Narrow the List If you identify a large number of groups (more than the project can realistically work with) during Step 1, consider narrowing the list. Criteria that can be used to narrow the list include: Distance from project site Distance from market Number of members (set minimum target) Additional/alternative discretionary criteria include: does the group have strong political affiliations? Is the group or its leaders/ members on any of the compliance watch lists? Alternatively, you may want to consider a public application process whereby a notice is placed in the local newspaper and interested groups have to apply and be evaluated in order to qualify for project assistance. Step 3: Conduct Background Check When possible, conduct background checks before going to the field. This is not intended to eliminate groups, rather to collect important supporting information that will help in the decision making process. The background checks should: Confirm registration, if applicable (lack of registration may not be a reason for excluding a group). Gather feedback from private sector players (buyers, processors, providers). Is the group known? Is the group trusted? Is the group reliable? Step 4: Conduct Initial Site Visit The initial site visit should include meetings with the board, management and a few farmer members. Whenever possible, work through a trusted/respected individual such as a government official, NGO worker or someone from the private sector. Ask him/her to attend the meeting with you. During the site visit, introduce the project and determine the individual s/group s initial interest in participating in the project. However, be careful not to make any firm commitments at this point. Consider a targeted application process. Use an application to verify information with relevant authorities and members. Step 5: Decide Which Groups to Explore Further With other key project staff, discuss the information gathered, the feedback received, and perceptions of the various groups. Based on these findings, collectively decide whether or not to move forward with each group. 9

16 If yes, proceed to Step 6 If no, communicate the decision back to group leaders Step 6: Hold Introductory Group Meeting Once you decide to move forward with a group, take steps to evaluate group capacity, interest, dynamics, responsiveness, and determine how realistic their expectations are. Consider a targeted application process. Use an application to verify information with relevant authorities and members. Review project objectives and beneficiary targeting and growth parameters. Does the group qualify? Do the members want to participate? Ensure project staff manages expectations along the way. Be very clear about what the project will do and what it will not do (especially related to funding). Clarify the expectations for the group and its members (e.g., participating in M&E data reporting). Introduce the concept of the partnership agreement (see AgPrO Training Module 2 on partnership agreements) and allow the group to consider it, but do not formalize an agreement at this time. Step 7: Make Final Decisions on Groups Working with the project team, discuss feedback and perceptions of each group. Validate against beneficiary targeting parameters (e.g., farm size, herd size, household income, etc.) and growth potential (access to inputs and service, labor, land, water, infrastructure, market access, knowledge base, etc.). Prioritize the list and run official background checks on each group through Watch Dog. Once the results are available, decide which groups to move forward with. Before confirming decisions, ensure buy-in from all members of the project team: project management, technical specialists and field staff. Step 8: Convene a Mobilization/Kickoff Meeting with Each Group At this meeting, reconfirm interest and agree on mutual expectations. Complete the partnership agreement utilizing AgPrO Training Module 2 as a guide. Step 9: Conduct Group Baseline Evaluation Conduct a baseline evaluation of each group utilizing the AgPrO Performance Measurement and Management System. Selection Process 2: Socially-oriented Groups Exist Step 1: Identify Existing Groups Enter selected community to identify the presence of existing organized groups that meet targeting requirements. Utilize government agents (health, production or commercial officers) and NGOs to help map the presence of existing groups (whether formal or informal). Develop an initial list and collect general information about the capacity and performance of the group. However, don t make decisions based on these initial perceptions; you will validate this for yourself. Steps 2 9: Follow the same procedures as Selection Process 1 10 Agricultural Producer Organization (AgPrO) Manual

17 AgPrO Training Module 1: Selecting Producer Groups Selection Process 3: Farmers are Not Organized into Groups Step 1: Evaluate the Potential for Forming Groups Enter the selected community to: Evaluate production/marketing potential Understand why there are no producer groups in the area (what is the history of groups in the area?) Identify the presence of farmers that meet targeting requirements (e.g., commodity production, production potential, food insecurity, high HIV/AIDS prevalence). Utilize government agents (health, production or commercial officers), NGOs, community leaders and/or private sector (buyers, traders, inputs suppliers, transporters, etc.) to identify progressive farmers and/or informal groups. If necessary, you can consolidate your list based on the viability of market access and/or distance from project site. Step 2: Conduct Field Visits to Talk with Farmers During field visits, utilize a local, trusted partner to guide you in the field. Talk to progressive farmers and also meet with other farmers. During these conversations, gather information such as: Knowledge of production potential of the area Common production practices Challenges related to production and marketing Experience of community in working in/with groups Who is doing/has done what in the community? (e.g., government, NGOs, private sector). What worked, what didn t and why? Step 3: Ground-truth Information Received Document your observations: What did you observe while out in the community? (Is the commodity in production? How extensive is it? Did you see active buying and selling of the commodity? Do input and service providers exist? Are there financial service providers?) Take time to review government data/records on commodity production and marketing, rainfall, sector studies, etc. Discuss your observations with private sector representatives (demand, supply, seasonality, pricing, inputs/services offered, etc.) Step 4: Organize a Community Meeting Work through community leaders to organize an open, public meeting. Invited attendees could include community leaders (government officials, traditional leaders, religious leaders, private sector leaders). The meeting should serve to introduce Land O Lakes and the project, as well as set clear expectations about the project focus and duration, community input requirements and outline the project exit strategy. During the meeting, solicit input and feedback from the community on the importance of the commodity, experience with the commodity, ongoing/recent/previous related work, and experience with groups (positive and negative), community perceptions, and related government/donor interventions. It is also important to review the beneficiary evaluation and selection process. Inform the community that a decision is yet to be made as to whether the project will work in the area. Outline the next steps in the process 11

18 and inform them that further communications will be channeled through the appropriate government official (preferably from a line ministry). Step 5: Conduct Internal Selection Meeting With relevant project staff, discuss feedback and perceptions of the groups. Based on these findings, collectively decide whether or not to move forward with each group. If yes, proceed to Step 6 If no, communicate the decision back to government officials Step 6: Conduct Community Assessment Conduct participatory rural appraisal (PRA) with the shortlisted groups. The Food and Agricultural Organization of the United Nations (FAO) has a tool that provides more background on PRAs. 1 Evaluate project s viability, the community s interest in the commodity (production and marketing), and their receptivity group formation. Any lack of interest or willingness to form groups should be discussed internally among project staff. This may or may not be a factor in the decision to work with any given community. Step 7: Hold Discussions with Various Stakeholders Discuss your findings and due diligence with government, private sector, NGOs and other stakeholders. Work to validate more detailed findings. Confirm interest by various parties to support and contribute to the project. If the project success will be contingent on specific inputs from others (e.g., new irrigation system, provision of extension services, forward contract commitment from buyer, etc.), confirm the willingness of each party to commit to these inputs/investments. Confirm with government officials that the project supports policies, strategies and the regulatory environment. Review and confirm working assumptions with stakeholders. Step 8: Convene Internal Team Meeting During this meeting, discuss feedback and perceptions of the communities. Validate this information against beneficiary targeting parameters and growth potential. Work with the chief of party and other project managers to reach a go/no-go decision. Ensure complete buy-in from all members of the project team, including project management, technical specialists and field staff. Step 9: Launch the Project in the Community Discuss project design with community leaders and mobilize a public community meeting to launch the project more broadly in the community. This meeting should: Introduce the project design and parameters Solicit feedback and questions from community members Outline community requirements to engage in the project and reinforce the message that community members need to cooperate in order to: Access a market opportunity from the private sector Access goods and services from the private sector/government/ngos Access training and technical assistance from Land O Lakes Agricultural Producer Organization (AgPrO) Manual

19 AgPrO Training Module 1: Selecting Producer Groups Form loose groups based on farm size/ production potential, number of groups, number of members per group (should correspond with project targeting criteria). Each group should identify a point of contact. Provide each group will an application form to officially apply for the project. Step 10: Undertake an Internal Review and Selection of Applications Conduct field verification if necessary and finalize the list of groups with which the project will work. Step 11: Hold Kick-off Meeting with the Group Please refer to AgPrO Training Module 4 (Selecting a Business Structure) and Module 5 13

20 Section 3: Sample Dairy Value Chain Milk Shed Analysis The objective of a milkshed analysis is to identify geographic areas that offer the best opportunity to build an institutional infrastructure to economically procure large quantities of milk from a contiguous area. The starting point for identifying milksheds within a particular location is to pinpoint geographic areas that have a comparative advantage in milk production based on variables such as rainfall (or access to year-round water sources), existing livestock population (or carrying capacity), climate, disease prevalence, and available feed and fodder. Once high potential production areas have been identified, the area can be evaluated using additional variables such as market access, existing infrastructure and availability of inputs and services to more accurately determine its potential as a viable milkshed. Milkshed analyses are typically carried out by private sector dairy processors, governments and/ or development partners to determine where to invest scarce resources to maximize returns on investment in milk production, collection and/or processing. A milkshed analysis is often conducted in two stages. In the first stage, analysis of secondary data is carried out to identify potential milk production areas. In the second stage, a sample survey is carried out in selected sample villages/towns to more clearly identify specific milk production areas that will be targeted for development by the processor, government and/or donor project. First Stage Analysis: Identify Potential Milk Production Areas This part of the analysis is usually based on secondary data (assuming it exists), which are normally compiled at the level of administrative units by government. Secondary data that can be examined to identify high potential milk production areas is outlined in the table below. 14 Agricultural Producer Organization (AgPrO) Manual

21 AgPrO Training Module 1: Selecting Producer Groups Data / Information Level Potential source(s) Area and number of villages District or lower unit Bureau of Economics & Statistics, human population census Distribution of villages by human population size groups and population growth rate District or lower unit Human population census Livestock population and growth rate District or lower unit Livestock census; Ministry/ Department of Livestock Road length by type of roads District or lower unit Bureau of Economics & Statistics; Ministry/Dept. of Roads/ Transport Number of electrified villages District or lower unit Bureau of Economics & Statistics; Ministry/Dept. of Energy Rainfall data District or lower unit Bureau of Economics & Statistics; weather bureau Total cultivated area District or lower unit Bureau of Economics & Statistics / Ministry/Dept. of Agriculture Cultivated area under food crops (grains, pulses and selected oilseeds) District or lower unit Bureau of Economics & Statistics / Ministry/Dept. of Agriculture Cultivated area under fodder crops District or lower unit Bureau of Economics & Statistics / Ministry/Dept. of Agriculture Total irrigated area District or lower unit Bureau of Economics & Statistics / Ministry/Dept. of Agriculture Irrigated area by crops District or lower unit Bureau of Economics & Statistics / Ministry/Dept. of Agriculture Maps showing administrative boundaries, roads, major towns and villages Number and location of existing milk collection centers, dairy producer groups and/or dairy processing plants District or lower unit District or lower unit National survey organization Ministry/Dept. of Livestock / Dairy Board / Ministry of Cooperatives / private sector Typically, the administrative structure within a country consists of: Federal State/Province District Division Village Because milksheds are usually defined by natural features such as rainfall, availability of feed and fodder, and disease prevalence, they may cut across one or more administrative unit. Milksheds are typically defined at a district, division or village level. With the advent of Google Earth and satellite imagery, it is possible to collect some of the abovementioned data in spatial form. This can be an extremely useful and cost-effective way of identify potential milksheds. Figure 1 provides an example of how spatial data has been used for this purpose. 15

22 Figure 2: Rainfall and Cattle Density in the Selected Milksheds Assessment Parameters Area and number of villages and distribution of villages by human population size groups Derivative: density of villages. Higher density means villages are located closer to each other and therefore increase the possibility of organizing shorter routes or covering of more villages per route. Where the density of villages is low, the area within and/or between each village would be greater and it may be more difficult to bring them under the coverage of a milk procurement route. Moreover, the objective is also to identify groups of villages that offer the best opportunity to organize a viable collection center. The number of potential producer groups/cooperatives that can be organized is also arrived at from this parameter. Livestock population Many countries conduct a livestock census. The frequency may vary from country to country depending on the importance attached to the census. Moreover, data on distribution of livestock by villages or other lower-level administrative units is generally not available. In this case, overall numbers of livestock (i.e., adult female cattle disaggregated by local breeds vs. exotic/cross breeds and/or adult female buffaloes) are used to relate it with human population. The presumption here is that the higher the number the more rural families in cattle keeping and, therefore, in milk production and marketing. 16 Agricultural Producer Organization (AgPrO) Manual

23 AgPrO Training Module 1: Selecting Producer Groups Road length by type of roads Derivative: density of all-weather rural roads. Rural milk procurement is a year-round operation and the road network should be all-weather so that the producers and producer groups can be reached during all seasons. Roads can be grouped as all weather and seasonal. Number of electrified villages In modern milk collection and bulking operations, where milk coolers, as well as testing and weighing operations, are critically based on the availability of a reliable power supply, this information is needed in relation to the population size of villages. Rainfall data Water is the basis of agriculture. Rainfall, its distribution, the length of the rainy season, and consistency in rainfall all need to be understood to determine the extent to which agriculture and dairying operations are stable in a given area. This data will also show the frequency of droughts and crop failures. Higher frequency of droughts and crop failures may mean that cattle-keeping is more important as a source of family income and sustenance than agriculture. Total cultivated area, cultivated area by food and fodder crops, total irrigated area, and irrigated area by crops Derivative: Cropping intensity and feed resource availability for sustainable livestock husbandry. Milk production is critically dependent upon the availability of home-grown feed resources. In a smallholder-based milk production system the availability of edible crop residues (food crops - grains and pulses/lentils, oilseeds like pea nuts, etc.) influences whether farmers keep animals and, if so, the numbers that can be raised. The area under fodder crops is an indicator if livestock husbandry is taken with commercial interest in mind or whether fodder crops are grown simply to supplement feeding of edible crop residues. Areas with higher cropping intensity under food and fodder crops have greater feed resource security for livestock and stability in milk production. Not all food crops provide edible crop residues. One must therefore determine the composition of commonly grown crops in a given area. Crops like cotton, sunflower, castor and linseed are commercially very important but do not provide edible crop residues. Many vegetable crops like potatoes, cauliflower, and cabbage provide a good deal of edible greens to supplement the dry residues. Crops like paddy and sugar cane provide inferior crop residues. Therefore, crop data and their grouping as feed resource providers is very important. Selection and Ranking of Potential Milkshed Areas For each of the parameters identified above, the mean and standard deviations are calculated. Each parameter is then placed in one of three ranks: Rank I: Values higher than mean + one standard deviation Rank II: Values within mean +/- one standard deviation Rank III: Values lower than mean - one standard deviation 17

24 Values for each geographic area are then added and a composite value is derived. From these composite values, a mean and standard deviation is again calculated. Geographic areas are then categorized in one of three zones: Zone I: Values higher than mean + one standard deviation Zone II: Values between mean +/- one standard deviation Zone III: Values lower than mean - one standard deviation At this stage of milkshed analysis, geographic areas are identified with the potential to develop viable milk production, collection and/or processing infrastructure based on relative stability of milk production and high probability of sustainable growth and development. Zone I geographic areas will invariably have the greatest potential, but may also have the most existing infrastructure, development and active competition, especially if they happen to be the best connected to or close to a large market. Zone II areas may have less immediate potential than those identified as Zone I, but they will have significant potential for future growth and expansion. Zone III areas should be viewed as not offering much potential at this point in time. Through this categorization process, the project can identify and prioritize areas to target development assistance. Stakeholder Validation of Priority Milkshed Areas Before committing scarce development resources to prioritized milkshed areas, it will be important to validate findings with key development partners from government, the private sector and/or the donor/ngo community. Additional evaluation criteria may be considered before actually investing in a given milkshed: Private sector interest in and commitment to investing in milk collection/processing Existing veterinary, artificial insemination (AI) and extension service infrastructure Private sector interest in and commitment to investing in input and service provision Government interest in and commitment to investing in development of the area Other current or planned donor/ngo investments in selected milksheds Political, social or other forms of insecurity Electric power supply (since operation of a milk collection and testing system requires reliable power supply) Availability of financial services. 18 Agricultural Producer Organization (AgPrO) Manual

25 AgPrO Training Module 1: Selecting Producer Groups Second Stage Analysis: Milk Procurement The objective of starting a milk procurement operation linked to a dairy is to see that the supply side of the value chain works consistently throughout the year. It also helps to ensure that the production base is strong in terms of livestock numbers as well as farming and livestock rearing practices. In the second stage of milk shed analysis, sample villages from each of the three zones are randomly chosen in proportion to the total number of villages in each zone. Care is taken to ensure that at least one village is chosen from each size group. A quick enumeration of all the households in selected sample villages is carried out to generate parameters for planning. A sample questionnaire can be found at the end of this guide. Sample Size If the villages are divided in four human population size groups, in three zones there will be at least 12 villages for enumeration. However, more than one village may need to be chosen from the model village size groups (statistical mode, i.e., group with highest frequency). Thus, there may be up to seven villages in each of the first two zones. In Zone III, which is not considered suitable for immediate action, four villages (one from each village size group) may suffice. The purpose of selecting villages from various population size groups is to be able to arrive at a reasonable estimate of marketable surplus by village size group and identify groups ideally suited for organizing a milk producers cooperative or association. Very large villages may not have enough milk to sell due a larger local demand. Therefore, they may not be targeted, despite overall high production and other favorable factors such as all-weather connectivity, power supply and processing infrastructure. They may in fact be the demand centers to which the system would need to cater. Parameters to be Generated through Second Stage Analysis Family details Understand the gross labor force availability for farming and dairying activities, and the role of women in it. Compare the proportion of children to the total population to know if children are contributing to labor (if number of adults is less than employment numbers). Operational land holding A family may operate more or less land than owned by leasing in or out a part of the holding. Leasing arrangements are generally made for a year or a season. These items of information will generate following parameters: gross area on which crops were grown, irrigated area as proportion of gross cropped area and cropping intensity (an indicator of sufficiency of water for irrigation). 19

26 Crop cultivation details The purpose of gathering data on crop cultivation is to determine the availability of crop residue and cultivated fodder for livestock raised by the family; the ratio of main produce to by-produce under irrigated and non-irrigated conditions for crops providing feed resources for livestock; and identify crops important as feed resource. Animal holding and milk production Parameters to be generated are: proportion of calves, heifers, lactating cows and bulls in total bovine holding, inter-calving period of adult breedable females by breed. Milk disposal Parameters to be generated are: percent of milk sold versus percent for home use, agency to which sold and agency wise proportion of sale (also if the sale is for use within the village or for taking it out of the village), price received per liter of milk sold (wet versus dry season), awareness about milk testing. Inputs and services Parameters about services used: cattle feed, AI and veterinary care and vaccinations; identify the services they use; prices paid for various inputs and services; and the source of services used. Milk Collection Route Mapping Route mapping is based on the findings of the household surveys and on the basis of the number of societies that can be organized (from the enumeration of sample villages). Route mapping identifies the locations of existing producer groups and collection centers, existing and proposed routes, location of existing and proposed bulking, cooling and/or processing facilities. It helps determine the final number of societies and milk routes that can be organized in each zone and the linkages with the processing facilities. When establishing route length, the time taken to reach the milk collected from the first society must be short enough to reach the processing facility without any risk of sourage/spoilage. Other Salient Features of the Milkshed Besides a fair (compositional) quality-based pricing, production enhancement inputs like veterinary service, breeding services and balanced feed are other important factors that attract milk producers to producer groups and help them stay loyal. 20 Agricultural Producer Organization (AgPrO) Manual

27 AgPrO Training Module 1: Selecting Producer Groups Annex A: Sample Questionnaire Village Identification: Name of the village Block: District Serial number / / / / 1-3 Household Identification & Details: Name of the head of household: Name of the respondent: Relationship with the head: Self=1, other =2 / /.4 Family Details Members Adults (18 years and older) Employed in Agric. Dairying Not working Children <10 years Male 6-11 Female Total Land Holding (operational) Land measurement unit Total units operated in last one year Of unit operated, units irrigated Total units operated in more than one cropping season Acre Hectare Other

28 Crop Cultivation Details Crop name Land measure unit 1 = Acre, 2 = hectare 3 = local unit Total Area Total Yield of the main crop kg Total Yield of crop residue kg CR used for feeding cattle yes = 1, No = Animal Holding & Milk Production Type Breed Adults (breedable) (numbers) Total milk produced yesterday In milk Dry liters ML Cows (Native) Cows (exotic/x-bred) Buffalo Milk Disposal Type of milk sold Milk sold yesterday to Quantity sold Price per liter (mention currency unit) If buyer Tests Milk fat 1=Y, 2=N liters ML Cow milk Buffalo milk Mixed milk Did not sell Agricultural Producer Organization (AgPrO) Manual

29 AgPrO Training Module 1: Selecting Producer Groups Cattle Feed Feeding; AI and Vet Services Used Cattle feed Cow milk 122 Buffalo milk 123 Mixed milk 124 Breeding service Natural service 125 AI only for cows 126 AI for both cows & buffaloes 127 Avail veterinary service from Government veterinary clinic 128 Government mobile clinic 129 Private mobile clinic 130 Vaccinations F & M 131 H S Investigator s Name: Signature: Date: / / / Investigator Instructions for Interview Village and household identification ensure that no household interview is duplicated and the village and household can be easily identified in case there is need to revisit. 1. One questionnaire is to be used for collecting information on one household. Numbers given at the extreme right are column numbers in the spreadsheet where the data under reference shall be recorded. Column 5 shall be left blank in the spreadsheet. 2. Each interviewer will be allotted a one-digit ID number. 3. Village Identification: Interviewer with ID number 1 will start the first interview with 101 and then progressively add on. First interview conducted by interviewer with ID number 2 will bear serial number 201 and so on. 4. Relationship of the respondent with the head of the household. The respondent should always be an adult family member. Do not interview children as the information given by them may be inaccurate. Record 1 in column if the respondent is the head of the household. For others respondents, record 2. 23

30 5. Family details: ( Family refers to persons living under one roof and sharing the same kitchen.) In column 2, row 1, record the number of male members of the family who are at least 18 years of age. In the next column, record the number of men 18 and over who are employed in agriculture and dairying. If a person is employed both in agriculture and dairying, record the activity that takes more of his time. In the third column, record the number of adults that are totally out of work. In the next column, record the number of males who have yet not completed 10 years of age. In the second row, similar information should be recorded for female members of the family. Landholding: Refers to landholding in the village of stay; a family may own land in more than one village but our intent is to know only about the land operated in the village of stay. Although one row would suffice for recording this information, three rows have been provided: one each for three land measurement units - acre, hectare and local unit. Many farmers use only local units of measure for land. The name of the unit should be mentioned. In column 2 record the number of units on which the farmer actually cultivated crops. In column 3, record the units on which irrigation was used. In column 4, record the number of units on which crops were grown in more than one season. Crop Cultivation: One row should be used for one crop. Write the name of the crop in column 1. If a mix of two or more crops is grown on the same piece of land in the same season, record it as one crop. For example; for maize + cow pea grown as a mix crop record crop name as Maize + Cow pea. In column 2, record the land measure unit: 1 for acre, 2 for hectare and 3 for local unit of land measurement. In column 3, record the number of land units under the crop. In column 4, record the number of units that were given irrigation. This may be equal to or less than the area mentioned in column 3, but never more. In column 5, record the total production of the main crop on the total area (as mentioned in column 3) in kg. In column 6, record the total amount of crop residues produced on the area under the crop. In column 7, record 1 if the crop residue is used to feed livestock (cattle and buffaloes). Record 2 if it is not used as livestock feed. Animal Holding and Milk Production: One row has been assigned for each type of milk. In column 1, mention the name of the breed, if known. Native cows in some areas may also be called zebu cattle or other indigenous names and they may be non-descript or belong to one of the recognized breeds. Write the breed name as stated by the farmer. In column 2, write the number of adult animals of the type that are actually producing milk at the time of interview. 24 Agricultural Producer Organization (AgPrO) Manual

31 AgPrO Training Module 1: Selecting Producer Groups In column 3, record the number of adult animals not producing milk on the day of interview. Total quantity of milk produced should be recorded in columns 4 & 5. While whole liters (integer) should be recorded in column 4, use column 5 to record fractions. For example, to record 7 liters and 450 ml, write 7 in column 4 and 450 in column 5. Milk Disposal: Four rows are provided to record milk sales. Use the first row for cow milk (milk of both native and cross bred cows). Use the second row to record buffalo milk sales, and use third row, if milk is sold as mixed cow +buffalo milk. In column 1, record the name of the agency to which milk was sold. It could be a private vendor, cooperative, a contractor, village milk shop owner or a neighbor. In columns 2 and 3 mention the quantity of milk sold on the day previous to interview day. Check if the quantity sold is within the quantity produced as mentioned in production section. Use column 2 for whole liters and column 3 for recording fractions. In column 4, mentioned the price received per unit of milk sold. Mention the name of the currency in top cell of column 4. Ask if the buyer (if it is anyone other than the neighbor) tests the milk for its fat content. Record response as 1 for Yes and 2 for No. If the response is did not sell record total quantity produced as not sold quantity in columns 2 and 3. Inputs and Services: In this section, we are only trying to find out if farmers use any of the modern inputs and if so, from which source. Services are mentioned in four sub groups as cattle feed; AI; veterinary services; and vaccinations. Against the type and source used record 1. Leave other columns blank. For vaccinations, names of two diseases (foot and mouth and Hemorrhagic Septicemia) are mentioned. For other vaccinations given, use the blank column and mention the name of the disease for which vaccination is given. At the end, write your name, sign it and record the date of interview as: month/date/year. 25

32 26 Agricultural Producer Organization (AgPrO) Manual

33 AgPrO Training Module 2: Developing Partnership Agreements Training Module 2 Developing Partnership Agreements Agricultural Producer Organization (AgPrO) Manual Prepared by Land O Lakes International Development Funded by The United States Agency for International Development 27

34 28 Agricultural Producer Organization (AgPrO) Manual

35 AgPrO Training Module 2: Developing Partnership Agreements Preface AgPro Training Module 2: Developing Partnership Agreements provides a checklist and sample documents intended to help Land O Lakes country program staff develop and implement clear agreements with partner organizations. This module is intended to be used after Land O Lakes staff members have identified the geographical areas and producer organizations that will be the focus of their agricultural development work (see Module 1: Selecting Producer Groups). In this module, the phrases partnership agreement (PA) and memorandum of understanding (MOU) are used interchangeably to refer to a document written between or among parties to work cooperatively on an agreed-upon project or meet an agreed-upon objective. PAs and MOUs are nonbinding agreements that represent a good faith statement of intent to work together with one or more partners. They are different from a contract, which is a binding legal agreement that is enforceable in a court of law. This module provides sample agreements that Land O Lakes country programs can use with cooperatives, development partners and government agencies. The target audiences for this module are: Land O Lakes program and field managers, cooperative and business development specialists and extension officers Government cooperative development officers Cooperatives and other producer groups Other development partners, including government agencies, nongovernmental organizations and private sector partners. Refer to chapter 2 of the Agricultural Producer Organization (AgPrO) Development Manual for an overview of the definition, purpose and steps of developing PAs and MOUs. 29

36 Section 1: Partnership Agreement Checklist This section of the module provides a checklist indicating when and how to enter into and terminate PAs. An important step of this process is ensuring draft PAs are reviewed and approved by the appropriate home office and/or program management staff. Other points to keep in mind: PAs can be modified over time as relationships with partners change. In some cases, especially in agreements with cooperatives, vernacular versions of the agreements should be made available to partners. When entering into a PA with a cooperative, the terms should be reviewed with all cooperative members, not just with the manager or the board of directors. The language used in the agreement should be clear and understandable. Each agreement should have a termination clause. This section is divided into four subsections that address the different stages of a PA: 1) determining whether an agreement is necessary; 2) drafting an agreement; 3) finalizing an agreement; and 4) managing an agreement. Is an Agreement Necessary? 1. Determine the need for and anticipated benefits of entering into a PA with the interested party (ies). 2. Land O Lakes chief of party, regional program director and/or home office program operations team hold discussions with parties to the PA and approve the intention to enter into a PA. 3. Participating parties discuss and approve their intention to enter into a PA. Drafting the MOU/PA 1. Draft the MOU/PA. Make sure to include and clearly define the following information: Name, contact information and affiliation of each party Goals and objectives of the partnership Terms and conditions, including: Duration of agreement, including start and end-date Conditions for termination (change in funding status/availability; nonperformance and engagement in illegal activities; among other conditions) Termination and suspension procedures Dispute resolution/mediation/arbitration procedures 30 Agricultural Producer Organization (AgPrO) Manual

37 AgPrO Training Module 2: Developing Partnership Agreements Inputs, outputs and deliverables. This information should be presented in a user-friendly format such as a narrative, list, work plan, or GANTT chart Financial obligations of each party Reporting requirements (type of information, format, frequency, etc.) of each party. 2. Determine if confidentiality is critical to the partnership. If so, include a confidentiality clause. 3. Determine appropriate signatories to the MOU/PA. Please consult the chief of party, regional program director or your program operations team to determine the most appropriate signatory. Finalizing the Agreement 1. The draft MOU should be reviewed and approved by the chief of party, regional program directors or program operations team. Management may opt to also have it reviewed by someone from the Land O Lakes, Inc. legal department. 2. Obtain signatures of representative(s) from participating parties. 3. Obtain signatures from third-party witness(s)/observer(s), if necessary. Managing the Partnership 1. Agree on format and procedures for review of progress indicators. Open communication and feedback are critical to any partnership. Expectations should be set up front as to how feedback will be given among parties. 2. Identify primary points of contact from each party. 3. Set a schedule for regular review of the partnership. 4. Consider developing a work plan (simple or detailed, with timelines, outputs, deliverables, etc.) to provide more structure to the relationship. 5. Document all communications related to the PA, including s, meeting minutes and notes from oral conversations. 6. Provide open, balanced feedback on the partnership as it progresses. This should include what is going well, what is not going well and what could be done differently (by all parties). 7. Openly discuss the issue if one or more of the parties is not meeting their commitments as defined by the MOU/PA. Action plans to get the partnership back on track should be developed, documented and signed. 8. In case one or more of the parties wishes to terminate or suspend the partnership, follow the terms and procedures outlined in the MOU/PA. 31

38 Annex 1: Sample Partnership Agreement Template The following is a sample partnership agreement template that can be adapted for use with a range of different partners. Sample Partnership Agreement Land O Lakes [name of program] is a [funder]-funded program whose purpose is to increase the productivity and competitiveness of the dairy sector of [country]. The management of [name of cooperative, dairy plant, service provider, etc.] undertakes, jointly with representatives of Land O Lakes, to prepare an annual company work plan covering plant operations, product development and business and market development. In the course of its association with [name of cooperative, dairy plant, service provider, etc.], Land O Lakes representatives will offer technical and business advice to the management and staff of the partner organization in support of the activities agreed to by both parties. Land O Lakes will not provide funding in any form, but will provide technical expertise and link the management of the partner organization to other organizations, institutions and other sources that may become available for the provision of financial services. Where relevant, and only with the agreement of the management of [name of cooperative, dairy plant, service provider, etc.], Land O Lakes will facilitate further business development through market linkages with other organizations, e.g., equipment and other suppliers, that may be able to contribute to attainment of the partner organization s business objectives. The association is voluntary, free of any charge and nonbinding on either side. Either party, on giving notice to the other party orally or in writing, may terminate the association. All commercial, financial, marketing, sales, technical or technological subjects and information pertaining to the business and processing activities of [name of cooperative, dairy plant, service provider, etc.] that come into the knowledge domain of Land O Lakes representatives will be treated as strictly confidential and will not be divulged by the representatives of Land O Lakes to third parties. Any proprietary information (product formulas, software, etc.) used by [name of cooperative, dairy plant, service provider, etc.] or provided by Land O Lakes will not be divulged to other competitor businesses. 32 Agricultural Producer Organization (AgPrO) Manual

39 AgPrO Training Module 2: Developing Partnership Agreements As a measure of its progress and success in the field, Land O Lakes is required to submit periodic reports of its activities to the funding agency and to Land O Lakes Inc. These reports will include statistical information pertaining to improved performance in the dairy industry of [country name] resulting from interventions provided by the Land O Lakes Program. Land O Lakes seeks to encourage private sector financial investments directed at developing the dairy sector in [country name]. Where third-party funding is appropriate and when it is available, the recipients of financial aid will be expected to participate in cost-sharing of any financial investments. Cost-sharing will be expected for training activities provided by Land O Lakes to the recipient s employees or staff. So that Land O Lakes can measure and report on business improvements resulting from technical services and training provided, the management of [name of cooperative, dairy plant, service provider, etc.], agrees to allow the representatives of Land O Lakes to access relevant business and financial records and agrees that these records may be used as statistical information in reports compiled by the Program and submitted to Land O Lakes Inc. and [funder]. It is understood and agreed by the parties that this agreement is nonbinding, in any sense. It is understood and agreed by the parties that Land O Lakes does not and will not hold any legal responsibility for any undesirable outcome deriving from, or associated with, the consultancy and technical assistance provided. It is agreed by the parties that Land O Lakes holds no obligation or legal liability for financial or any other kind of losses that may occur as a result of assistance or advice provided. In agreement, [name] [title] Land O Lakes Date: [name] [title] [organization] Date: 33

40 Annex 2: Sample Agreement with a Cooperative MEMORANDUM OF UNDERSTANDING BETWEEN LAND O LAKES Inc. Zambia AND [NAME OF DAIRY COOPERATIVE SOCIETY] FOR THE DEVELOPMENT OF A MARKET-LINKED SMALLHOLDER DAIRY PROGRAM IN [GEOGRAPHICAL AREA] Introduction Land O Lakes Zambia CFAARM program is a USAID-funded program with the purpose to Reduce food insecurity and increase resilience through increased production and marketing of the dairy sector of Zambia. The Land O Lakes program has been operating in Zambia since Among other interventions under this program, smallholder dairy farmers in selected areas have been empowered to run dairy cooperatives as a way of contributing to the elimination of food insecurity and improve their incomes. The program works with primary dairy cooperatives as the basis for sustainability of smallholder dairy farmers who are the focal point persons for milk production and bulking. The program has facilitated establishment of milk collection centers (MCCs) as central points for farmers to deliver their milk for onward selling to processors on their behalf. To achieve sustainability of this intervention, the cooperatives, through the MCCs, need to have the capacity to run and operate profitably and transparently, with all stakeholders fully aware of the operations and financial position of the cooperative at every given point. 34 Agricultural Producer Organization (AgPrO) Manual

41 AgPrO Training Module 2: Developing Partnership Agreements Memorandum This Memorandum of Understanding, hereinafter defined and hereinafter referred to as MOU, provides the basis for an effective and mutually beneficial collaboration amongst the two parties. The MOU is made this [ ] day of [month], [year] between the following two parties: 1. [name of cooperative] having its registered office at [location of the cooperative] (hereinafter referred to as [abbreviated name]); and 2. Land O Lakes Incorporated, having its principal office at 191B Chindo Road, Kabulonga, Lusaka (hereinafter referred to as LOL Inc.). The two parties have agreed to enter into this MOU to reflect their mutual intention to cooperate, coordinate and/or combine their resources and activities to assure the efficient and viable implementation of dairy development activities that are consistent with the objectives of the Land O Lakes CFAARM Program. Whereas: The parties named above have agreed to work together in order to support and contribute to increased smallholder participation in the developing dairy industry as follows; The [name of cooperative] positions itself as the focal point for smallholder dairy farmer mobilization and coordination for economical, effective and efficient linkage of said farmers to prime markets for milk and dairy inputs. Land O'Lakes Inc. positions itself as a facilitator and provider of dairy-related business and technical advisory services and linkages to financial and equipment providers through the market- linked smallholder dairy program. THE MEMORANDUM OF UNDERSTANDING NOW WITNESSES AS FOLLOWS: 1.0 DEFINITIONS AND INTERPRETATIONS In this Memorandum of Understanding, hereinafter defined and hereinafter referred to as MOU the following words and expressions shall have the meaning assigned to them. 1.1 Memorandum of Understanding means the written understanding and any annex, extensions, renewals and amendments thereto entered into by the parties. 1.2 Parties or Partners shall mean [name of cooperative] and Land O'Lakes Inc. 1.3 Authorized Representatives shall mean any officer appointed for either party to perform services related to this MOU and notified in writing. 1.4 [Abbreviated name of the cooperative] shall mean the [name of cooperative]. 1.5 MCC shall mean milk collection center. 1.6 Co-op shall mean cooperative. 1.7 GRZ shall mean the Government of the Republic of Zambia 35

42 2.0 OPERATION OF THE MEMORANDUM OF UNDERSTANDING The Parties Agree That: 2.1 [Name of cooperative] s role is to: i. Conduct its affairs in a transparent and democratic manner based on the laid-down principles of a coop and in keeping with the facets of the Cooperatives Act as enshrined in the laws of the sovereign Republic of Zambia ii. Be accountable to its members and the other parties to this agreement iii. Manage the MCC in keeping with advice provided by the partners as regards cooperative governance, business management, milk quality and hygiene conditions iv. Ensure that the MCC is adequately staffed and prudently managed v. Maintain records of all milk received, sold and rejected milk (citing reasons for rejection) vi. Submit MCC and/or co-op records to Land O Lakes upon request for the purpose of monitoring and evaluation and implementation of other program activities vii. Maintain harmony with member smallholder dairy farmers by paying them their dues in full at an agreed-upon time every month viii. Participate and provide necessary resources and input in the planning and implementation of specific activities and projects proposed by the partners ix. Promote the concept of joint marketing of milk through bulking among the smallholder dairy farmers in the area x. Promote and manage the use of artificial insemination, veterinary services, supplementary feeds and other inputs among members xi. Provide necessary information to members on milk markets and inputs xii. Support the extension personnel provided by the partners xiii. Willingly provide timely reports and information at the request of the partners xiv. Take full responsibility for any loans (equipment and inputs) xv. Participate in all activities promoted by the partners, such as field days and training xvi. Limit the risk of exposure to litigation and loss on all equipment and facilities provided or constructed by the partners. 2.2 Land O Lakes role is to provide the following services: Business Development i. Conduct financial and economic feasibility assessments for the MCC ii. Assist the co-op in managing its business profitably through effective financial controls, transparency and accountability. iii. Assist the co-op in identifying and negotiating supply contracts with guaranteed suitable markets and suppliers of dairy inputs and outputs iv. Appraise and introduce other income-generating activities, new products and markets for the co-op (community) to increase income streams to farmers and the co-op. 36 Agricultural Producer Organization (AgPrO) Manual

43 AgPrO Training Module 2: Developing Partnership Agreements Financial/Equipment Linkage i. Facilitate the maintenance of bulk tank and infrastructure to house the equipment ii. Facilitate access to stainless steel milk cans, milking buckets, testing equipment and other equipment required iii. Facilitate efficient and effective financial reporting systems at the MCC using the Accounting Bureau System (ABS) software through monthly submission of MCC returns. Capacity Building and Training i. Provide training in cooperative governance, management and development ii. Provide training and advice in general animal husbandry, with emphasis on feeds and feeding management iii. Provide business and entrepreneurship skills training to the co-op iii. Assist in developing, designing and compiling appropriate recordkeeping templates and systems for MCCs. iv. Facilitate the adoption of quality assurance systems and programs for raw milk quality improvement v. Mentor the co-ops along the path to sustainability by strengthening internal systems, which should include functional subcommittees, community livestock workers (CLWs) and artificial insemination technicians (AITs). Project Management i. Assist in transforming/diversifying the MCCs into full-service centers for feeds and other inputs, veterinary and artificial insemination services and technical assistance ii. Facilitate a good working relationship among all partners involved in the project iii. Facilitate access by the co-op to information and technical assistance from other organizations and government agencies iv. Provide management support for the revolving fund for the project v. Monitor and evaluate the program. 3.0 RESPONSIBILITIES Each of the partners is responsible for the specific areas of assistance described above and for determining the most effective means to carry out the associated tasks. The parties agree that this MOU is subject to provisions listed in appendix A. 4.0 COMMENCEMENTS AND DURATION This MOU shall become effective upon execution by the two parties hereto and shall continue subject to the termination clause. The parties further undertake to review the performance of this agreement one calendar year from the date of signing. 37

44 5.0 AMENDMENTS Except as otherwise expressly stated or provided herein, any alterations, additions, or appendix to this MOU shall not be valid unless made in writing and signed by the parties. 6.0 TERMINATION In the instance of breach of the tenets of this MOU, gross negligence, bankruptcy, fraud or incompetence to perform this MOU, or any other infraction of local laws, either party may terminate this MOU in writing. Written termination shall be presented to the other party, and will take effect thirty (30) days from the date of presentation. 7.0 GOVERNING LAW This MOU shall be governed by and construed in accordance with the laws of the Republic of Zambia. 8.0 ARBITRATION In the event of a dispute concerning any matter relating to this MOU, the parties shall first use their best efforts to settle it in an informal and amicable manner. Failing this, one party will give ninety (90) days written notice to the other party, at which point the parties may proceed to arbitration. Chapter 40 of the laws of the Republic of Zambia shall govern this arbitration. 9.0 NOTICES Except as otherwise provided herein, any notices to be served hereunder may be served by registered post, fax or to the parties addresses listed below. [Name of Cooperative] Address Land O Lakes Address The Chief of Party Land O Lakes Inc. 191 B Chindo Road Kabulonga P.O. Box Lusaka Fax: (01) Agricultural Producer Organization (AgPrO) Manual

45 AgPrO Training Module 2: Developing Partnership Agreements Each participant hereby agrees to fulfill its respective responsibilities according to the description, terms and conditions of this Memorandum of Understanding. Agreed and Signed: Name of Cooperative Name : [Name of cooperative representative] Title : [Title of cooperative representative] Signature : Date : / / Witness for [Name of Cooperative] Name : Signature : Land O Lakes Inc. Name : [Name of chief of party] Title : Chief of Party Signature : Date : / / Witness for [Name of Cooperative] Name : Signature : Government Representative: Name : [Name of Government representative] Title : [Title of Government representative] Signature : Date : / / 39

46 Annex A Preconditions for Technical Assistance 1. Hold a general meeting to resolve the ownership dispute concerning the cooperative truck by (date). 2. Conduct an audit of the cooperative s business records before (date). 3. Circulate a notice for the cooperative s annual general meeting by the end of (date). 4. Hold an annual general meeting twenty-one (21) days after notification indicating the place and time. 5. Present the cooperative s audited accounts to the membership. 6. Conduct elections for new officers. 7. Put in place an operating manual by (date). 8. Conduct training for at least two-thirds of the membership on cooperative principles and members rights and responsibilities by (date). 9. Conduct training for the new board members on their roles and responsibilities by (date). 10. Hold at least four full board meetings by (date). 11. Conduct at least one general meeting by (date). 12. Submit all outstanding ABS data by (date). 13. Circulate a financial report to the general membership every month. 14. Make decisions that are of interest to the development objectives of the cooperative. 40 Agricultural Producer Organization (AgPrO) Manual

47 AgPrO Training Module 2: Developing Partnership Agreements Annex 3: Sample Agreement with a Development Partner MEMORANDUM OF UNDERSTANDING This Memorandum of Understanding (MOU) is among Ankole Dairy Products Limited (ADAP), Uganda Private Sector Dairy Industry Development (UPSDID) and the Support for Private Enterprise Expansion and Development (SPEED). 2 The three parties shall be referred to as ADAP, UPSDID and SPEED in this MOU. The three parties have agreed to enter into this MOU to reflect their mutual intention to cooperate, coordinate and combine their resources and activities to ensure the efficient and viable implementation of the attached Scope of Work (SOW), which is consistent with the objectives of the SPEED Project and UPSDID. The terms and conditions herein appearing shall govern the roles, responsibilities, duties and obligations of the respective parties under this MOU. 1. Term This MOU shall come into force and effect from the date it is signed and shall continue for a period of 12 months unless terminated by either Party in accordance with Clause No Objective At the end of the term of this MOU, the agreed-upon Somuc Agricultural Consultants-SAGRICON (consulting firm) shall have implemented the attached SOW. 3. Responsibilities and commitments SPEED and UPSDID will provide ADAP with the services of a consulting firm. ADAP will give the consulting firm access to information considered essential by either the consulting firm or SPEED and UPSDID through completion of the consultancy. ADAP will ensure that the consulting firm has access to all support from the company staff to the extent required for successful completion of the assignment. UPSDID will (as appropriate) provide the following services: Assess the capacity of the service providers to implement the SOW Coordinate consultancy activities with ADAP, SPEED and the consultancy firm and supervise the work to be carried out as per the SOW Provide the services of staff to oversee and follow up on implementation of the SOW Share the cost of the consultancy with SPEED and ADAP 2 SPEED is a project of the United States Agency for International Development (USAID) in Uganda administered by Chemonics International Inc, a prime recipient of a USAID Assistance Award, and Land O Lakes Inc. 41

48 Undertake periodic supervision jointly with SPEED on implementation of the company activities Assist in preparation of the fixed-price contract with the provider for the cost-sharing portion for UPSDID. SPEED will (as appropriate) provide the following services: Provide services of an Mbarara-based consulting firm Identify and select jointly with UPSDID a suitable service provider to implement the SOW Provide technical assistance to the consulting firm Share local costs with UPSDID and ADAP Assist in preparation of the fixed-price contract with the provider for the cost-sharing portion for SPEED Provide services of SPEED staff to oversee implementation of the SOW Undertake periodic supervision over implementation of the activities. UPSDID and SPEED will ensure that ADAP has complete access to any of the products emanating from the consultancy. UPSDID, SPEED and ADAP will monitor the progress of the consultancy. At least biweekly, ADAP and SPEED will jointly discuss, either in person or by phone, the results and progress of the consultancy. 4. Reporting ADAP agrees to provide UPSDID and SPEED, semi-annually, with the following information relating to its operations until December 2003: Current number of employees, disaggregated by gender Annual milk production for previous year Annual sales for the previous year Amount of outstanding financing in USH and US$ Amount of foreign and local investment in USH and US$. This information will be due to the SPEED project on June 30 and December 31 of each year. 5. Expenses Unless otherwise mutually and explicitly provided and agreed upon, the three parties (UPSDID, SPEED and ADAP) agree to share all expenses and costs related to this activity on a 40 percent (SPEED): 60 percent (UPSDID & ADAP) basis. It is further agreed that UPSDID and ADAP shall pay the agreed-upon consultant its 60 percent contribution as per the payment schedule. Pursuant to this MOU, each party shall conclude a separate contract with the consulting firm. SPEED s contract with the consulting firm shall become effective on the date of receipt of a copy of a contract signed by the consulting firm, UPSDID and ADAP for implementation of the attached SOW. 42 Agricultural Producer Organization (AgPrO) Manual

49 AgPrO Training Module 2: Developing Partnership Agreements 6. Other Future Activities Any request for additional SPEED support deemed necessary for furtherance of ADAP s business objectives may be considered and, once approved, shall be covered by supplemental agreements. 7. Dispute Resolution Any doubts or ambiguities or disputes in the interpretation of the provisions of this MOU or any of its supplements shall be resolved through mutual consultations and negotiations among the parties. 8. Confidentiality UPSDID, SPEED and ADAP agree to maintain confidentiality with respect to details of this MOU. UPSDID and SPEED further agree to maintain in confidence all proprietary information received from ADAP or the consulting firm working on their behalf, including consultant reports and financial information. 9. Termination Either party may terminate this MOU upon thirty (30) days of written notice to the other. In such a case, UPSDID and SPEED reserve the right to withdraw technical support and discontinue all financial support. The parties hereto set their hands this day of, Kampala, Uganda. Chairman of the Board Ankole Dairy Products Limited Country Coordinator, Land O Lakes Inc. Private Sector Dairy Development Program Chief of Party SPEED Project 43

50 Annex 4: Sample Agreement with a Government Agency Memorandum of Understanding Between Land O Lakes, Inc. (Land O Lakes) 1080 West County Road F, Shoreview, MN Telephone: (651) Fax: (651) and Ministry of Agriculture [Address Phone Fax] [Date] WHEREAS, Land O Lakes has effectively and successfully worked with the Ministry of Agriculture since the signing of its first Memorandum of Understanding (MOU) dated [date] to prepare the ministry s five-year, market-oriented Master Plan; WHEREAS, the Ministry of Agriculture recognizes Land O Lakes as one of its key development partners; WHEREAS, the Ministry of Agriculture and Land O Lakes desire to further develop and expand their collaboration to implement the Master Plan to alleviate poverty and expand domestic and export markets for agricultural products; WHEREAS, Land O Lakes and the Ministry of Agriculture desire to leverage donor funding to implement the Master Plan in [country] (e.g., Millennium Challenge Account, United States Department of Agriculture, other), which will build the efficient and effective capacity of [country] s agricultural systems; WHEREAS, a system is defined as all of the various components within an industry s value chain that are linked to pull commodities and products, including input supply, farm-level production, processing and marketing all the way to the consumer; WHEREAS, the Master Plan, which provides a strategy for market-led economic growth, includes recommendations to build upon a system s strengths and guide the investment of donor funding to overcome system weaknesses inhibiting rural economic growth, income generation and job creation; 44 Agricultural Producer Organization (AgPrO) Manual

51 AgPrO Training Module 2: Developing Partnership Agreements THEREFORE, Land O Lakes and the Ministry of Agriculture agree to continue their collaboration to support the implementation the Master Plan as funding becomes available. Potential areas of Land O Lakes technical and training assistance to be provided in collaboration with the Ministry of Agriculture may include but are not limited to the following: Strengthen the Ministry of Agriculture s institutional capacity and the skills of key staff to implement the newly designed Training Plan for Ministry staff, MCA staff, key development partners and the private sector. Develop scopes of work/terms of reference for the procurement of development services. Conduct field and technical assessments. Build local and regional capacity (public and private sectors) to research, identify and access profitable agribusiness market opportunities in local, regional and international markets and communicate these opportunities to local farmers and entrepreneurs, leading to increased investments and, thereby, incomes in rural areas. Promote and attract local and international investments in agri-food systems best representing comparative advantages for expansion in domestic and export markets. Facilitate the creation of alliances to leverage resources and business opportunities for rural development and the building of strong linkages between producer organizations and the market (exporters, foreign buyers, retailers, wholesalers, traders, processors, packers, etc.). Conduct training and outreach activities (information, education and communication) with rural producers, micro-, small-, medium- and large-scale agribusinesses throughout targeted commodity value chains to improve entrepreneurial capacities and business management and marketing skills, and to disseminate best practices in marketing and production to enable them to operate in a more efficient and profitable manner, thereby increasing household income and improving food security. Create new and strengthen existing cooperatives and associations, especially in marketing and management, to organize and mobilize a system s production base to respond to market forces. Provide technical assistance to existing and support the establishment of new demonstration centers in selected areas to illustrate to rural producers the benefits of sustainable production and processing practices, including environmental stewardship factors. Develop and implement a National School Milk Program, including dairy sector development activities. Review, assess and make recommendations on market-oriented, agribusiness-supportive agricultural policies and quality standards that foster and support the development of rural areas. Facilitate private and public sector understanding of, and ability to comply with, sanitary and phytosanitary regulatory issues in the promotion of agricultural trade. Develop and manage grants management program(s) to increase the availability and quality of technical support to producer groups and rural development NGOs. Collaborate in agricultural research, extension and education capacity-building programs based on the needs of producers, producer organizations and the private agribusiness sector. 45

52 Utilize sustainable development as an instrument to resolve economic, environmental and social problems in rural areas. Facilitate training in both short-term, non-degree programs and degree-seeking programs in [country], the United States and other countries as appropriate that focus on building skills and expertise in agricultural marketing, agribusiness management, cooperative development and agribusiness technical areas (including land and water resource management, crop and livestock productivity, food science, engineering, and agricultural economics). This MOU shall supersede the MOU signed by Land O Lakes and the Ministry of Agriculture on [date]. This MOU shall serve only to document an agreement between the parties and shall not be construed as a Teaming Agreement or any other type of contractually binding instrument. IN WITNESS WHEREOF, representatives of the parties have executed this Memorandum of Understanding effective as of the date above written. Land O Lakes, Inc. Ministry of Agriculture, [country] [name] [name] Vice-President International Development Division [date] Minister of Agriculture [date] 46 Agricultural Producer Organization (AgPrO) Manual

53 AgPrO Training Module 3: The CLARITY Principles for Cooperative Law Training Module 3 The CLARITY Principles for Cooperative Law Agricultural Producer Organization (AgPrO) Manual Prepared by Land O Lakes International Development Funded by The United States Agency for International Development 47

54 48 Agricultural Producer Organization (AgPrO) Manual

55 AgPrO Training Module 3: The CLARITY Principles for Cooperative Law Preface AgPrO Training Module 3: The CLARITY Principles for Cooperative Law provides an overview of the purpose and objective of the CLARITY principles. Section 2 outlines the list of the nine principles developed by the Cooperative Law & Regulation Initiative. Section 3 provides a scorecard for evaluating a country s cooperative law. The target audiences for this module are: Land O Lakes program and field managers, cooperative and business development specialists and extension officers Government cooperative development officers Cooperatives and other producer groups Other development partners, including government agencies, nongovernmental organizations and private sector partners. 49

56 Section 1: The Purpose and Objective of Clarity In 2005, Land O Lakes and seven U.S.-based international cooperative development organizations began the Cooperative Law and Regulation Initiative (CLARITY). (See a list of the principles below.) The chief goal of CLARITY is to support cooperative movements in developing countries to create a legal and regulatory environment that sustains cooperative businesses and helps them flourish. Building on established principles for cooperative development, CLARITY promotes cooperatives as independent entities governed by their members. It strives to change restrictive cooperative laws and regulations, especially in developing countries. In cases where the cooperative law appears too restrictive, the development organization needs to assess alternatives for a producer group that wants to establish a business. All countries allow other forms of business ownership (e.g., corporations, limited liability companies and associations). As the legal definitions and implications of each business structure vary from country to country, it is important to consult the relevant authorities in your country and to obtain a complete understanding of the local governing laws. If a producer group chooses to become a legal entity other than a cooperative, CLARITY principles can still apply. Groups may decide to operate informally without a legal structure in their early stages. In this case, they should also agree upon a set of written rules consistent with cooperative principles. 50 Agricultural Producer Organization (AgPrO) Manual

57 AgPrO Training Module 3: The CLARITY Principles for Cooperative Law Section 2: Clarity Principles for Legal and Regulatory Enabling Environments Protect democratic member control: Law must protect the democratic character of cooperatives, vesting control of the organization in its members. Protect autonomy and independence: Cooperatives are private sector businesses. Law must protect the autonomy and independence of cooperatives from government, persons, or entities other than members of the cooperative. Respect voluntary membership: Law must protect the voluntary nature of membership in cooperatives: membership in cooperatives should be determined by each cooperative, not mandated by law or government order. Require member economic participation: Law must protect and promote the responsibilities of membership, including the duties to contribute equitably to and democratically control the capital of the cooperative. Require equitable treatment: Law and regulation should be no less advantageous to cooperatives than to other businesses in the same sector, while protecting and being sensitive to the mutuality of cooperatives. Incorporation, law enforcement, dispute resolution, and licensing of cooperatives should be handled in the same manner as for other businesses. Promote access to markets: Sector-specific regulations should provide reasonable accommodations and incentives where appropriate to enable cooperative forms of business to operate. Provide coherent and efficient regulatory framework: Regulatory framework should be simple, predictable, and efficient; it should minimize bureaucratic delay and obstructions to business operation and should avoid conflict and duplication of other laws. Regulation with respect to the business of cooperatives should be handled by institutions with the most relevant specialized expertise. Protect due process: Cooperative organizations and their members should be accorded due process of law, including applicable rights to hearings, representation, and impartial appeals, for decisions of the state that impact cooperatives or their members. Avoid conflict of interests: The role of state in the law enforcement, dispute resolution, license, and promotion should be administered in a manner that avoids duplication, undue influence, and minimizes conflicts of interest. Source: Enabling Cooperative Development: Principles for Legal Reform CLARITY, the Cooperative Law & Regulation Initiative 51

58 Section 3: Clarity Scorecard for Cooperative Law The CLARITY Cooperative Scorecard, presented below, can be used to evaluate a country s cooperative law. 3 It can be used either to propose improvements to the law or to decide whether or not a producer group should register under the cooperative law in that country. In this module, the scorecard is used for the latter purpose. Step 1: Obtain a copy of the country s cooperative law. The ministry in charge of cooperatives can provide a copy or, in some countries, the cooperative law is available online through a government website. Step 2: Read the cooperative law, identify those sections that address the 12 main questions in the scorecard, and rate the law on how well it addresses those questions (and the specific issues listed under each question). Step 3: Enter the ratings on the summary sheet and calculate a cumulative score. Step 4: Review scorecard results to determine the extent to which the cooperative law provides adequate benefits and protections to producer groups and their members. Note that Land O Lakes staff and partners should take into account not only the cumulative score for a country s cooperative law, but also the ratings on key questions. For example, if the registrar of cooperatives has broad powers to intervene in the operations of a cooperative, that may be an adequate reason to look at an alternative business structure for producer groups, even if the cumulative rating of the law is relatively high. 3 The scorecard is excerpted from CREATING CLARITY: Assessment, Analysis and Outreach for Cooperative Legal Reform, published by the Overseas Cooperative Development Council (OCDC) in The CLARITY Scorecard is reprinted in this module with the permission of OCDC. 52 Agricultural Producer Organization (AgPrO) Manual

59 AgPrO Training Module 3: The CLARITY Principles for Cooperative Law Annex A: Clarity Scorecard CLARITY SCORING SCALE The CLARITY Scorecard bring together all the information you've gathered and allow you to give the elements of the law you're evaluating a n umerical value. The Scorecard indicates how closely each element compares t the CLARITY Principles. Using these percentages, you then can set priorities and begin discussing solutions. Level of Compliance with the Law 0 = Does not comply with the basic CLARITY Principles or does not contribute to the achievement of the basic Principle objective. 1 = Weak compliance with the basic CLARITY Principles and weak contribution to the achievement of the basic CLARITY Principle objective. 2 = Partial compliance with the basic CLARITY Principles and partial contribution to the achievement of the basic Principle CLARITY objective. 3 = General compliance with the basic CLARITY Principles and general contribution to the achievement of the basic Principle objective. 4 = Full compliance with the basic CLARITY Principles and achievement of the basic CLARITY Principle objective. Score (Shade = Not applicable) CLARITY Principles 1 - Protect democratic member control 2 - Protect autonomy and independence 3 - Respect voluntary membership 4 - Require member economic participation 5 - Promote equitable treatment 6 - Promote access to markets 7- Provide coherent and efficient regulatory framework 8 - Protect due process 9 - Avoid conflicts of interest 53

60 CLARITY SCORECARD QUESTIONS Questions CLARITY Principles & Explanation Enabling & Disabling Examples Score/ Notes Law Reference 1. Formation and Registration of a Cooperative Score Article 1a. Is a time period set for the approval of registration applications (after which there is automatic approval)? 1b. Are registrationm requirements for the same as for regular businesses? 1c. Are the Registrar's duties combined with other cooperatives promotion or activities? Principle 7 - efficient regulatory framework Explanation - the default for regulatory inaction should be to approve the registration to minimize the impact of bureaucratic delay on cooperative formation Principle 5 - equitable treatment Explanation - How do requirements for starting a cooperative compare with requirements for starting a new business? Some groups may choose to register as an association or other type of business it is is easier and quicker than registering a cooperative Principle 9 - conflict of interest Explanation - combining promotion and regulatory tasks can create conflicts of interest in the agency - an agency devoted to promoting cooperative formation should not also be in charge of enforcing regulatory mandates Enabling - all applications shall be finally disposed of within 30 days or assumed to be granted Diasbling - statutory 6 month approval period that in practice runs into years and practice runs into years and prohibits operation until registration is formally approved Enabling - cooperatives are required to file with similar requirements to corporation law Disabling - there are many special requirements for formation of cooperatives that do not appljy to other businesses Enabling - registration functions are handled by a separate ministry than those charged with cooperative promotion and technical assistance Disabling - registrar of cooperatives is also charged with cooperative promotion, regulation and dispute meditation 54 Agricultural Producer Organization (AgPrO) Manual

61 AgPrO Training Module 3: The CLARITY Principles for Cooperative Law 1d. Does the government impose mandatory bylaws or otherwise restrict member governance? Principles 1 & 2 - democratic governance and autonomy Explantion - a central characteristic of a cooperative that supports their vitality is the vesting of ultimate governance of the organization inb its membership Enabling - membership has maximum ability to shpe the structures and processes of the organization through bylaws, law imposes minimum requirements applicable to other business for appointing officers Disabling - mandatory bylaw language is impossed for all cooperatives Scoring Scale - Level of Law Compliance 0 - Does not comply with the CLARITY Principles or contribute to the achievement of the underlying goal 1 - Weak complinace with CLARITY Principles and/or weak contribution to the underlying goal 2 - Partial complinace with the CLARITY Principle(s) and contribution to the achievement of the underlying goal 3 - General complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 4 - Complete complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 55

62 CLARITY SCORECARD QUESTIONS Questions CLARITY Principles & Explanation Enabling & Disabling Examples Score/ Notes Law Reference 2. Cooperative Supervision/Regulating a Cooperative Score Article 2a. Are cooperatives subject to the same or similar regulatory requirements as other businesses? 2b. Does the law protect the cooperative from government interference in cooperative business decisions? 2c. Are the regulatory and promotion functions separate offices or a separately controlled agency institution? Principle 5 - equitable treatment Explanation - cooperatives should be subject to minimal regulations as other forms of business; the main force for regulating cooperatives is member governance Principle 2 - autonomy and independence of cooperatives Explanation - cooperatives, like other businesses, should be empowered to manage their businesses free from the dictates of government officials Principle 9 - conflict of interest Explanation - Entrusting the same agency with promotion and regulation could result in conflicts of interest and compromise the efficiency and fairness of regulation Enabling - cooperatives are subject to the same regulator agency and laws as other businesses Diasbling - cooperatives are subject to much more eroneous reporting and oversight requirements that other private businesses Enabling - law prohibits government interferance in internal affairs of cooperatives Disabling - government officials are given authority to control or approve cooperative business decisions Enabling - creation of a promotion office that gives technical assistance, but has no control over regulating cooperatives Disabling - One agency is granted all power over registration, promotion and regulation of cooperatives Scoring Scale - Level of Law Compliance 0 - Does not comply with the CLARITY Principles or contribute to the achievement of the underlying goal 1 - Weak complinace with CLARITY Principles and/or weak contribution to the underlying goal 2 - Partial complinace with the CLARITY Principle(s) and contribution to the achievement of the underlying goal 3 - General complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 4 - Complete complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 56 Agricultural Producer Organization (AgPrO) Manual

63 AgPrO Training Module 3: The CLARITY Principles for Cooperative Law CLARITY SCORECARD QUESTIONS Questions CLARITY Principles & Explanation Enabling & Disabling Examples Score/ Notes Law Reference 3. Legal Status and Rights of a Cooperative Score Article 3a.1. Is a cooperative granted the same legal rights as other businesses (the right to sue, enter into contracts, hold assets, etc.)? 3a.2. Is a cooperative granted the same legal rights as other businesses (the right to sue, enter into contracts, hold assets, etc.)? 3b. Are cooperative officials given the same legal liability as corporate officers (not held personally responsible for coop matters, unless they act fraudulently)? Principle 2 - autonomy Explanation - Businesses form corporatrions in part to obtain the same legal rights to enter contracts and utilize legal processes as individuals have - known as "legal personhood." Cooperatives, like other businesses, must have these rights to do business effectively Principle 5 - equitable treatment Explanation - Businesses form corporations in part to obtain the same legal rights to enterr contracts and utilize legal processes as individuals have - known as "legal personhood." Cooperatives, like other businesses, must have these rights to do business effectively Principle 5 - equitable treatment Explanation - Cooperative officials should owe fiduciary duties to the cooperative (as in corporate law), but be protected from legal responsibility (unless there was dishonesty or fraud) because it allows them to confidently represent the cooperative in all situations without fear of personal reprisal Enabling - an explicit statement giving the rights of individuals to cooperatives (access to courts, contracts) Disabling - Requiring government approval for entering contracts, engaging legal processes or other activities normally undertaken by individuals or corporations Enabling - an explicit statement giving the rights of individuals to cooperatives (access to courts, contracts) Disabling - Requiring government approval for entering contracts, engaging legal processes or other activities normally undertaken by individuals or corporations Enabling - stating that coop personnel owe fiduciary duties to the cooperative, but are not liable (i.e. are indemnified) in the course of their duties, unless there was willful misconduct Disabling - considering law suits against cooperatives or their officers to be suits against the government Scoring Scale - Level of Law Compliance 0 - Does not comply with the CLARITY Principles or contribute to the achievement of the underlying goal 1 - Weak complinace with CLARITY Principles and/or weak contribution to the underlying goal 2 - Partial complinace with the CLARITY Principle(s) and contribution to the achievement of the underlying goal 3 - General complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 4 - Complete complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 57

64 CLARITY SCORECARD QUESTIONS Questions CLARITY Principles & Explanation Enabling & Disabling Examples Score/ Notes Law Reference 4. Membership in a Cooperative Score Article 4a. Can the government require specific individuals or groups to be membrs in a cooperative? 4b. Can the government dictate size and qualifications for membership in a cooperative? 4c. Does the law permit government agencies to be members of cooperatives? Principle 3 - respect voluntary membership Explanation - government mandated membership undermines the democratic character of cooperatives and harms the accountability links between a cooperative and its members Principle 1 - democratic member control Explanation - the number and attributes of members for a given cooperative will vary depending on the goals and services of the cooperative; these decisions should be left to the members and management Principle 2 - autonomy and independence of cooperatives Explanation - if the government was a member it would not provide the independence needed for the cooperative to be considered a private organization Enabling - allowing cooperatives to set the requirements for membership and permitting (not requiring) membership based onuses of cooperative services Disabling - Requirement that a certain group (e.g. dairy farmers) be a member of a national cooperative Enabling - permits the members to determine the minimum number of members and the qualification requirements Disabling - requires that a cooperative have atleast 20 members Enabling - banning a member of the cooperative regulatory authority from being an officer or director of a cooperative Disabling - allowing the cooperative regulatory authority to appoint officers of a cooperative Scoring Scale - Level of Law Compliance 0 - Does not comply with the CLARITY Principles or contribute to the achievement of the underlying goal 1 - Weak complinace with CLARITY Principles and/or weak contribution to the underlying goal 2 - Partial complinace with the CLARITY Principle(s) and contribution to the achievement of the underlying goal 3 - General complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 4 - Complete complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 58 Agricultural Producer Organization (AgPrO) Manual

65 AgPrO Training Module 3: The CLARITY Principles for Cooperative Law CLARITY SCORECARD QUESTIONS Questions CLARITY Principles & Explanation Enabling & Disabling Examples Score/ Notes Law Reference 5. Member Gorvenance - Membership Control of a Cooperative Score Article 5a. Does the law require one-person-one-vote democratic governance? 5b. Does the government require the business records to remain open to inspections by members? Principle 1 - demographic member control Explanation - unlike stock corporations, where voting shares are distributed according to capital invested in the corporation, cooperatives are governed by its members based on a oneperson-one-vote principle Principle 1 - democratic member control Explanation - access to information on the operation of the cooperative is necessary for members to effectivelty perform their role as the owners and governors of the cooperative Enabling - each cooperative member has only one vote, which may be voted through a variety of means (e.g. cumulative voting, etc.) Disabling - permitting votes to be weighted by contributions to the cooperative Enabling - requiring the cooperative to make its records, auditing reports and other essential information available to any member upon request Scoring Scale - Level of Law Compliance 0 - Does not comply with the CLARITY Principles or contribute to the achievement of the underlying goal 1 - Weak complinace with CLARITY Principles and/or weak contribution to the underlying goal 2 - Partial complinace with the CLARITY Principle(s) and contribution to the achievement of the underlying goal 3 - General complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 4 - Complete complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 59

66 CLARITY SCORECARD QUESTIONS Questions CLARITY Principles & Explanation Enabling & Disabling Examples Score/ Notes Law Reference 6. Regulating Officers & Directors of Cooperatives Score Article 6a. Does the government have the authority to dictate the roles and responsibilities of management? 6b. Does the government have power to appoint or remove officers of a cooperative? 6c. Does the government retain power to dictate or supervise cooperative financial arrangements? Principle 1 & 2 - democratic control and autonomy Explanation - the members of the cooperative should remain responsible for defining the division of roles between the board of directors and management (e.g. through the bylaws) depending on the nature of the sector in which they do business Principle 2 - autonomy and independence of cooperatives Explanation - cooperatives must remain responsible to members, who should be the sole electors of the Board and Management, not to government officials. Principle 2 - autonomy and independence of cooperatives Explanation - subject to auditing requirements, cooperatives should have complete autonomy over their expenditures and investments like other businesses. Enabling - gives members the authority to define the responsibilities of the Board of Directors and Management Disabling - dictates the adoption of generalized structures for governance that may be at odds with business necessity Enabling - giving all authority to appoint officers and directors of the cooperative to members Disabling - granting the cooperative regulatory authority power to appoint or remove officers of the cooperative Enabling - granting full discretion over financial management decisions, subject to financial audits Disabling - mandating certain expenditures or investments or requiring government approval for financial decisions Scoring Scale - Level of Law Compliance 0 - Does not comply with the CLARITY Principles or contribute to the achievement of the underlying goal 1 - Weak complinace with CLARITY Principles and/or weak contribution to the underlying goal 2 - Partial complinace with the CLARITY Principle(s) and contribution to the achievement of the underlying goal 3 - General complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 4 - Complete complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 60 Agricultural Producer Organization (AgPrO) Manual

67 AgPrO Training Module 3: The CLARITY Principles for Cooperative Law CLARITY SCORECARD QUESTIONS Questions CLARITY Principles & Explanation Enabling & Disabling Examples Score/ Notes Law Reference 7. Regulating the Board of Directors of a Cooperative Score Article 7a. Does the government have the authority to appoint or remove members of the Board of Directors? 7b. Can the government dictate the size of the Board? Principle 1 - democratic member control Explanation - the board should be responsible to the members who elect them, not to the government or any other outside entity Principle 2 - autonomy and independence of cooperatives Explanation - the size (above the minimum number for decision making e.g. 3) of a Board of Directors should be determined by the members through bylaws; the appropriate number will depend upon factors internal to the cooperative and should not be dictated by the government Enabling - all responsibility for electing or removing directors belong to the cooperative's members Disabling - cooperative regulator has authority to appoint or remove board members Enabling - the board shall be elected in the number determined by the bylaws and be atleast three members Disabling - requiring the Board be no less than five members and no more than no nine members Scoring Scale - Level of Law Compliance 0 - Does not comply with the CLARITY Principles or contribute to the achievement of the underlying goal 1 - Weak complinace with CLARITY Principles and/or weak contribution to the underlying goal 2 - Partial complinace with the CLARITY Principle(s) and contribution to the achievement of the underlying goal 3 - General complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 4 - Complete complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 61

68 CLARITY SCORECARD QUESTIONS Questions CLARITY Principles & Explanation Enabling & Disabling Examples Score/ Notes Law Reference 8. Capital Accounts Score Article 8a. Is the surplus income from cooperatives distributed according to patronage of the cooperative rather than capital investment? 8b. Does the government mandate distributions to funds for capital, reserves, education or other activities? Principle 4 - requiring member economic participation Explanation - a key distinction between cooperatives and share holding companies is that in cooperatives surplus income (i.e. profits) are distributed according to use of the cooperative rather than capital invested Principle 1 - democratic member control Explanation - although investments in reserves, education and other purposes may be prudent and should be permitted and encouraged, mandating specific contribution levels sacrifices democratic member control and may be unwise in specific circumstances Enabling - requirement that after deducting operating expenses and costs, the remainder of proceeds shal be distributed to members according to the ration of their patronage to the total patronage of the cooperative Disabling - permitting the cooperative to distribute surplus income according to capital invested in the cooperative Enabling - law allows, but does not require, the creation of reserves and distribution to educational funds Disabling - requiring a cooperative to put at least 25% of its annual surplus into a reserve or educational fund Scoring Scale - Level of Law Compliance 0 - Does not comply with the CLARITY Principles or contribute to the achievement of the underlying goal 1 - Weak complinace with CLARITY Principles and/or weak contribution to the underlying goal 2 - Partial complinace with the CLARITY Principle(s) and contribution to the achievement of the underlying goal 3 - General complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 4 - Complete complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 62 Agricultural Producer Organization (AgPrO) Manual

69 AgPrO Training Module 3: The CLARITY Principles for Cooperative Law CLARITY SCORECARD QUESTIONS Questions CLARITY Principles & Explanation Enabling & Disabling Examples Score/ Notes Law Reference 9. Regulating the Auditor Score Article 9a1. Does the law allow cooperative members to select the auditor of their choice? 9a2. Does the law allow cooperative members to select the auditor of their choice? Principle 1 - democratic member control Explanation - purpose of an audit is to facilitate member control of the cooperative by assuring affairs are being conducted in an honest and professional way; to serve this purpose, members should be empowered to select an auditor that they trust Principle 2 - autonomy and independence Explanation - purpose of an audit is to facilitate member control of cooperative by assuring affairs are being conducted in an honest and professional way; to serve this purpose, members should be empowered to select an auditor that they trust Enabling - requiring the auditor to report to and be elected by general members Disabling - giving the cooperative regulator the authority to conduct an audit or appoint an auditor itself Enabling - requiring the auditor to report to and be elected by general members Disabling - giving the cooperative regulator the authority to conduct an audit or appoint an auditor itself Scoring Scale - Level of Law Compliance 0 - Does not comply with the CLARITY Principles or contribute to the achievement of the underlying goal 1 - Weak complinace with CLARITY Principles and/or weak contribution to the underlying goal 2 - Partial complinace with the CLARITY Principle(s) and contribution to the achievement of the underlying goal 3 - General complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 4 - Complete complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 63

70 CLARITY SCORECARD QUESTIONS Questions CLARITY Principles & Explanation Enabling & Disabling Examples Score/ Notes Law Reference 10. Regulations Regarding Dispute Resolution Score Article 10a. Is the entity that adjudicates disputes independent of the agency that promotes or regulates cooperatives? 10b1. Do cooperatives have access to courts and existing tribunals and can they voluntarily enter into alternative dispute resolution agreements? 10b2. Do cooperatives have access to courts and existing tribunals and can thet voluntarily enter into alternative dispute resolution? Principle 9 - avoid conflicts of interest Explanation - dispute mechanisms must ensure impartiality by being independent of officials with responsibilities for promoting or regulating cooperatives in other settings Principle 7 - efficient regulatory framework Explanation - cooperatives should have equal access to the same tribunals as any other businesses to minimize the duplication of resources and promote equal treatment between cooperatives and other businesses Principle 8 - dues process Explanation - cooperatives should have equal access to the same tribunals as any other businesses to minimize the duplication of resources and promote equal treatment between cooperatives and other businesses Enabling - empowering an independent mediator office with no cooperatives oversight responsibilities to handle disputes between cooperatives or between a cooperative and thrid party Disabling - referring all disputes involving cooperatives to the cooperative registrar or cooperative regulator Enabling - permitting cooperatives full access to the courts as any other business Disabling - mandating that all disputes involving a cooperative be brought before the registrar or cooperative regulator or are considered a dispute with the government Enabling - permitting cooperatives full access to the courts as any other business Disabling - mandating that all disputes involving a cooperative be brought before the registrar or cooperative regulator or are considered a dispute with the government Scoring Scale - Level of Law Compliance 0 - Does not comply with the CLARITY Principles or contribute to the achievement of the underlying goal 1 - Weak complinace with CLARITY Principles and/or weak contribution to the underlying goal 2 - Partial complinace with the CLARITY Principle(s) and contribution to the achievement of the underlying goal 3 - General complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 4 - Complete complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 64 Agricultural Producer Organization (AgPrO) Manual

71 AgPrO Training Module 3: The CLARITY Principles for Cooperative Law CLARITY SCORECARD QUESTIONS Questions CLARITY Principles & Explanation Enabling & Disabling Examples Score/ Notes Law Reference 11. Regulation of the Dissolution, Amalgamation & Merger of Cooperatives Score Article 11a. Does the law provide for the dissolution and distribution of assets after dissolution of a cooperative? 11b. Does the law provide for the merger and amalgamation of cooperatives through the defination of procedures to notify members, etc? Principle 3 & 8 - voluntary membership and due process Explanation - cooperatives are voluntary organiozations which have the right to cease to exist as well as to form; law should ensure that any dissolution is truly voluntary with adequate notice and process involving the membership Principle 3 & 8 - voluntary membership and due process Explanation - a cooperative should have the right to change its shape through mergers or amalgamations to grow and provide better services to its members while protecting the rights of members Enabling -the law permits dissolution and provides for procedures for notifying all members to approve the action and fairly distributing all assets of the business to the members Disabling - lack of provision for how to dissolve a cooperative Enabling - including the procedures needed to complete a merger & member rights to abstain from membership in the new society Disabling - lack of provision for cooperatives to merge or amalgamate Scoring Scale - Level of Law Compliance 0 - Does not comply with the CLARITY Principles or contribute to the achievement of the underlying goal 1 - Weak complinace with CLARITY Principles and/or weak contribution to the underlying goal 2 - Partial complinace with the CLARITY Principle(s) and contribution to the achievement of the underlying goal 3 - General complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 4 - Complete complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 65

72 CLARITY SCORECARD QUESTIONS Questions CLARITY Principles & Explanation Enabling & Disabling Examples Score/ Notes Law Reference 12. Regulation of Apex Organizations for Cooperatives Score Article 12a. Are the laws surrounding unions/apex organizations permissive (not requiring cooperative membership in them)? Principle 2 - autonomy and independence of cooperatives Explanation - the allowance of apex orgenizations can be a great support to cooperatives, however requiring membership in them or requiring certain structures can undermine the efficiency and uses of apex/unions Enabling -allowing cooperatives to create structures that will promote, train and provide resources to cooperatives themselves Disabling - permitting the government to mandate membership in a cooperative union Scoring Scale - Level of Law Compliance 0 - Does not comply with the CLARITY Principles or contribute to the achievement of the underlying goal 1 - Weak complinace with CLARITY Principles and/or weak contribution to the underlying goal 2 - Partial complinace with the CLARITY Principle(s) and contribution to the achievement of the underlying goal 3 - General complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 4 - Complete complinace with CLARITY Principle(s) and contribution to the achievement of the underlying goal 66 Agricultural Producer Organization (AgPrO) Manual

73 AgPrO Training Module 4: Reviewing and Selecting a Business Form Training Module 4 Reviewing and Selecting a Business Form Agricultural Producer Organization (AgPrO) Manual Prepared by Land O Lakes International Development Funded by The United States Agency for International Development 67

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75 AgPrO Training Module 4: Reviewing and Selecting a Business Form Preface AgPrO Training Module 4: Reviewing and Selecting a Business Form is designed to assist Land O Lakes staff and representatives of producer groups in determining an appropriate legal structure for producer groups and one that is consistent with cooperative principles. The module contains two sections: a review of different business forms, and steps in determining the current legal status of a producer group. 69

76 Section 1: Review of Business Forms Reviewing and Planning a Producer Group s Business Structure After selecting the project s geographical area(s) and the specific communities and producer groups with which the project will work, 4 one of the next important steps is to work with producer group members to plan or review their organization s business form. Business form refers to the legal status of an organization, i.e., whether or not it is registered with the government and, if so, under which business category. Different business categories are discussed in the next subsection of the module. Business forms and related legal and political issues vary from country to country. Thus, project staff should discuss business registration options at an early stage with attorneys and others who are familiar with the various business structures in a country. In some cases, producer groups are already registered with the government as cooperatives or associations. In other cases, producer groups are operating informally, or are just being organized and are not yet registered. In all cases, project staff should work with members to review the organizational status of each producer group to determine: 1) whether it is registered; 2) under what statute it is registered; and 3) what steps should be taken to make sure that the organization provides adequate legal protection to the group and its members. The table below presents key issues to review when conducting a basic business structure evaluation and preparing an action plan. 4 See Module 1: Selecting Producer Groups and Module 2: Developing Partnership Agreements for detailed information on these two topics. 70 Agricultural Producer Organization (AgPrO) Manual

77 AgPrO Training Module 4: Reviewing and Selecting a Business Form Producer Group Checklist Is the producer group registered with the government? If it is, obtain a copy of the registration documents and bylaws. If the producer group cannot produce the documents, obtain a copy from the appropriate government agency. Review the documents to determine whether or not they provide adequate legal protection to the producer group and its members and to determine to what extent the documents are consistent with the cooperative principles. 5 If the producer group is not yet registered, has it prepared bylaws or any other written operating procedures? If it has, review these documents and work with the producer group to develop them into formal registration documents. If it has not, work with the producer group to select an appropriate business structure and to prepare registration documents and bylaws. Selecting Business Categories As mentioned above, it is important for project staff to familiarize themselves with the business structures in a country. In particular, they should identify which business category or categories provide the most benefits and the best protection for producer groups and their members. There are seven basic business categories: 6 1. Sole proprietorship: A sole proprietorship is a business owned by one person. The owner may operate on his or her own or may employ others. The owner of the business has total and unlimited personal liability for the debts incurred by the business. Comments: Not an appropriate structure for a producer group because it is owned by one person. 2. Partnership: A partnership is a form of business in which two or more people operate for the common goal of making profit. Each partner has total and unlimited personal liability for the debts incurred by the partnership. There are three typical classifications of partnerships: general partnerships, limited partnerships and limited liability partnerships. Comments: This structure may be an option for producer groups. Depending on the country and the legal classification, the group may or may not have personal liability protection. 3. Limited Liability Company (LLC): An LLC is a legal form of business that provides limited liability to its owners. It is a hybrid business entity having certain characteristics of a corporation and certain characteristics of a partnership or sole proprietorship (depending on how many owners there are). 5 Use the Cooperative Scorecard in Module 3 to review the registration documents. 6 These definitions are derived from the U.S. Small Business Administration website, and several other online sources. 71

78 Comments: The laws related to LLCs vary from country to country. This may be an option for producer organizations in some countries. 4. Corporation: A business corporation is a for-profit, limited liability entity that has a separate legal personality from its members. A corporation is owned by multiple shareholders and is overseen by a board of directors, which hires the business' managerial staff. Comments: This is an option for producer organizations in most countries; however, a farmer/member may be double-taxed in some countries, once as an owner of the corporation and once as a producer. 5. Cooperative: Often referred to as a "coop business" or "coop," a cooperative is a for-profit, limited liability entity that differs from a corporation in that it has members, as opposed to shareholders, who share decision-making authority. Cooperatives are typically classified as producer cooperatives, consumer cooperatives or worker cooperatives. Cooperatives generally agree to abide by the principles of the International Cooperative Alliance. Comments: In general, this is the preferred business structure for producer organizations. However, in some countries, unfavorable laws, regulations and administrative practices may cause a producer group to choose another business structure. 6. Association: An association is composed of a group of individuals who voluntarily enter into an agreement to accomplish a purpose. An association is usually incorporated as a nonprofit organization that does not distribute its surplus funds to owners or shareholders, but instead uses them to help pursue its goals. Comments: This is usually a relatively simple way for producer groups to become registered. However, because of their not-for-profit status, they are not designed to share income and distribute profits among members. Also, once an association is incorporated, it is difficult to transfer assets from to a for-profit business entity. 7. Informal organization: An informal organization is a business that is not formally registered with the government as a business entity. Comments: This approach may work in the early stages of a producer group s operations. However, it provides no legal liability protection for its members; and the lack of clear operating rules may cause serious problems among members in the long run. Land O Lakes focuses our international development work on the formation of producer groups. A producer group can be organized under any of the business structures listed above, except, by definition, a sole proprietorship. In most cases, producer groups are organized as cooperatives. It is important to note that the laws relating to these categories may vary significantly from country to country. For example, in some countries, groups forming cooperatives have to go through a twoyear probationary period before the coops have full legal status. This cumbersome registration process may cause a group to register under a different business category. The next section of this module provides a detailed scorecard to evaluate the cooperative laws of a country. This scorecard is intended to assist program staff and producer groups to choose a business structure. 72 Agricultural Producer Organization (AgPrO) Manual

79 AgPrO Training Module 4: Reviewing and Selecting a Business Form Section 2: Determine the Current Legal Status of a Producer Group After surveying the range of business forms, project staff should review the current legal status of each producer group and the country s cooperative law to determine which business form is most suitable. There are a few scenarios that could be at play: If a producer group is registered with the government and the registration documents and bylaws are in order and adequately conform to the cooperative principles, no additional actions need to be taken. If a producer group is registered with the government and there are minor problems with the registration documents and/or bylaws, the group should amend the registration documents and bylaws as needed. If a producer group is not yet registered, it should register under a category that provides adequate legal protection to the group and its members and in a way that conforms to the cooperative principles. In most cases, this will be under the cooperative law. However, based on the results of the scorecard in Section 2, the cooperative law in some countries may not provide the best legal Project staff should assist producer group members to secure registration forms from the appropriate government ministry, fill them out and submit them. protection for producer groups and their members. In these cases, producer group members and project staff should select the business law that provides the best protection. If the producer group is registered under a business category that does not provide adequate legal protection to the group or its members or does not conform to the cooperative principles, it should register under a category that provides these benefits. Project staff may conclude that producer groups would fare better if they registered under a business category other than the cooperative law. In this case, the group should seek legal counsel to determine whether or not there is a business category that would better suit their needs. If a producer group needs to revise or prepare bylaws or other registration documents, refer to the bylaws checklist and sample bylaws in Training Module 5. 73

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81 AgPrO Training Module 5: Cooperative Formation, Governance and Structure Training Module 5 Cooperative Formation, Governance and Structure Agricultural Producer Organization (AgPrO) Manual Prepared by Land O Lakes International Development Funded by The United States Agency for International Development 75

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83 AgPrO Training Module 5: Cooperative Formation, Governance and Structure Preface Training Module 5: Cooperative Formation, Governance and Structure will increase the understanding of member-owners, directors, employees and others about how to form and effectively govern a cooperative business. Not all producer-owned businesses are registered as cooperatives. Regardless of what business form producer groups use, the cooperative way of doing business and cooperative principles provide a framework to develop a business that serves the best interests of its producerowners. 7 (Throughout this module, cooperative refers to both businesses that are registered as cooperatives and to producer-owned businesses that are registered under other statutes, but operate in accordance with cooperative principles.) This module is divided into three main sections. The first section outlines the steps to take to form a cooperative, including keys to success and what to avoid. The second section describes cooperative governance, including the rights and responsibilities of cooperative members, members of the board of directors (including officers), managers and employees. The third section introduces group rules and bylaws. Sections 4 and 5 are sample bylaws from Uganda and Zambia. This module was developed as part of a more comprehensive training seminar, but it can also be a stand-alone workbook. It was designed to be presented by a Land O Lakes staff member or other trained facilitator. The content is intended to be understandable and applicable for a variety of producer organizations. 7 See Module 4: Reviewing and Selecting a Business Form for a detailed analysis of business forms. 77

84 Section 1: Steps to Form a Cooperative This section provides a step-by-step guide to forming a cooperative. The primary audience is Land O Lakes staff and local agricultural leaders that are in the process of forming producer groups or are considering doing so. Starting a cooperative is complex. Field staff working with groups that are in the process of forming a cooperative must demonstrate a combination of expertise, enthusiasm, practicality, dedication and patience. A new cooperative may be welcomed with enthusiasm or it may be met with opposition or skepticism. Negative historical experiences with cooperatives in some countries and regions may create skeptical attitudes towards cooperatives as a way to help accomplish a group s goals. Field staff must be prepared to react to different situations and employ various strategies to ensure that a cooperative is indeed the right structure for the needs of the community. If a cooperative is the ideal structure, staff should also help ensure that there is strong community ownership. Group Mobilization Effective group mobilization requires an open mind and the ability to listen to the needs, interests and concerns of producers and stakeholders. Initially, it is important to gauge the interest of potential group members to understand whether they are likely to mobilize. Information gathered through previous AgPro modules should help the mobilizer assess the group s readiness. A number of factors may influence the likelihood of successful group formation. When assessing the potential for group formation and collective action consider: The level of trust and social capital within a community and between groups of individuals. Understanding the dynamics of social capital can provide an organization with a better sense of the opportunities and constraints of collective action and group formation to achieve economic and social objectives. Use the World Bank s Social Capital Assessment Tool (SOCAT) 8 to help understand these dynamics. The historical perspective of groups in the community. This aspect is important for groups in any community, but should receive careful attention in post-conflict communities. Understanding the current and historical tensions in communities, as well as methods of dispute resolution, is vitally important to determining group viability. It will also help determine the appropriate approach to group mobilization. The reasons for group formation, which could include a number of factors ranging from a desire to address marketing inefficiencies to capturing additional returns from collective action. Mobilizing a group takes leadership and this leadership must be community-led. A compelling need and a few community leaders can spark the idea of cooperative formation, however, leaders must 8 Social Capital Assessment Tool (SOCAT), the World Bank, EXTSOCIALDEVELOPMENT/EXTTSOCIALCAPITAL/0,,contentMDK: ~menuPK:418220~pagePK:148956~piPK:216618~th esitepk:401015,00.html 78 Agricultural Producer Organization (AgPrO) Manual

85 AgPrO Training Module 5: Cooperative Formation, Governance and Structure be broadly respected. Project staff can help to better understand the leadership dynamics and points of influence in a community through visits and conversations with community members. Mobilizing a new group takes time. There may be varying levels of interest and a group may need time to develop a sense of common purpose. Field staff can help by encouraging groups who are in the early stages of mobilization to meet frequently and openly discuss the reasons for group formation. It is important not to rush this process. There should be plenty of time for exploratory meetings so issues can be discussed and a range of community member voices can be heard. Along the way, the group should discuss important issues such as their purpose and vision. Understanding prospective member needs are also important and the initial group may want to survey a larger group of potential members to see if a broader need exists in the community or if it is confined to a small group. In addition, it is important to conduct a basic economic analysis to look at the status quo and compare it to a producer organization or cooperative model. It is also important to recognize that group members may have different motivations or a small minority group of emerging leaders may be pushing mobilization. In order for a new group to be viable in the long-term, there must be buy-in and general consensus across the potential members and community. It is also important that potential members who disagree do not feel intimated and are able to share their views freely. Holding a secret ballot to vote on key issues or decisions in the early stages can be a helpful strategy. At these stages of early development some individuals may choose to leave the process and others may choose to join. Once a group has emerged with common goals, objectives and purpose a next step is to discuss with the group opportunities to formalize the group structure, including forming a cooperative. How to Form a Cooperative As discussed in the previous module, while formal cooperative institutions provide many benefits, this may not be the right solution for every producer group. Even if a formal cooperative entity is not the immediate next step, groups can still be encouraged to operate under core cooperative principles, including democratic member control. There are several key steps to take after a group initiates formation of a cooperative. Note that these steps are not necessarily in order and registration may need to occur earlier or later in the process, depending on a country s regulations and laws. It is also important to remember that field staff can help facilitate the process, but leadership and ownership should always come from group members. Keys to Success Adequate planning Shared vision, mission and goals Communication and transparency among members and leaders Regular business meetings Sound economic rationale, business plan and practices Adequate financial recourses Leadership with integrity and appropriate skills Linkages with other cooperatives 79

86 Step 1: Conduct a feasibility analysis and develop a business plan. This should be done to complete and expand on the initial analysis that was done in group formation including the cost-benefit analysis of forming a cooperative. It is crucial to outline important factors that will contribute to the economic viability of the cooperative (e.g., likely buyers, anticipated price increases for products from collective marketing, costs that can be reduced through shared purchasing of inputs, etc.). For more information, see the modules on preparing basic or strategic business plans. Step 2: Develop by-laws. By-law creation should be a democratic process. In any group, there may be a wide range of education and literacy levels. As a result, it is paramount that the larger group is involved and that they understand what is being written and discussed. See Module 2 for more on by-laws. Note: The benefits a member receives directly from providing goods or crops to the cooperative are one form of value (e.g., prices and increased market access). Equity ownership in the cooperative creates value as a longer term investment. Groups should consider equity ownership when they are determining how to share profits of the organization back to members (e.g., dividends). Step 3: Accumulate capital. Just like any business, a cooperative needs adequate financial resources from the start. Obtaining financial capital can be challenging: much of the initial starting capital must come from members. Member contributions to the cooperative should be recorded and documented as equity. Step 4: Undertake registration process / incorporation. This process differs depending on the country, region or even district in which a group is located. It is important to obtain national and local information on the registration process. In some countries, laws may require a minimum number of members or amount of capital. Registration may require extensive paperwork and/or a visit from a local cooperative authority. Note: Recruiting new members may occur at different points of cooperative formation. Things to Watch Out For Lack of clearly identified mission. If potential members are unable to articulate a common need, vision or understanding of issues that they cooperative will solve, these are potential indications that they may need further support before they are ready to take the next step. A new cooperative shouldn't be formed without thoughtful consideration; knowing when a group needs more time or isn t yet ready is very important. Potential members must identify a clear mission statement with definite goals and objectives. Lack of democracy. In some cases, a small group of educated and influential individuals may come to dominate the cooperative formation process, thereby reducing the democratic nature of the cooperative. Project staff must support both leaders and members so they all have the tools to fully engage in the democratic process during cooperative formation. A lack of informed and engaged members at the beginning is likely to hinder the cooperative s success in the long run. 80 Agricultural Producer Organization (AgPrO) Manual

87 AgPrO Training Module 5: Cooperative Formation, Governance and Structure Lack of strategic planning. It is important that cooperatives take plenty of time as they navigate through the business and strategic planning phases. Understanding the business objectives, goals and having a sense of what it will take to accomplish them is extremely important. If an early stage cooperative fails to properly develop a business model and execution plan it will likely have trouble surviving. (Note that strategic planning is important not only for newly formed cooperatives, but also for existing cooperatives.) Lack of proper governance. A cooperative must have clearly defined roles and responsibilities for members, cooperative management and the board of directors alike. Problems may arise when, for example, one group oversteps its bounds (e.g., board members get caught up in day-today operations) or there is a lack of effective process for electing board members to represent member interests. Lack of financing. It is common for businesses to be underfinanced in their early stages. Often, the first months of operations (and even the first years) are not profitable, so adequate financing is important to survive this period. Failure to identify and minimize risks. Risks to starting a new business can be reduced if they are identified early. Careful study of competition, government regulations, industry trends, and alternative business practices can mitigate risks. Inadequate communications. Keeping the membership, suppliers, and financiers informed is critical during the early life of a cooperative. Lack of communication or incorrect information can create apathy or suspicion. Directors and management must decide to whom and how communications are to be directed. Clear and adequate communication among members, management and board members is also crucial to the success of a cooperative. Outside influences. Another challenge for new cooperatives is determining how to balance integration and inclusion of outside influences while maintaining autonomy. Many countries have a history of politics interfering in cooperative business. Cooperative leaders should pay careful attention to the involvement of individuals with strong institutional / political connections and take care to understand how this may impact governance and general business (primarily democratic control and benefits accruing to members). 81

88 Section 2: Cooperative Governance and Structure Good governance has become an important topic of discussion, not only in cooperatives, but in all types of organizations from large publicly owned businesses to small enterprises. Common to all organizations, governance is now seen as a prerequisite for sustainable economic growth. Cooperative members and staff must understand the cooperative principles and good governance, including controls and member economic participation. Education and training are essential to ensure that the cooperative is effectively run and fully democratic. What is Governance and Why is it Important for Cooperatives? One business analyst defines governance as the relationship between shareholders, creditors, and corporations; between financial markets, institutions and corporations; and between employees and corporations. 9 Corporate governance would also encompass the issue of corporate social responsibility, such as with respect to culture and the environment. Generally, governance refers to the process of making and implementing decisions. Cooperative governance encompasses a wide range of topics and issues. It comprises oversight and management of the cooperative so that it serves the interests of its members/owners. Cooperative governance provides a structure for setting objectives and goals, identifying strategies to achieve objectives, and developing and implementing a performance monitoring plan. Cooperative governance also includes the rules and regulations by which a cooperative operates. For cooperative governance to be most effective, these should be developed and agreed upon by the cooperative s membership. The rules and regulations must be comprehensive and cover all aspects of the cooperative s operations and functions. Rules and regulations provide a structure through which the board and management pursue members interests and facilitate effective monitoring and utilization of available resources. A cooperative is a unique form of business because it balances and protects many different interests during the course of its operation. 9 Claessens, S (2003) Corporate Governance and Development Global Corporate Governance Forum, Focus 1, Washington: World Bank. 82 Agricultural Producer Organization (AgPrO) Manual

89 AgPrO Training Module 5: Cooperative Formation, Governance and Structure Cooperative Structure and Management Cooperative Chain of Command The figure below depicts the relationship among the four key groups in a cooperative. Cooperative Chain of Command MEMBERS BOARD OF DIRECTORS MANAGEMENT In a successful cooperative, members, directors, managers and employees each understand their rights, roles and responsibilities. EMPLOYEES A. Members A cooperative is a democratic organization owned by its members. The active economic and democratic participation of members in any cooperative is therefore central to good governance. Each cooperative should have clearly defined rights and responsibilities. Members should ensure that policies and performance are in accordance with the cooperative s objectives as well as with the International Cooperative Alliance Statement of Cooperative Identity. The board is responsible for reporting to members on the cooperative s progress and performance. The board should have a communication strategy in place that ensures frequent engagement with members. The board is also charged with member recruitment and should develop innovative ways to attract new members. Members are responsible for knowing their rights and responsibilities and must hold their boards accountable for the cooperative s performance. Rights and Responsibilities Member rights and responsibilities are contained within the cooperative s bylaws and are outlined in the table below. (Note that this list is not comprehensive and each cooperative may also include others in their bylaws.) 83

90 Member Rights Attend and participate in meetings Vote Participate in the leadership by standing for election to the board and committees Voice opinions and be heard Be consulted on key issues and decisions Be informed on all cooperative affairs Inspect the cooperative s registration, incorporation and other official documents Realize income and/or other benefits from the cooperative s business operations Expect business practices to be consistent with the cooperative s values and principles Be treated equally among other members Institute an inquiry into the cooperative s affairs Withdraw membership Member Responsibilities Comply with bylaws, codes of conduct, internal regulations, policies and procedures Act in the best interests of the cooperative Reserve and protect the society s image and reputation Acknowledge and believe that the cooperative is a distinct membership organization Acknowledge and subscribe to cooperative values and principles Use the cooperative s services and participate in its economic activities Participate in education and training programs Ensure the longevity of the cooperative Question and probe actions and decisions Encourage others to join the cooperative and use its services Pay entry fees, buy shares and pay dues Attend meetings Conform to decisions of general meetings Protect and defend the cooperative s assets and equity B. The Board of Directors A cooperative needs an effective board to oversee its activities. The board is collectively responsible for the success of the business. All directors are legally responsible for the board s decisions. Boards should act in accordance with the cooperative values and principles and are responsible for governance. It is their responsibility to direct cooperative management, to guide the cooperative s direction, to develop policies and to monitor implementation. In many cooperatives, directors receive a small amount of compensation for attending board meetings and for carrying out activities on behalf of the cooperative. Fees paid to board members should be set by the members at the annual general meeting. Fees should always be based on the ability of the cooperative to afford them. New cooperatives usually don t compensate directors because they are not yet making a profit. Primary cooperatives that are making a profit pay small fees. Profitable secondary cooperatives tend to pay somewhat larger fees. Compensation guidelines should be designed to minimize any sort of abuse of the fee structure (e.g., holding extra meetings to collect compensation). In general, compensating board members for their work encourages them to effectively uphold their responsibilities; it also helps attract skilled professionals to the cooperative s boards and committees. 84 Agricultural Producer Organization (AgPrO) Manual

91 AgPrO Training Module 5: Cooperative Formation, Governance and Structure Duties and Responsibilities The roles of cooperative boards are similar to other business boards of directors except that cooperative boards are accountable to their members and must adhere to cooperative values and principles. The duties and responsibilities of a cooperative board are outlined in the table below. Duties and Responsibilities of a Cooperative Board Accountable to members and endorse their rights Manage the affairs of the cooperative democratically on the basis of cooperative principles Strive to satisfy the economic and socio-cultural needs of members as well as increase their awareness of rights and responsibilities Improve the material living conditions of cooperative members Promote cooperative education amongst its members Carry out strategic planning on behalf of the cooperative Safeguard integrity in financial reporting Make timely and balanced disclosures Recognize and manage risk so that it does not prevent the cooperative from achieving its goals Respect the cooperative s rules regarding board compensation Recognize the legitimate interests of stakeholders Act with integrity and ethics Officers Officers are board executives. The board usually elects officers (from its membership), shortly after the members elect the board in the annual general meeting. Depending on the cooperative laws and rules of the country, and the cooperative s bylaws, these officers include a chairperson, a vice-chairperson, a secretary and a treasurer. Each officer has specific duties as detailed in the cooperative s bylaws. The chairperson presides at all meetings and watches over the cooperative's affairs, serving as the main communication link between hired management, other directors and members. The vice-chairperson performs the duties of the chairperson, if the chairperson is absent or unable to perform his or her duties. The secretary keeps a complete record of all meetings of the board of directors and general membership and also serves as the official custodian of the cooperative's stamp, bylaws and membership records. The treasurer ensures the accuracy and proper handling of bookkeeping and financial accounts and is responsible for presenting periodic financial reports. 85

92 Election and Removal of Board Members Members of the board of directors are elected at a general meeting. They should hold office for a specific period of time ( term ) to ensure regular renewal of the board. This can be achieved in two ways depending on the bylaws: 1) the age rule, whereby upon reaching a certain age, a director is no longer eligible to stand for re-election; or 2) imposing a mandatory term or time limit after which a director is not eligible for re-election. There should be rules that measure the cooperative s performance and ensure that directors perform their duties effectively. The same rules should enable members to remove a director or an entire board from office if the director or board is not upholding responsibilities or has committed a substantial breach of the code of conduct. This is usually achieved through a petition in which a majority of members endorse the removal of such a director or board member and call for the holding of a special general meeting. The Annual General Meeting Every cooperative should hold an annual general meeting of its members or delegates. This meeting should take place every calendar year and as prescribed in the cooperative s bylaws. The meeting serves to communicate with members and encourage their participation. Members should be informed of and encouraged to attend the annual general meeting, as well as election meetings and other meetings. Adequate notice (as specified in each cooperative s bylaws) should be given for all membership meetings through appropriate means, e.g., mail, posters in stores, advertisements in the local press and on the cooperative s notice boards and website. The notice should contain a statement of the meeting s purpose and, wherever practicable, the agenda for the meeting shall be made available to each member or delegate in advance of the meeting. While adhering to an agenda, the organization and content of the meeting should be kept as open and accessible as possible. The time and venues of the members meetings need to be convenient to the greatest number of members. C. Management The manager of a cooperative is appointed by and accountable to the board of directors. While the manager is not part of the cooperative s board, he or she should attend all board meetings and be an active, non-voting participant. The board of directors decides what the cooperative will do; the manager decides how it can best be done to effectively serve members. The board should seek and arrange for the appointment of a manager and other executive staff of the cooperative on renewable and fixed terms. It should ensure that people with the best commercial and financial insight who are empathetic to the cooperative mode of business lead the management team. The manager supervises day-to-day operations of the cooperative, often delegating these activities to paid staff. Thus, he or she manages employees, as well as the cooperative s finances, in accordance with board-approved policies. 86 Agricultural Producer Organization (AgPrO) Manual

93 AgPrO Training Module 5: Cooperative Formation, Governance and Structure D. Employees Although a cooperative is a unique form of business, in the end, it is still a business. In many ways, working for a cooperative is similar to working for a non-cooperative firm. However, adherence to the cooperative s values and principles place unique obligations on its employees. Understanding the cooperative s special relationship with its member-owners will help employees improve member services, maintain a high level of customer satisfaction, effectively represent the cooperative and build its image. 87

94 Section 3: Cooperative Bylaws Cooperatives, like other business organizations, need rules or bylaws to ensure that they are managed to the benefit all members. 10 Bylaws are written rules adopted by the cooperative to govern its members and regulate business matters. All members should be able to read the bylaws and feel free to ask any questions about them. It may be necessary to engage the local cooperative extension officer or another qualified person when preparing a producer group s bylaws. Key Information to Include in Bylaws Name of the organization Objectives of the organization Membership rules: terms of admission, shares and entrance fees, etc. Procedures for transferring shares Extent of a member s liabilities within the group Guidelines for running general meetings and decision making points at the meetings Duties of board members, the election process, terms and guidelines for removal if necessary Authorized signatories (officers authorized to sign documents on behalf of the cooperative) Distribution of profits In most countries, the government has a standardized set of bylaws and other registration documents that a cooperative or other producer organization should use. These standardized documents can be obtained from the appropriate ministry. The documents can be modified by the producer group to address the specific issues of the group. However, if the group makes too many changes in the standardized forms, its application may be rejected. The completed bylaws and other documents should be presented to the members for approval at a general meeting. Checklist for Developing Bylaws and Other Legal Documents Obtain copies of registration documents from the appropriate government ministry. For a cooperative, these documents usually include an article of incorporation form, a bylaws form, and standardized examples of how to fill out these forms. There are similar documents for other business forms, such as a for-profit corporation or a limited liability company. 10 Note that this section often refers to cooperatives and bylaws. As discussed in Sections 1 through 3, some producer groups may choose to register as another kind of business. Note that different business types have different registration procedures and terminologies, but the basic steps are the same as for registering a coop. Thus, this bylaw checklist is relevant to these other business forms a well. 88 Agricultural Producer Organization (AgPrO) Manual

95 AgPrO Training Module 5: Cooperative Formation, Governance and Structure Follow the prescribed format for developing bylaws based on the statutory requirements in your country. Ensure any amendments to a registered cooperative s bylaws or registration documents are approved by the relevant ministry. Consider developing operating procedures to supplement to the bylaws. Such procedures may include policies that are not required to be included in the bylaws and may necessitate occasional updating or revision. Examples include codes of practice, financial management policies and administrative policies. Making operating procedures a supplement to the bylaws provides added flexibility for making changes to the producer groups policies without having to formally amend the bylaws. Engage relevant government authorities when questions arise about registration or governance issues that cannot be resolved by members and their advisers. Encourage the cooperative to minimize political and other external interference in developing or amending bylaws and registering the organization. Issues to Consider When Developing Bylaws or Other Registration Documents Bylaws should state the business objectives of the group. For example, for a dairy cooperative, there should be some reference to the production, collection, processing and marketing of milk. Bylaws should clearly define the roles, responsibilities and division of labor among the board of directors, management and members. This is particularly important when it comes to financial management and reporting responsibilities between the board treasurer and the manager. Position descriptions should be developed for all governance and management-related positions before finalizing bylaws. Board size and structure should reflect the scale and nature of the business objectives and activities. Operating procedures for the board of directors should be clearly defined, including: election process, qualification criteria, suspension and termination policy and process, length of term in office, term limits, promoting diversity, and performance metrics and expectations. Board member terms should be staggered to ensure a smooth transition between incoming and outgoing board members, thereby building and preserving the institutional memory of the organization. 89

96 Succession planning should be clearly addressed in the bylaws. This means that staff and board members should be prepared to take on new roles when required (e.g., if key staff leave the organization or are temporarily unable to carry out their duties). Bylaws should clearly define the financial reporting process, timeline and requirements for both external and internal audiences. Typically, cooperative and other business statutes dictate reporting requirements such as the annual audit, annual general meeting, board meetings and extraordinary general meetings. However, the process for keeping members informed of the financial position of the organization is often not clearly defined. A grievance and disciplinary code of conduct should be outlined in the bylaws. The specific details of the code may be included as a separate operating procedures policy (as mentioned above) but at a minimum should be referenced in the bylaws. The process and procedures for distributing member benefits (patronage and dividends) should be included. The process and procedures for amending bylaws should be clearly defined. The board should review all clauses of draft bylaws with members, and confirm their understanding and agreement, before registering the organization or amending the bylaws. The board should be encouraged to review the bylaws regularly and should ensure that any amendments have been approved by the relevant government authority and have been clearly communicated to and understood by the members. In some countries, supervisory committees are established within cooperatives to provide oversight and resolve conflicts on an as-needed basis. If supervisory committees are required in your country, the bylaws should clearly define the structure, roles, responsibilities and operating guidelines for these committees. Land O Lakes, other NGOs and other external parties should be discouraged from asserting undue influence over the drafting of bylaws or other registration documents. Guidance and recommendations may be provided but should not be dictated. 90 Agricultural Producer Organization (AgPrO) Manual

97 AgPrO Training Module 5: Cooperative Formation, Governance and Structure Section 4: Sample Bylaws from Uganda DRAFT BYLAWS OF THE WANGAMU FARMERS COOPERATIVE SOCIETY LIMITED Interpretation of Phrases and Definition of Words or Terms In these bylaws, unless the context states otherwise, certain phrases, words and terms contained herein are to be defined and interpreted in accordance with The Cooperative Societies Act No.12 of 1997 and The Cooperative Societies Rules of 1998 drawn thereunder, hereinafter referred to as the ACT and the RULES, respectively. BYLAWS: This means the bylaws made by the society and registered under the Act, and includes any registered amendment of such bylaws. APEX SOCIETY: This means a cooperative society, membership of which is restricted to cooperative unions, and includes a society established to serve the cooperative movement by providing facilities for banking, insurance and the supply of goods and services. DIVIDEND: In relation to a member of the cooperative society, this means the yield on the member s share calculated by reference to the proportion that that member s share capital bears to the total share capital of the society. MEMBER: This is any person admitted to membership of the society in accordance with these bylaws. MANAGEMENT COMMITTEE: This is the governing organ of the society, to which management of the affairs of the society is entrusted by the members. OFFICER: This includes the Chairman, Vice-Chairman, Honorary Secretary, Treasurer, Committee Member, employee or any other person empowered under the Act, the Rules or bylaws of this society, to give directions in regard to the business of this society. REGISTRAR: This means the Registrar of Cooperative Societies appointed under the Cooperative Societies Act No.12 of 1997, and includes the Deputy Registrar of Cooperative Societies and such other officers as are appointed under the same Act. 91

98 THE ACT: This means The Cooperative Societies Act No.12 of THE RULES: This means The Cooperative Societies Rules of THE TRIBUNAL: This means The Cooperative Tribunal established under Section 77 of the Act. SPECIAL GENERAL MEETING: This means a General Meeting other than an ordinary General Meeting, of which at least fifteen (15) clear days written notice of the proposed resolution, and of the proposed date, time and venue of the meeting has been given to each member. BONUS: Bonus, in relation to a member of a cooperative society, means the value of members produce delivered through the society that is subsequently divided among the society members, calculated by reference to the proportion that the individual member s produce bears to the total produce delivered to the society. 1. NAME OF SOCIETY The name of the society shall be..., which shall hereafter be referred to as the SOCIETY. 2. REGISTERED ADDRESS The registered address of the society shall be....post OFFICE BOX The society is registered as specified under the terms and conditions of The Cooperative Societies Act No.12 of OBJECTS OF THE SOCIETY a) The objects of the society are to promote the economic interest and general welfare of its members in accordance with Cooperative principles and values. The cooperative principles are: Open and voluntary membership Democratic member control Economic participation by members Autonomy and independence Education, training and information Cooperation among cooperatives Concern for the community. 92 Agricultural Producer Organization (AgPrO) Manual

99 AgPrO Training Module 5: Cooperative Formation, Governance and Structure The values of cooperatives are: Self-help Self-responsibility Democracy Equality Equity Solidarity Members are: Honesty Openness Social responsibility Caring for others b) The specific objects of the society shall be as follows: i) To arrange for the cooperative processing, grading, packing, transporting, marketing and all other such operations and activities as may be necessary for the most profitable disposal of members dairy produce ii) To arrange for purchase and resale of materials, machinery and other requirements of the members, provided that the society may carry out such other activities with nonmembers on such terms and conditions as agreed upon by members in a general meeting iii) To promote cooperation and goodwill between members and the society iv) To cooperate with other cooperatives in order to promote members interests, and, in furtherance of this objective, the society may affiliate with an Apex, countrywide or secondary cooperative Organization v) For the attainment of the above objects, the society may do all other acts and things as may be necessary, subject to these bylaws, the Act and the Rules, provided that such acts or things are approved by members in a general meeting vi) To promote good farming practices in accordance with advice of government departments and relevant non-governmental organizations and, to that end, own and operate agricultural and other machinery and livestock for the benefit of members vii) To enact measures to control pests and diseases of livestock as well as crops viii) To encourage thrift and provide for accepting of deposits and other banking services when approved by members in a general meeting ix) To make loans to members in the form of goods, services, kind or cash to help them in their farming activities in accordance with these bylaws, the Act and the Rules thereunder x) For the attainment of these objects, to acquire property and chattels and do all other such things as may be necessary subject to these bylaws, the Act and the Rules thereunder. 93

100 4. MEMBERSHIP Members shall consist of: a) Original members who signed the application for registration b) New members subsequently admitted in accordance with these bylaws, and whose names are entered in the Register of Members. 5. A person who possesses all of the following qualifications shall be eligible for membership: a) Ordinarily resides on or occupies land within the society s area of operation, namely.. b) Has attained the age of eighteen (18) years c) Is of good character d) Keeps livestock or has produce capable of being marketed through the society in accordance with these bylaws e) Is of sound mind. 6. Members shall be admitted by the Managing Committee, subject to confirmation at the next General Meeting. On being accepted by the Managing Committee, a member shall sign his name or make his thumb-mark in the Register of Members in the presence of two members of the committee to indicate his acceptance of the society bylaws. The committee may refuse membership to any person who does not possess the qualifications as per bylaw article No.5 above. Appeal against such decision shall be made to the General Meeting. A further appeal may be made to the Cooperative Tribunal and, if not satisfied, to the High Court, whose decision shall be final. In addition, he shall pay his entrance fees and purchase at least one share in the society. 7. Every member shall nominate in writing one person to whom, on the member s death, his share or interest shall be transferred. The member shall have power to change the name of the nominee. The name of the nominee shall be entered in the Register of Members of the society, or recorded in a sealed envelope to be kept securely by the society, and any alterations thereon shall be signed by the member himself. If not admitted to membership, the nominee shall be paid the value of the shares or assets, less any sum due from the deceased member to the society. Such payment shall be made within one year from the date of the member s death. 8. Membership in the society shall cease from the effective date if a member: a) Dies b) Ceases to hold the qualifications for membership as specified in bylaw article No. 5 c) Is expelled from the society d) Voluntarily withdraws from the society in accordance with the provisions of bylaw article No. 9 e) Becomes of unsound mind, certified by a recognized medical practitioner f) Ceases to hold a share in the society in accordance with the provision of bylaw article No.16 g) Is convicted in a court of law for an offense of dishonesty h) Becomes inactive by being unable to deliver produce to the society for a period of three (3) months in accordance with bylaw article No. 5 (iv). 94 Agricultural Producer Organization (AgPrO) Manual

101 AgPrO Training Module 5: Cooperative Formation, Governance and Structure 9. A member may withdraw from the society only at the end of each financial year and then only after giving one month s notice, provided he is not in debt to the society. A member may transfer to another society upon giving one-month notice to the society. Such transfer must be approved by the committee of each respective society concerned. 10. The committee, or the General Meeting, may expel a member who: a) Is convicted in a court of law for an offense involving dishonesty b) Acts in any way against the interests of the society c) Trades on his own account in any produce scheduled by the society under these bylaws, unless written permission is given by the Management Committee and, where applicable, the relevant government departments or marketing. 11. Any member expelled by the Management Committee may appeal to the next General Meeting, which shall have power to reinstate him or confirm his expulsion. A further appeal may be made to the Cooperative Tribunal and, if not satisfied, to the High Court, whose decision shall be final. 12. Any person ceasing to be a member, including an individual transferring to another society, may be repaid the following amount, after deductions of any debts owed by him to the society: a) The value of his shares, unless the society holds loans or deposits from nonmembers b) Any bonus, dividends or interest due to him at the date on which the membership ceases c) Any deposit or sum held by the society on his behalf 13. On the death of a member, the Management Committee shall within one (1) pay to his nominee all sums due to him or her as specified under bylaw article No FUNDS OF THE SOCIETY These shall include: a) Entrance fee of Ugandan Shillings 1,000 only and at least 10 ordinary share(s) of nominal value of Ugandan Shillings 100 only b) Share capital c) Any reserve, capital formation funds and any other funds established with the approval of the general meeting d) Surplus funds resulting from the operations of the society, as set out in these bylaws e) Grants and donations f) Loans from members 15. Investment of society funds: a) The funds of the society may be applied to the promotion of the stated objects of the society as set out in bylaw article 45. b) The society may invest or deposit its funds only: i. In the cooperative bank ii. In and upon such investments and securities as are for the time being authorized for the investment of trust funds iii. In a capital formation fund, which shall only be applied in projects approved by members in a General Meeting iv. In the shares of any other cooperative society 95

102 v. With any bank licensed under the Banking Act vi. In the stock of any statutory body established in Uganda or in any limited liability company incorporated in Uganda or in any other manner approved by resolution at a General Meeting of the society. SHARES 16. The society shall have the following types of shares: a) Ordinary shares b) Redeemable shares paid by members to meet specific needs of the society that will be redeemed to members after a period agreed upon by a General Meeting. Every member shall hold at least ordinary shares (Ugandan shillings only) in the society and shall increase such shares to an amount approved by the General Meeting from time to time. No member shall hold more than one-fifth (20 percent) of the total ordinary issued and paid-up shares of the society. 17. Minimum ordinary shares shall be paid in full on application for membership. 18. The society need not buy back ordinary shares issued to a member, but may do so if it has a share transfer fund. 19. With the approval of the Management Committee, a member may at any time transfer his ordinary shares to another member, but not to a nonmember. 20. All transfers of ordinary shares must be registered with the Secretary on payment of a transfer fee to be determined by the Management Committee, but no transfer is valid unless so registered. 21. For limited liability societies, the liability of a member shall be limited to the amount paid on ordinary shares held by the member. 22. POWERS TO BORROW a) Loans shall be accepted from members and nonmembers, provided that loans from nonmembers shall be accepted on condition that: i. The General Meeting is satisfied that the society genuinely needs the deposit or loan, and the terms and the rate of interest are reasonable ii. Repayment of the deposit or loan is secured to the satisfaction of the General Meeting iii. Maximum liability fixed by the General Meeting is not exceeded iv. The General Meeting has given approval. b) For the purpose of securing better any loans accepted by the society under paragraph (A) above, the society may grant a charge over assets of the society. The authority to grant a charge shall be reserved for the General Meeting and delegated to the Management Committee. 23. The rate of interest on any deposit or loan from members shall not exceed 6 percent per annum except with the approval of the General Meeting. 96 Agricultural Producer Organization (AgPrO) Manual

103 AgPrO Training Module 5: Cooperative Formation, Governance and Structure 24. COMMISSION The society may charge a commission on produce or goods sold or bought through the society and may charge for other services rendered. The rate of commission and other charges shall be decided by the Management Committee, published on the society notice board and, recorded in the committee meeting minutes, provided that such rates are confirmed by the General Meeting. 25. RESERVE FUND The society shall maintain a Reserve Fund that shall be used for discharging the liabilities of the society, in the event it is liquidated, or for any purpose to be decided by the General Meeting but approved by the Registrar of Cooperative Societies, as prescribed in bylaw article GENERAL MEETING The supreme authority of the society shall be vested in the General Meeting of members. Such meeting shall be held in the following manner: a) Annual General Meeting: The Annual General Meeting shall be held every year to elect the management committee and to consider the audited accounts. It will also undertake such other business as provided for in these bylaws. A notice of at least fifteen (15) calendar days shall be given prior to the General Meeting. b) Special General Meeting: A Special General Meeting shall be held: i. When convened by the Management Committee, the Registrar, or, his representative ii. Within twenty-one (21) days of a written demand from at least one-third of active members, or, at least one--third of the total active members who have affixed their original signatures and national identity card number to the written demand. 27. At least ten (10) days before a General Meeting, the Honorary Secretary or Society Manager shall take all possible and usual steps, such as announcements at public meetings, churches, mosques, markets and schools; posting of a notice on the society notice boards; and announcements in the local newspapers and electronic media, to inform all members of the date and main business of the meeting. All written notices of the meeting shall include a statement of the business to be dealt with at the meeting. 28. Except when convened by the Registrar or his representative, the quorum at General Meetings shall require attendance of at least one-third of the membership or one-quarter of the total members, whichever is less, for the disposal of the business of the meeting. When a quorum is not present, the Chairman shall adjourn the meeting and shall fix a date within one (1) month for the adjourned meeting, which shall be advertised as prescribed by these bylaws. If at such a meeting, a quorum is again not present, the Chairman shall declare the meeting open and proceed with the business of the meeting with those members present, one and a half hours after the advertised time of the meeting. 97

104 29. The General Meeting conducted shall have the powers and duties as prescribed in the Rules. The Annual General Meeting shall: A) Consider the statement of accounts, the auditors report, the inspection or inquiry report, if any and the report of the Management Committee on the activities of the society during the past financial year B) Decide on the disposal of the net gain or surplus resulting from the operations of the society during the past financial year C) Confirm or decide otherwise the action to be taken by the Management Committee and give direction to the new committee where necessary D) Confirm, or decide otherwise, the admission and expulsion of members under bylaw article Nos. 8 and 11 E) Elect, suspend or remove a member of the Management Committee F) Fix the maximum liability that the society may incur in loans and deposits, whether from members or nonmembers G) Consider the rate of commission to be charged by the society, and the estimated income and expenditure for the financial year following the Annual General Meeting H) Amend or enact new bylaws I) Schedule the type of produce to be delivered and marketed by the society and decide what other functions shall be performed by the society in accordance with these bylaws J) Fix the amount to be indemnified by the committee members as prescribed by Rule 35 and bylaw article 31 (C) (L). The new Management Committee may not take office until items (A) and (G) have been dealt with. 30. All business discussed or determined at a General Meeting shall be recorded without erasures or corrections in a minute book, which within one (1) week of the meeting shall be signed by the Chairman of the meeting and at least one other committee member who was present at the meeting, to indicate that in their opinion the record is a true, fair and complete record of all the matters that were discussed or determined at the General Meeting. At the next meeting, after approving alterations or variations, which shall be duly written below the above-quoted signatures and not as alterations to the original records, the meeting shall resolve and authorize the Chairman to sign and date the final record. 31. THE MANAGEMENT COMMITTEE a) The Management Committee shall consist of not more than nine (9) members. It shall include the Chairman, Vice-Chairman, Treasurer, Honorary Secretary and not fewer than five (5) other members. b) The Chairman, Vice-Chairman, Treasurer and Honorary Secretary shall be elected from among the members of the Management Committee in accordance with the Cooperative Rules of Members shall be elected for three (3) years, one-third retiring annually. 98 Agricultural Producer Organization (AgPrO) Manual

105 AgPrO Training Module 5: Cooperative Formation, Governance and Structure c) No person shall be eligible for membership of a committee of the society or remain a member of such committee if he or she i. Is not a member of the society ii. Is under twenty-one (21) years of age iii. Receives any remuneration, salary or other payment from the society, except in accordance with the Act iv. Is seen to be competing with the society v. Has an undercharged bankruptcy or is of unsound mind vi. Has been adversely named by the Registrar, or the Registrar s representative, in an Inquiry Report endorsed by an Annual or Special General Meeting, for mismanagement or corrupt practices while still a member of the Management Committee of the society in the last ten (10) years vii. Has been convicted of any offense under the Act or Rules made thereunder viii. Has been convicted of any criminal offence involving dishonesty, or is imprisoned for three (3) months or more ix. Has any outstanding debts owing to the society at the end of the financial year, other than in respect of a loan under the provision of these bylaws, the Act and the Rules made thereunder x. Does not have a level of education of least 0 xi. Is not an active member of the society and whose produce delivered to the society has been less than kilograms or liters per day for the past three (3) years xii. Has been unable to indemnify the society, that is, has not executed an indemnity as provided in the Cooperative Societies Act No.12 of 1997 and the Cooperative Rules of a) Meetings of the Management Committee shall be held regularly, at least once every month, and at other times when necessary. Five (5) members shall form a quorum for the disposal of the business of the meeting. b) If a member of the Management Committee fails to attend three (3) consecutive meetings without being excused, his position may be declared vacant and the vacancy filled as provided for in these bylaws. 33. DUTIES OF THE MANAGEMENT COMMITTEE a) The Management Committee shall be the executive authority of the society, subject in all respects to the supreme authority of the General Meeting of the society s members. Its procedures, powers and duties shall be as described in the Rules; in particular, it shall: i. Observe, in all its transactions, the Act, the Rules made thereunder and these bylaws ii. Ensure that true and accurate records are kept of the society s funds, property and receipt and disposal of members produce, and make frequent checks of all books, cash and property, including stores for resale iii. Present at the Annual General Meeting an audited balance sheet, together with proposals for disposal of surplus, if any iv. Prepare and present to the Annual General Meeting, for adoption, the estimate of income and expenditure for the financial year following the Annual General Meeting and the commission rate to be charged against the produce of the society, sufficient 99

106 to cover all the liabilities and obligations, both outstanding and anticipated, for the financial year following the Annual General Meeting v. Provide adequate budgetary allocation for education and training of ordinary members, committee members and staff vi. Appoint, suspend, punish or dismiss any paid employee of the society and supervise his or her work subject to their requirements and the provisions of the Act applicable to them vii. Impose fines under these bylaws and the Act viii. Issue new shares and approve transfer of shares ix. Regulate matters regarding pooling of produce and matters relating to standards of quality, in accordance with these bylaws x. Generally manage the affairs of the society xi. Determine, at the General Meeting affiliations with a cooperative union, other societies and any other cooperative organization and accordingly take necessary actions xii. Consider and approve applications for loans from members, in accordance with these bylaws. b) In the conduct of affairs of the society, the Management Committee shall exercise the requisite prudence and diligence of ordinary men of business, and may be held jointly and personally responsible for any losses to the society, resulting from negligence, carelessness or failure to observe these bylaws, the Act and the Rules made thereunder. c) No expenditure shall be authorized by the Management Committee unless it is covered by the estimate formally approved by the Annual General Meeting or Special General Meeting. 34. A record of business discussed or decided at any meeting of the Management Committee shall be written without erasures or corrections in a minute book, which within one (1) week of the meeting shall be signed by the Chairman of the meeting and at least one other committee member who was present at the meeting, to indicate that in their opinion the record represents a true, fair and complete record of all matters pertaining to the meeting. 35. CHAIRMAN AND VICE-CHAIRMAN (OR CHAIRPERSON AND VICE-CHAIRPERSON) a) The powers and duties of the Chairman shall be to: i. Convene all the meetings of the society ii. Prepare, or cause to be prepared, the agenda of the meeting iii. Chair the meeting and control the business to be transacted iv. Direct the affairs of the society in conjunction with other elected officials of the society v. Close the meetings vi. In absence of the Chairman, all the duties of the Chairman shall be executed by the Vice-Chairman as assigned to him or her by the Management Committee vii. Sign all accountable documents. 100 Agricultural Producer Organization (AgPrO) Manual

107 AgPrO Training Module 5: Cooperative Formation, Governance and Structure Subject to the Cooperative Societies Rules of 1998, article 29(4) and any subsequent amendment thereto, no person shall serve in the post of Chairman for more than two (2) terms of three (3) years each, and no person who has held office for two (2) consecutive terms shall be eligible for re-election as Chairman, without written exemption from the Registrar of Cooperative Societies. b) TREASURER The powers and duties of the Treasurer shall be to: i. Manage, or cause to be managed, the financial affairs of the society in a competent and efficient manner ii. Maintain full and complete records of all assets, liabilities, income and expenses of the society iii. Ensure safekeeping of the society s finances, securities and books of account iv. Ensure that all payments and expenditures are duly authorized v. Assure compliance with all directives of the Management Committee. c) HONORARY SECRETARY The duties of the Honorary Secretary are: i. Record minutes of Management Committee meetings and General Meetings ii. Ensure that the society s correspondence is promptly and correctly attended to iii. Prepare and send notices of meetings iv. The Management Committee may delegate some or all of the Honorary Secretary s duties to the Society Manager. v. Keep in safe custody the rubber stamp of the society No person shall be eligible for a post in the executive, or remain in the executive, if he or she is not literate. 37. SUPERVISORY/AUDIT COMMITTEE a) The General Meeting may, when need arises, elect a Supervisory/Audit Committee whose powers and duties shall be to: i. Scrutinize all books of account ii. Scrutinize minute books of both committees and General Meetings iii. Scrutinize receipts and payments iv. Scrutinize invoices, tenders and any other documents relating to the business transactions of the society v. Submit a report of their findings within two (2) weeks of the date of the General Meeting electing them vi. Any other duty assigned to them by the General Meeting vii. Report to the Management Committee once every quarter and table their recommendations. 101

108 The Supervisory Committee shall consist of members [for example, three (3) members]. b) No person shall be eligible for membership of the Supervisory Committee or remain in such committee if he or she: i. Has not been active for the last years ii Has less than three (3) years experience in management of cooperative societies iii. Has no bookkeeping knowledge (ACNC or its equivalent) iv. Has not reached Form 4 level of education. The Supervisory/Audit Committee tenure of office shall be determined by the General Meeting but shall not exceed one (1) year. 38. The committee shall have the power to appoint one or more hired help as the committee may require. They shall carry out such duties as may be required by the committee. No hired help shall attend meetings of the committee unless required to do so by the Chairman/Chairperson. 39. BOOKS OF ACCOUNTS The following books and records shall be kept by the society: a) A register of members showing the name, address and occupation of each member; number of shares held; the date and serial number of the share receipt; the date of admission to membership; particulars of the appointed nominee as provided in bylaw article No.7 (provided a separate share register may be maintained if necessary); and the date of leaving the society b) Minute books for Management and General Meetings c) A cash book showing details of all moneys received and paid out in any way whatsoever, including the number and date of the receipt or payment voucher, indicating reasons for the respective receipt or payment d) A ledger containing such accounts as are necessary for the proper conduct of the business e) A personal ledger showing the transactions of each member, including details of produce delivered by each member to the society and subsequent payment made thereof f) Property records g) A ledger for stores for resale showing the balances at hand at all times, item by item h) Such other books as the Management Committee or Registrar may prescribe. 40. a) The Management Committee may make such rules as it considers fit regarding the conduct of the society s business. Any rules made shall be recorded in the minute book and published on the society s noticeboard. The rules shall come into effect after a reasonable lapse of time. b) The society may by resolution of a simple majority of the General Meeting make rules governing the methods of farming to be followed by members and other rules governing proper running of the society. 102 Agricultural Producer Organization (AgPrO) Manual

109 AgPrO Training Module 5: Cooperative Formation, Governance and Structure 41. FINANCIAL YEAR The financial year of the society shall be DELIVERY OF PRODUCE a) The society shall market only such types of produce as shall be decided by the General Meeting. b) The Management Committee may direct the kind of produce that shall be delivered by each member, and need not accept such produce unless it is of the standards required and is delivered at the time and place directed. c) A receipt for all the produce delivered to and accepted by the society shall be issued on behalf of the society at the time of delivery. d) The Management Committee shall make rules as it deems fit regarding the kinds of produce to which a pooling system shall be applied and shall decide on the periods of such pools and the quality of such produce. 43. BINDING RULES Where the society has exercised its powers under bylaw article No. 3(C)(ii) and entered into contract with a member under the Act for the purpose of securing performance of the obligations under the contract, the member shall not, without first obtaining written consent of the Management Committee, sell or otherwise dispose of any of his or her produce of any kind described as falling within these bylaws by the General Meeting, to any corporation, organization, society or person, other than this society. If the member acts inconsistently with said contract, he or she shall pay to the society such sum estimated by the Management Committee as the loss arising from the breach of the contract. Payment of such damages by the member shall in no way preclude the imposition of a fine under these bylaws. 44. AUTHORIZATION FOR SIGNING OF SOCIETY DOCUMENTS Society checks shall be signed on behalf of the society by the: a) Chairman b) Vice-Chairman c) Treasurer d) Honorary Secretary 45. DISPOSAL OF SURPLUS Subject to the provisions of the Act, the net gain or surplus resulting from the operations of the society, during the financial year, shall be disposed of as follows: 103

110 Credit a quarter (25 percent) of surplus to the Reserve Fund; the balance may be disposed of as decided by the General Meeting by way of: a) Paying dividends to members b) Paying bonuses to members in proportion to the value of produce delivered, or business transacted by them, through the society c) Being carried to the Reserve, Shares Refund Account or other funds of the society, including the unallocated surplus reserve, if any d) Being contributed to any educational or charitable purpose e) Paying a gratuity or honorarium to retiring officers or to servants of the society f) Any other manner approved by the General Meeting. 46. FINES The Management Committee may impose a fine on a member for breach of these bylaws, in such an amount as may be deemed appropriate, subject to the provisions of the Act. No fine exceeding the sum of Kenya shillings 5,000 (Kenya shillings five thousand only) shall be imposed, subject to any amendment of the relevant section of the Act and the Rules thereunder. 47. DISPUTES Any dispute arising out of these bylaws or concerning the business of the society that cannot be resolved by the Management Committee or General Meeting shall be referred to the Cooperative Tribunal under the Cooperative Societies Act, No.12 of 1997, and, if still dissatisfied, appeal to the High Court, whose decision shall be final. 48. For the purpose of these bylaws, a debt owed by a member of the society, or vice versa, shall be regarded as a dispute. MISCELLANEOUS 49. No officer or member shall receive from the society any payment except the actual costs of traveling and subsistence while working on the society s business, except as honorarium from surplus as allowed in bylaw 45 (E) unless a member is appointed as a paid servant of the society. 50. The General Meeting, in accordance with the provisions of the Act, shall appoint auditors, and the society shall pay as audit fees such sum as the committee may approve and supervision fees such sum as the Registrar may require. 51. A copy of these bylaws shall be furnished to every member who requests a copy. The cost of producing such a copy shall be met by the member. 52. LIQUIDATION The society shall be liquidated only by order of the Registrar or by a resolution of two-thirds of the members at a General Meeting. On dissolution of the society, after duly discharging the liabilities of the society repayment of the share capital and reserve funds if any will follow procedures as approved by the Registrar. 104 Agricultural Producer Organization (AgPrO) Manual

111 AgPrO Training Module 5: Cooperative Formation, Governance and Structure 53. COMMON SEAL The seal of the society may be a rubber stamp bearing the words seal of the... and shall be used to sign on behalf of the society supplementary to bylaw article No ELECTIONS a) At least one (1) year before the Annual General Meeting, the General Meeting of members shall appoint a returning officer to preside over the elections. b) All elections shall be held within the established electoral areas of the society. Electoral areas shall be determined by the General Meeting from time to time. Any dispute arising from elections that cannot be resolved by the General Meeting shall be referred to the Cooperative Tribunal under the Act, and if still dissatisfied, appeal to the Registrar or his representative, whose decision shall be final. 55. All elections shall be by a show of hands or queuing, unless a secret ballot is specifically requested by a majority of members present at the General Meeting. 56. The Management Committee may, by a three-quarters (75 percent) majority vote, recommend to the General Meeting suspension of a committee member who violates the respective applicable law, the Act or Rules thereunder or these bylaws, or for any other good, sufficient and justified cause. 57. OATH OF ALLEGIANCE a) The Executive Officer, members of the Management Committee and employees of the society shall hold in the strictest confidence information concerning all transactions and personal affairs of the society with its members, and all information with respect to proceedings of Management Committee meetings and respective minutes. b) In case of breach of confidentiality, besides resulting action, the responsible party shall be removed from office or, in the case of an employee, have his or her employment terminated. c) No executive officer, committee member or employee of the society shall in any manner participate in deliberations upon, or determination of, any question affecting his own personal or financial interest. In the event of disqualification of any such Executive Officer, committee member or employee, he or she shall withdraw from such deliberation and determination, Management Committee and the remaining qualified committee members present at the meeting, provided they constitute a quorum without the disqualified person, may exercise the relevant powers of the Committee. 58. CONFLICT OF INTEREST Every committee member and employee of the society shall be required before taking part in any business transactions that the society may be about to discuss, or initiate, to disclose any personal interest in the matter and shall not take part in any discussion or vote upon that item of business. The Management Committee member or employee shall physically absent himself or herself from the discussion, unless it is determined that the individual has relevant information to provide. Failure to divulge this information may result in removal from office or termination of employment. 105

112 59. AMENDMENT OF BYLAWS These bylaws may be amended in accordance with the procedure set forth in the Act and the Rules thereunder, but no amendment shall become effective until it is approved and registered by the Registrar of Co-operative Societies. 60. ACCEPTANCE We, the undersigned executive officers of the cooperative society named herein, do hereby accept and adopt these bylaws for and on behalf of the society, together with any changes or alterations that have been initiated or signed by us. CHAIRMAN VICE-CHAIRMAN. TREASURER HONORARY SECRETARY CERTIFIED, that the foregoing bylaws of WANGAMU FARMERS CO-OPERATIVE SOCIETY LIMITED have been approved by me and duly REGISTERED. GIVEN UNDER MY HAND AT KAMPALA THIS DAY OF..YEAR.. REGISTRAR OF COOPERATIVE SOCIETIES 106 Agricultural Producer Organization (AgPrO) Manual

113 AgPrO Training Module 5: Cooperative Formation, Governance and Structure Section 5: Sample Bylaws from Zambia THE CO-OPERATIVE SOCIETIES ACT No. 20 OF 1998 (PART III, Section 19) BYLAWS OF THE KWANSHAMA DAIRY CO-OPERATIVE UNION LIMITED PRELIMINARY DEFINITION/INTERPRETATION THESE ARE THE BYLAWS RELATING TO THE REGULATIONS OF KWANSHAMA DAIRY CO- OPERATIVE UNION LTD, TO PROVIDE FOR MATTERS CONNECTED WITH OR INCIDENTAL TO THE FOREGOING. ACT means the Co-operative Society Act No. 20 of 1998 and any amendments thereto, and any other law replacing it. BOARD OF DIRECTOR means the governing body of KWANSHAMA DAIRY CO-OPERATIVE UNION LIMITED to whom the supervisor and direction of its affairs are entrusted by the members. BYLAWS means these bylaws of the Kwanshama Dairy Co-operative Union Ltd COOPERATIVE see society here under NONMEMBER means a person not being a member who uses the services of a society to such an extent as provided for in the bylaws. PATRONAGE BONUS means a share of the net surplus of the society divided among the members in proportion to the use made of the services of the Co-operative or the value of labor provided by members. REGISTRAR means the Registrar of Co-operative Societies. RESOLUTION means a resolution passed by a majority of the members at a meeting of the society. SOCIETY means the co-operative, in this case, the Kwanshama Dairy Joint Co-operative Society Ltd. All other words or phrases shall be defined or interpreted in accordance with the Co-operative Societies Act No. 20 of 1998 or any law replacing it. All questions concerning interpretation or these bylaws or any other matter not provided for herein, as well as errors and omissions, shall be referred to the Registrar, whose decision thereafter shall be final and conclusive. 107

114 Preamble STATEMENT ON THE CO-OPERATIVE IDENTITY Definition A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. Values A co-operative is based on the values of self-help, self-responsibility, democracy, equality and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness and social responsibilities caring for others. Principles The co-operative principles are guidelines by which co-operatives put their values into practice. 1st Principle: Voluntary and Open Membership Co-operatives are voluntary organizations open to all persons able to contribute their services and willing to accept the responsibilities of membership, without gender, social racial, political or religious discrimination. 2nd Principle: Democratic Member Control Co-operatives are democratic organizations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary co-operative members have equal voting rights (one member, one vote); and co-operatives at other levels are also organized in a democratic manner. 3rd Principle: Member Economic Participation Members contribute equitably to and democratically control the capital of their cooperative. At least part of that capital is usually the common property of the cooperative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes: developing their co-operative; setting up reserves, part of which at least would be indivisible; benefiting members in proportion to, their transactions with the cooperative; and supporting other activities approved by the membership. 4th principle: Autonomy and Independence Co-operatives are autonomous, self-help organizations controlled by their members. If they enter into agreements with other organizations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their cooperative autonomy. 108 Agricultural Producer Organization (AgPrO) Manual

115 AgPrO Training Module 5: Cooperative Formation, Governance and Structure 5th principle: Education, Training and Information Cooperatives provide education and training for their members, elected representatives, managers and employees so they can contribute effectively to the development of their co-operative. They inform the general public particularly young people and opinion leaders about the nature and benefits of co-operatives. 6th principle: Cooperation among Cooperatives Cooperatives serve their members most effectively and strengthen the co-operative movement by working together through local, national, regional and international structures. 7th principle: Concern for Community Cooperatives work for the sustainable development of their communities through policies approved by their members. 1. NAME AND ADDRESS This society shall be known as Kwanshama Dairy Co-operative Union Limited, hereinafter referred to as the society or the (KWANSHAMA) 1.2 The society s postal address shall be: C/O Kamfinsa High School P O Box KITWE 1.3 The Registered Office of the society shall be situated at Kamfinsa Market, Kitwe. 1.4 The society shall concentrate its activities within and around Kamfinsa in Kitwe District but shall extend its trading activities to any other parts of Zambia and international market, as demand dictates. 2. OBJECTIVES The purpose of the co-operative is to promote the living standards of the members and the community in the Kitwe area socially, economically and environmentally by undertaking any or all of the following activities: 2.1 Encouraging members to engage in the production of milk and related milk products 2.2 Providing dairy services to its members such as medication, AI and feeds 2.3 Undertaking and carrying out all kinds of business operations connected with the marketing and handling of dairy produce and products on behalf of its members 109

116 2.4 Undertaking and carrying out all kinds of business operations connected with purchasing, procuring, dealing in and distributing agricultural requisites to its members and nonmembers among the dairy community in Kitwe District and the communities around 2.5 Encouraging its members and nonmembers to engage in the production of milk products of all kinds, including livestock 2.6 Encouraging its members in the production, processing, utilization and marketing of all dairy products wholly or partially derived therefrom 2.7 Carrying out and undertaking any other kind of activities necessary for the conduct of the objectives stated above and in the interest of members, including creating thrift among members and administering provident and productive loans to members 2.8 Providing necessary and appropriate information, education and training to its members and the community with respect to the co-operative movement, dairy activities, civic roles and obligations, social and economic factors, HIV/AIDS and health matters and other matters relevant and important to the community. 3. FINANCING 3.1 The works of the Kwanshama Dairy Co-operative Union shall be conducted in such a way that capital accumulation is achieved through business operations and contributions to ensure the development and independence of the Union. 3.2 Where and when necessary, the Kwanshama Dairy Co-operative Union shall solicit financial assistance for its developmental projects and programs, its members and the community by entering into working arrangements with the government, the council, Nongovernmental organizations (NGOs), co-operative partners, bank donors and any other organizations, businesses and individuals. 3.3 The co-operative union shall have the following source of funds: a) Entrance and membership fees b) Income from and for utility services provided by the co-operative society c) Commissions for services rendered to members through the society d) Income from the society s business activities e) Grants and donations received in the name of the society f) Loans obtained from various sources g) Share capital contributions by members of the society h) Any other income form approved activities. 110 Agricultural Producer Organization (AgPrO) Manual

117 AgPrO Training Module 5: Cooperative Formation, Governance and Structure 4. MEMBERSHIP 4.1 Membership of the cooperative union shall comprise of the founder members whose list is appended hereto. However, the society shall have a minimum of three (3) members and no maximum limit shall be placed on the number of members. 4.2 Notwithstanding bylaw 4.1 above, membership shall be open to any registered primary co-operative society, association or organization active within Kitwe District that is willing to promote the purpose of the union, regardless of opinions, occupation, social status, race, creed or political belief. Any other societies that are bona fide producers of milk in the territory in which they operate, and that agree to the bylaws of the union may become members. 4.3 Membership shall be made by written application to the Board of Directors; the applicant shall at the same time pay a nonrefundable application fee. 4.4 The Board of Directors reserves the right to accept or reject any application of admission to membership without being compelled to give reasons thereto. 4.5 Immediately upon being accepted, the applicant shall be advised to pay for at least one share capital (see bylaw No. 8 on shares). 5. MEMBERS OBLIGATIONS Every member of the Kwanshama Dairy Co-operative Union must abide by the Co-operative Societies Act, these bylaws and any regulations and resolutions passed by the Annual General Meeting and must to the best of their ability promote the development of the union and work for solidarity and good harmony in the membership. 6. WITHDRAWAL OF MEMBERSHIP 6.1 Any member is entitled to withdrawal from the union by means of written and witnessed notice to the Board. Withdrawal can take place only at the end of the.financial year. The notice of withdrawal shall be communicated in writing to the Board not less than one (1) month before the end of the financial year. 6.2 A refund of share capital to a member society that has withdrawn from the union shall be paid only after the end of the close of that year s financial accounts, but other funds, if any, can be withdrawn with thirty (30) days notice if that can be done without detriment to the equal rights of the remaining society members. 6.3 Where the financial stability of the union would be impaired if it made payment at par or paid-up value for the shares held by the member society that has withdrawn, the Directors may suspend payment for such period if approved by the Annual General Meeting, except that such period shall not exceed one (1) year from the date the member society withdrew from the union. 111

118 6.4 Unless the Board finds special reason to permit exceptions, no more than twenty (20) percent of the union s share capital may be paid out during one financial year. 7. SUSPENSION AND EXPULSIONS 7.1 A member may be suspended from the union and subsequently be expelled for: a) Failure to pay any sums due to the union after judgment has been made in favor of the union by a competent arbitrator b) Any action that the Board may consider to be disloyal to or contrary to the interests of the union or that deceives its offices or allows such action to be done on a member s behalf c) Any action that the Board may believe is likely to defeat, frustrate or hinder the objects of the Kwanshama Dairy Co-operative Union as defined in these bylaws 7.2 The Board shall have power to suspend a member and recommend his or her expulsion to the General Meeting. 7.3 If the General Meeting does not vote on a recommendation to expel a a member within twelve (12) months from the date of the member s suspension, such suspension shall be withdrawn, and the member will be treated as though no such suspension had been imposed with respect to the offense unless it is a continuing offence. 7.4 A member expelled under these bylaws shall forfeit all rights of membership in the union with effect from the date of suspension or expulsion, whichever is earlier. 8. SHARE CAPITAL 8.1 The share capital for the Kwanshama Dairy Co-operative Society shall be valued at 10,000,000 million [[is this supposed to be 10 million, as below? Please verify all numbers here and make sure there are periods where periods should be]] Kwacha [[for?]] each co-operative society member. 8.2 Each co-operative shall hold ten (10) shares of K1, 000,000; thus, ten million Kwacha (K10, 000,000.00) shall be known as the co-operative s full shares. 8.3 A co-operative may not exercise full rights of membership in the union unless it has paid at least one share of K1, 000, Shares shall always be paid for in cash to the society Treasurer/Secretary. 8.5 A co-operative member shall pay for all shares within a period of sixty (60) [[is 60 correct? 5 years?]] months from the date it becomes; otherwise, the membership shall be nullified. 8.6 No co-operative member shall be allowed to hold more than one-fifth of the total paidup shares in the union. 112 Agricultural Producer Organization (AgPrO) Manual

119 AgPrO Training Module 5: Cooperative Formation, Governance and Structure 9. LIABILITY A member co-operative s liability for debts shall be limited to the pledged nominal value of the co-operative s full shares in the union when the union is under liquidation; otherwise, it is obliged to pay any debt it owes to the union in full. 10. TRADE WITH NON CO-OPERATIVE MEMBERS 10.1 The Kwanshama Dairy Co-operative Union shall do business with nonmembers, but such business will not attract any dividends or bonus. 11. [Not applicable] 12. GOVERNING BODIES OF THE SOCIETY 12.1 The governing bodies of the Kwanshama Dairy Co-operative Union shall be as follows: a) General Meetings (bylaw 13) b) Board of Directors (bylaw 14) c) Management(bylaw 17) d) Subcommittees (optional) e) Disciplinary Committee 12.2 The supreme authority of the Kwanshama Dairy Co-operative Union shall be vested in the Annual General Meeting (AGM) Only co-operatives that have shown special interest in the development of the union and that have good contacts with members and business clients shall be eligible to be elected to the Board of Directors Members employed in management in the Kwanshama Dairy Co-operative Union (management) cannot be elected to the Board of Directors. 13. GENERAL MEETINGS 13.1 The Kwanshama Dairy Co-operative Union shall hold an Annual General Meeting once every year, not later than three (3) months after the audit has been connected In addition to the AGM, at least on Special General Meeting (SGM) shall be held to deal with, among other things, the general outlines for estimates and activities of the following year Any other General Meeting shall be called by the decision of the Board, or when least one-tenth (1/10) of the total number of the voting members make a written request thereof. A proposed agenda shall always be attached to the written request Notices for the AGM shall be issued at least fourteen (14) days in advance; notices for other General Meetings will be made at least ten (10) days in advance. 113

120 13.5 A quorum for the AGM will require two-thirds (2/3) of the total voting membership At the AGM, the following items shall be included in the agenda;- a) Minutes of previous meeting b) Adoption of the minutes c) Agenda d) Chairperson s report e) Financial report f) Election of office bearers g) AOB 14. BOARD OF DIRECTORS 14.1 The Board of Directors shall always be elected by the General Meetings and shall consist of eleven (11) individuals from the co-operative society plus thirty (30) independent Disciplinary Committee members The maximum term of office of all Board of Directors shall vary as follows: a) Four Board members - 2 years b) Four Board members - 3 years c) Three Board members - 1 year. The duration of term of office is two (2) terms of two (2) years each. There should be a two-year rotation of Chairperson Leadership, and two successive chairmen of the Board should not come from the same co-operative. The election should take place at the Board level The Board, with approval of the AGM, can adopt a rotation system where some Directors remain as others join them for purpose of ensuring regular continuity of the co-operative society The Board shall elect from among itself Chairperson and Vice-Chairperson, Secretary and Treasurer but the Board shall always have eleven (11) members Nobody shall be allowed to act as a member of the Board of Directors until he or she has reached the age of 25 years The Board shall hold at least one Board Meeting once a month Minutes of the Board shall be kept appropriately and submitted for approval to the next Board meeting Seven (7) Directors shall form a quorum at any meeting of the Board. 114 Agricultural Producer Organization (AgPrO) Manual

121 AgPrO Training Module 5: Cooperative Formation, Governance and Structure 14.9 The Board shall with special care watch over the management and administration of the funds of the Kwanshama Dairy Co-operative Union Ltd. 15. CESSATION OF BOARD DIRECTOR 15.1 A member of the Board shall cease to hold office in the event of the following: a) Ceasing to be a member of the society b) Being convicted in a court of law of any offense involving dishonesty or in any matter of public embarrassment c) Being removed from office by the General Meeting d) Being absent from three (3) consecutive Board Meetings e) Being proved immature in dealing with the affairs of the Kwanshama Dairy Cooperative Union Limited. f) Being certifiably insane In relation to bylaw 16.1 above, a member of the Board shall be removed from office by suspension for any of the reasons stated in bylaw 8 herein above. 16. DUTIES OF BOARD OF DIRECTORS 16.1 Specific duties of the Board of Directors shall be set in supplementary regulations to these bylaws. However, the Board is obliged to: a) Check that detailed estimates are made for the union s activities and that these activities are based on facts and reasonable assumptions b) Regularly check the estimates against the results to ensure that measures deemed necessary have been taken c) Ascertain at least twice a year that mortgage documents against which, according to the books, no loans have been taken are in the ownership of the society and are kept in a satisfactory manner. d) Keep the Board informed on the care and maintenance of union properties The Board of Directors should exercise discretion concerning information they acquire during meetings or in the supervision of the union s administration The Board shall execute elections of representatives to associations in which the union is or intends to become a member and where the General Meeting has not reserved for itself the right to hold such elections. 17. DECLARATION OF OFFICES 18.1 Each member of the Board of Directors shall annually, or upon being elected or appointed to the Board, sign a DECLARATION FORM relating to: a) Faithfully performance or duties b) Keeping in strict confidence business transacted between the union and its members. 115

122 18. UNION MANAGER 18.1 The Manager shall act on the decision of the Board 18.2 Without a decision of the Board, the Manager may; a) Arrange the execution of the decisions made according to instructions b) Decide on matters regarding procuring the fixtures and fittings/repair within the limits of the Boards determined plans and estimates c) Decide on questions of day-to-day operation of the union. 19. DUTIES OF THE UNION MANAGER 19.1 The Union Manager is obliged to ensure: a) That those notifications that the Union, according to these bylaws and the Cooperative Act, must make and the measures it must take are completed in due time b) That the union s movable and real properties are adequate insured c) That staff insurance that is required by law or contract is obtained and paid for by the union d) That notices and orders are properly exhibited in the union s shops, stores and offices The Union Manager is obliged to keep all books, to organize and supervise the bookkeeping with great care and to arrange satisfactory cash and goods controls according to the principles approved by the Board The Union Manager is responsible for the satisfactory organization of co-operative education and information work The Union Manager shall submit to every ordinary Board Meeting a report on union activities since the last meeting, including financial reports The Union Manager is responsible for preparing business to be brought before the board for making sure that the Board submits reports to the General Meeting according to instructions and bylaws The Union Manager shall ensure that the accounts of the union are ready for audit within four (4) weeks from the end of the society s financial year and that a stock-taking certificate is prepared and signed in a manner acceptable to the auditors The Union Manager shall arrange for the receipt of all contributions, fines and other money due to the union and the deposit of same in the union s bank account. 20. AUDITORS For the purpose of scrutinizing the conduct of the business by the Board and of auditing the union s accounts, the Annual General Meeting shall appoint an independent auditor. 116 Agricultural Producer Organization (AgPrO) Manual

123 AgPrO Training Module 5: Cooperative Formation, Governance and Structure The auditor shall audit the accounts as required by the Co-operative Societies Act and submit a report to the Annual General Meeting, the Registrar and the Board. The Board of Directors shall be entitled to express itself on the observations made by the auditor. The Board s explanation shall be done in writing and submitted to the General Meeting at which the audit report is to be presented. 21. CLOSING OF ACCOUNTS AND BOARD OF DIRECTOR S REPORT 21.1 The union shall keep the books and records as required by the Act The accounts of the union shall be closed on March 31 each year 21.3 At the closing of accounts, the stock of goods on hand shall be accounted for as at least 10 percent below the purchase value, or the sales value if it is lower, which prevails at the closing of accounts At least 15 percent of the original cost of fixtures and equipment shall be written off; premises shall be depreciated by at least the amount that the tax authorities recognize as deductible It is the duty of the Board each year to use for education purposes a sum equal to at least 5 percent of the net surplus from the preceding year All accounts shall be available to the auditors at the latest eight (8) weeks after the closing of the accounts. 22 SIGNATORIES 22.1 The Board of Directors shall appoint a suitable number of persons, including the Union Manager, as signatories for the society The common seal of the Kwanshama Dairy Co-operative Union Ltd. shall be a rubber stamp containing the name and registered number of the union. It shall be kept by a person appointed by the Board and shall be used on all documents executed in the name of the society. 23. REGISTERS The officers charged with responsibility shall maintain the following registers and documents in proper order: a) A register of members showing name, address, membership number, date of admission to membership, nominee s name and date of termination of membership b) Cash books showing all receipts and payments or money and balance for each day on which business is done c) Ledgers d) Minute books for records of both General and Board Meetings 117

124 e) Register of shares f) Such other records and registers as the Registrar may from time to time require g) Inventory register. 24. GENERAL REGULATIONS The Board shall always decide in matters of principle or of great financial importance, such as: a) Change in the society s area of activity b) Aims and plans in general for the society including long- and short- term budgets c) Purchase or sale of real estate d) Procuring of loans, or mortgaging of real estate e) Permanent investments of funds f) Financial statements of the business to be bought before the General Meeting for deliberation. The Board shall seek the AGM s approval for disposing of or mortgaging the union s real estate or leasehold. Minutes shall be kept of decisions made at the meetings of the Board and submitted for approval at the next meeting. The minutes shall be kept at the head office of the union. The following business shall always be dealt with at t meetings of the Board: a) Quorum of the members of the Board b) Decisions as to whether the notices of the meeting have been correctly issued c) Reading and confirmation of the minutes of previous Board Meeting d) Matters arising from the minutes e) Report from the Union Manager f) Financial report g) Business brought before the Board by the General Meeting in accordance with the bylaws. Seven (7) Directors elected by the General Meeting shall form a quorum. The majority of those participating in the vote, and at least half of the total number of Board members, must be in agreement to make a decision valid. In accordance with the bylaws of the union and existing laws, the Board shall exercise supervising of the management of the Union. The Board shall, with special care, watch over the business management, the keeping of accounts and the administration of funds; examine the decisions and measures of the Union Manager with reference to their agreement with the laws, bylaws, instructions or otherwise current regulations of proceedings, in respect of the shops and other premises of the union; and ensure that planned and energetic education and information work is carried out. The Board shall negotiate an employment contract with the Union Manager. The Chairperson and the Vice-Chairperson of the board shall sign such contract on behalf of the union. 118 Agricultural Producer Organization (AgPrO) Manual

125 AgPrO Training Module 5: Cooperative Formation, Governance and Structure The Board is obliged to: a) Regularly check the budgetary estimates against actual performance and ensure that corrective measures are put in place b) Ascertain that mortgage documents are in safe custody of the union c) Follow all issues of contracts entered into by the union d) Keep itself informed of the care and maintenance of properties e) Check that the union has satisfactory insurance coverage f) Check that the balance sheet and books submitted to the Board at the closing of accounts are in agreement with the ledger. A member shall not be eligible for election to the Board if her or she: a) Is holding any salaried employment in the union b) Trades in the kind of goods the union handles as a competitor c) Is in arrears with any amount owed to the union d) Has failed to do business with the union during its preceding financial year, to a value to be determined by the Board. The Union Manager shall report to each meeting on his management of the union during the preceding period. Regular Board Meetings shall be held once every month. Special Board Meetings shall be called at any time when it becomes necessary. Any three (3) Directors may request the Chairperson to convene a Special Board Meeting, specifying the business to be transacted at such a meeting, and the Chairperson shall comply with such request unless in the opinion of the majority of the Directors the request is frivolous. The Chairperson of the Board of Director shall preside at all meetings of the union His or her other duties shall include: a) Calling meetings b) Presenting to the Annual General Meeting the Board s report of affairs of the union c) Presenting to the Annual General Meeting the recommendation of the Board concerning the distribution of the net surplus d) signing checks, notes, bills of exchange and other negotiable instruments used in carrying out the business of the union, unless another person is authorized to do so by resolution e) Performing such other duties and transacting such other business that customarily relates to the office. In the absence or inability of the chairperson to carry out his or her duties, all the rights and powers of the Chairperson shall be vested in the Vice- Chairperson. Organizations or associations that are members of the Union are entitled to be represented at the General Meeting by one delegate only. 119

126 Any member desiring the inclusion of a certain business in the notices to the Annual General Meetings shall give written notice thereof to the Board not less than six (60 weeks before the Annual General Meeting. The Kwanshama Dairy Co-operative Union Ltd. shall be liable for its obligations only to the amount of its assets, including paid shares and entrance fees. Voting on matters other than elections shall be open. If a member wishes to lodge a complaint, and submits it in writing to the Board, the Board is obliged to investigate the matter and inform the complainant of its decision on the matter. Amendments to these bylaws may be made in accordance with the Co-operative Societies Act. The Union shall seek liquidation when two-thirds of the paid-up shares capital has been lost, and the loss has not been made good within a period of three (3) months after it has been reported at a General Meeting. Funds then existing shall be allocated to purpose of general welfare approved by the General Meeting. All other questions shall be decided upon in accordance with the Co-operative Societies Act; however, the Board shall from time to time issue supplementary regulations for the smooth running of the Kwanshama Dairy Co-operative Union Ltd. Honorarium: Retiring members of the Board of Directors who have completed successful terms of office shall receive an honorarium, to be determined on individual basis by the Board of Directors, including the executives of the three co-operatives. Should Kwanshama Dairy Co-operative Union Ltd. be dissolved, the share capital shall, after the business has been wound up, be repaid to the members. Funds then existing shall be allocated to purposes of general welfare approved by the General Meeting. Minutes, management records and auditors reports and ledgers shall be delivered to the Registrar of Co-operatives. All other questions shall be decided upon in accordance with the Co-operative Societies Act and the Registrar of Cooperatives. 120 Agricultural Producer Organization (AgPrO) Manual

127 AgPrO Training Module 6: Setting up an Office and a Recordkeeping System Training Module 6 Setting up an Office and a Recordkeeping System Agricultural Producer Organization (AgPrO) Manual Prepared by Land O Lakes International Development Funded by The United States Agency for International Development 121

128 122 Agricultural Producer Organization (AgPrO) Manual

129 AgPrO Training Module 6: Setting up an Office and a Recordkeeping System Preface Setting up an Office and a Recordkeeping System is the first of four financial management sub-modules and training sessions. The series provides a step-by-step introduction to financial management for cooperative managers, bookkeepers, board treasurers and others interested in co-op accounting. The series begins with office organization and recordkeeping, proceeds to basic bookkeeping, and then provides information on the preparation of financial statements and financial analysis and planning. Good financial management is an essential set of tools for a successful cooperative. These sub-modules show how to use these tools effectively. This first sub-module focuses on steps to take to set up an efficient and affordable office and establish a recordkeeping system that provides the basis for tracking and improving cooperative performance. The module uses the example of a milk collection center to introduce a recordkeeping trail that allows the cooperative to keep track of its income, expenses and other financial information. The same type of financial tracking system applies to other kinds of cooperative activities as well. 123

130 Section 1: Steps to Set Up an Office There are many issues to consider when setting up an office. Starting and maintaining an office requires careful planning. What can the business afford? Should the office be attached to the milk collection center or are there reasons to locate it elsewhere? Should the organization rent, lease or buy an office? How should it be furnished? What supplies are needed? How should it begin operations and staffing? These are all questions addressed in Section 1. Step 1: Identify Sources of Financing This step entails identifying sources of financing and arranging the terms of financing for the rental/lease/purchase of an office and fixed assets. Usually businesses, including cooperatives, get their financing from three main sources: member equity, retained earnings and borrowed funds. Member equity is the portion of assets owned by the cooperative s member shareholders. Members commonly provide equity capital by purchasing shares from the cooperative and paying membership fees. Retained earnings. Cooperatives often retain a portion of income generated from the sale of milk or other products and services. For example, funds generated from the sale of milk and kept for use by the cooperative are usually referred to as per-unit retains. Retained earnings can be used by the cooperative for office or other expenses. Borrowed funds. In most cases equity capital sources need to be supplemented by external sources of financing. These include loans from nonmembers, financial institutions and other creditors. If a cooperative decides to borrow funds as part of the financing for its office, these funds should represent a small percent of the cooperative s net worth. Others sources of financing include government agencies, foundations and private donors. Step 2: Select a Site Office set-up begins with a good location. Finding an appropriate site is very important when starting a new office or business. Conduct extensive research using the latest information as well as local market knowledge. Systematically determine the long-term viability of particular office locations and ensure that desired sites can be developed within the cooperative s budget. Convenience, accessibility, parking, visibility, appearance, security and affordability should be considered. Use demographic resources to map the location of the office in relation to suppliers and the availability of support services and infrastructure such as roads, water and power. As a commercial office, proximity to potential markets should also be an important factor. Basic research is fundamental to ensuring an appropriate business location. Step 3: Carefully Negotiate a Rent or Lease Agreement If the space for the office is being leased or rented, negotiate an agreement that meets the cooperative s needs. Make sure the agreement is transparent, contains no hidden expenses and can be renewed in the future on terms that are fair to the cooperative. Also ensure 124 Agricultural Producer Organization (AgPrO) Manual

131 AgPrO Training Module 6: Setting up an Office and a Recordkeeping System that the agreement has termination clauses that protect both the lessor and lessee. There should also be room for flexibility to accommodate the growth of the business. Maximize the impact and efficiency of your facility by customizing the design of the building to facilitate the way the cooperative works and to complement the unique features of the building. Ensure that the agreement allows for the temporary modification of floor plans. Create a floor layout that meets the needs of the business and its budget. Step 4: Assess Requirements for Furnishings, Equipment and Supplies Assess furnishing, equipment and supply needs for the office by developing and reviewing a detailed budget and list of items. Look for solutions that promote long-term operational efficiency and reliability, for example develop a system to reduce paper use and promote green energy. Get quotes from vendors who are well-established and accessible and provide quality products. Establish good relationships with equipment and service providers in case maintenance or repairs are needed in the future and set aside funds for these services up front. Remember to stay within to your budget and don t be tempted to spend more money than anticipated; extra funds will be needed to get through start-up. Step 5: Begin Operations Now that the office is set up, operations can begin. A cooperative may begin operations either with directors and other members providing volunteer services or with a small initial paid staff. This decision depends primarily on the budget. It is essential to arrange the work space efficiently. Position files, printers, phones and copiers according to the work specifications of each person. Develop a scheduling system that works for everyone and will keep things on track. Notice boards should be set up in places where staff members and volunteers can easily access the information on display. Cooperative announcements, coming events, activities, industry news and trends, articles of interests and alerts of immediate and urgent concerns can go on the boards. Step 6: Recruit Staff To ensure appropriate staffing, a cooperative should carefully identify needs; prepare job descriptions that address these needs; clearly advertise the requirements for each position; carefully screen and hire; and use a probationary period of three to six months to make sure the new employee is able and willing to carry out the duties required for the position. Job descriptions should specify technical skills and other selection criteria for each position. The board of directors or manager may bring in an outside expert to help with job interviews if a position requires a specialized skillset. The cooperative should develop an orientation and training program for new employees as well as procedures for hiring and firing staff, determining salary levels, evaluating performance and rewarding or sanctioning performance. The role of the board of directors changes after staff is hired. Board members will become less involved in the day-to-day operations of the cooperative. Instead, they focus on policy, oversight and long-term planning issues. It can be difficult for board members to make this shift from daily involvement to oversight; one of the biggest sources of tension in emerging cooperatives is when board members interfere with the operational activities of the business. 125

132 Section 2: Components of a Good Recordkeeping System A cooperative needs to keep very careful, well-organized records. Preferably, the accounting system will be organized by function and have appropriate checks and balances in place. Avoid the practice of one person entering all transactions as this can open the door to fraud. All recordkeeping must be based on written documentation such as invoices, bills, receipts, or internal notes, such as advance notes or payroll records to justify a certain transfer of funds. Documentation requirements vary by transaction, but no transaction should take place without written record. This section describes the different kinds of documents and the procedures for keeping track of them. Filing System A good filling system helps a cooperative keep its operations and its records in order. Organizing work into manageable, independent steps that can be performed at any time is particularly helpful. Staff should avoid keeping accounting documents at their desks, except when they are working with them. When documents are not being used, they should be filed appropriately. Policy, Procedures and Documentation Systems Comprehensive policies, procedures and documentation systems are the backbone of the financial and operational systems of cooperatives and other businesses. Without them, internal controls will be difficult to resolve and performance cannot adequately be tracked. These systems are also the foundation on which accounting and business decisions are made. The layout of these internal control systems may be developed by management staff, but the governing board needs to review the systems and establish them as part of the cooperative s policy. The following section outlines an internal documentation control system and procedures for a milk collection center (MCC). Work Control Procedures at Milk Collection Centers This section provides a system of forms that can be copied and used by MCCs, though there may be country and business-specific variations. These forms can be used as exercises during the training. 126 Agricultural Producer Organization (AgPrO) Manual

133 AgPrO Training Module 6: Setting up an Office and a Recordkeeping System Step 1: Suppliers deliver milk A) Record delivery information in a reception book, which is signed by each supplier The quality controller uses a Milk Supplies Form (below) to register the volume, quality and amount owed to each farmer. This document must be signed by the farmer to ensure that correct volumes are recorded and that the farmer agrees with the recording. It should be filled out in triplicate. The quality controller calculates the balance and hands the form over to the cashier at the close of the day with a summary of total milk delivered, morning deliveries, afternoon deliveries, milk rejected and total amount payable to farmers. The quality controller retains a copy. Form: Milk Supplies Date: Person Testing: FormT Name/Group Name Delivery Time Lct. Reading Milk rejected A/L Vol. Milk Accepted Price per liter Amount Initials PV # Morning Deliveries Mulenga Francis Zuma Junior MORNING TOTAL Evening Deliveries Mulenga Francis Zuma Junior EVENING TOTAL DAILY TOTAL B) Record milk deliveries on suppliers delivery cards All suppliers must have delivery cards to register volumes, date and amount due. These cards must accompany every delivery of milk and be filled out and signed by the quality controller. The cards serve as the record for the farmers and a secondary record in case of a dispute. Milk Deliveries (Farmers Passbooks) Date Morning Sign Evening Sign Daily Totals Amount Remarks WEEKLY TOTAL AMOUNT 127

134 C) Reject poor quality milk All milk that does not meet the cooperative s quality standards and policy (refer to operations manual) is rejected by the quality controller. The cooperative does not bear any financial liability for milk that does not conform to the standards. Rejected milk is recorded under the appropriate column in the reception register. D) Tip milk from cans into the cooler Any milk spilled at this stage in the operations is the complete responsibility of the quality controller. E) Record transactions in payment voucher The milk supplies form is transferred to the cashier at the close of business. The cashier is then responsible for transferring the information from the milk supplies form to payment vouchers (see below). Vouchers should be clearly written and all details entered. Milk Supplies Payment Voucher Dairy Cooperative Tel: Payment Voucher No. P.O. Box Supplier s Name X Supplier s No. X Supplier s Passbook No. X Milk Liters Date A.M. P.M. Total Liters Price Value Suppliers Signature Total Deductions Net Payment Sign/Date Paying Officer X Sign/Date Recipient X To ensure accurate recording of payment vouchers, the cashier should check the additions and calculations on the milk supplies form completed by the quality controller. F) Enter payment voucher numbers in reception sheets While filling out the payment vouchers, the cashier records the serialized payment voucher number on the milk supplies form for each supplier. G) Check accuracy of payment vouchers Payment vouchers should be reviewed by the cashier to ensure that the volumes and amount due are recorded in line with the milk supplies form. All written numbers must conform in appearance to the written policy number for clarity. 128 Agricultural Producer Organization (AgPrO) Manual

135 AgPrO Training Module 6: Setting up an Office and a Recordkeeping System H) Archive All the top cover pages of voucher books should be clearly marked with the type of vouchers and the opening date of use. The closing date of the voucher book should then be written when the book is used up. The cashier is responsible for this exercise. Used up records should be filed in chronological order by type and date, and systematically arranged in the archive section of the filing cabinet(s). The manager or quality controller must maintain contra files of records that he or she will have originated and/or endorsed. The sales person will maintain contra files of records from sales. I) Link to inventory records On a daily basis, the quality controller updates the milk reconciliation form with the purchases from the milk reception form (Form T) and milk supplies form. This form is filled out in triplicate. On a daily basis, the quality controller hands over the milk reconciliation form to the cashier who posts the gain/loss into QuickBooks. For any loss or gain in volume that is 1 percent or more than the day s total, as reflected in the milk reconciliation form, the cashier should look into the discrepancy in order to correct the anomaly. Milk Reconciliation Form Milk Reconciliation Form (reception) Date B/F Purchases Total To sales C/F Total Sales (ltrs) FORM: Milk Reconciliation Loss/Gain Remarks J) Enter in QuickBooks using reception sheets The cashier uses the milk supplies form to enter milk supplies into the accounting software. To ensure correct recording, the corresponding payment voucher is used to verify that correct volumes are recorded. 129

136 Step 2: Transfer of responsibility of milk from reception to sales A) Fill out Milk Issues Form The quality controller transfers responsibility of milk to sales using the Issues Form (see below), which records the products, volume and time of the transfer. Issues from reception to sales Issues Form Form: Issues Date Time Volume Quality Controller Sales Person Milk Yoghurt.25 Yoghurt.50 Black Pills White Pills B) Quality controller and salesperson cross-sign Immediately upon receipt of milk, the quality controller and salesperson sign to verify the volumes and to transfer responsibility of the product to sales. C) Link to inventory records Milk that is transferred is recorded on the milk reconciliation form at the beginning of the following day by the quality controller. Sales keep a daily summary of total milk transferred for the balancing of the day s sales. Step 3: Milk sales A) Package milk In polythene bags, jerry cans and customers containers using calibrated measuring cups. The salesperson is responsible for ensuring that volumes sold to customers are accurate and financial problems that result from inaccurate measurement are avoided. B) Receive cash from customers The salesperson receives cash equal to the value of the goods that are purchased. C) Count cash The salesperson and the manager count the cash together to ensure that the correct amount of money was received. D) Limit access to cash through the use of a cash safe or cashbox with a combination lock When money is received from customers, it should be kept in a safe and secure location to which only the salesperson has access. 130 Agricultural Producer Organization (AgPrO) Manual

137 AgPrO Training Module 6: Setting up an Office and a Recordkeeping System E) Deliver milk to customers After money is received, milk is given to customers in the correct volume ordered. F) Prepare delivery notes for credits and prepayments When milk is purchased on credit (in accordance with the cooperative s credit approval policy) or by means of a prepayment, the salesperson issues a delivery note. Delivery notes are signed by both the customer and the salesperson. The notes record the volume, price and totals (see below). DAIRY COOPERATIVE M/s DELIVERY NOTE No Date QTY DESCRIPTION AMOUNT Delivered by Signature. Received by.. Signature.. G) Give the correct amount of cash to the cashier At the end of the day the salesperson counts the cash received and hands it over to the cashier with all accompanying delivery notes. H) Summarize balances for prepayments The cashier uses the delivery notes to summarize the balances for prepaid customers. This summary is accomplished through recording the information in QuickBooks. 131

138 I) Invoice customers Delivery notes that correspond to credit purchases are recorded by the cashier. The customer is invoiced according to the delivery note. The invoice is prepared using QuickBooks. (See sample invoice below). DAIRY COOPERATIVE M/s. INVOICE No. DATE QTY PARTICULARS RATE AMOUNT TOTAL Amount in words Signature.. J) Reconcile actual volumes and the book balance The cashier uses the milk sales reconciliation form to balance the day s sales against the goods issued to sales. This form is completed every morning upon the receipt of cash from the salesperson. The form is updated by management to reconcile the actual amount of cash received with that which was required from issues. Milk Sales Reconciliation Form (cash count) Credit Sales Prepaid Sales Cash Sales Yoghurt.25 Yoghurt.50 Black Pills White Pills Date Milk Issued Total Rev. cash required actual cash Diff. K) Enter information in QuickBooks The cashier enters information on sales of all products into QuickBooks using the milk sales reconciliation form, delivery notes and inventory book. 132 Agricultural Producer Organization (AgPrO) Manual

139 AgPrO Training Module 6: Setting up an Office and a Recordkeeping System Step 4: Money received A) Count cash The cashier counts the cash to verify the amount being handed over by the sales department. Cash is counted in a safe location away from the view of customers. B) Issue a receipt The cashier provides a receipt to the sales department for all money received. (See the form below.) DAIRY COOPERATIVE M/s. RECEIPT No. DATE QTY PARTICULARS RATE AMOUNT TOTAL Amount in words Signature.. C) Number receipts sequentially Ensure accurate recording and filing by using sequentially numbered receipts. D) Provide delivery notes When receiving cash from window sales, the cashier must obtain delivery notes from the salesperson for credit and prepaid purchases. E) Use the milk sales reconciliation form The cashier uses the milk sales reconciliation form to balance the day s sales against the goods issued to sales. This form is completed every morning upon the receipt of cash from the salesperson. The form updates management on the actual amount of cash received against that which was required from issues. F) Prepare the bank summary form The money received for the previous day is recorded on the bank deposit summary form to identify receipts, values and types of transaction. The bank deposit summary form is filled out by the cashier before the money is deposited to ensure that all money from the day s sales is banked. The person making the deposit signs the form to verify its accuracy. 133

140 Credit: Bank Deposit Summary Form Receipt # Value Subtotal Prepaid: Rebanked: Cash: Total Deposited Depositor Signature: X Date: X G) Use serially numbered deposit forms The proceeds from the previous day s sales are fully banked with no money taken out for expenses until it has been transacted through the bank. It is recommended that money be taken to the bank between the hours of 8:00 a.m. and 11:00 a.m. for the safety of the money and the person transporting it. Serialized bank deposit slips are used and a bank stamp/seal is obtained upon the deposit of the money. The bank deposit counter folio is attached to the bank deposit summary sheet and filed. 134 Agricultural Producer Organization (AgPrO) Manual

141 AgPrO Training Module 6: Setting up an Office and a Recordkeeping System H) Update QuickBooks The cashier updates the accounts which have been affected by the deposit. I) Review bank statements at the end of the month The cashier reviews monthly statements from the bank. Step 5: Payments to suppliers A) Suppliers payment schedule The cashier pays milk suppliers according to a schedule of when they would like to receive payments. Payments to suppliers are made only on specific days that they have chosen, for example, Mondays and Thursdays: Weekly Twice a week Monthly Payments are made during specific hours, for example between 1:00 p.m. and 6:00 p.m. Supplier Payment Form No Supplier Name Monday Thursday Bank/Cash Remarks B) Link to payment vouchers Suppliers payments are compiled by the cashier from the outstanding milk supplies payment vouchers. C) Raise payment voucher The cashier selects the payment vouchers for which the suppliers want payment and prepares them for approval and withdrawal. D) Approve voucher The manager approves the farmer s payments when the payment voucher has been prepared accurately against the Milk Supplies Form and all additions and calculation have added up correctly. E) Authorize voucher The account signatories sign the payment voucher as the final authorization. Upon authorization, the schedule is stamped. F) Prepare and sign check The cashier prepares the check against the approved and authorized schedule and presents it to the account signatories to sign. 135

142 G) Withdraw cash from bank The check is brought to the bank by the cashier and the money is drawn according to the amount on the check. H) Pay cash to suppliers The cash drawn from the bank is returned to the MCC by the cashier and stored in a safe and secure location with limited access. The money is taken from the secure location when farmers arrive for payment. The farmer signs the payment voucher, is given the original copy of the voucher and receives the money. I) Enter into QuickBooks A copy of the payment voucher is used by the cashier to enter volume, date and amount paid to the supplier into QuickBooks. J) Cross-check entries The cashier checks the entries in QuickBooks to make sure that the correct amount was paid to the suppliers and that the QuickBooks bank account balances with the actual account. K) Redeposit uncollected suppliers monies in bank When suppliers do not come to collect their payment on the day they requested, the money is re-banked in the morning with the sales of the previous day. The supplier needs to make another request for payment. Step 6: Cash/credit expenses and purchases A) Requisition Requests for expenses are made to the cashier by the heads of different departments (manager, sales, quality, and accounts) according to the schedule of concerned areas for each department. 136 Agricultural Producer Organization (AgPrO) Manual

143 AgPrO Training Module 6: Setting up an Office and a Recordkeeping System DAIRY COOPERATIVE COMBINED FUNDS REQUISITION Date Check Number Amount... PAYMENT AGAINST DESCRIPTION AMOUNT Total Prepared. Sign. Date.. Checked by Sign..Date... Verified.Sign.. Date Endorsed.Sign.. Date. Department requisition schedule Manager Quality Control Cashier Sales Payroll per schedule Lab testing Suppliers payment Office supplies equipment Building repair and maintenance Generator fuel, oil and repairs Electricity, water, rent, and utilities Airtime Equipment repair & maintenance Furniture repair and maintenance Cleaning supplies Refrigerant gas Computer repair and maintenance Staff tea Staff uniforms Air time Office supplies Air time Transport Lunch Electrical repairs Airtime Bus. committee Transport allowance Telephone for office Petty cash Transport Uncategorized expenses Transport 137

144 Petty cash requisitions must be within approved areas from the department requisition schedule and must be made only on approved petty cash expense items. Requisition for petty cash should be made by the cashier when the money on hand drops below an agreed-upon level and should be topped up to an agreed-upon level. For example, the recommendation for Land O Lakes Uganda cooperatives is to top up the amount to 160,000/- when it falls to 100,000/-. Petty Cash approved expense lists Escorts Paraffin Sugar Tea leaves Photocopies Toilet paper Other office supplies Air time Transport Generator fuel Generator oil COOPERATIVE PAYMENT VOUCHER No. Paid to Dr to A/C Particulars Date Amount Total Shs Amount in words.... Prepared and paid by.. Checked by.. Authorized by....received by. 138 Agricultural Producer Organization (AgPrO) Manual

145 AgPrO Training Module 6: Setting up an Office and a Recordkeeping System B) Carry out stock checks Stock checks must be carried out by the cashier to make sure the expense/purchase is necessary. C) Track rate of consumption Cashier tracks rate of consumption to ensure expenses are necessary and the product isn t being overused. D) Maintain suppliers list A common suppliers list is kept by the cashier indicating where purchases can be made. E) Maintain written terms of agreement with common suppliers F) Prepare purchase request When the stock check is completed, the cashier prepares a purchase request using a payment voucher and presents it to the manager for approval. G) Approve expenses All expenses and purchases must be approved and signed by the manager before expenses are incurred. The manager uses the budget as the guide for approval. If the manager is making a request it must be verified by the cashier. Any expense over and above any single budget line item must gain approval from the business committee. The request is prepared by the cashier upon approval. Petty cash requests are prepared using the payment voucher; all other expenses are prepared using the requisition form. H) Authorize expenditures Only the manager authorizes petty cash and only if expenses are within the budget. Authorization for other expenses and purchases is held by the signatories on account. I) Maintain record of products and supplies The record of products and supplies where they are located is kept by the cashier. J) Check orders The cashier checks orders and receipts to ensure that the right expenses were made at the correct prices and that the correct products were received. K) Calculate expenses Calculations related to expenses are done by the cashier to reduce errors. L) Process payroll liabilities In processing payroll liabilities, refer to the current payroll schedule. 139

146 Employee Salary Structure and Payment Schedule Quality Controller Cashier Sales Person Asst. Milk Tech Asst. Sales Cleaner Total Base Salary Tea Allowance Lunch Allowance Transport Allowance Housing Allowance Gross Normal Monthly Salary Bank Charges Bonuses Gross Monthly summary (Less :) Penalties Break Tea Lunch Advances Employee NSSF Contribution Net Monthly Pay Check Net Monthly NSSF Payments Employee NSSF Contribution Employer NSSF Contribution Total NSSF Contribution The internal control procedures laid out above can be customized to suit each cooperative. Step 7: Archiving Archiving is the organization and maintenance of documents no longer in use. Documents must be kept so they can be referred to in the future to address possible queries. Archived records are not kept in the current filling system, but are stowed away in boxes. For legal, financial and historical reasons, it is very important to keep old records and to have them well organized in case they need to be accessed quickly. 140 Agricultural Producer Organization (AgPrO) Manual

147 AgPrO Training Module 6: Setting up an Office and a Recordkeeping System Segregation of Duties It is important to separate duties to mitigate financial risk. The degree of segregation depends on the level of risk. Traditionally, the following segregation of duties exists: A) The person who distributes funds should be different from the person who does financial reporting or reconciliation. This person maintains the ledger books, including a cash ledger, and obtains all required receipt documentation. B) The person who does financial reporting enters the transactions into the accounting system from the receipts. This person must be able to determine if a receipt is valid by watching for altered or fake receipts, and by determining reasonableness. A system of approval before payment should be in place so that this person can verify that the expense has been authorized. C) The person doing bank and cash reconciliations should be different from the person doing the reporting and the distribution of funds. This person must perform a physical count at the end of each accounting period and compare the physical count to the ledgers and the reports generated from the accounting system. For example, these functions can be divided between the board secretary and the board treasurer or between the treasurer and the staff accountant. 141

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149 AgPrO Training Module 7A: Preparing a Basic Business Plan Training Module 7A Preparing a Basic Business Plan Agricultural Producer Organization (AgPrO) Manual Prepared by Land O Lakes International Development Funded by The United States Agency for International Development 143

150 144 Agricultural Producer Organization (AgPrO) Manual

151 AgPrO Training Module 7A: Preparing a Basic Business Plan Preface The Agricultural Producer Organization (AgPrO) Manual contains two training modules on business planning: Level I: Preparing a Basic Business Plan; Level II: Preparing a Strategic Business Plan; and a reference guide on Approaching Financial Services for Investment. In each of the modules a case study based on the Molako Producer Group, a dairy cooperative in Zambia, is used to illustrate the levels of business planning. Training module 7A presents information on how to prepare a basic business plan that can be used when a group is in its formative stages preparing for registration and establishing clear understanding among group members about the basic business operation. The module is divided into three sections: introduction to basic business planning, basic business plan development, and an annotated outline of a basic business plan. This module is intended for use as a training tool by Land O Lakes staff and other trainers to assist producer group members and leadership in developing a basic business plan. After the Level I business plan is completed, the group will be ready to register and begin operations. 145

152 Section 1: Introduction to Basic Business Planning Definition of a Business Plan A business plan is like a roadmap: it provides direction so a business can plan for the future and avoid bumps in the road. 11 Creating a good business plan requires a substantial investment of time and human resources, but it is a worthwhile investment that pays off in the long run. A business plan should be a working document; it should not be something that is created and then remains filed away. Rather, a business plan should be reviewed periodically (e.g., quarterly) and, if the organization is not on track to meet its goals, measures should be taken to improve performance. Alternatively, the plan could be revised to reflect a more realistic set of goals and a strategy for attaining them. A business plan is a set of business goals and defined ways to achieve those goals. A basic business plan is a simplified version that can be developed to register a cooperative or other producer organization. It can also provide guidance on how to run the business during the early stages of its operation. This module focuses on the preparation of a basic business plan. Some countries require a group to have a business plan in place before it can be registered. Even if a plan is not required in a particular country, it is a good idea to prepare one before starting operations. A group should develop a strategic business plan (see Module 7B) after operations have been underway for about six months. A reference guide, Approaching Financial Services for Investment, is the final iteration and is intended to help secure financing. Development and Use of a Basic Business Plan It is essential for a producer group to understand and feel a sense of ownership over its business plan. While an outside organization can help develop the plan, the cooperative should provide input throughout the process to ensure buy-in. To successfully adopt the plan, a business needs to understand and apply the implementation process and operate within the proposed financial projections. A basic business plan will help the group to answer important questions, such as: Why are farmers interested in forming a cooperative? What is the goal of the group? What products does the group want to sell? Where will they be sold? How will the group accomplish this goal? When does the group hope to reach this goal? 11 Source: Agricultural Producer Organization (AgPrO) Manual

153 AgPrO Training Module 7A: Preparing a Basic Business Plan Section 2: Basic Business Plan Development Outline of a Basic Business Plan Business plans may differ in their design, detail and complexity. However, most are presented in a similar format. The basic business plan outline presented below is designed to: Meet the requirements for registering a cooperative or producer group Serve as a management tool for the organization s elected leaders and managers Provide a format for clarifying business activities, management structure, bylaws and other elements required for a cooperative to successfully function. Basic Business Plan Outline The elements of a basic business plan are listed below. The information for each section can be collected through a series of questions that are presented in the next section. 1. Purpose and Objective 2. Type of Business 3. Product 4. Customers 5. Competitors 6. Management 7. Source of Funds 8. Budget 9. Cash Flow (recommended, but not required) 10. Bylaws (usually an annex) 147

154 Developing a Basic Business Plan The following series of questions is meant to help the group consider a range of factors required to develop a cooperative s structure and the basic business plan. 1. Purpose and Objectives a. Why do you want to form a cooperative? b. What will be the purpose and objectives of your cooperative? 2. Type of Business a. What type of business activities will your cooperative be involved in? b. Where will the cooperative be located? 3. Product(s) and Services a. What product(s) and/or services will the cooperative be selling? 4. Customers a. Who will the customers be for the product(s) the cooperative will be selling? 148 Agricultural Producer Organization (AgPrO) Manual

155 AgPrO Training Module 7A: Preparing a Basic Business Plan 5. Competitors a. Are there other organizations, cooperatives or businesses selling or producing the same product(s) in the community? b. How many other organizations, cooperatives and businesses in the community are selling or producing the same product(s)? c. Have these other organizations, cooperatives and businesses been expanding in the last year? d. How will our cooperative compare with these organizations, cooperatives and businesses? 6. Management a. Who will be responsible for managing the business of the cooperative after it begins operations? 7. Sources of Funds a. How does the cooperative intend to raise funds for its operations? 149

156 8. Budget (Projected Profit and Loss Statement) a. What is the projected budget for the cooperative for the first six months? (Estimate a budget for the cooperative for the first six months using the format below.) Monthly Budget No. Item Quantity Unit Cost Total 1 Income Total Income 2 Expenses Milk Collection Center: Total expenses 3 Net Income (Total Income less Total Expenses) 150 Agricultural Producer Organization (AgPrO) Manual

157 AgPrO Training Module 7A: Preparing a Basic Business Plan Six Month Budget A very important part of making a business plan is thinking about the future, as the expenses and income for your cooperative may differ by month and season. In particular, consider the effect of different seasons (such as the rainy season or the dry season) on milk production and sales. No. Item Month 1 1 Income Month 2 Month 3 Month 4 Month 5 Month 6 Total First 6 Months Total Income 2 Expenses Milk Collection Center: Total expenses 3 Net Income (Total Income less Total Expenses) 9. Cash Flow Projections A cash flow projection or budget shows the organization s projected cash inflows and outflows over some specified period of time. Although the profit and loss statement can accurately reflect an organization s true profit (or loss), it should not be used to determine whether an organization will have enough cash to cover its obligations or liabilities when they come due. 151

158 Preparing cash flow projections can alert managers of potential cash flow problems in advance. The cooperative can then plan to avoid or mitigate the problem by changing its activities or seeking a loan, for example. Most lending institutions require documentation (such as a cash flow budget and several weeks or months of advance notice) in order to issue a loan. A cooperative does not need to include a cash flow budget in a basic business plan to become registered. However, Land O Lakes strongly recommends that a cooperative prepare a cash flow budget before it begins operations. Following is a simplified format for a cash flow budget. For a detailed presentation on how to prepare a cash flow budget, see Module 9, Financial Management Level II: Financial Statements and Analysis. Simplified Cash Flow Projections for Six Months Collections and Purchases 1. Sales (Estimated) Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 2. Collections on sales Purchases 3. Cost of milk sold: 65% of sales 4.Payments to farmers: cost of milk sold last month (1 month lag) Cash Gain or Loss for Month 5. Total Collections (from line 2) 6.Payments for Purchases (from line 4) 7. Other Expenses (staff, water, electricity, etc) 8. Subtotal of Payments and Other Expenses (lines 6 + 7) 9. Net Cash Gain or Loss (line 5 - line 8) Cash Surplus or Loan Requirement 10. Cash at Start of Month (in the bank) Cumulative Cash (lines ) 152 Agricultural Producer Organization (AgPrO) Manual

159 AgPrO Training Module 7A: Preparing a Basic Business Plan Section 3: Molako Dairy Cooperative: Case Study in Business Planning The next section presents the basic business plan of Molako Dairy Cooperative in Zambia. Note that cooperative registration requirements vary from country to country. It is important to follow the registration requirements and the basic business plan requirements for each country. Molako Dairy Cooperative (MDC) is composed of smallholder dairy farmers who are interested in forming a milk marketing group. They have heard that established groups can access discounted inputs, credit and other services, resulting in potentially higher profits because of lower operating costs and higher sales prices. MPG includes 110 farmers. They want to formalize the group and have decided that registering as a cooperative is their best option. As part of the registration process, the group is required to develop a basic business plan. A consultant has informed MPG about the registration process and they have started to develop a basic business plan. Several factors are favorable to the formation of a cooperative in this instance: All group members have access to a milk collection center. Members are already marketing some of their milk. MPG expects all the milk to be purchased by Sunrise Dairy. 153

160 The board of directors of Molako Dairy Cooperative prepared the following business plan when it registered as a cooperative in Purpose and Objectives The purpose for which Molako Dairy Cooperative would like to form a cooperative is to promote the economic, social, cultural and environmental needs and aspirations of its members and the community within and around Molako village, by achieving the following objectives: Encouraging members and non-members to engage in the production of milk and related products, including livestock Undertaking and carrying out all kinds of business operations connected with marketing and handling of (dairy) produce and products on behalf of its members Marketing dairy cooperative produce, by handling, grading and storing the produce according to appropriate and acceptable standards. 2. Type of Business The type of business the MDC is going to undertake is dairy farming. 3. Product The main product for MDC shall be milk and any other milk products the cooperative will be capable of producing, including dairy feed, cereals, fruits, vegetables, livestock, poultry, and fisheries. 4. Customers The targeted customers shall be the local people, and small-scale milk processors. 5. Competitors Our key competitors will be other commercial dairy farmers and small-scale dairy farmers in the Molako District. 6. Management The business shall be managed by a board of directors. 7. Source of Funds Funds will come from share contribution (minimum three shares per member) and a membership subscription fee. Share Contribution: 25 x 150,000 = K3,750,000 Membership Subscription Fee: 25 x 50,000 = K1,250,000 Total K5,000, Agricultural Producer Organization (AgPrO) Manual

161 AgPrO Training Module 7A: Preparing a Basic Business Plan 8. Budget 8a. Monthly Budget No. Item Quantity Unit Cost Total Amount 1 Income Sale of Milk 3750 liters /month 2,240 8,400,000 Total Income 8,400,000 2 Expenses Purchase of milk* 3750 liters/month 1,400 5,250,000 Milk Collection Center: Staff 2 payments/month 550,000 1,100,000 Cleaning detergents 4 units/month 30, ,000 Transport 4 payments/month 100, ,000 Petty Cash 1 payment/month 100, ,000 Electricity 1 payment/month ,000 Water 1 payment/month 150, ,000 Total expenses 7,370,000 3 Net Income 1,030,

162 8b. Six Month Budget In the example below, cooperative leaders found out after talking with farmers that their income from milk sales is normally 40 percent lower during the dry season. Therefore, the cooperative management team estimated that milk sales and budgeted milk purchases from farmers are both lower during the rainy season as well. Rainy Season No. Item January February March April May June Total First 6 Months 1 Income Sale of milk 5,040,000 5,040,000 8,400,000 8,400,000 8,400,000 5,040,000 40,320,000 Membership 1,250,000 1,250,000 Subscription Fee Total Income 6,290,000 5,352,500 8,712,500 8,712,500 8,712,500 5,352,500 43,445,000 2 Expenses Purchase of milk 3,150,000 3,150,000 5,250,000 5,250,000 5,250,000 3,150,000 25,200,000 Milk Collection Center Staff 1,100,000 1,100,000 1,100,000 1,100,000 1,100,000 1,100,000 6,600,000 Start-up 1,000,000 supplies (buckets, brushes, etc) Cleaning 120, , , , , , ,000 detergents Transport 400, , , , , ,000 2,400,000 Petty Cash 100, , , , , , ,000 Electricity 250, , , , , ,000 1,500,000 Water 150, , , , , , ,000 Total expenses 6,270,000 5,270,000 7,370,000 7,370,000 7,370,000 5,270,000 37,920,000 Net Income 3 (Total Income less Total Expenses) 20,000 82,500 1,342,500 1,342,500 1,342,500 82,500 5,525, Cash Flow Projections In the example below, notice that collections on sales and payment to farmers are zero in the first month. This is because it is standard practice to provide buyers with 30 days to pay their invoice. Therefore, the cooperative will not receive cash until the following month. This normally means that farmers will also need to wait until the following month to receive cash for milk they sell in the current month. 156 Agricultural Producer Organization (AgPrO) Manual

163 AgPrO Training Module 7A: Preparing a Basic Business Plan Simplified Cash Flow Projections for Six Months: January February March April May June Collections and Purchases 1. Sales (Estimated) 5,040,000 5,040,000 8,400,000 8,400,000 8,400,000 5,040,000 2.Collections on sales 0 5,040,000 5,040,000 8,400,000 8,400,000 8,400,000 Purchases 3. Cost of milk sold: 65% of 3,276,000 3,276,000 5,460,000 5,460,000 5,460,000 3,276,000 sales 4. Payments to farmers: cost 0 3,276,000 3,276,000 5,460,000 5,460,000 5,460,000 of milk sold last month (1 month lag) Cash Gain or Loss for Month 5. Total Collections (from line 2) 0 5,040,000 5,040,000 8,400,000 8,400,000 8,400, Payments for Purchases 0 3,276,000 3,276,000 5,460,000 5,460,000 5,460,000 (from line 4) 7. Other Expenses (staff, water, 3,120,000 2,120,000 2,120,000 2,120,000 2,120,000 2,120,000 electricity, etc) 8. Subtotal of Payments and 3,120,000 5,396,000 5,396,000 7,580,000 7,580,000 7,580,000 Other Expenses (lines 6 + 7) 9. Net Cash Gain or Loss (line (3,120,000) (356,000) (356,000) 820, , , line 8) Cash Surplus or Loan 820,000 Requirement 10.Cash at Start of Month (in ,000 1,640,000 the bank) Cumulative Cash (lines ) (3,120,000) (356,000) (356,000) 820,000 1,640,000 2,460,000 Note that cumulative cash is negative for the first three months. There are two main reasons for this: 1) Expenses are much higher in the first month, when the cooperative will be buying supplies they will need to operate their milk collection center. 2) No payment is received from the buyer until the second month of operation, and then this payment is used to repay debt from the first month. This continues until the fourth month, when the cumulative cash finally becomes positive. To avoid this situation, many cooperatives collect a share contribution from their members. In this case, it is very important that the cooperative is careful to document the names of shareholders and the amount of their contribution. The total amount share contribution should be recorded as Owner s Equity on the balance sheet. 157

164 Section 4: Basic Business Plan Template 1. Purpose and Objectives 2. Type of Business 3. Product 4. Customers 5. Competitors 6. Management 7. Source of Funds 158 Agricultural Producer Organization (AgPrO) Manual

165 AgPrO Training Module 7A: Preparing a Basic Business Plan 8. Budget 8a. Monthly Budget No. Item Quantity Unit Cost Total 1 Income Total Income 2 Expenses Milk Collection Center: Total expenses 3 Net Income (Total Income less Total Expenses) 159

166 No. Item Month 1 1 Income Month 2 Month 3 Month 4 Month 5 Month 6 Total First 6 Months Total Income 2 Expenses Milk Collection Center: Total expenses 3 Net Income (Total Income less Total Expenses) 160 Agricultural Producer Organization (AgPrO) Manual

167 AgPrO Training Module 7A: Preparing a Basic Business Plan Simplified Cash Flow Projections for Six Months: January February March April May June Collections and Purchases 1. Sales (Estimated) 2.Collections on sales Purchases 3. Cost of milk sold: 65% of sales 4. Payments to farmers: cost of milk sold last month (1 month lag) Cash Gain or Loss for Month 5. Total Collections (from line 2) 6. Payments for Purchases (from line 4) 7. Other Expenses (staff, water, electricity, etc) 8. Subtotal of Payments and Other Expenses (lines 6 + 7) 9. Net Cash Gain or Loss (line 5 - line 8) Cash Surplus or Loan Requirement 10.Cash at Start of Month (in the bank) Cumulative Cash (lines ) 161

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169 AgPrO Training Module 7B: Preparing a Strategic Business Plan Training Module 7B Preparing a Strategic Business Plan Agricultural Producer Organization (AgPrO) Manual Prepared by Land O Lakes International Development Funded by The United States Agency for International Development 163

170 164 Agricultural Producer Organization (AgPrO) Manual

171 AgPrO Training Module 7B: Preparing a Strategic Business Plan Preface The Agricultural Producer Organization (AgPrO) Manual provides two training modules on business planning: Level I: Preparing a Basic Business Plan; Level II: Preparing a Strategic Business Plan; and a reference guide on Approaching Financial Services for Investment. Level I presented information on basic business plans. These plans are usually developed for the purpose of registering a cooperative or producer organization and provide guidance on how to run the organization during its initial phase of operation. Once the organization has been formally registered and has become operational, an important next step is to prepare a business plan that focuses on the strategic operation of the organization. This module presents information on how to prepare a strategic business plan. It is divided into four sections: definition and uses of a strategic business plan; steps to prepare a strategic business plan; deciding who should prepare a strategic business plan, and how to use a strategic business plan as a planning and monitoring tool. The information contained in this module is intended for use by Land O Lakes staff and other trainers to assist producer group managers and directors to develop a strategic business plan themselves or to carefully monitor and review a strategic business plan prepared by an outside consultant. Managers and directors who use this training tool should already have a basic understanding of business planning. 165

172 Section 1: Definition and Uses of a Strategic Business Plan What is a Strategic Business Plan? In Business Planning Level I: Preparing a Basic Business Plan, a business plan is defined as a road map that provides directions so a business can plan its future and help it avoid bumps in the road. 12 Business plans map out a producer group s internal and external environments, its target markets, customers, competition and resources. A strategic business plan is different from a basic business plan in two key ways: It provides more in-depth analyses of key factors that may affect a producer organization. This information is used on an ongoing basis to monitor and improve the performance of the cooperative. It makes projections over a longer time period than most basic business plans (three to five years vs. one year). Why is it Important to Develop a Strategic Business Plan? The benefits of developing a strategic business plan include: Identify a clear road map for the producer organization: The process of writing the plan gets the organizational leaders to think ahead, set goals, anticipate problems, and set measures for success. Develop realistic objectives for the business: Business planning activities such as seeking out and analyzing competitors, figuring out how to reach target markets, and comparing projected revenue against expense statements, focus decision makers on achievable outcomes. Measure success and improve productivity: The process of writing goals, objectives, plans, and financial statements sets targets against which actual performance can be measured, making mid-course corrections to get back on track if necessary. Increase accountability: It will help board members communicate measurable objectives to the general membership, and be held accountable for the results. Decide not to develop a business or business activity: Sometimes the most successful outcome of a business plan is the decision not to proceed. Researching and writing a plan can reveal the realities of tough competition, a small target market or poor returns. Many owners of failed businesses would have saved considerable time, money and heartbreak if they had done a proper business plan. 12 Source: Agricultural Producer Organization (AgPrO) Manual

173 AgPrO Training Module 7B: Preparing a Strategic Business Plan Assess staffing requirements: A good business plan clarifies the type and number of staff members a producer organization should recruit. It also provides reassurance to prospective staff members that the business has a realistic set of goals and objectives and a plan to achieve them. Identify funding to be accessed from potential members and from external sources: A good business plan is the key to securing initial or expansion funding from producer group members, banks, other financial institutions or partner organizations. See the reference guide on Approaching Financial Services for Investment. Measure performance: The plan will help the cooperative track the achievement of its goals and objectives over time. When Should a Strategic Business Plan be Developed? A strategic business plan should be developed after the cooperative has been in operation for about six months. This allows enough time for the board and management to have a good sense of how initial operations are progressing. While the basic business plan helps to get the organization launched and operational at the outset, the strategic business plan sets a detailed three year (or longer) course that keeps the organization on track to meet its goals. A strategic business plan should be modified at least every three years. It should also be revised if a cooperative s performance is substantially different from initial projections (either better or worse performance), and when an organization is planning to expand, restructure or diversify its operations, or enter into a joint venture with another business. For example, if a producer organization is planning to add a milk collection center or get involved in yogurt production or some other kind of processing, it should revise its business plan prior to making the change. Just as when a business is starting up, a strategic business plan can help an established business avoid serious problems when it is making a significant change in its operations. What Should be Considered When Developing a Strategic Business Plan? Although there are no hard and fast rules for preparing an effective strategic business plan, there are some guidelines that can improve the quality of the plan: Use clear and concise language. This includes using diagrams, graphs and tables where possible. Clearly describe the opportunities at the outset. Get your readers interested right away in the potential of the business. Seek advice and have others review the plan. Have others review the plan critically to ensure that it is clear, concise, complete, compelling, and inspires confidence. A strategic business plan should be a useful monitoring and evaluation resource. It should be a tool for comparing planned activities against actual operations of the cooperative, and then making changes in the organization to improve performance. 167

174 Ensure that the contents of the plan are verifiable. Do not make general statements without supporting them with reputable sources and concrete data. State the sources of your information in the document. Conduct research and feasibility studies. Ensure that the information presented in the plan provides enough detail to accurately measure the current market and market trends, and carefully assesses the organization s capacities and objectives. Explain the assumptions and elements of your financial projections. Don t just list the numbers; explain how they were calculated and what they mean. For example, explain how the sales forecasts were calculated. 168 Agricultural Producer Organization (AgPrO) Manual

175 AgPrO Training Module 7B: Preparing a Strategic Business Plan Section 2: The Components of a Strategic Business Plan The primary purpose of a strategic business plan is to prepare a set of realistic, measurable objectives that the cooperative strives to achieve over a three to five year time period. It is also used to measure and improve the cooperative s performance. In other words, the purpose of the plan is to develop, execute and, if necessary, modify the cooperative s business development strategy. Molako Dairy Cooperative: Case Study in Strategic Business Planning The previous module in this series, Level I: Preparing a Basic Business Plan, presented a business plan outline and gave the example of the basic business plan that Molako Dairy Cooperative prepared when it registered as a cooperative. Note that the business plan outline presented below is more detailed than the outline presented in Level I. Strategic Business Plan Outline 1. Executive Summary 2. Organizational Vision 3. Organizational Mission 4. SWOT Analysis 5. Marketing Plan 6. Implementation Plan 7. Financial Discussion A. Profit and Loss (P&L) statement B. Projected cash flow budget C. Projected balance sheet D. Sensitivity analysis 8. Supporting Documents Molako Dairy Cooperative is a smallholder dairy farmers cooperative that was established in 2003 and is located in the Southern Province of Zambia. In 2005, the cooperative prepared a strategic business plan, and improved its operations with assistance from Land O Lakes. It established bulking facilities, improved the aggregation of its milk, and began selling to one buyer. The focus of this module is on the development of Molako s strategic business plan. 169

176 Step-by-Step Development of a Strategic Business Plan This part of the module provides additional information on preparing a strategic business using Molako Dairy Cooperative s plan as an example. Note that there are some differences between the way Molako s plan is organized and the outline presented above. Variations in business plans are acceptable as long as all of the components are included. 1. Executive Summary As the name implies, the executive summary provides a brief overview of the entire document. It is very important that the executive summary be written clearly and concisely. Many people, including the organization s members and potential outside funders, will read only this part of the document or will decide to read the full plan based on their evaluation of the executive summary. It should be limited to 1.5 pages or less in length. Although the executive summary is chronologically the first section of the business plan, it should be written after all of the other sections have been prepared. The executive summary should highlight the key marketing, implementation, cash flow and profitability elements that will make the business a success. It should provide the reader an overview of what the business does and why it has good potential to be profitable. 2. Organizational Vision It is important to include the cooperative s vision statement in the business plan. A vision can be described as an ultimate goal or ideal for the cooperative. It is the reason for the cooperative s existence and provides the basis for setting its mission. The vision statement should answer the question: What would our cooperative like to achieve in the future? The vision for the cooperative should address and clearly answer the following questions. Answering these questions will guide the development of a vision statement. What business is the cooperative in (products, markets or technologies)? How does the cooperative want to go run the business? Why does the cooperative exist? What does the cooperative want to be in the long run? 3. Organizational Mission The mission is defined as the fundamental purpose that sets the producer organization apart from other businesses of its kind. A mission statement defines what an organisation is, why it exists, and its reason for being. Molako s Vision Statement We are determined to be the best smallholder dairy cooperative in Southern Province. Molako s Mission Statement Our mission is to increase and improve the quantity and quality of milk marketed through the cooperative for the benefit of the membership. 170 Agricultural Producer Organization (AgPrO) Manual

177 AgPrO Training Module 7B: Preparing a Strategic Business Plan An organization s mission has to do with what the organization does as opposed to where it wants to be (vision) or what it thinks is important (values). 4. SWOT Analysis (Analysis of Strengths, Weaknesses, Opportunities and Threats) A SWOT analysis is an important part of a strategic business plan because it helps a cooperative s management team systematically identify the organization s internal strengths and weaknesses as well as external opportunities and threats. This analysis, in turn, can be used by cooperative leaders to develop a business strategy that builds on its strengths, reduces its weaknesses, takes advantage of opportunities and mitigates threats. For example, in Molako s SWOT Analysis presented below, one of the threats listed is the high cost of dairy cows. In order to address this threat, Molako decided to begin a scheme in which cooperative members pass along cows to other members. Strengths Membership willingness to grow Adequate management capacity within the cooperative to run the business Committed cooperative leadership in office Adequate infrastructure for expansion Opportunities Small scale processors need more milk Livestock commodity dealers willing to trade with the cooperative and offering good prices Weaknesses Lack of financial capacity to facilitate growth in the cooperative Limited vision or focus by leadership on the future of the cooperative Limited awareness by general membership on the vision/future of the cooperative Threats More cooperatives being formed in the area High cost of dairy cows More communities willing to join the cooperative Buyers willing to buy more milk if the cooperative could guarantee higher quality 5. Marketing Plan Many small businesses, including cooperatives, often do not spend enough time on marketing and marketing plan development. The lack of forward thinking about changing market conditions and 171

178 the subsequent lack of preparation for and adaptation to these changes is a frequent cause of business failure. The two biggest reasons for paying inadequate attention to developing future markets are: preoccupation with the immediate, day-to-day operations of the business and lack of market planning skills. To avoid these issues, cooperatives should develop marketing plans that answer the following questions: What products should we sell, and why? Who will buy our products, where, when, and in what quantities or volumes? Are there substitute products in the market, if so how will these impact demand? (e.g., if price of wheat is too high do people begin to substitute for corn?) What is the ideal product mix and is this likely to change in the next few years? If so, how will it change? For example, Molako s primary product is raw milk. The SWOT Analysis indicates that there are significant opportunities for expanding the milk production of Molako s members and increasing the number of members. In order to take advantage of expanding markets, the cooperative will need to increase members production and improve the quality of milk delivered to its collection centers (issues also identified in the SWOT Analysis). The cooperative could also develop a longer term plan to expand its mix of products. Increasing the volume and improving the quality of its raw milk are its priorities for the next two years. Perhaps after that objective is achieved, Molako will review its marketing priorities and consider developing additional products and buyers. There are a number of tools that can be used to develop a marketing plan; all of them are designed to help sell more products at the best possible price. Marketing requires understanding the competition so that you know how big or small of a player you are in the industry. It is also important to know what percentage of the market share you currently have, and hope to have in the future. For a detailed discussion of creating effective marketing plans, please see Section 5 of Module 8: Technical Operations. 6. Implementation Plan The implementation plan should include a concise overview of the organization s core objectives for growth and performance. For each objective, the implementation plan should list realistic strategies for how these objectives will be accomplished, and targets by which the organization can assess whether it is on track to achieve its objectives. The cooperative can use the implementation plan to develop an internal action plan with details about how business activities will be carried out, when, and by whom. A detailed action plan is extremely important in the day-to-day functioning of the business, however, it is not necessary to include such details in the strategic business plan. 172 Agricultural Producer Organization (AgPrO) Manual

179 AgPrO Training Module 7B: Preparing a Strategic Business Plan For example, Molako s SWOT analysis indicated that their current buyer would purchase more milk if the cooperative could guarantee higher quality. Molako s leadership has therefore decided that it would be possible to increase sales by improving quality. A. Measurable Objective(s) In order to determine whether or not a cooperative is successful in achieving its goals and objectives, it needs to measure its performance over a specified period of time. Creating specific, measureable, attainable, relevant, timebound (S.M.A.R.T) goals could help a cooperative stay on track to achieving its objectives. Creating goals that adhere to these standards helps a cooperative clarify its end vision, take actions within the necessary timeframe and stay focused, motivated and prioritized. Molako s 2008 Objective It is our expectation that the quantity of milk produced at farm level and marketed through the cooperative will have increased by eighty percent within two years. B. Strategies for Achieving Objectives Having measurable objectives is not enough. A cooperative also needs to identify the steps it will take to achieve its objectives. These steps or business strategies also need to be measurable. As with objectives, if you can t measure it, how do you know if you have accomplished it? Following are seven business strategies Molako adopted for the period in order to increase the volume of milk marketed through the cooperative during the year. Molako s Implementation Plan for Objective: 20% annual increase in milk sales to purchaser 1. Have a committed and dedicated membership by the end of two years. a. Recruitment campaign; b. Board and management review and revise member services; c. Improve financial transparency, including quarterly financial statement to members; and d. Increase efficiencies in operations to improve returns. 2. Artificially inseminate 160 cows with improved genetics semen each year. a. Train an additional three A.I. technicians in the next 2 years; b. Hold at least three farmer sensitization and education meetings; c. Hold training sessions on artificial insemination and its benefits; d. Stock at least 200 straws of semen each year; and e. Inseminate at least160 cows per year. 3. Source 60 dairy animals each year. a. ldentify breeding farms for dairy cows; b. Train farmers on animal management; c. Solicit support from partners; and d. Access financing from a lending institution (Micro Bankers Trust). 173

180 4. Improve the animal management skills of 60 farmers each year. a. Conduct two training sessions on pasture management; b. Conduct two training sessions on feed formulation and management; c. Conduct two training sessions on animal health management; and d. Disseminate information relevant to animal health each month. 5. Set up an input supply system by the end of 2008.* a. Identify best system for input supply management; b. Train manager on input supply management; c. Identify potential and willing suppliers of inputs; d. Mobilise and educate farmers on input supply modalities; e. Enter into supply contracts for inputs with suppliers; and f. Periodically reassess demand patterns for inputs. 6. Improve the quality of milk delivered to the milk collection centre. a. Train 180 farmers on mastitis testing; b. Monitor farmers construction of 180 milking parlours; c. Train 180 farmers on milk hygiene techniques; and d. Provide 180 farmers with adequate and essential milk buckets, cans etc. 7. Financial Projections Developing financial projections allows the cooperative management to design actionable items for the strategic business plan. This important component requires a certain skill set and may necessitate outside business service providers. AgPrO Training Module 9: Financial Management is a training tool to assist board members and management to understand and prepare financial projections. It should be used as a companion guide to the financial projections section of this module. Financial projections should include: Profit and loss (P&L) statement. This should be a 12-month and three- to five-year projection of expected profitability of the business based on reliable information about input costs, expenses and cost of capital. Projected cash flow budget. In an agribusiness, this is perhaps the most important projection tool. It determines the amount of available cash at any given time in a projected period for servicing debts and cash expenses. If the cash flow displays negative totals, this means that the business is likely to become illiquid at those times. Example: If a cooperative is interested in establishing a second milk collection center, projecting the cash flow requirements of the cooperative (cash in and cash out) will identify whether or not * Milestone: a significant point in development, according to Merriam-Webster Online. 174 Agricultural Producer Organization (AgPrO) Manual

181 AgPrO Training Module 7B: Preparing a Strategic Business Plan there may be a time when the cooperative does not have enough cash. Take the hypothetical case that a second MCC will require a $10,000 expenditure in Month 2. However, in this case the expenses already forecast by the cooperative for that month plus the MCC expenses would result in a negative amount of cash for the month. As such, the cooperative should not proceed with the start-up of a second MCC until it figures out how to do so without becoming illiquid. Possibilities could include borrowing funds to cover the cash shortage or postponing the project until the cooperative has more cash reserves. Projected balance sheet. The balance sheet projections are an indication of the assets of the business and how they will be financed. Assets = Liabilities + Owners Equity Sensitivity analysis. The sensitivity analysis is a valuable tool in testing the robustness of a business, should input costs increase, sales volumes decrease, or if price and profitability are impacted in any way. A good sensitivity analysis will show the break-even point at various expected levels of profitability. The P&L statement and options of variable numbers serves as the source of information for the analysis. External financing is not discussed here. If one intends to use the business plan to access moving capital or fixed capital assets, a financing plan will demonstrate to the audience that the repayment process has been well prepared in line with available cash in the cash flow projections, and profits in the P&L. 8. Supporting Documents The business plan should be clear, concise and not too long. However, there are generally no restrictions on the number of supporting documents that can be provided and funding applications often require them. Supporting documents serve as proof of key facts, and they substantiate data in the projections. 175

182 Section 3: Deciding who Should Prepare a Strategic Business Plan The starting point in developing a strategic business plan is for the cooperative board to have a clear reason for developing a plan. The next step is for the board to decide who will prepare the plan. The board has three choices: Prepare the plan internally using a combination of board members and staff Prepare the plan with the assistance of a trusted partner (such as Land O Lakes or another NGO) Engage a qualified and trustworthy consutant or firm to prepare the plan. The decision should be based partly on an assessment of the extent to which the cooperative board and staff have the skills to prepare a high quality plan; and partly on the importance of having the plan be based on an objective analysis of the cooperative s current and projected business activities. Steps to Working with External Organizations or Consultants to Prepare a Strategic Business Plan A cooperative should generally not prepare a strategic business plan without external supoprt. Engaging Land O Lakes, another trusted NGO or a BDS provider can help maintain quality and objectivity. However, cooperative representatives should stay involved and provide input and close monitoring along the way. Engaging an NGO If the cooperative plans to engage the support of an NGO, it is important to have a clear set of steps and a timetable for the development of the plan. These steps should include: Step 1: Designate a planning committee Designate a business planning committee to include representatives from the cooperative and technical assistance providers from the NGO. Step 2: Create an outline The outline should set the structure of the plan and identify who is responsible for preparing and reviewing each component. Step 3: Set deadlines Set dates by which each component and the entire plan will be completed. Step 4: Determine Monitoring System and Frequency Devise a systematic procedure so that the measurable objectives in the plan will be used to monitor and improve cooperative performance. 176 Agricultural Producer Organization (AgPrO) Manual

183 AgPrO Training Module 7B: Preparing a Strategic Business Plan Engaging an External Consultant It is important to carefully identify and select a business development service (BDS) provider to prepare a cooperative s strategic business plan. The cooperative should establish a business planning committee to coordinate the process of selecting a BDS provider, to communicate regularly with the provider, and to review, revise and approve the strategic business plan. Follow the seven steps presented below to select and oversee the work of a BDS provider. Step 1: Develop a scope of work and budget The scope of work (SOW) should provide a detailed outline of the strategic business plan the consultant will be expected to prepare. The budget should specify the financial resources a cooperative has to spend on the business plan. Step 2: Seek qualified applicants Seek qualified applicants for the assignment through local media, personal and organizational references, and other means. A brief advertisement should be posted and should outline the skills necessary to carry out the scope of work. Step 3: Screen applicants and select a finalist Begin the screening process by eliminating from the list those who lack the minimum requirements for preparing a strategic business plan (e.g., inadequate formal education or lack of prior experience). Among the candidates who meet the minimum requirements, the cooperative may use a variety of selection criteria, including references/letters of recommendation, cost, and the potential for a long-term relationship (as opposed to a one-time service). Step 4: Brief the finalist on the assignment After the selection process is completed, the business planning committee should meet with the BDS provider to brief them on the cooperative s operations and discuss the SOW for the business plan. The BDS provider should have access to all documents relevant to the preparation of the strategic business plan. Step 5: Draw up a formal contract The deliverables in the contract should be based on the scope of work. It should include specific dates by which a draft plan and final plan are to be completed. It should specify the cost and include a payment schedule. The contract should also specify the ongoing communication and monitoring role that the cooperative s business planning committee will have in relation to the BDS provider. The contract should also note the circumstances under which the contract can be terminated by either or both parties. Step 6: Communicate and provide oversight along the way Representatives of the business planning committee should have regularly scheduled meetings with the consultant while the plan is being prepared. Through these meetings, committee members can: Make sure the consultant is preparing the plan in a manner that is consistent with the contract; Provide input to the plan; and Become familiar with the evolving plan. 177

184 Step 7: Review drafts and provide feedback Through this review process, the business planning committee and other cooperative representatives should make sure that they understand the plan and that the plan is consistent with the scope of work and with the cooperative s overall objectives. They should also have the opportunity to request changes before the final plan is completed. It is also a good idea to have a third party review the plan before it becomes final. This not only allows another opportunity to catch mistakes, but provides fresh perspective and ideas to the process. 178 Agricultural Producer Organization (AgPrO) Manual

185 AgPrO Training Module 7B: Preparing a Strategic Business Plan Section 4: Using the Strategic Business Plan as an Organizational Tool Agriculture is a high-risk business. It requires constant analysis of internal and external factors that will affect the business and its ability to satisfy its member-owners. Economists refer to agricultural production as a price-taking industry, which means that producers generally have little say in the price of their product, regardless of the price of inputs. The challenge for producer organizations in unprotected markets is to constantly align their means to their member-owners ends, wherever possible. This means to change what one can, to adjust to what one can t change, and be able to discern the difference between the two. The business plan is a living document, and needs continual analysis, amendment and alignment, provided that the member-owners support this process. Development of the vision and mission of the business require careful thought; they are two elements that should not be changed unless special circumstances dictate. A business plan is typically used to: Periodically determine whether or not a cooperative is on track to meet its measurable objectives. Periodic reviews of the business plan should occur at least on a quarterly basis and should compare planned performance against actual performance. If things get off-track, a cooperative should consider either changing the strategies to achieve the objectives or changing the objective itself. Identify when the board and management need to respond to changes in the external environment (e.g., changes in milk prices). Maintain a long-term rather than a month-to-month approach to decision making. 179

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187 AgPrO Training Module 8: Technical Operations Training Module 8 Technical Operations Agricultural Producer Organization (AgPrO) Manual Prepared by Land O Lakes International Development Funded by The United States Agency for International Development 181

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189 AgPrO Training Module 8: Technical Operations Preface Training Module 8: Technical Operations contains five sections. From procurement, supply chain management, technical support, quality control to marketing, this module walks a cooperative through the cycle of conducting business in the field and provides a detailed explanation of what each concept entails and how to best approach it. The target audiences for this module are: Land O Lakes program and field managers, cooperative and business development specialists and extension officers Government cooperative development officers Cooperatives and other producer groups Other development partners, including government agencies, nongovernmental organizations and private sector partners. 183

190 Section 1: Procurement Procurement is the acquisition of goods, equipment or services from an external source to support business operations. The steps of a procurement include soliciting, evaluating, selecting and delivering goods or equipment as well as engaging in services such as construction, legal counsel or security. A best practice is to establish a risk-based approach to procurement standards and processes. Under a risk-based approach, the process and documentation requirements for procurements balance the risk level and size of the intended procurement with the staff time and documentation requirements to ensure the best combination of diligence and efficiency. A good business sets standards for its employees and vendors for all procurements. Such standards include: Free and open competition in accordance with good commercial practices Selection of the best value good/service that most effectively meet business needs Accountability for performance and to the terms of the contract for vendors Avoidance of conflicts of interest, collusion (or the appearance of), kick-backs or bribes, fraud, unfair competitive advantage or other unethical business practices in the selection, evaluation, award and administration of procurement transactions. The Procurement Process The entire procurement process can take significant time to complete. The general process follows: solicit bids, evaluate bids, select winning bidder and conduct due diligence, obtain funder approvals (if required), draft, review and sign contract, deliver goods and implement services, and finally, conduct a final procurement file review. Good procurement practices consider a range of providers and are open to competition. Once a group of potential providers of goods/services is identified, it is important to conduct a cost analysis and assess the prices of the good/service relative to its value. Following these practices will help the business make good decisions by obtaining high quality goods and services while managing costs. The procurement process and the number of steps and average time to complete each step vary based on the size and type of procurement. Identify Specifications and solicit Bids Evaluate Bids, Select Winning Biddrer and conduct due dilligence Obtain further approvals if required Draft, Internal Review and Signature of Contract/ Purchase Order 2-4 weeks 2-4 weeks 1-3 weeks 2 weeks - 3 months Delivery of Goods / Impelementation of Services Varies Final Procurement File Review and Close Out, as needed Varies 184 Agricultural Producer Organization (AgPrO) Manual

191 AgPrO Training Module 8: Technical Operations Identify the Procurement Need The first step for any procurement is to clearly define the item(s) or service the business needs to meet its specific objective. The need to procure specific goods, equipment or services may have been defined in the business planning process. It also may have arisen from a need during the course of business operations. In either case, it is important to think through the steps (and potential roadblocks) to the procurement in advance and to develop a plan. The procurement plan may be very simple for basic procurements (office furniture or audit services), or very detailed for large and complex procurements (construction or evaluation services). The following questions should be considered in the procurement plan: Program Needs and Requirements How will the item(s) or service(s) benefit the business? Are there any special requirements or specifications? Are there any approvals or waivers required by the donor for this type of procurement? Will there be any environmental impact to consider? Budget, Cost and Availability Is the cost for the good, equipment or service included in the approved business year budget? Is the item or service available locally? Regionally? Internationally? For equipment/supplies, does it make more financial sense to rent or buy? What types of costs are usually included in this type of procurement in addition to the base cost (such as transportation, installation, aftersales maintenance contract, etc.)? Timing When must the item be delivered / service completed? What outside factors could influence the timing and scope of the procurement (e.g., elections, the rainy season, other procurements that take priority, etc.)? How long will shipping/delivery take? Roles Is there a designated individual in your business responsible for procurements? If not, who in the business will manage the procurement? Who from the program team will take part? For specialized equipment or services (e.g., construction or dairy equipment), does the business have the required technical expertise to create the specifications, evaluate bids and monitor the delivery and implementation of the procurement? If not, can the business obtain a consultant to assist in the procurement process? 185

192 Define Specifications The next step is to document (in writing) the specifications for the item or service to be procured. The specifications define the parameters and the technical requirements needed to satisfy project requirements. Designing specifications is one of the most important steps in the procurement process. Welldesigned specifications will help the procurement process go smoothly, and will ensure that the bidders can offer responsive bids. If specifications are poorly defined, the bids received may be for unsuitable items, excessive prices, poor quality and/or inadequate capacities. In this case, solicitation process may need to be repeated, wasting valuable time and energy. Alternatively, the end product from the vendor may not meet program needs, which is not an effective or appropriate use of funds. Small procurements may have very simple specifications. For example, Five office file cabinets with locking drawer. Large or complex procurements will have more detailed specifications that may require technical expertise from an external expert consultant. The procurement manager should define the specifications. For complex or large procurements, the procurement manager should seek technical expertise to make sure the specifications are properly defined. Dos and Don ts for Defining Specifications Dos Use clear, concise language (bullet points are helpful). Be general enough to allow maximum vendor participation, but specific enough to ensure vendors submit suitable, comparable bids. Specify minimum capacities, capabilities and sizes (e.g., for size of motor or capacity of pay load). Define what you need the equipment or service to do (e.g., carry at least 10,000 ltrs of milk over unpaved rough roads ). Don ts List good/service requirements that would limit competition to one brand name or vendor. Be restrictive by limiting source, manufacture, or origin. (Note: in some cases there may be limited sources for a particular good or service efforts should be made to identify the different possibilities.) Once the specifications are defined, the next step is to create evaluation criteria for the proposals. 186 Agricultural Producer Organization (AgPrO) Manual

193 AgPrO Training Module 8: Technical Operations Roles and Responsibilities The procurement process involves many different staff members at different stages of the process. The number of people involved and their roles will vary based on the size and type of procurement and the composition of the field team. A best practice is to implement appropriate checks and balances to maintain the integrity of a procurement. One way to do this is to create a committee to approve the procurement. This is particularly important for larger ones. 187

194 Section 2: Supply Chain Management Supply chain management is the active management of the flow of goods to maximize customer value and achieve a sustainable competitive advantage. A supply chain is a set of organizations linked by one or more upstream and downstream flows of products, services, finances, or information from a source to a customer. The management of a supply chain encompasses activities involved in movement and storage of raw materials, inventory management, product development, sourcing, procurement, production and logistics as well as information systems. It also includes coordination and collaboration with suppliers, intermediaries, third party service providers and customers. And, it comprises manufacturing operations and drives coordination among marketing, sales, product design, finance and information technology. The primary responsibility of supply chain management is to link major business functions and business processes within and across companies into a cohesive and high-performing business model. Inventory Management Part of supply chain management is inventory management, or controlling a business s stock base. Inventory management is a science of effectively overseeing the constant flows of units out of and into an inventory base. It is about knowing what is on hand and where it is in use. It involves acquiring and maintaining a proper merchandise assortment. Efficient inventory management also involves replenishment, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, future inventory price forecasting, quality management and returns and defective goods. Balancing these competing requirements is an on-going process as business needs shift and as the company reacts to external and internal changes in the business environment. It is also important to maintaining optimal inventory levels. Some of the common challenges businesses face as they seek to effectively manage their inventory include: too much inventory, inaccurate inventory tracking, unclear priorities and lack of backup data. The fear of not having enough in stock could lead to overspending on inventory, which can drain working capital and reduce profits. Old inventory can be hard to move and is subject to damage and depreciation. One way to avoid this problem is to project how much supply the business will need based on how much was sold in the past. Decent calculations will not only free up capital but also keep existing inventory fresh. Inventory tracking can be tedious and there are lots of opportunities for miscounting. Electronic data interchange and bar codes scanning are good tools to help eliminate data entry errors. Keeping focus on items that matter the most is essential. Excel spreadsheet and other software programs can be useful tools for staying on track. Lastly, it is always safe to keep a backup copy of inventory data in case the computer breaks down or should other emergencies arise. 188 Agricultural Producer Organization (AgPrO) Manual

195 AgPrO Training Module 8: Technical Operations Product Knowledge Product knowledge refers to the understanding of a good or service produced. Having sufficient knowledge of products used and products produced at the cooperative is essential to managing a supply chain. Product knowledge might include information about the product s application, function, features, usage and support requirements. A business sales representative is someone that is typically expected to acquire product knowledge that they are responsible for selling to consumers. Ways to Acquire Product Knowledge Marketing literature Sales representatives Training sessions Customer testimonials Samples or practical use Thorough product knowledge has many benefits. First and foremost, it means increased sales. It is difficult to persuade customers to buy a product if a sales representative cannot explain how it will address their needs. A good understanding of a product allows a retailer to use different techniques and presentation methods. Strong communication skills are important and deep knowledge helps boost a sales representative s confidence. Being enthusiastic and educated about a product and its uses will help generate excitement and decrease a customer s uncertainty. Customers are more likely to buy from sales representatives who have a thorough understanding of their products; therefore, ensuring sales representatives are educated helps increase a product s competitiveness. It is thus important to understand how a product is made, its value, how it should be used and what products work well together. Other things to know about a product are its pricing structure, history, available styles, colors or models, distribution and delivery, as well as servicing, warranty and repair information. Supply Chain Strategy Effective management of a supply chain starts with the development and execution of a long-term strategy that evaluates the cost-benefit trade-offs of operational components to drive down costs and maximize efficiencies. A supply chain strategy also establishes how an organization works with its supply chain partners, including suppliers, distributors and customers. As the marketplace becomes more competitive, it is critical to reinforce existing relationships and work together. The strategy should also be consistent with and supportive of the overall business strategy and complement efforts in areas such as purchasing, logistics, manufacturing and marketing. A great supply chain strategy, linked with operational excellence, can provide success not only for the company but also for its partners and customers. A supply chain strategy should: Identify supply chains in which a firm can compete Assess the organization s capability, operational strengths and weaknesses Help managers understand how the firm will provide value to the supply chain 189

196 Guide the selection of supply chain partners, including suppliers, subcontractors, transportation providers and distributors Identify ways to cooperate and collaborate with partner organizations. Developing the Supply Chain Strategy Understanding an organization s overall business strategy is an important first step to create a supply chain strategy, as the strategy derives from as well as enables the business strategy. A close examination of the core competencies, focus, and means of differentiation outlined in the business strategy is helpful to develop supply chain management strategies. Assessing the extended supply chain by conducting a detailed assessment of the organization s capabilities is the next step. A good starting point is to scrutinize the organization s assets and evaluate how well they support the strategy. For instance, if the company adopts a low cost provider strategy, it would need to The Importance of a Collaborative Process It is important to engage partner companies to develop the supply chain strategy. A collaborative process will ensure clear expectations, open communication and mutual goals. It will also help an organization learn more about the companies with which it does business. replace its old machinery and disparate systems, which may result in high operational overhead and costly process inefficiencies. A supply chain assessment can also be helpful to thoroughly understand the operational strengths and opportunities for improvement. Once the assessment is complete, a team can be organized to review recommendations, prioritize opportunities, identify risks and move forward with implementation. The implementation plan should include activities and tasks, roles and responsibilities, a corresponding timeline and performance metrics. Executing the Supply Chain Strategy Supply chain strategies encompass a cost focus, a customer focus and a strategic focus. The success of a strategy is only as good as the company s ability to fully and properly execute it. Performance management and communication with partners are important aspects in executing the strategy. Closely following the implementation plan, applying good project governance and managing performance throughout implementation are essential for successful execution of the strategy. Tracking performance gives an organization a way to measure its progress towards realizing the goals of a strategy. It also helps individuals understand their contribution, roles and responsibilities, and creates a more cohesive organization. Rewarding people for their performance on a regular basis provides an incentive to stay on track and strive beyond basic requirements. Performance goals should also be used to communicate business expectations to outside entities. The more the extended supply chain is involved, the more the supply chain strategy is supported and reinforced. 190 Agricultural Producer Organization (AgPrO) Manual

197 AgPrO Training Module 8: Technical Operations Executing a supply chain strategy means dealing with many different entities, both internally and externally. It is thus important to execute in a manner consistent with these different groups or stakeholders. The goals of the organization s supply chain components and those that it conducts business with must be similar and carried out at the same speed. Should the home organization moves at a speed other supply chain entities are unable to maintain, misalignment and poor efficiencies are likely to result. Good communication and clear expectations are key to keeping the extended supply chain in sync. It is important to regularly revisit the supply chain strategy to keep its focus up-to-date. During these reviews, the organization should assess whether or not it has met the goals of the business strategy, if the needs of the supply chain partners have changed and how the industry has changed. Aspects to consider include new competitors, business practices, products and technology. It may also be helpful to reassess the supply chain organization to look for new opportunities to further position the organization for success. 191

198 Section 3: Technical Support Technical support services attempt to help a cooperative solve specific problems. Training and technical assistance by a qualified provider can increase farm productivity; improve animal or crop genetics; broaden access to farm supplies such as high-quality feeds (sometimes at a discount price); increase availability of veterinary services; enhance access to credit and other financial services; increase access to clean water; and provide more effective literacy and health training. Business development typically has an external focus on: Potential mergers and acquisitions Negotiating deals (mergers, distribution deals, spinoffs) Business alliances Joint ventures Land O Lakes targets our technical support based on each producer group s business model and their current needs. New market opportunities Business development is one area we provide technical training and input to help cooperatives remain sustainable and grow. The goal of business development is to grow the company. Doing so requires creativity and knowledge about the market environment. Market penetration, market development, alternative channels, product development and coming up with new products are ways to expand market share and grow the company. Growth Strategies Market Penetration. A simple and less-risky growth strategy is to simply sell more products to customers. Effective market penetration requires sufficient knowledge on market environment, customer needs, creativity and persistence. Finding new ways for customers to use the product and alternative sales channels are important forms of market penetration. Market Development. Devising a way to sell more current products to an adjacent market (e.g., offering products or services to customers in another city or region) could have a huge impact on market expansion. Many fast-growing companies rely on market development as their main growth strategy. Alternative Channels. This involves pursuing customers in a new or different way (e.g., selling products online). The internet has become an important channel for product promotion. Using the internet as a means for customers to access products or services to complement traditional sale venues could dramatically increase sales and brand recognition. Product Development. Product development involves developing new products to sell to existing and new customers. It would be ideal to sell new products to existing customers because selling to existing customers is far less risky than having to learn a new product, new market and new customer pool at the same time. New Products. Sometimes, market conditions dictate that it is necessary to create new products for new customers. Developing new products can be risky, expensive and labor and time consuming yet exciting at the same time. For growing businesses that have a solid financial base, pursuing new products helps the company increase sales and market share. For startups 192 Agricultural Producer Organization (AgPrO) Manual

199 AgPrO Training Module 8: Technical Operations and new businesses, it is important to establish solid footing in the field before dedicating resources to new product development. Other alternative growth strategies include: Horizontal. This growth strategy involves buying a competing business. Employing such a strategy not only adds to company's growth, it also eliminates a potential competitor. Acquiring key competitors over the years is both a shortcut to product development and a way to increase market share. Backward. A backward integrative growth strategy involves buying one of the suppliers as a way to better control the supply chain. Doing so could help the business develop new products faster and potentially more cheaply. Forward. Acquisitions can also be focused on buying component companies that are part of the distribution chain. For cooperatives, this could be buying distribution centers and local grocery stores as a means to pushing the product into the market. 193

200 Section 4: Quality Control Quality control is a process that is used to help ensure a product or service meets a certain standard or specification. It involves thoroughly examining the quality of products through the entire manufacturing process or the results of services. The basic goal of the quality control process is to ensure that products or services meet specific safety requirements, specifications and characteristics to ensure that what is produced is consistently safe and wholesome. A team of workers at a cooperative can test a certain number of products, but 100 percent testing of any product is not feasible nor is it the goal. One cannot test quality. A proactive and preventative food safety The goal of the quality control team is to identify manufacturing processes or products that do not meet specific quality standards or other product specifications. If a problem is identified, the cooperative may need to reject a member s delivery to uphold its commitment to buyers. Production might need to be suspended until the problem is corrected as continuing to produce out-of-specification or nonconforming products has no value. program based on the seven principles of HACCP (Hazard Analysis and Critical Control Point) should be the quality control goal. Random testing can and should be done to verify that members are adhering to established quality standards. Evaluation of test results is a matter of training and experience. Before setting levels of standards or specifications, the baseline will have to be established through a period of time as consistency is required. When knowledge of existing quality of a product has been obtained, future quality standards will be set. However, in some countries, there are standards already set by quality legislation bodies. Standards must be set at a minimum to be in conformity with these standards, but strive to be better. This means that there will be need for close cooperation between the producer, processor and the standards or quality legislations bodies. Thus, quality control standards should be under continuous evaluation according to improved methods of production and processing. Quality control standards should be reviewed and revised as needed such as if the production process or equipment is changed in any manner. Quality Control Plan A quality control plan (QCP) is an important document that identifies the product type, frequency, and limits of sampling and testing to be done. It outlines a method to ensure that products or services have reached a specific quality standard. As quality control is usually the last step products go through before reaching the market - it is important. A QCP should include: A list of all products produced and testing or analyses to be done A sampling plan that includes locations, devices, techniques, frequencies and test methods 194 Agricultural Producer Organization (AgPrO) Manual

201 AgPrO Training Module 8: Technical Operations A testing plan that includes the types of tests and test methods, and the means to isolate material represented by nonconforming tests A description of other process control techniques that are used beyond the minimum required A documentation plan with details on control charting, test data, and schedules, etc. The location of the reference documents, control charts, schedules, test data, material shipment records and other pertinent information. Roles and Responsibilities Personnel involved in quality control are the quality control manager, alternate quality control manager, safety manager and quality control staff members. The project manager can also get involved in the process as an overall supervisor responsible for the product. The quality control manager (QCM) is responsible for overseeing the overall design and implementation of the QCP and coordinating all project testing, inspections and reporting matters directly with the project manager. The managers, and all workers, have the authority to intercede directly and stop work due to any unsafe work practices, site conditions or the production of nonconforming product. The quality control manager s key duties include: Prepare, design, approve and implement the quality control plan Verify and inspect project materials Estimate quantities and costs of materials, equipment, and labor to determine project feasibility Coordinate different tests, e.g., tensile test, soil test, compression test Supervise quality inspectors for different inspection activities Carry out or supervise quality control checks as defined by the quality plan Coordinate workers in an effective manner to achieve program objectives Provide technical advice on design, construction, and program modifications and structural repairs to industrial and managerial personnel. In many instances, it is helpful to have an alternate quality control manager to back up and assist the manger in overseeing implementation of the quality control plan and coordinate project testing, inspections and reporting matters directly with the manager. The alternate quality control manager has similar responsibilities as the manager, and is directly responsible for carrying out the QCP in the manager s absence. A safety manager is responsible for overseeing overall implementation of the safety plan and for coordinating all health and safety matters directly related to quality controlling of the project. The safety manager s key duties include: Design, develop, review and sign the Program Accident Prevention Plan 195

202 Participate in quality control planning, safety and health checklists development, and perform design and system safety analyses Provide safety and health expectations and training for quality control staff Provide on-site consultation as needed to ensure the Accident Prevention Plan is fully implemented Conduct general safety inspections on a regular basis and set frequency to ensure a safe work environment. Quality control staff members work under the manager and alternate manager to perform regular inspections, analyses and testing of products and services. Their key duties include: Attend pre-inspection meetings to review products features, specifications and quality control standards Perform regular inspections and examinations Immediately report problematic products to manager or alternate and follow the process to prevent the further production of non-conforming product plus secure such product so it cannot enter the consumer flow and cause damage Attend follow-up meetings to review the inspection process File inspection documents to keep on record. Inspection Process Step 1: Pre-Inspection Meetings Pre-inspection meetings should be conducted by the quality control manager prior to the beginning of quality assessments to review the quality control plan, expectations, product specifications and established standards; answer questions; and review safety steps. It is important that all staff members are clear on what they are inspecting, how to go about it, product quality standards, the special features and characteristics of the product and safety standards. The following are topics for discussion at preinspection meetings: Review applicable product specifications and quality standards Review testing procedures and frequency Review provisions to ensure controlled inspection and testing Examine the work area to ensure sanitation requirements are met and that all required preliminary work has been completed Examine related production material, and confirm that products are in compliance with the contract and are properly stored Ensure all safety precautions are met and the required safety equipment is available. Step 2: Quality Inspections Quality inspections shall be performed on an established regular basis or when the required standard of work is not being met. The same individuals who attended the pre-inspection meeting should be the ones to conduct the inspections. Staff members can be organized into teams or could conduct inspections individually depending on the nature of the work. Products inspected should be chosen at random. The same product can be inspected multiple times during the manufacturing 196 Agricultural Producer Organization (AgPrO) Manual

203 AgPrO Training Module 8: Technical Operations process and at set frequencies when questions or concerns arise. Problematic products should be taken out, set aside to prevent further use, and closely examined later to determine the root cause(s) of the problem. The QCM should supervise the quality inspectors for different inspection activities and ensure that proper procedures are followed. It is critical to document standard operating procedures (SOPs) and follow them. Personnel must understand and be trained to adhere to the SOPs. The following is an outline of the basic steps to be accomplished during inspections: Divide inspectors into groups and assign tasks Perform inspections Verify adequacy and accuracy of inspection and testing Ensure safety procedures are property followed Document inspection results Examine the work area for compliance. Step 3: Follow-Up Inspections Follow-up inspections shall be performed to review quality control results and file records. It is also important to ensure that the control established during pre-inspection meeting continues to provide a product that conforms to the contractual requirements and product specifications. During the follow-up: Problematic products and services that do not comply with the requirements shall be documented and product numbers should be recorded. Non-conforming product must be disposed of in a safe manner to prevent harm to any end user (animal or human). Inspection and testing documents shall be properly filed and maintained for record purposes. The QCM should review with staff members which steps went well and which did not, and revise a new plan for future inspections to ensure the consistent production of safe and wholesome products. 197

204 Sample Quality Plan Checklist Date Plant/Production Center Name Plant/Production Center Location [ ] Telephone Number [ ] Address [ ] County [ ] Section [ ] Township [ ] Range [ ] Reference to Identifiable Points Parent Company Name [ ] Address Project Manager Name Quality Control Manager Name Alternate Quality Control Manager Safety Manager Name Inspector Sampling Plan [ ] Frequency [ ] Locations [ ] Sampling Devices and Techniques [ ] Test Method Numbers [ ] Means of Tracking Production and Load-out Tests Testing Plan [ ] Gradation [ ] Decantation (Load-out only) [ ] Crushed Particles (Min. 1/Week, None If < 100 t) [ ] Deleterious Material (Min. 1/Week, None If < 100 t) [ ] Procedure for Isolating Non-Conforming Material [ ] Test Method Numbers 198 Agricultural Producer Organization (AgPrO) Manual

205 AgPrO Training Module 8: Technical Operations Section 5: Marketing Marketing is introducing and communicating the value and benefits of a product for the purpose of selling it. It is critical to attract customers and promote the company s name and image as it can increase product competitiveness. Numerous interconnected activities are involved in agricultural marketing, such as production planning, growing and harvesting, grading, packing, transporting, storage, food processing, distribution, advertising and sales. Marketing systems are dynamic, competitive and involve continuous change and improvement. Effective marketing requires those involved in marketing chains to understand buyer requirements, both in terms of product and business conditions. Conducting Market Research Market research is gathering useful, timely and comprehensive information to identify customer needs and preferences, assess qualified demand and analyze the competitive environment to inform product/service development and business decisions. In conducting market research, a cooperative needs to first identify its target market, or the groups of customers to which its products are catered. It also needs to demonstrate how the product meets customer needs and qualified demand. Specifically, the cooperative needs to know: Customer type (B2B/B2C/retail, outlet/wholesale distributor, etc.) Customer location Customer needs, preferences and values Products (Are potential customers ready to buy what is being sold? Are current customers happy with the products? What level of quality do they demand? What volume do they need, with how much lead time, during which seasons? Are there additional products would they like to buy?) Pricing (How much will potential customers pay for the products currently sold or those that being considered, including price to distribute, physical product and delivery?) Types of Market Research Two types of research are commonly conducted: primary research and secondary research. Primary market research is original and direct, can take the form of a questionnaire, survey, interview, focus group, observation, experiment or panel study. Secondary research involves reviewing the information already developed by other experts or practitioners. Articles, books, magazines or surveys are good resources; they are usually easily accessed in libraries, universities and professional organization websites. It is also important to consider how often a cooperative should update its market research to account for shifting trends. The business environment, customer preferences, and production and distribution methods will change over time. Market research needs to be conducted on a periodic basis to ensure a cooperative stays on top of evolving circumstances. 199

206 Creating a Marketing Plan Creating a marketing plan can be the first step to effectively promoting a product. A marketing plan is a central part of an organization s overall business plan with a specific focus on service and product communication and promotion. It is a comprehensive overview that outlines an organization's overall marketing efforts (including the budget), target market and audience, and competitive environment. It also includes strategies to reach the target market and ways to differentiate from other competitors. A strong marketing plan will help an organization remain profitable and sustainable and spend its funds wisely and appropriately. A solid marketing plan should include the following eight components: Mission statement: A clear, well-understood, agreed-upon purpose helps a group stay strong and move forward. Mission statements provide a blueprint to the overall marketing plan, specifying business goals and objectives as well as strategies to achieve those goals. Product and service description: Should cover basic product information such as name, color, shape, special features or characteristics, as well as identify how the product is differentiated from other similar ones on the market. Market analysis: Is a study on market size, competitive environment, the product or service s position in the market, key competitors, as well as strategies for expanding market share. Market analysis is essential to determine market share and identify potential customers. Positioning strategy: An important part of market analysis is positioning strategy, or what makes your business stand out amongst your competition. In this process, it is helpful to think broadly, to list out competitors, direct and indirect alike. The positioning strategy should establish where the cooperative stands in the market, whether it offers the highest quality, the lowest price, the best value or the most reliable delivery. Pricing strategy: There are two approaches to go about developing a pricing strategy. A cooperative could choose to adopt a low cost strategy or high price/high quality strategy. To pursue a low cost strategy, it is usually necessary to have a company as large as or larger than its competitors. It is often very difficult for small businesses to compete with larger ones on the basis of price. If a cooperative expects customers to pay more for its products because the quality is higher than its competitors, it can pursue a high price/high quality strategy. Sales and distribution: It is often helpful to outline sales targets on a periodic basis; goals such as increase sales by 30 percent each year for the next three years or increase sales by 5 percent over the next quarter are useful benchmarks. These targets need to be realistic and achievable, however, and be based on sales from past periods. The marketing plan should explain in detail how targets are established and how they can be achieved. It can also be worthwhile to specify the number of units a cooperative must sell to break even and answer questions such as whether sales volume will vary by season and region. Distribution refers to determining where target customers are located and ways to get the products to customers. Cooperatives need to consider if there is special equipment that can be used to distribute the products, how to pay for distribution, and the procedures involved. Promotion tactics: A well thought out promotion strategy increases sales and brand recognition to current and potential customers. It is important, however, to tie the promotion strategy back 200 Agricultural Producer Organization (AgPrO) Manual

207 AgPrO Training Module 8: Technical Operations to the cooperative s financial analysis and strategic business plan, as promotion could be costly and management should determine beforehand how much it can afford to spend on marketing the product. A whole promotion package could include the following elements: Advertising strategy (radio, television, billboards, murals, internet, newspaper) Sales promotion strategy Publicity/public relations strategy (sponsoring community events, issuing press releases about new activities or any other engagement with the broader public) Internet marketing strategy Mobile message marketing strategy Direct marketing strategy (Packaging: if your product comes in a package, the design of the package can greatly affect customers perception of the product. If you use a truck to transport your products, your company logo and other marketing messages may also be painted on the truck.) Customer service: Customer service is providing service to customers before, during and after a purchase. It is designed to enhance satisfaction and meet expectations. The essence of good customer service is bringing old customers back and attracting new ones through word-ofmouth. Although the role of customer service may vary by product or industry, it is generally important to an organization's ability to generate income and revenue, as a customer service experience can change the entire perception a customer has of the organization. Good customer service is especially important to small businesses, who rely heavily on word-of-mouth often cannot survive on-going bad press. Courtesy, caring and willingness to serve are keys to building a good customer experience. Other important customer service skills include patience, attentiveness, tenacity, communication skills, time management skills, persuasiveness, ability to use positive language, ability to appropriately handle surprises and willingness to learn. Whom to Involve A cooperative can choose to develop its marketing plan in-house or hire outside professionals. Either way, collecting feedback from everyone in the company is essential. In addition to the marketing team, it is important to involve individuals in finance, manufacturing, human resources and supply. It will take all aspects of the company to make the marketing plan work. Reinforcing the Message Businesses need to reinforce their marketing message by using several different channels. If the target customer is a business, it is important to ask whether anyone in the organization has a connection to someone within that company. Which events does the target customer attend? Do they belong to any trade unions or other organizations? Which online or print publications do they read? Which radio station do they listen to? The answers to these questions will help you determine which marketing channels to use. If your target customer won t pay the minimum price you need to sustain operations, you may need to alter your business plan significantly. It is far better to come to this conclusion early on, before you invest time and money into your business model. 201

208 Updating the Marketing Plan Regularly revisiting the plan is important to keeping it up-to-date and fully operational. This is especially true when new products or services come out. As today s business environment is constantly changing, it is recommended to first create a short-term plan (up to one year). Sections of the plan can address the medium- and long-term future (two to four years), but the bulk of the plan should focus on the coming year. Implementing a Marketing Plan Marketing plan implementation is the translation of targets and procedures into actual practice. It is a process that ensures action assignments are executed in a manner that accomplishes the plan s stated objectives. An effective and successful implementation usually requires several steps: 1. Get input from all invested parties 2. Present the plan to the entire organization 3. Establish a system for tracking and monitoring the plan 4. Schedule monthly strategy meetings with established methods of reporting progress 5. Set annual review dates for new assessments and an updated plan As good implementation is critical to the success of the business, it is important to ensure that all members are on board, understand and agree with the business objectives. This is referred to as internal marketing. Internal marketing encompasses the managerial actions necessary to ensure all members of the organization understand and accept their respective roles in implementing the marketing process. Creating specific actions, assigning tasks to and establishing a system of monitoring and evaluation are good tactics to use. During the implementation process, it is important to keep in mind that planning and implementation are interdependent processes that are constantly evolving and require continuous adjustment. It is also important to establish a direct and reliable system of communication and a clear manner of tracking progress. Management staff of a cooperative will need to meet on a regular basis to address the progress of the implementation. Employees should also be held accountable for their role in implementation and be encouraged to speak up with any questions or concerns they might have. (Some employees who are ready to make positive changes could lack the authority or courage to do so.) Types of Marketing Cooperatives can utilize various marketing methods based on their projected costs and effectiveness. Whether they engage in traditional, internet or mobile marketing, the key is to properly understand the target market, the pros and cons of each type of marketing and identify the most appropriate method for the particular type of business the cooperative is engaged in. 202 Agricultural Producer Organization (AgPrO) Manual

209 AgPrO Training Module 8: Technical Operations Traditional marketing utilizes strategies like TV, radio, mail and print advertising such as magazines, coupon books, bulletin boards, catalogs or brochures. While many cooperatives may find traditional methods to be the only means of reaching consumers, they can be cost prohibitive. Print materials are not only expensive, but require office equipment such as computers, copiers and printers that may not be available in certain areas. It may also require help from outside groups, for example, to design and print promotional materials. In addition, it is often difficult to track results of traditional marketing. It is hard for cooperatives to know how much of a sales increase is due to direct marketing implementation. With the spread of cellular phone usage in recent years, mobile marketing has gained increasing popularity. Mobile marketing can provide customers with time and location sensitive, personalized information that promotes goods, services and ideas. Compared to traditional marketing, mobile marketing is able to reach more people faster with lower cost. In remote areas where most customers do not have cellular services, traditional methods such as brochures, bulletin board and word of mouth may be the best and, in certain cases, the only way of reaching customers. Building a Brand Branding consists of the name, symbol, design or any element that identifies the goods and services of a company. Branding is the visual voice of a company. Developing a corporate brand is important because a positive brand image will give consumers, and other interested stakeholders, confidence about the full range of products and services. The goal is to differentiate from competitors and to create a unique brand. The challenge of branding is to convey the company s message in a unifying voice. To build a brand, a cooperative must first determine what it tries to convey and to whom it is intended. Brands are not only valuable, but convey a sense of quality and credibility. While it can take years for a company s logo to become a trusted source or one that people instantly recognize, brand building is essential to a company s overall success in the world of marketing. As branding is fundamental and essential, building brands creates incredible value for a cooperative. For small startups, creating brand awareness or loyalty may seem like a challenging and long-term task. However, even though brand recognition does take a lot of time and effort, it is possible to achieve for even the smallest companies. In today s world, most businesses utilize online marketing to promote their company s brand. For cooperatives operating in rural areas where most members or customers do not have internet or mobile devices, traditional marking with bulletin boards and print materials might be the best method. Since brand awareness can lead to brand loyalty, the goal as a business should be to create a group of customers or followers who not only recognize the brand, but also trust it and are loyal to it. Once that s achieved, the cooperative establishes itself as an influential authority in the industry and gains a share in the overall marketplace. Tips to Build a Brand Focus on a single brand Keep the name simple, descriptive and memorable Apply the brand consistently Protect the brand by trademarking or displaying copyright Use the internet and different social media platforms Engage in mobile or traditional marketing Create word of mouth (for startups, this may be the most cost-effective way in the initial phase) 203

210 Sample Marketing Plan Outline 13 I. Mission Statement A. State the purpose of the marketing plan. B. Explain why you are in business, both personal and business goals. C. Review business goals and objectives as well as specific strategies to reach them. II. Product/Service A. Identify each service and product specifically. For product, identify in terms of name, trademark, color, shape, and other characteristic, including packaging and labeling. B. Differentiate products/services in terms of exclusive processes or superior ingredients and other features. C. Describe product/service weaknesses. D. Describe product lines, and new products/services that will be introduced. E. Give cost of each product/service. F. Give the price you plan to charge for each product/service G. Identify percent of annual sales and total dollar amount each product/service represents. Ill. Market A. Identify your customers - include all demographic and lifestyle information. B. Identify location of customers (local, regional, national or international). C. Identify factors in customer selection of the products/services and brands, including remittances. D. Identify the size of the total market E. Identify market trends, including information about market studies and test marketing. F. List factors that affect purchasing such as: 1) seasons, 2) obsolescence, 3) tax considerations, 4) price, availability, service, 5) emotional considerations, and 6) all other factors. G. Will promotional activities be concentrated in specific markets? IV. Competition (Direct and Indirect) A. Identify competitors by divisions, product lines and markets. B. Identify and compare your company's and your competitors' strengths and weaknesses. C. Compare your marketing techniques with those of your competitors. 13 Marketing, Curators of the University of Missouri, 2010, Agricultural Producer Organization (AgPrO) Manual

211 AgPrO Training Module 8: Technical Operations V. Pricing A. Review product/service costs for accuracy including all variable and fixed expenses. B. Be sure all products/services carry their share of expenses plus provide for profit. C. Compare prices for your products/services with similar products/services in the industry. VI. Distribution 1. If your prices will be higher, they need to provide the necessary "added value" to justify. 2. If your prices are lower, explain why in terms of your marketing strategy. A. Identify the most effective methods for getting products/services to customers in the target market. B. Identify need for warehousing of products and for distribution channels if not sold direct to buyer. VII. Promotion Mix A. Describe potential advertising program - discuss the following: 1. Possible use of ad agency and/or in-house ad department 2. Media choices, how selected and target audience 3. Project expenditures for each medium and product/service B. Describe potential public relations/publicity activities - i.e. business opening. VIII. Sales Forecasting A. Review sales history of competitors through secondary research. B. Show recent sales trends in industry. C. Make any seasonal adjustments. D. Project sales and income for next four quarters. (See business plan cash flow projections.) IX. Action Plan A. List all marketing strategies/activities. B. Prioritize all strategies by levels of importance. XI. Production A. Determine level of production/service necessary to meet demand generated by marketing. 205

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213 AgPrO Training Module 9A: Bookkeeping Training Module 9A Financial Management Level I: Bookkeeping Agricultural Producer Organization (AgPrO) Manual Prepared by Land O Lakes International Development Funded by The United States Agency for International Development 207

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215 AgPrO Training Module 9A: Bookkeeping Preface The overall objective of Training Module 9A: Bookkeeping is to strengthen the business capacity skills of dairy producer groups. Such skills are necessary as businesses establish financial management systems essential for their survival, operation and growth as commercial and sustainable business entities. This module is designed for those with little to no basic bookkeeping training. Specifically, this module provides hands-on practice in the preparation, classification and summarization of basic financial information. The purpose of studying formalized financial systems is to encourage participants to keep good financial records and later, to use those records as the basis for making business decisions (refer to Level 2 Financial Management). Training Module 9a seeks to provide real-life examples to aid in illustrating various financial management concepts. As such, a case study is set forth on the following page that describes the operations of a particular dairy producer group. The case study will provide a backdrop throughout the training seminar and will be the focal point of exercises. Each section in the module presents specific concepts and key definitions. Notes and examples are included at the end of the module as a reference. 209

216 BUTENDE DAIRY COOPERATIVE SOCIETY: CASE STUDY IN FINANCIAL MANAGEMENT Butende Dairy Cooperative Society (BDCS) was established in January 2003; it is located in a remote up-country district of Kalanda. Through this cooperative effort, approximately 60 farmers pool their milk together, giving Butende approximately 600 liters daily to sell in the wet season and 400 liters daily in the dry season. Butende s financial year runs from January 1 to December 31. Butende received initial financial support from its member farmers by issuing individual cooperative shares valued at 5,000 shillings each. Each member farmer was expected to buy at least 1 share. In total Butende received 300,000 shillings in exchange for the shares. The cooperative obtained a 1,500 liter cooler worth 9,000,000 shillings as a grant from USAID. Butende sells some of its milk to private milk traders and individual buyers. Most of its sales however, go to a processor called Dairy Creameries Limited (DCL). Butende entered into an agreement with the Dairy Creameries to supply them with 300 liters daily. In exchange for this guaranteed supply from Butende, the DCL agreed to a firm buying price each season, which averages 200 shillings per liter. DCL deducts the cost of collecting the milk from the payment made to Butende. They pay Butende every two weeks. However, payment can be delayed now and again up to a month. Butende is responsible for paying its supplier farmers. Typically it pays 50 shillings less per liter than DCL pays Butende. It pays its supplier farmers every two weeks (twice per month). Other than the milk cooler, Butende owns a piece of land, some office furniture and equipment and a small pick-up truck. It is excited about its most recent purchase of a generator to be used in case of power black-outs. Butende secured a very low interest loan, repayable over 10 years, to cover this 4,000,000 shilling investment. 210 Agricultural Producer Organization (AgPrO) Manual

217 AgPrO Training Module 9A: Bookkeeping Section 1: Bookkeeping Overview Bookkeeping is entering business transactions into record books and maintaining such records properly. For records to be most useful to a business, they have to be sorted, classified and summarized. Following such classifications and summaries, an organization can further analyze and establish such broad common questions as: What does a business own and what does it owe others? What is the revenue expenses, and income of the business on a periodical basis? Is the business operating at a surplus or deficit and why? Further, good bookkeeping enables: Accurate processing of payments to supplier farmers and proceeds from sales. Members to know whether the business is profitable so they can encourage prospective member farmers to join the cooperative. The cooperative to approach financial institutions in case of need. Authorities to accurately calculate taxes payable where applicable. Investors and development partners to be able to provide investment and services on the strength of well-kept records. The foundation for making good financial decisions is having access to reliable information in the right quantity at the right time. Without understanding the numbers, a good manager cannot make decisions. Bookkeeping is the very basis on which the cooperative s performance can be established and it can help determine what should be done in the future. It must therefore be done accurately. 211

218 Section 2: Identifying Business Activities Every business activity has financial implications and results in financial transactions. The diagram below shows that business activities result from the business objectives of the organization. Mission Statement: Describes generally why a cooperative is in business. Objectives / Goals: Sets forth what a cooperative wants to achieve. Activities: Explains how a cooperative will achieve its objectives/goals. Mission Objectives Activities The types of activities will vary depending on the nature of the business. In a dairy cooperative, financial transactions could include purchases of equipment, payments to farmers and receipt of payments from buyers. Identifying these activities and the associated financial transactions are an important first step to recordkeeping. 212 Agricultural Producer Organization (AgPrO) Manual

219 AgPrO Training Module 9A: Bookkeeping Section 3: Source Documents and their Controls Every business activity necessitates spending or receiving money and those transactions must then be documented. The documents where the original information is recorded before this information is transferred into books of accounts are called source documents. Source documents are retained to back up the information in the book of accounts. Types of Source Documents Cash receipt: A document issued by the person receiving money to the person paying the money as evidence that the transaction (payment) is complete. Date Cash Receipt No. OR Payment voucher No Butende Dairy Cooperative Society P.O. Box 9010 Kalanda Received from OR Paid to Qty Particulars Amount Total Payment voucher: A document used to organize payment of an invoice. Included is information necessary to process payment for an invoice including items such as purchase orders and invoices. Purchases Invoice: A document received from a supplier showing the details of goods or services the cooperative has obtained, but has yet to pay for. 213

220 Purchases Invoice No OR Sales Invoice No From: Baruka Stationers Ltd P.O. Box 1591 Dabani To: Butende Dairy Cooperative Society P.O. Box 9010 Kalanda Date: Qty Particulars Amount Total Sales Invoice: A document issued by the seller to the buyer showing full details of the goods sold and their prices or services rendered but not yet paid for. Bank pay in slips and cheque counterfoils: Documents that validate the depositing of money into a bank (pay in slips) or the withdrawal of money from a bank (counterfoils). Milk reception book register: A register in which the supplier s name and details of the milk received are recorded immediately upon testing and measurement. The details of the quality tests carried out, morning and evening reception, amount per liter and signature of the supplier confirming the transaction are all required. The person receiving and accepting the delivery should also record the volume of milk received into the supplier s milk passbook and sign against it. 214 Agricultural Producer Organization (AgPrO) Manual

221 AgPrO Training Module 9A: Bookkeeping Milk reception register Date: Butende Dairy Cooperative Society P.O.Box 9010 Kalanda No Name Lacto mtr Resazurin C.O.B Acidity/ ph Price per litre Morning Evening Total Vol 1 Kiondo P Okello R Sianga J Nyathi Sign The full register can be found in Annex A. Supplier payment schedules: These documents summarize the milk received from supplier farmers over a specific period of time and express it in monetary value to enable accurate payment of each supplier for that particular period. A supplier payment schedule takes the form of a spreadsheet. It includes the amount to be paid to each supplier in the far right column and the daily total cost of milk received in the bottom row. Farmers payment schedule Butende Dairy Farmers Cooperative Society Period: March 1st to 5th 2003 Price per litre: Shs. 200= No Name Litres Amount 1 Salongo ,400 2 Sr. Lucy ,800 3 Kalanzi ,100 4 Musaazi ,800 Liters ,100 Amount 8,000 8,200 8,300 5,500 8,100 38,

222 Internal Control Procedures for Source Documents The following table outlines the activities, control objectives and control procedures for source documents. Cash Receipts Activity Control Objectives Control Procedure Pay cashier Issue a receipt Record in sales sheet Record in cashbook/journal Bank takings Correct amount paid Cash safeguarded Record of the amount Purpose All volumes and returns recorded Accurate and complete All receipts recorded Accurate and complete Security Intact banking Count cash Price list Price tags (bar code) Define discount range Limited access (cash safe or cashbox) Receipt books Duplicate copies Sufficient detail (date, item, qty, amount in words and figures) Coding/different sequences for income types Stamp Signature Additions and calculations Link to stock records Link to sales ledger Categorize by products Daily summaries Sequentially pre-numbered receipts Recording in number order Sequence checking Banking/deposit slip Range of receipt numbers in banking Journal shows link between takings and bankings Update cashbook Accurate and complete Cross referencing Sequence checking Receive bank statement Accurate and complete cashbook Reconciliation 216 Agricultural Producer Organization (AgPrO) Manual

223 AgPrO Training Module 9A: Bookkeeping Milk Purchases Activity Control Objectives Control Procedure Person delivers milk Record transaction in ledger Make payment Correct volume recorded Good quality Price per liter Accurate and complete Verify that account is Bona fide No over/under payment Enough money in bank Goes to correct payee Record in reception book and sign Recorded in supplier book and sign Coded suppliers Additions and calculations Link to stock records Daily summaries Milk purchases ledger Suppliers payment schedule Coded checking Payment voucher raised Linked to reception book Schedule stamped Approval(s) done Checks prepared and signed Pick checks and sign in person Send confirmation to bank Update cashbook Accurate and complete Cross referencing Sequence checking Proving 217

224 Credit Purchases Activity Control Objectives Control Procedure Requisition Supplier sourced Place order Receive goods Receive invoice Record transaction in books Make payment Valid and necessary expense Within budget Value for money Independent relationship Orders placed with proper authorization Correct items Good condition Used for business purpose Correct items Prices Correct supplier Information on liabilities Correct classification Bona fide No double payment Enough money in bank Goes to correct payee Authorization Stock check Rate of consumption List of authorized/common suppliers Quotes Steering/tender committee Written document Agreed procedure with supplier Goods reception note issued Link to stock records Check to order and delivery note Additions and calculations Batch entry Suppliers ledger account Coding Checking Payment voucher raised Supporting documents reviewed Paid items stamped Approval(s) done Cheques prepared and signed Receipts attached Update cashbook Accurate and complete Cross referencing Sequence checking Proving 218 Agricultural Producer Organization (AgPrO) Manual

225 AgPrO Training Module 9A: Bookkeeping Credit Sales Activity Control Objectives Control Procedure Deliver goods Issue invoice Record in sales sheet Record transaction in ledger Receive payment Issue a receipt Record transaction in ledger Bank takings Correct volume Good condition Damages sorted Correct debtor Correct items Prices Debtor volumes and dues Returns recorded Accurate and complete Accurate and complete Correct amount paid Correct debtor Cash safeguarded Record of the amount Purpose Accurate and complete Security Intact banking Goods reception note received Sufficient detail (dates, item, quantity, product(s), amount in words and figures, stamped, signed) Check to goods reception note Payment due date Additions and calculations Link to stock records Link to debtors ledger Categorize by products Daily summaries Sales ledger Debtors ledger account Coding Sequence checking Link to invoice issued Check invoice number and details Counting cash Supporting documents reviewed Ensure cheque is valid and has sufficient detail Receipt books Duplicate copies Sufficient detail (date, item, quantity, amount in words and figures) Coding/different sequences for income types Stamp Signature Links to receipts and invoice Sequentially pre-numbered receipts Recording in number order Debtors ledger account Sequence checking Update cashbook Accurate and complete Cross referencing Sequence checking Proving Banking/deposit slip Range of receipt numbers in banking Journal shows link between takings and bankings 219

226 Section 4: Recording Revenue and Expenses Understanding Revenue and Expenses Every business activity requires an application of resources, which has cost implications. In order for an organization to be able to monitor whether its operations are profitable, a good financial manager needs to understand certain key accounting and bookkeeping concepts. These include the ability to manage and account for revenues and expenses. Revenue is the value of goods sold and services provided to costumers during a period of time. It s the money an organization collects from selling its products to customers. Expenses are the cost of the goods and services used in the process of earning revenue. This is the money your organization must spend to produce the products. What is a Chart of Accounts? Companies have various types of revenue and numerous expenses. In order to keep track of all items, organizations normally create a chart of accounts that systematically (numerically) lists all revenue and expense items. In addition, what the company owns and owes others is grouped into assets and liabilities. Additionally, for the purpose of developing financial statements, individual revenues, expenses, assets, liabilities, and owner s equity are grouped into broader categories such as operating expenses, current assets, and long term liabilities. Annex C is an example of a complete chart of accounts that indicates these groupings. The extent of detail in any chart of accounts depends on the needs of the organization. While a chart of accounts can always be expanded with new account numbers, an account number should never be deleted within a financial year. Every account number on the chart of accounts represents a ledger account. There is a ledger account and ledger account number for every single revenue, expense, asset and liability. All ledger accounts put together as a whole form the general ledger. The picture below shows what a typical chart of accounts looks like. 220 Agricultural Producer Organization (AgPrO) Manual

227 AgPrO Training Module 9A: Bookkeeping Chart of Accounts Butende Dairy Cooperative Society Account number Text Sales 1105 Bulked milk sales 1110 Window milk sales Total sales Cost of goods sold 2005 Raw milk 2010 Transport charges DCL 2015 Draft charges 2020 Transport charges Total cost of goods sold Operating expenses The full chart of accounts can be found in Annex C. In the case story of Butende, the chart of accounts has been structured as depicted below. This numbering system could be used by your organization, or your organization could develop its own classifications. Chart of Account Number Description Pertains to Revenue Profit and Loss Statement Expenses Assets Liabilities Balance Sheet Statement Accrual and Cash Basis Accounting There are two distinct ways by which an organization may record its daily financial transactions generated from implementing its business activities. These are: Cash Basis Accounting: Revenue transactions are recorded when cash is collected from the customer, expenses are recorded when the payment is made. 221

228 Accrual Basis Accounting: Revenue is recorded when it is earned, and expenses are recorded when the related goods or services are used. The main difference between these two methods is the time when the financial transactions are recorded. The cash basis accounting method records transactions when the payments occur. In this method, the profit (and loss) stated for a period normally equals the cash in hand or in the bank at end of the accounting period. The accrual basis accounting method, which is based on the matching principle, records transactions committed, but not necessarily paid for (with cash) yet. The matching principle requires that revenue is offset with all the expenses incurred in generating that revenue, thus providing a measure of overall profitability of the economic activity. For example, if Butende sells milk to DCL every day, then that revenue must be recorded everyday on the day the milk was sold, not when the payment was collected from DCL. Likewise, if Butende incurred any expenses to bring about the sale, then those expenses, such as the purchase of raw milk from the farmers, must be recorded on the day they were incurred. The expense is not recorded when Butende makes cash payment to the farmers. Using this method, revenue will be offset against expenses in the same period, allowing us to determine the true profitability of operations. 222 Agricultural Producer Organization (AgPrO) Manual

229 AgPrO Training Module 9A: Bookkeeping How to Record Revenue and Expenses Accurately Over 500 hundreds years ago, an Italian monk devised the double-entry bookkeeping system for financial transactions it is still in use today. Double-entry bookkeeping is a system in which each transaction is recorded twice (once to show where the transaction originated, and once to show where it went). Double-entry bookkeeping helps avoid but also trace and identify omission of a transaction because it can be verified in two different locations. The two entries are known as a debit and a credit. In the case of recording revenue and expenses accurately, debits and credits must be used. A debit is an amount entered in the left-hand side of a T-account (see below for explanation of a T-account). A debit is used to record an increase in an expense account (or a decrease in a revenue account). A credit is an amount entered in the right-hand side of a 11 T-account. A credit is used to record an increase in a revenue account (or a decrease in an expense account). To help accountants think through transactions and how they should be posted according to this double-entry bookkeeping system, T-accounts are used. A T-account is a graphical representation of a ledger account. It is called a T-account because it looks like the letter T. The left-hand side of the T-account represents debits; the right-hand side reflects credits. Below is a depiction of a T-account. Cash Revenue Account Expense Account Debit Credit Debit Credit 223

230 Section 5: Recording Assets and Liabilities What are Assets, Liabilities and Owner s Equity? An asset is what an organization owns. Assets are grouped as follows: Assets Current Assets: Assets that can be turned into money within a year Cash at hand and bank Inventory Trade debtors Fixed Assets: Assets that cannot be turned into money within a year Land Buildings Equipment A liability is what an organization owes to others. Liabilities are grouped as: Liability Current Liability: Obligations that have to be paid within a year Short-term creditors Taxes Short-term loans Long-term Liability: Obligations that do not have to be paid within a year Long-term loans Owner s equity is the claim of owners against the assets of an organization. Owner s Equity Owners original investment in the company Any later investment Retained earnings from previous years 224 Agricultural Producer Organization (AgPrO) Manual

231 AgPrO Training Module 9A: Bookkeeping A fundamental principle of the double-entry bookkeeping system is the accounting equation. The diagram below graphically illustrates this principle. What resources the organization owns. ASSETS LIABILITES OWNERS EQUITY Who paid for the resources That is: Assets = Liabilities + Owner s Equity Why is the above equation always true? Because the totals of the two sides of the equation are two views of the same business property. The listing of assets shows what the organization owns. The liabilities and owner s equity show who supplied these resources and how much each group supplied. Everything that an organization owns has been supplied by the creditors (or the owners). How to Record Assets, Liabilities and Owner s Equity Accurately The double-entry bookkeeping system is also used when recording assets and liabilities (we must record the transaction twice). In recording assets, liabilities and owner s equity, we again use debits and credits. A debit is an amount entered in the left-hand side of a T-account. A debit is used to record an increase in an asset (or a decrease in liability/owner s equity). A credit is an amount entered in the right-hand side of a T-account. A credit is used to record an increase in liability/owner s equity (or a decrease in an asset). Again, to help bookkeepers think through transactions and how they should be posted according to this double-entry bookkeeping system, T-accounts are used. Asset Account Liability Account Owners' Equity Account Debit Credit Debit Credit Debit Credit The Importance of Depreciation and How it is Calculated Depreciation is the part of the original cost of a fixed asset consumed during its period of use by the organization. It is an expense for services consumed in the same way as expenses for items such as salaries, rent or electricity. 225

232 Assets depreciate in value because: They deteriorate through use by wear and tear They become obsolete as new and better options come onto the market They become inadequate because of the growth and changes in the size of the operations of an organization. Depreciation costs must be recognized to reflect the true value of an asset at any one point in time. There are numerous ways to calculate depreciation. Two basic methods include: Straight-line depreciation: A depreciation method that deducts the cost of using the asset in equal amounts over the asset s defined life span. Declining-balance method: The depreciation of a fixed asset is recalculated every year based on the net book value reached to date. A fixed percentage is applied. An organization must decide what percentage to use depending on its accounting policies and how the assets are used (which considers average wear and tear). Generally, depreciating costs are higher at the beginning of an asset s life and decrease over time. Net Book Value Time Straight-line Declining balance Annex D includes examples on how to calculate depreciation. Expenses and Expenditures In accounting terms there is a difference between expenditures and expenses. Expenditures are an outlay of money to buy a capital investment such as a building or piece of machinery. Expenditures are only recorded on the balance sheet. Expenses: When the goods are actually used or services provided in the process of generating revenue, they are expensed. Expenses are reflected on the Profit and Loss Statement. For example, a company s purchase of a machine is an expenditure, as it is recorded as an asset and paid with funds from the bank. When the machine is in use, wear and tear occurs. As such, the company will depreciate the machine s value to reflect every day it is in use. Thus, it decreases in value over time. The depreciation is then an expense for the company as the machine is used. 226 Agricultural Producer Organization (AgPrO) Manual

233 AgPrO Training Module 9A: Bookkeeping Section 6: Putting It All Together: The Trial Balance Step 1: Using Daily Journals Daily journals are day-to-day books of the business in which all aspects of transactions are recorded in a chronological order prior to their entry in the ledger. They are used to keep track of an organization s daily activities such as sales, purchases and returns. During daily operations: When a sale is made, it should be recorded in the sales day book/journal. When raw materials are purchased, a purchase day book/journal should be used to keep track of the quantity and cost of materials received. When amounts of goods are returned by trade debtors, a sales return book should be used. To record small cash receipts and payments, a petty cash book should be used. Payment vouchers should be used whenever payment is made to staff or to outside vendors. People receiving money must always sign for it. When purchasing an item, a receipt must always be attached to the payment voucher. The daily journals constitute the basic source of information about any financial transaction, and this information must be transferred into the double-entry bookkeeping system earlier described. Many organizations however, enter only credit sales and credit purchases along with returns in the respective journals. From the copy of the invoice, an entry is made into the respective journal to show the following: Date Name of supplier/customer Invoice number Folio column Final amount of invoice Step 2: The Cash Book Recording transactions from the daily journals into the cash book is the second step in keeping track of business operations, according to the double-entry bookkeeping system. The cash book is comprised of sheets that allow each transaction to be systematically recorded twice. The cash book is a chronological listing of transactions. A cash book can either be made by hand by printing sheets out from Excel, or a pre-printed cash book can be made at a local stationery shop. 227

234 An example of a cash book sheet is provided below. Cash Book Sheet Date Voucher no. Particulars Account number Cash Bank Ledger Account Debit Credit Debit Credit Debit Credit Date of the entry Vouchers should come in chronological order Write a clear description of the transaction. This is the ledger account number. The number is found in the chart of accounts. Most entries will be over cash or bank. Linked to the chart of accounts. Note whether it is a debit or credit posting Step 3: The Ledger Cards The process of transferring the debits and credits from the cash book to the proper ledger account cards is called posting. The ledger account card is the form used to record increases and decreases in any given single chart of accounts number. All the ledger cards taken together form the general ledger. The general ledger is arranged in the order of the ledger card account numbers and corresponds to the chart of accounts. 228 Agricultural Producer Organization (AgPrO) Manual

235 AgPrO Training Module 9A: Bookkeeping Account no: 3105, fuel for generator Year: 2004 Ledger cards Page: 1 Date Particulars Debit Credit Balance The same date as in cash book Particulars is transferred from cash book Transferred from the cash book, only one debit or credit posting per line A debit posting will be positive and a credit negative. The balance is increasing/ decreasing depending upon the entries. The full sheet for the ledger card can be found in Annex F. It is worthwhile to note that all asset accounts normally have debit balances. While all liability and owner s equity accounts generally have credit balances. With respect to revenue and expenses, expense accounts typically have debit balances while revenue accounts have credit balances. Helpful Hints to Remember Debits and Credits For Revenue and Expenses: Revenue Account Expense Account Debit Credit Debit Credit For Assets, Liabilities and Owner s Equity: Asset Account Liability Account Owners' Equity Account Debit Credit Debit Credit Debit Credit 229

236 Or, remember MONEY INTO BANK OR CASH Always DEBIT Bank or Cash MONEY OUT OF BANK OR CASH Always CREDIT Bank or Cash Cash and Bank Reconciliation A cash reconciliation and a bank reconciliation are two methods by which you can verify, or cross check, that your recorded cash and bank balances equal what you truly have in-hand or in the bank. Cash reconciliation should be done daily to cross check that the amount entered into the cash journal is actually equal to cash-at-hand. Bank reconciliation is normally done monthly when a company has received the monthly statement from the bank. This verifies that neither the organization nor the bank has made any errors with respect to the amount of money that was banked. It is important that the bookkeeper does the reconciliation regularly to ensure the bookkeeping accurately and precisely reflects the organization s reality. (A step-by-step guide to making a cash and bank reconciliation can found in Annex H.) How to Make a Trial Balance All input for the trial balance comes originally from transactions recorded chronologically in the cash book. The cumulative balance on each ledger card is then transferred to the trial balance. The trial balance proves that the ledger is in balance and checks that all postings have been entered with equal debits and credits. However, the trial balance does not prove that transactions have been correctly analyzed and recorded in the proper accounts. 230 Agricultural Producer Organization (AgPrO) Manual

237 AgPrO Training Module 9A: Bookkeeping The trial balance for Butende is illustrated below. Trial Balance Butende Dairy Cooperative Society March 2003 Account number Text Debit Credit Sales 1105 Bulked milk sales 27,532, Window milk sales Total sale Cost of goods sold 2005 Raw milk 17,935, Transport charges DCL 5,655, Draft charges 109, Transport charges 852, Total cost of goods sold Operating expenses Cost of production 2105 Spillage 212, Rent 20, Water 9, Electricity 40, Fuel for generator 2130 Fuel for use other than transport of milk 2,199, Chemicals 2140 Detergents and cleaning 2145 Testing tools 2150 Repairs buildings 587, Repairs vehicles 83, Total cost of production Selling and administration 2205 Salaries 20, Lunch allowance 135,

238 Annex A: Milk Reception Register Milk Reception Register Date: Butende Dairy Cooperative Society P.O.Box 9010 Kalanda No Name Lacto mtr Resazurin C.O.B Acidity/pH Price per litre Morning Evening Total Vol 1 Kiondo P Okello R Sianga J Salongo Sr. Lucy Kalanzi Musaazi Samula St Jude Ssenkima George Luvule Ndawula Ntumwa Kayemba Dr. Mayega Lubyayi Kadi Kaddu Mrs.Kigozi Bukalasa Molondo TOTAL Sign 232 Agricultural Producer Organization (AgPrO) Manual

239 AgPrO Training Module 9A: Bookkeeping Annex B: Example Farmer Payment Schedule BUTENDE DAIRY FARMERS COOPERATIVE SOCIETY Farmers payment schedule Month: March 1st to 15th, 2004 Price per liter: Shs. 200/= No. Name Liters Amount 1 Nalongo Sr.Mark Kalanzi Musaazi Wasajja Samula Ssentongo St.Jude Ssenkima Okello George Sseremba Ssebuwufu Luvule Ssevume Ndawula Ntumwa Kayemba Dr. Mayega Lubyayi Kadi Kaddu Mrs.Kigozi Bukalasa Ssuuna Mulondo Ssali Nansambu Total Liters Total Amount

240 Annex C: Chart of Accounts CHART OF ACCOUNTS BUTENDE DAIRY FARMERS COOP SOCIETY (March 2003) A/c No Particulars Revenue Sales 1105 Bulked milk sales 1110 Window Sales Total Sales Other Revenue Grants Donations Membership Total other revenue Total Revenue Operating Expenses Cost of goods sold 2005 Raw milk 2010 Transport charges DCL 2015 Draft charges 2020 Transport charges Total costs of goods sold 234 Agricultural Producer Organization (AgPrO) Manual

241 AgPrO Training Module 9A: Bookkeeping Cost of production 2105 Spillage 2110 Rent 2115 Water 2120 Electricity 2125 Fuel for generator 2130 Fuel for use other than transport of milk 2135 Chemicals 2140 Detergents and cleaning 2145 Testing tools 2150 Repair and maintenance of buildings Repair and maintenance of vehicles Repair and maintenance of equipment Repair and maintenance of furniture and fittings Soak pit Total costs of production Selling and Administration Administration 2205 Salaries 2210 Wages 2215 Casual labour 2220 Lunch allowance 2225 Travelling allowance 2230 Subsistence allowance 2235 Staff uniforms 2240 Staff training 2245 Fuel for administration 2250 Meetings 2255 Entertainment 2260 Stationery and Supplies 2265 Telephone and Communications 2270 Insurance 2275 Trading License 2280 Dairy Authority Fees 2285 Legal fees 235

242 2290 Audit fees 2291 Environmental Authority fees 2293 Miscellaneous Total costs of administration Selling and distribution 2305 Advertisements 2310 Fuel 2315 Marketing Commission 2320 Promotions 2325 Vehicle parking fees Total costs of selling and distribution Total Selling and Administration costs Depreciation 2405 Depreciation of equipment 2410 Depreciation of Furniture and fittings 2415 Depreciation of Motor vehicles Total depreciation Non-operational expenses 2510 Interest and bank charges 2515 Lease payments 2520 Taxes 2525 Board/Committee allowances Total Non-operational costs Assets Current Assets 5005 Cash 5010 Bank 5015 Trade debtors 5020 Inventory 5025 Prepaid rent Total Current Assets 236 Agricultural Producer Organization (AgPrO) Manual

243 AgPrO Training Module 9A: Bookkeeping Fixed Assets 5105 Land 5110 Building 5115 Cooler 5120 Milk cans 5125 Pick up truck 5130 Office furniture 5135 Generator 5140 Accumulated depreciations Total Fixed Assets Liabilities Current liabilities 6005 Trade Creditors 6010 Taxes payable 6015 Short term loans Total Current liabilities Long term liabilities 6105 Loan for generator Total long term liabilities Owners equity 7005 Paid in Capital 7010 Retained earnings Total owners equity 237

244 Annex D: Depreciation Schedule BUTENDE DAIRY FARMERS COOP SOCIETY Declining Balance Method Item: Pick-up truck Year Value b/f Additions Total cost Depreciation Acc. Depreciation Net book during year rate Depreciations during year ,000,000 10,000, % 0 1,000,000 9,000, ,000, ,000, % 1,000, ,000 8,100, ,100, ,100, % 1,900, ,000 7,920, ,920, ,920,000 10% 2,710, ,000 7,128, ,128, ,128,000 10% 3,502, ,800 6,415, ,415, ,415,200 10% 4,214, ,520 5,773, ,773, ,773,680 10% 4,856, ,368 5,196, ,196, ,196,312 10% 5,433, ,631 4,676, ,676, ,676,681 10% 5,953, ,668 4,209, ,209, ,209,013 10% 6,420, ,901 3,788,112 Straight-line Method Item: Pick-up truck Year Value b/f Additions Total cost Depreciation Acc. Depreciation Net book during year rate Depreciations during year ,000,000 10,000, years 0 1,000,000 9,000, ,000, ,000, years 1,000,000 1,000,000 8,000, ,000, ,000, years 2,000,000 1,000,000 7,000, ,000, ,000, years 3,000,000 1,000,000 6,000, ,000, ,000, years 4,000,000 1,000,000 5,000, ,000, ,000, years 5,000,000 1,000,000 4,000, ,000, ,000, years 6,000,000 1,000,000 3,000, ,000, ,000, years 7,000,000 1,000,000 2,000, ,000, ,000, years 8,000,000 1,000,000 1,000, ,000, ,000, years 9,000,000 1,000, Agricultural Producer Organization (AgPrO) Manual

245 AgPrO Training Module 9A: Bookkeeping Annex E: Cash Book Sheet Cash Book Sheet Date Voucher No Particulars Account Number Cash Bank Ledger Account Debit Credit Debit Credit Debit Credit Balancing 239

246 Annex F: Ledger Card Ledger cards Account No Page Year: Date Particulars Debit Credit Balance 240 Agricultural Producer Organization (AgPrO) Manual

247 AgPrO Training Module 9A: Bookkeeping Annex G: Bookkeeping Sheet Bookkeeping Sheet Date Particulars Account Number Cash Bank Ledger Account Debit Credit Debit Credit Debit Credit 04/06/2004 Milk delivery(19*200) ( ,800 04/06/2004 Milk delivery(19*200) (1 3,800 04/06/2004 Electricity April (2 140,000 04/06/2004 Electricity April ( ,000 06/06/2004 Sale of milk (3 60,000 06/06/2004 Sale of milk ( ,000 15/06/2004 Paid milk supplier ( ,000 15/06/2004 Paid milk supplier (4 90,000 30/06/2004 Salary for Accountant ,000 30/06/2004 Salary for Accountant 100,000 Balancing 60,000 90, , ,800 63,800 Reconciliation Total Debit (60, ,800) 393,800 Total Credit (90, ,000+63,800) 393,800 Balance 0 241

248 Annex H: Guide to Making Cash and Bank Reconciliations CASH and BANK RECONCILIATION Definition This is the process whereby the balance shown in the cashbook relating to a particular Bank account is compared with the balance shown on the bank statement at the same date. The figures in both are compared with each other, and the differences listed. The sum of the differences should enable reconciliation between the two balances. Process for doing a bank reconciliation statement a) Collect the following documents: 1) Last months bank reconciliation statement (BRS) 2) The current months cashbook (CB) 3) The current months bank statement (BS) b) Tick of the outstanding items in last months BRS against the current moths CB e.g., Bank charges, outstanding cheques; if items are still outstanding, mark them as o/s and remember to bring them into the BRS that you are about to do c) Tick off all entries in the current months CB to the BS d) Mark all items that are NOT ticked in both CB and BS o/s e) Do the BRS in accordance with the outline below Outline-Common Format Bank reconciliation statement as at Shs Shs Balance as per bank statement xxx Less: Cheques drawn (entered in cashbook) not yet through bank: Chq. No : Payee x xxx Chq. No : Payee y xxx Chq. No : Payee z xxx Total cheques not debited in Bank, but in cashbook xxxx Items credited in the Bank statement not entered in cashbook xxx xxxx xxxx Add: Receipts entered in cashbook not yet in bank statement xxx Bank charges entered in Bank statement not in CB xxx Balance as per cashbook xxxx 242 Agricultural Producer Organization (AgPrO) Manual

249 AgPrO Training Module 9A: Bookkeeping Annex I: Trial Balance TRIAL BALANCE BUTENDE DAIRY FARMERS COOP SOCIETY (March, 2003) Account Number Particulars Debit Credit Sales 4,533, Bulked milk sales 1,223, Window Sales Total Sales Other Income 1205 Grants 9,000, Donations 4,000, Membership Total other revenue Total Income Operating Expenses Cost of goods sold 2005 Raw milk 1,793, Transport charges DCL 165, Draft charges 10, Transport charges 85, Total costs of goods sold Cost of production 2105 Spillage 21, Rent 2, Water Electricity 4, Fuel for generator 2130 Fuel for use other than transport of milk 19, Chemicals 2140 Detergents and cleaning 2145 Testing tools 243

250 2150 Repair and maintenance of buildings 2155 Repair and maintenance of vehicles 2160 Repair and maitenance of equipment 2165 Repair and maintenance of furniture and fittings 2170 Soak pit Total costs of production Selling and Administration Administration 2205 Salaries 32, Wages 2215 Casual labour 2220 Lunch allowance 13, Travelling allowance 6, Subsistence allowance 2235 Staff uniforms 2240 Staff training 2245 Fuel for administration 2250 Meetings 3, Entertainment 2260 Stationery and Supplies 3, Telephone and Communications 14, Insurance 2275 Trading License 2280 Dairy Authority Fees 2285 Legal fees 2290 Audit fees 2291 Environmental Authority fees 2293 Miscellaneous 4, Total costs of administration Selling and distribution 2305 Advertisements 2310 Fuel 2315 Marketing Commission 2320 Promotions 2325 Vehicle parking fees Total costs of selling and distribution 244 Agricultural Producer Organization (AgPrO) Manual

251 AgPrO Training Module 9A: Bookkeeping Total Selling and Administration costs Depreciation 2405 Depreciation of equipment 30, Depreciation of Furniture and fittings 5, Depreciation of Motor vehicles 15, Total depreciation Non-operational expenses 2510 Interest and bank charges 5, Lease payments 2520 Taxes 2525 Board/Committee allowances Total Non-operational costs Assets Current Assets 5005 Cash 15, Bank 213, Trade debtors 277, Inventory Prepaid rent 10, Total Current Assets Fixed Assets 5105 Land 700, Building Cooler 9,000, Milk cans 5125 Pick-up truck 10,000, Office furniture 150, Generator 4,000, Accumulated depreciations 50, Total Fixed Assets 245

252 Liabilities Current liabilities 6005 Trade Creditors 1,924, Taxes payable Short term loans 1,639, Total Current liabilities Long term liabilities 6105 Loan for generator Total long term liabilities Owners equity 7005 Paid in Capital 300, Retained earnings Total owners equity Balancing 26,670,174 26,670, Agricultural Producer Organization (AgPrO) Manual

253 AgPrO Training Module 9B: Financial Statements Training Module 9B Financial Management Level II: Financial Statements Agricultural Producer Organization (AgPrO) Manual Prepared by Land O Lakes International Development Funded by The United States Agency for International Development 247

254 248 Agricultural Producer Organization (AgPrO) Manual

255 AgPrO Training Module 9B: Financial Statements Preface The objective of Training Module 9B: Financial Statements is to strengthen dairy producer groups capacity to establish financial management systems. These systems are critical for their operations, survival, and growth as commercial and sustainable business entities. Specifically, this module discusses the fundamentals of financial statements and assists participants in understanding, analyzing and preparing a balance sheet and profit and loss statement. The purpose of studying formalized financial statements is to encourage participants to keep good financial records and to use those records as the basis for making business decisions. This module bases all examples and discussions on the Butende Dairy Producer Group case study. This case study was first presented in Financial Management Level I: Bookkeeping and is continued in this module. The module offers specific concepts for participants to take away. Key definitions are included in a reference guide for participants to use as they conduct their daily business operations. This training material is designed for financial and nonfinancial persons who have already received basic bookkeeping training (e.g., through AgPrO Financial Management: Level I). 249

256 BUTENDE DAIRY COOPERATIVE SOCIETY: CASE STUDY IN FINANCIAL MANAGEMENT Butende Dairy Cooperative Society is a farmers cooperative located in a remote upcountry district of Kalanda. Through this cooperative effort, 60 farmers pool their milk together, giving Butende approximately 600 liters daily to sell in the wet season and 400 liters daily in the dry season. Butende s financial year runs from January 1 to December 31. Butende received initial financial support from its member farmers by issuing individual cooperative shares valued at 5,000 shillings each. Each farmer member was expected to buy at least one share. In total, Butende received 300,000 shillings in exchange for the shares. The cooperative obtained a 1,500-liter cooler worth 9 million shillings through a grant from USAID. Butende sells some of its milk to private milk traders and individual buyers, but most of its sales go to a processor called the Dairy Creameries Limited (DCL). It entered into an agreement with the Dairy Creameries to supply them with 300 liters daily. In exchange for this guaranteed supply from Butende, the DCL agrees to a firm buying price each season: 200 shillings per liter on average. DCL deducts the cost of collecting milk from the payment made to Butende. They pay Butende every two weeks. However, payment can sometimes be delayed up to a month. Butende is responsible for paying its supplier farmers. Typically, it pays 50 shillings less per liter than DCL pays Butende. It pays its supplier farmers every two weeks (i.e., twice every month). Other than the milk cooler, Butende owns a plot of land (on which it hopes to build its own premises), some office furniture and equipment; and a small pickup truck. The cooperative is excited about its recent purchase of a generator that can be used in case of power blackouts. Butende secured a very low interest loan, repayable over 10 years, to cover this 4,000,000 shilling investment. 250 Agricultural Producer Organization (AgPrO) Manual

257 AgPrO Training Module 9B: Financial Statements Section 1: Period End Statements: The P/L And B/S Two key financial statements in business operations are the profit and loss statement (P/L) and the balance sheet (B/S). Both are prepared directly from the numbers found in the organization s trial balance (refer to the Level I: Bookkeeping). Although an organization s accountants might have done a good job capturing all the business transactions in the daily journals, cash book and ledger cards, the numbers themselves are not very helpful unless they can be summarized in a fashion that allows managers to know the results of operations. For example: Is the organization making a profit? Is it suffering a loss? Or is it just breaking even? Although the trial balance captures all the transactions systematically, managers still should not use the numbers to interpret results. The transactions must be recorded in the profit and loss statement and the balance sheet. From the trial balance: Revenue and expense go into the profit and loss statement; assets and liabilities go into the balance sheet. Trial Balance Retained Earnings Profit and Loss Statement Balance Sheet Statement Revenue / Expenses Assets / Liabilities 251

258 What Is the Profit and Loss Statement? A profit and loss statement is a financial statement that summarizes an organization s profitability over a specific period of time. In this statement, net income is determined by comparing: 1. Sales price of the goods or services sold by the organization (revenue) and 2. Cost to the organization of the goods and services used up by operations (expenses) The P/L statement takes in both revenue and expenses irrespective as to whether the cash has been received or paid. It will help you determine if your organization is making a profit or suffering a loss. A P/L statement is comprised of revenue and expenses that have been carefully grouped and come straight from the trial balance. Other numbers are calculated by the financial manager. Key Terms Found in the P/L Statement Net Sales: The first line on the P/L representing all sales less any returned goods or discounts. This number can be found in the trial balance. Cost of Goods Sold (COGS): An expense representing the cost of buying raw materials and processing them into finished goods. COGS includes clear-cut direct costs such as cost of raw milk and transport charges as well as others that are less clear-cut. These numbers come from the trial balance. Operating Expenses: Expenses incurred for the purpose of producing revenue. These expenses are often subdivided into 1) production expenses and 2) sales and administrative expenses. These costs are more often indirect or overhead costs; however, they are still incurred in revenue production and therefore are considered an operating expense. These numbers come from the trial balance. Bear in mind, however, that if an organization has two distinct product lines with two distinct revenue flows, the operating costs must be apportioned in a manner that is consistent with the amount of resources that were expended to produce each product line. Non-operating Expenses: Expenses that are not directly related to the organization s primary business activities (e.g., taxes and interest charges). Gross Profit: A key subtotal of the P/L. The difference between sales revenue earned and cost of the goods sold. Operating Income: Another key subtotal of the P/L that shows the relationship between revenue earned from customers and expenses incurred in producing this revenue. In effect, operating income measures the profitability of an organization s basic business operations and leaves out other types of revenue and expenses. Net Income (or Net Loss): Considered to be the most important figure of the P/L. It shows the overall increase (or decrease) in owners equity resulting from all business activities during the period. 252 Agricultural Producer Organization (AgPrO) Manual

259 AgPrO Training Module 9B: Financial Statements What Can Be Learned from the P/L Statement? In looking at gross profit, operating income and net income, it is easier to assess how an organization is performing if the real numbers are converted to percentages; percentages help highlight trends over time, and even make it possible to compare against other operators in an industry. With respect to the P/L, these percentages are often referred to as margins. The P/L has three key profit margins: Gross Profit Margin = Gross Profit / Net Sales Operating Profit Margin = Operating Income / Net Sales Net Profit Margin = Net Profit / Net Sales 253

260 The table below is Butende s P&L statement. Profit and Loss Statement Butende Dairy Cooperative Society 1st FY Quarter Results: March to May 2003 (in shillings '000) Name of Document Cooperative Time Period Mar Apr May 1st Qtr Total 1st Qtr Avg Net Sales Bulked Milk Sales 27,532 38,079 55, ,873 40,291 Window Milk Sales Total Net Sales 27,532 COGS Raw Milk 17,935 24,734 36,994 79,663 26,554 Transport Charges (DCL) 5,655 8,202 12,088 25,945 8,648 Draft Charges Transport Charges (leased , for PC's) Less: Total Cost of Goods Sold 24,551 Gross Profit 2,981 Operating Expenses Cost of Production 3,152 3,084 4,105 10,341 3,447 Selling and Administration , Depreciation , Less: Total Operating Expenses 4,433 4,536 5,572 14,541 4,847 Operating Income -1,452 Non-Operating Expenses Taxes Interest and Bank Charges Board Allowances Less: Total Non-operating Expenses Net Income -1,504 All Numbers from Trial Balance You must calculate these: Gross Profit = Net Sales - COGS Operating Income = Gross Profit Operating Expenses Net Income = Operating Income Non-operating Expenses 254 Agricultural Producer Organization (AgPrO) Manual

261 AgPrO Training Module 9B: Financial Statements Profit and Loss Statement Butende Dairy Cooperative Society 1st FY Quarter Results: March to May 2003 (in shillings '000) Mar Apr May 1st Qtr Total 1st Qtr Avg Net Sales Bulked Milk Sales 27,532 38,079 55, ,873 40,291 Window Milk Sales Total Net Sales 27,532 38,142 55, ,131 40,377 COGS Raw Milk 17,935 24,734 36,994 79,663 26,554 Transport Charges (DCL) 5,655 8,202 12,088 25,945 8,648 Draft Charges Transport Charges (leased , for PC's) Less: Total Cost of Goods Sold 24,551 33,887 49, ,735 35,912 Gross Profit 2,981 Gross Profit Margin 11% Operating Expenses Cost of Production 3,152 3,084 4,105 10,341 3,447 Selling and Administration , Depreciation , Less: Total Operating Expenses 4,433 4,536 5,572 14,541 4,847 Operating Income -1,452 Operating Profit Margin -5% Non-Operating Expenses Taxes Interest and Bank Charges Board Allowances Less: Total Non-operating Expenses Net Income -1,504 Net Profit Margin -5.5% Takes into consideration all expenses and revenue whether or not directly related to business operations. This is often called the bottom line. Measures profitability before interest and tax, allows you to consider how your operations are affecting profits. Most basic measure of profitability; a ratio less than 1 percent means a product was sold for less than it cost to produce it. 255

262 In addition to looking at the gross profit, operating and net profit margins, it is also insightful to put revenue and expenses into a common size. That is, for each line of revenue or expense, consider how much it is contributing to the total revenue or expense category. Using this technique over time helps to quickly see if any one line of revenue or expense is increasing/decreasing more than others. The Profit and Loss Appropriation Account shows how the net profits are to be used or distributed. It is sometimes referred to as the distribution balance account or the balance disposable account. Generally, for cooperatives, the distribution is outlined as per the cooperative statutory rules of the cooperative act and the bylaws, and is subject to approval by the general meeting. Profit and Loss Statement Butende Dairy Cooperative Society 1st FY Quarter Results: March to May 2003 (in shillings '000) Mar Mar % Size Apr Apr % Size Net Sales Bulked Milk Sales 27, % 38, % 55,262 Window Milk Sales 0 0% % 195 Total Net Sales 27, % 38, % 55,457 May May % Size COGS Raw Milk 17, % 24, % 36,994 Transport Charges (DCL) 5, % 8, % 12,088 Draft Charges % % 215 Transport Charges (leased for PC's) % % 0 Less: Total Cost of Goods Sold 24, % 33, % 49,297 Gross Profit 2,981 Gross Profit Margin 11% Operating Expenses Cost of Production 3,152 71% 3,084 68% 4,105 Selling and Administration % % 967 Depreciation % % 500 Less: Total Operating Expenses 4, % 4, % 5,572 Operating Income -1,452 Operating Profit Margin -5% Non-Operating Expenses Taxes 0% 0% 102 Interest and Bank Charges % % 52 Board Allowances 0% 0% 320 Less: Total Non-operating Expenses % % 474 Net Income -1, Net Profit Margin -5.5% 256 Agricultural Producer Organization (AgPrO) Manual

263 AgPrO Training Module 9B: Financial Statements How to Prepare the Appropriation/Distribution Balance Account The appropriation account has two sides: credit and debit. Below the main points of each are explained. Credit side: Net profit for the year: The net profit brought down from the profit and loss account. Balance brought forward from last year: All the profits may not be appropriated during a period. If this happens, there will be the balance on the appropriation account, as brought forward from the previous period. These profits are usually called retained profits. Debit side: Transfers to statutory reserve fund: A specified percentage of profits (usually 10 to 20 percent) of the credit side that will not be included in the calculation of dividend pay-outs, but rather transferred to reserve fund accounts. There may be a specific reason for the transfer, such as a need to replace fixed assets. In this case, an amount would be transferred to a fixed assets replacement reserve account. If the reason is not specific, the amount would be transferred to a general reserve account. Share transfer reserve funds: A specified percentage of profits (usually 1 to 10 percent) of the credit side. It is the appreciation value of each share when the organization makes profits. National Cooperative Education Fund: This allocation is outlined in the Cooperative Act of some countries. The Development Fund: This allocation is outlined in the cooperative s bylaws and is subject to approval of the board of Directors. The fund is used to cover the organization s expansion plans. Taxes payable on profits: Taxation levied by the state based on the amount of profits made. It depends on the tax regime of a particular state and is not an expense; rather, it is an appropriation of profits. Honorarium: A bonus paid to members of the board in appreciation of good business outcomes during the year. Dividends: A share of profits for shareholders. The amount of dividends distributed is a decision made by the board of directors. The board should consider such factors as government/ cooperative directives, the effect of taxation, the availability of bank balances to pay the dividends, etc. It is expressed as a percentage of the amount availed per share. Out of the remainder of the profits, the board will propose an amount of dividends to be paid out. Retained profits: After dividends have been paid, there will probably be some profits that have not been appropriated. These retained profits will be carried forward to the next year. They are then transferred to a retained profits account sometimes called the accumulation fund account. Social fund: An agreed percentage of earnings allocated to noncore value-added activities such as health care or road repairs. 257

264 In order to balance the appropriation account, total credits must equal the total debits. A practical example in calculating the appropriation account will be shown in section 2 of this module What Is the Balance Sheet? The balance sheet is a statement that lists the values of an organization s assets, liabilities and owners equity at the end of an accounting period. All values come directly from the trial balance. In other words, the balance sheet provides an overview of the resources the organization owns, the debts that it owes and the amount of the owners equity. Recall the accounting equation: Assets = Liabilities + Owners Equity. The balance sheet must balance. Remember ASSETS LIABILITES OWNERS EQUITY The top half of a balance sheet reflects an organization s assets (the left-hand side of the accounting equation) and the bottom half reflects all liabilities and owners equity (the right-hand side of the accounting equation). From the balance sheet you can determine an organization s net worth as well as its working capital. Net worth is the amount by which total assets exceeds total liabilities. Working capital is current assets minus current liabilities. The level of working capital should be high enough to cover the time needed to convert raw materials into finished goods, finished goods into sales and sales into collected cash. 258 Agricultural Producer Organization (AgPrO) Manual

265 AgPrO Training Module 9B: Financial Statements See a sample balance sheet below. Balance Sheet Butende Dairy Cooperative Society May 31, 2003 (1st FY Quarter) ASSETS (shillings actual) Current Assets Cash 200,000 Bank 3,089,575 Trade Debtors 23,400,000 Inventory 0 Prepaid Expenses DCL Lease (500k every 6 months) 250,000 Rent (120k every 6 months) 60,000 Total Prepaid Expenses 310,000 Total Current Assets 26,999,575 Fixed Assets Land 7,000,000 Building 0 Equipment Cooler Truck (10 yr life) 60,000,000 Car (5 yr life) 2,000,000 Office Furniture (5 yr life) 1,500,000 Less: Accumulated Depreciation S/L 1,500,175 Total Equipment 61,999,825 Total Fixed Assets 68,999,825 Total Assets 95,999,400 LIABILITIES and OWNERS EQUITY Current Liabilities Trade Creditors 20,143,400 Taxes Payable 0 Short-Term Loans These must 0 Total Current Liabilities equal, or 20,143,400 Long-Term Liabilities Mortgage Payable for Cooler Truck BALANCE 59,843,000 Total Long-Term Liabilities 59,843,000 Total Liabilities The only item 79,986,400 Financed by: (Owner's Equity) Paid-in Capital NOT from the Trial Balance 18,000,000 Retained Earnings -1,987,000 Total Owner's Equity 16,013,

266 Connection between the P/L and B/S After calculating the net profit (or loss) on the P/L statement, this amount is carried forward to the balance sheet as retained earnings. Retained earnings are the portion of owners equity that was accumulated through profitable business operations. In this case, the organization suffered a loss, which reduced the total owners equity. Profit and Loss Statement (FY 1st Quarter total) ( 000) Total Non-operating Expenses 842 Net Income - 1,987 Balance Sheet Statement (as of May 31, 2003) Paid-In Capital 18,000,000 Retained Earnings - 1,987,000 Total Owners Equity 16,013,000 Total Liabilities and Owners Equity 95,999, Agricultural Producer Organization (AgPrO) Manual

267 AgPrO Training Module 9B: Financial Statements Section 2: Understanding the Numbers: Ratio Analysis As suggested earlier, good recordkeeping leads to correct financial statements, which in turn help management and outside investors make appropriate business decisions about an organization s operations. The profit and loss statement is the key financial statement that helps assess the profitability of an organization. That is, did the organization s operations increase owners equity? If so, then the organization is heading in the right direction. However, there are other measures that management and investors use to assess if operations are going along well or are running off course. This assessment typically requires the use of ratios. Ratio Analysis Uses the figures found in the financial statements to determine how well (or poorly) a company is operating. The ratios themselves are most meaningful when compared against previous periods (to see a trend) or against other companies in the same industry. The following sections discuss how the financial tools, or ratios, can reveal information about an organization s solvency, liquidity and operating efficiency. Understanding and Measuring Solvency Solvency refers to the ability of an organization over the long term to pay its debts when they are due. Organizations that pay their debts promptly are said to be solvent. In contrast, an organization that finds itself unable to pay its debts when they are due is said to be insolvent. If an organization cannot pay its debts on time, it eventually will be forced to stop operating. When a company assumes a larger portion of debt than the amount invested by its owners, it is leveraged. Leverage within an organization is the use of borrowed money to increase a return on investment. Organizations must be careful not to take on too much debt and debt must be paid back regularly with interest. If operations slow down and sales revenue diminishes, debt payments still need to be made. To determine the solvency of an organization, we can use the following ratio to help evaluate if it is heavily burdened with debt and thus may have difficulty meeting its financial obligations in the long term. 261

268 Debt to Equity Total (ST and LT) Debt / Owners Equity Remember! These numbers come from the balance sheet 79,986,400 / 16,013,000 = ~5.0 For every shilling invested by Butende owners, there are shillings of debt. Whether this is too much debt is dependent upon the industry. However, ratios greater than two show an extensive use of debt. Understanding and Measuring Liquidity Liquidity measures an organization s ability to meet its short-term obligations with cash or other assets that can be converted quickly into cash. Usually companies that go out of business have run into liquidity problems. The current ratio and the quick ratio (for those organizations that carry inventory) are good measures of whether an organization is going to run out of cash to run its operations. The current ratio determines whether an organization has enough working capital to meet its short-term financial obligations. Current Ratio Current Assets / Current Liabilities 26,999,575 / 20,143,400 = 1.34 Remember! These numbers come from the balance sheet 262 Agricultural Producer Organization (AgPrO) Manual

269 AgPrO Training Module 9B: Financial Statements Generally, a current ratio of two is about right. Any number less than two means an organization might not be able to meet its short-term obligations. Any number above two means the organization is letting too much money sit in the bank instead of reinvesting it back in the company or paying it out to the owners as dividends. If an organization has a ratio of less than two, how can the level of working capital be determined? Again, remember that working capital consists of the available cash that allows an organization to operate for a period of time without necessarily receiving any payments from its customers. Since the exact time of payment by customers is uncertain, then every organization must hold a certain minimum amount of working capital to allow its operations to continue until its customers have paid. The following example, based on Butende s first quarter 2003 balance sheet, is a useful model to calculate an organization s working capital needs. Working Capital Needs First, take Current Ratio Desired, or 2, x Current Liabilities = Required Current Assets for Ratio of 2 Then, deduct actual Current Assets from Required Current Assets You will get the amount by which Working Capital needs to increase. 2 x 20,143,400 = 40,286,800 (Required Current Assets) 40,286,800 26,999,575 = 13,287,225 (Extra Working Capital Needed) For those organizations that hold inventory, the following is another ratio to help assess liquidity. Quick Ratio Current Assets - Inventory / Current Liabilities This ratio cannot be calculated for Butende as it carries no inventory. This ratio measures an organization s ability to pay its immediate obligations. A ratio of 0.5 or 1.0 is considered acceptable. 263

270 Understanding and Measuring Operating Efficiency Many organizations problems stem from their operations. For example, low use of production equipment, such as cooling tanks, high production losses, excessive transportation charges or very slow payment from trade debtors could all hurt performance. A few measures of efficiency include the following ratios. All examples are based on Butende s first quarter results. Returns on Assets Net income before taxes / Total assets -1,885,000/95,999,400= -0.2 Remember! These numbers come from the B/S AND P/L Typically, this ratio is used to compare results against other companies in the industry. Thus, it is hard to say whether the ratio above is in line or not. However, because the ratio is negative, it suggests that assets need to be used more than they are currently to make the organization profitable in the long run. This is a good ratio to calculate and review over several periods to see the trend. Sales to Receivables Net sales / Trade debtor accounts 121,131,000 / 23,400,000 = 5.18 Remember! These numbers come from the B/S AND P/L This number measures the number of times the trade debtor accounts turn over in a period. The higher the number, the more efficient a company is at collecting its money from the trade debtors. This ratio is most useful if monitored over several periods. It would also be helpful to know what the ratio was for other organizations in the industry. Inventory Turnover COGS / Inventory = This ratio cannot be calculated because Butende does not carry inventory. However, this ratio measures the number of times an organization s inventory turned over during a period. Inventory use is improving when this number increases. A lower number indicates that a large amount of money is tied up in inventory that might have been used more efficiently elsewhere. This ratio is most helpful if calculated over several periods. 264 Agricultural Producer Organization (AgPrO) Manual

271 AgPrO Training Module 9B: Financial Statements Breakeven Point Analysis In addition to ratio analysis, financial managers often find it useful to know the point at which sales cover or equal costs? This is considered the breakeven point. Breakeven point analysis determines the volume of sales at which fixed and variable costs will be covered. All sales over the breakeven point produce profits. Any drop in sales below that point will produce losses. In order to understand and calculate a breakeven point, it is useful to understand that expense can be divided into three categories, as illustrated below. Quick Ratio Directly relate to production costs, such as milk input, culture and packaging. These are also known as direct costs. Semi-variable costs Are affected by the number of items produced, but are not directly linked to the output (e.g., salaries or utilities, such as water/electricity/telephone charges); also known as an overhead or indirect cost. Fixed costs Expenses that a company has to pay irrespective of the level of production (e.g., rent or interest charges on a loan); also known as an overhead or indirect cost. Types of costs Expenses Variable Cost Semi-variable Cost Fixed Cost Income Breakeven Point 265

272 There are two ways to think about an organization s breakeven point. By sales level, which refers to the level of sales an organization needs to make in order to cover its total costs. By price level, which refers to the price an organization needs to charge in order to cover the total costs of a particular product. The following is an example of how to calculate Butende s breakeven point by sales following one month of operation in March By Sales Level Total operating & non-operating expenses / Gross profit margin 4,433, ,000 / 11% = 40,772,727 Remember! These numbers come from the P/L To break even in March 2003, Butende would have needed net sales of 40,772,727 shillings. Obviously this falls short of what it did sell, which totaled 27,532,000 shillings. This makes sense since Butende s net profit was negative for the period. The following is an example of how to calculate Butende s breakeven point by price following one month of operation in March This calculation cannot be used for an organization producing several products. However, it is adequate for organizations with three or four product lines, as long as direct and indirect costs can be accurately broken out and apportioned to the respective product lines. By Price Level COGS + Total operating & non-operating expenses / Units produced 24,551, ,433, ,000/ 80,798 ltrs. = 360 To break even, Butende would have needed to charge the Dairy Creameries on average 360 shillings per liter instead of the average price of 337 shillings per liter. The number of liters produced of 80,798 is given. In the case of Butende, we have been considering the operating results of the bulking center as a whole. However, you could also perform a breakeven analysis on each of its milk collection centers (MCCs) to determine which are running most or least profitably. 266 Agricultural Producer Organization (AgPrO) Manual

273 AgPrO Training Module 9B: Financial Statements MCC MCC MCC Bulking Center MCC With the tools you ve been given, you can determine which, if any, of these MCCs are meeting their breakeven points. MCC 267

274 Section 3: The Cash Flow Budget In broad terms, organizations go out of business for two reasons: 1. They are not profitable 2. They are not solvent Of these two reasons, it is generally the inability of the organization to manage its cash needs that will force an organization to cease operations. Cash is king, and without it an organization cannot function. If all sales are not paid in cash and trade debtor accounts accumulate, an organization runs the risk of not having enough cash on hand when it comes time to pay its expenses. The accrual basis accounting method accommodates this delay in collecting or paying out cash by not letting it affect an organization s profitability (or loss). That is, once a product or service is sold, an accountant should record the revenue-generating transaction immediately, whether or not cash was collected. The same applies to expenses: Once a cost is incurred and expensed, the accountant should record that expense-creating transaction immediately, whether or not cash was collected. Therefore, although the profit and loss statement is an accurate reflection of an organization s true profit (or loss), it does not determine if the organization will have enough cash available to cover its obligations or liabilities when they come due. One of the most important parts of short-term planning is to estimate an organization s cash requirements. The cash flow budget that will assist in maintaining levels of liquidity to ensure long-term, profitable operations. A cash flow budget shows the organization s projected cash inflows and outflows over some specified period of time. How to Make a Cash Flow Budget There are three steps in making a cash flow budget: 1. Estimate sales/collections and purchases/payments 2. Calculate net cash gain or loss 3. Determine cash surplus or loan requirement Below, the process for each step is outlined using Butende s cash flow budgets presented on the following pages. 268 Agricultural Producer Organization (AgPrO) Manual

275 AgPrO Training Module 9B: Financial Statements Step 1: Estimate Sales/Collections and Purchases/Payments In this step, an organization must estimate what it thinks its sales will be for the upcoming months. It also needs to consider when cash payments will actually be received by trade creditors. In the case of Butende, we know that Dairy Creameries pays with a two-week time lag and so only 50 percent of the total sales are collected during the month. The example below provides for a time when the total balance of the payment does not come within the next month. (This was done to reflect that the example can be built to suit any organization s reality.) Step 1 also requires an organization to estimate what inputs it needs to produce the upcoming months sales revenue. Many organizations purchase inventories a month in advance using the items in production, but then do not actually pay for the purchases until sometime later. In the case of Butende, its only real input is the raw milk purchased from farmers. Further, it does not purchase in advance, but purchases every month. Also, it pays the farmers within two weeks time. Step 2: Calculate Net Cash Gain or Loss In Step 2, the organization calculates what it will actually collect in cash for a particular month, and then deducts what it will pay out in cash during that same month. It is acceptable to use an estimate or average of typical operating and non-operating expenses. In this step, once the subtotals of collections and payments have been calculated, the net gain or loss cash position is clear. Step 3: Determine Cash Surplus or Loan Requirement Step 3 considers the amount of cash on hand and in the bank, which is added to the subtotal. However, if by adding in this cash an organization still falls short of the desired target, it will need to seek options to finance its operations. Please note that in future periods where there is positive cash flow, the amount borrowed in previous periods will be repaid with all new positive cash flows. In other words, Line 14 (the cash at start of month, or amount borrowed over time) would be deducted from Line 13 (the net cash gain), to arrive at your cumulative cash. The following model is what Butende could have produced before it knew its actual sales and expense figures, that is, this would have been produced in early

276 Cash Flow Budget Butende Dairy Cooperative Society June August 2003 (in '000 shillings) April May June July Step 1 Collections and Purchases 1 Sales (Estimated) 40,000 56,000 65,000 60,000 Collections 2 During Month of Sales (50%) x (Month's Sales) 32,500 30,000 3 During 1st Month After Sales (40%) x (Month's Sales) 22,400 26,000 4 During 2nd Month After Sales (10%) x (Month's Sales) 4,000 5,600 5 Total Collections (Add: lines 2, 3, 4) 58,900 61,600 Purchases 6 COGS (90%) ( Month's Sales) 50,400 58,500 54,000 7 Payments: 2-wk lag (50% Last Month's COGS + 50% This COGS) 54,450 56,250 Step 2 Cash Gain or Lost for Month 8 Total Collections (from Step 1, line 5) 58,900 61,600 9 Payments for Purchases (from Step 1, line 7) 54,450 56, Operating Expenses (estimate 12% of Sales) 7,800 7, Non-operating Expenses (estimate 1% of Sales) Subtotal of Payments (lines ) 62,900 64, Net Cash Gain or Loss (line 8 - line 12) (4,000) (2,450) Step 3 Cash Surplus or Loan Requirement 14 Cash at Start of Month (in the bank) 3,000 (1,000) 15 Cumulative Cash (cash at start) + (gain/loss) (line ) (1,000) (3,450)1 16 Target Cash Balance 1,750 1, Cumulative surplus or (loan) to meet target (line 15-16) (2,750) (5,200) If Butende wants a buffer of 1.75 m/=. Shs, it needs to secure a loan of 2.75 m/=. Butende is short of cash AND is still short of cash after cash in bank has been factored in. 270 Agricultural Producer Organization (AgPrO) Manual

277 AgPrO Training Module 9B: Financial Statements Cash Flow Budget Butende Dairy Cooperative Society June November 2003 (in '000 shillings) June July Aug Step 1 Collections and Purchases 1 Sales (Estimated) 65,000 60,000 35,000 Collections 2 During Month of Sales (50%) x (Month's Sales) 32,500 30,000 3 During 1st Month After Sales (40%) x (Month's Sales) 22,400 26,000 4 During 2nd Month After Sales (10%) x (Month's Sales) 4,000 5,600 5 Total Collections (Add: lines 2, 3, 4) 58,900 61,600 Purchases 6 COGS (90%) ( Month's Sales) 58,500 54,000 7 Payments: 2-wk lag (50% Last Month's COGS + 50% This COGS) 54,450 56,250 Step 2 Cash Gain or Lost for Month 8 Total Collections (from Step 1, line 5) 58,900 61,600 9 Payments for Purchases (from Step 1, line 7) 54,450 56, Operating Expenses (estimate 12% of Sales) 7,800 7, Non-operating Expenses (estimate 1% of Sales) Subtotal of Payments (lines ) 62,900 64, Net Cash Gain or Loss (line 8 - line 12) (4,000) (2,450) Step 3 Cash Surplus or Loan Requirement 14 Cash at Start of Month (in the bank) 3,000 (1,000) 15 Cumulative Cash (cash at start) + (gain/loss) (line ) (1,000) (3,450) 16 Target Cash Balance 1,750 1, Cumulative surplus or (loan) to meet target (line 15-16) (2,750) (5,200) 271

278 Section 4: Finding the Answers: A Group Exercise This section is a group exercise to test what you have learned about financial statements. Step 1: Prepare Key Financial Statements Please break into work groups of three or four participants. Review the following pages in this module and: Complete the profit and loss statement for Butende s second FY quarter results. (You have been provided all the information needed to complete the statement.) Then, complete the balance sheet for Butende s second FY quarter. (You must complete the four missing numbers.) Step 2: Interpret Financial Statements Using the tools you ve gained today, calculate as much information as possible about Butende s profitability, solvency, liquidity and efficiency for its second FY quarter. Step 3: Advise Your Senior Managers Having completed steps 1 and 2, divide your work group into two smaller groups. Half of you will play the role of senior managers; the other half will play the role of the financial managers/accountants. As senior managers, formulate questions to which you would like answers and write down example questions to share with the group. As financial managers/accountants, prepare yourselves for questions you think your senior managers might ask. Write down these questions and share with the group. 272 Agricultural Producer Organization (AgPrO) Manual

279 AgPrO Training Module 9B: Financial Statements Profit and Loss Statement Butende Dairy Cooperative Society 2nd FY Quarter Results: June to July 2003 (in shillings '000) Jun Jul Aug 2nd Qtr Total 2nd Qtr Avg Net Sales Bulked Milk Sales 64,428 55,815 33, ,015 51,338 Window Milk Sales ,767 2, Total Net Sales 64,597 56,513 35, ,649 52,216 COGS Raw Milk 43,996 37,754 23, ,597 35,199 Transport Charges (DCL) 14,151 12,437 6,737 33,325 11,108 Draft Charges Transport Charges (leased for PC's) Total Cost of Goods Sold 58,397 50,407 30, ,522 46,507 COGS as percent of sales 90% 89% 86% 89% 89% Gross Profit 6,200 6,106 4,821 17,127 5,709 Gross Profit Margin 10% 11% 14% 11% 11% Operating Expenses Cost of Production 4,080 3,744 1,913 9,737 3,246 Selling and Administration 771 1,477 1,215 3,463 1,154 Depreciation , Total Operating Expenses 5,351 5,721 3,628 14,700 4,900 Op Exp as percent of sales 8% 10% 10% 9% 9% Operating Income ,193 2, Operating Profit Margin 13.7% 6.8% 3.36% 1.54% 1.54% Non-Operating Expenses Taxes Interest and Bank Charges Board Allowances Total Non-operating Expenses , Non-op exp as percent of sales 0.6% 0.8% 1.6% 0.9% 0.9% Net Income , Net Profit Margin 0.7% 0.1% 1.8% 0.66% 0.66% 273

280 Current Assets Balance Sheet Butende Dairy Cooperative Society August 31, 2004 (2nd FY Quarter) ASSETS (shillings actual) Cash 325,000 Bank 9,181,956 Trade Debtors 13,813,724 Inventory 0 Prepaid Expenses DCL Lease (500k every 6 months) Rent (120k every 6 months) Total Prepaid Expenses 0 Total Current Assets 23,320,680 Fixed Assets Land 7,000,000 Building 0 Equipment Cooler Truck (10 yr life) 60,000,000 Car (5 yr life) 2,000,000 Office Furniture (5 yr life) 1,500,000 Less: Accumulated Depreciation S/L 3,000,350 Total Equipment 60,499,650 Total Fixed Assets 67,499,650 Total Assets 90,820,330 LIABILITIES and OWNERS EQUITY Current Liabilities Trade Creditors 12,091,330 Taxes Payable 0 Short-Term L 0 Total Current Liabilities 12,091,330 Long-Term Liabilities Mortgage Payable for Cooler Truck 59,686,000 Total Long-Term Liabilities 59,686,000 Total Liabilities 71,777,330 Financed by: (Owner's Equity) Paid-in Capital 18,000,000 Retained Earnings 1,043,000 Total Owner's Equity 19,043,000 90,820,330 Total Owner's Equity 274 Agricultural Producer Organization (AgPrO) Manual

281 AgPrO Training Module 10: Growing the Business Training Module 10 Growing the Business Agricultural Producer Organization (AgPrO) Manual Prepared by Land O Lakes International Development Funded by The United States Agency for International Development 275

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283 AgPrO Training Module 10: Growing the Business Preface Training Module 10: Growing the Business contains three sections. Section 1 provides an overview of the different models for business growth. Section 2 discusses whether a cooperative should make the decision to integrate. Case studies on integration and de-integration along with lessons learned are provided. Section 3 presents a brief overview of raising capital through internal and external means. The target audiences for this module are: Land O Lakes program and field managers, cooperative and business development specialists and extension officers Government cooperative development officers Cooperatives and other producer groups Other development partners, including government agencies, nongovernmental organizations and private sector partners. 277

284 Section 1: Business Growth Models Ready to Grow the Business Growing the business involves increasing both revenue growth and profitability (and thus returns to members of the cooperative). Marketing cooperative enterprises can grow businesses in a number of ways. A cooperative might focus on growth by increasing existing member patronage (e.g., helping farmers increase yields or reduce the amount of side-selling) or by recruiting new members. In order to accomplish growth objectives, a cooperative may have to invest in services for their members. For example, member services for a dairy cooperative might include veterinary services, herd management, assistance with breeding, business development services, and holistic management training. Services can be sold to members and non-members alike and create additional returns and dividends for cooperative members. Cooperatives may also choose to grow by expanding operations and integrating into parts of the value chain in an effort to create a capacity to meet market demand and increase member patronage. Any cooperative investment for growth should be well thought out and should be done only if profitable and directly responsive to members stated needs. Business Growth Models in Marketing Cooperatives 1. Growth through increased production. If demand for products is high, then a cooperative may choose to invest in increasing production to deliver to buyers. One way to help farmer members increase production is by developing services. Cooperatives may choose to introduce many different types of services to members. Services are designed to mutually reinforce the well-being of the farm and the cooperative. Agricultural marketing cooperatives may provide services such as inputs (seed, fertilizer), fuel, machinery, technology, farmer training and financing. Provision of services helps increase farmer yield and patronage to the cooperative. A precondition for this to be valuable is that the cooperative has appropriate capacity to handle the increase in patronage and the cooperative has a viable market to sell the final product. 2. Growth through product differentiation. Cooperatives may choose to increase the value of the final product before it is sold. For a basic marketing cooperative, this may include investments to ensure quality standards are in place. Assuming buyers will pay higher prices for product differentiation and enhanced quality will increase returns to the cooperative and members. Cooperatives may also choose to invest in storage options that allow them the flexibility to sell products when prices are most favorable. 3. Growth through horizontal integration is one strategy that cooperatives may use to generate economies of scale that create cost efficiencies for the cooperative. Cooperative growth through horizontal integration occurs when cooperatives combine in the same part of the value chain. In the dairy industry, horizontal integration could involve cooperatives collaborating or pooling resources around a milk collection center. Other examples may include mergers 278 Agricultural Producer Organization (AgPrO) Manual

285 AgPrO Training Module 10: Growing the Business of cooperatives into structures such as unions as a way to combine resources and reduce costs. Larger operations generally have more resources that can be leveraged. In return, this generates competitive prices for inputs and higher volumes of product for consolidation and sale. 4. Growth through vertical integration is another strategy that integrates cooperatives into the value chain. Vertical integration could include cooperatives acquiring input production and investing in the supply chain or acquiring processing capabilities to capture more value by converting raw product into a good that can be sold directly to the end consumer. Vertical integration can occur under many different structures, including primary cooperatives that have created forward and backward linkages in the value chain (e.g., developing processing capabilities or capabilities to produce input supplies) or tiered structures such as when primary cooperatives or unions form federated systems or apex organizations. Vertical integration provides great opportunities for growth, but like horizontal integration, also comes with challenges. Running an integrated business requires significant expertise and the ability to manage separate lines of business and associated risks. 279

286 Section 2: Making the Decision to Integrate The Decision to Integrate The most common reasons that cooperatives decide to integrate are risky markets and market failures. Consider the example of a monopolistic buyer that owns a processing facility which takes raw material delivered from the cooperative and converts it into a final product to be sold to the consumer (e.g., raw milk converted to butter or wheat converted to flour or cereal). The buyer of the agricultural commodity may decide to stop purchasing or may not consistently purchase from the cooperative. If there is not a significant alternative to sell the product, the cooperative will face many challenges including depressed prices and inconsistent sales. Vertical integration into processing allows the cooperative to capture more value and remove the uncertainty that a processor will accept the raw agricultural commodity. However, to succeed, the integrated cooperative must still be able to deliver a quality finished product to the end consumer. Figure 1: Vertical Integration Consumers Retailers Processing Bulking Bulking Collection Collection Collection Dairy Producers Inputs and Services 280 Agricultural Producer Organization (AgPrO) Manual

287 AgPrO Training Module 10: Growing the Business Case Study: UCCCU s Decision to Integrate UCCCU Cooperative Structure Uganda Crane Creameries Cooperative Union (UCCCU) is located 170 miles from Kampala in Mbarara, Uganda. It is a federation of 10 member unions that brings together 128 primary cooperative societies throughout southwest Uganda. As of 2013, 18,305 farmer members contribute milk to UCCCU. The cooperative serves an area with a rich history of dairy farming and good climate for dairy production. The Case for Integration Through the 1990s, dairy farmers in southwest Uganda had felt the pains created by an inefficient market and a dominant buyer in Kampala. The situation lead to an inconsistent demand for raw milk and low prices for milk paid to farmers. Managing a cold chain in the region was also very difficult as raw milk had to be delivered to rural collection points from the surrounding hills and then from the bulking centers to Kampala. The distance and time covered created significant quality challenges that further reduced the price paid for the raw milk product. Quality control and supply chain management continued to present challenges in relationships with buyers. In 2003, dairy farmers from two major associations, Western Uganda Dairy Farmers Association (WUDA) and Uganda National Dairy Farmers Association (UNDAFA), joined forces to purchase a dairy processing facility (Dairy Corporation, LTD) from the government. The purchase was unsuccessful and the associations were not able to vertically integrate at the time. Growth of the Union In 2007, UCCCU opened a secretariat in Mbarara consisting of a group of seven unions. Following the creation of UCCCU, several additional dairy unions in the region joined. In 2009, an eighth union (Sheema) joined followed shortly by Isingiro Union in 2012; a tenth union member was added in Between 2005 and 2013, UCCCU members have contributed 810,000 USD towards the construction of the processing facility. United by Common Grievances UCCCU membership s commitment to owning a processing facility continues to be driven by the common grievance brought on by a monopolistic buyer and market failure. Farmer members have shown that common goals, commitment, trust in the leadership and willingness to invest earnings into a processor will create more value for them. 281

288 Challenges and Lessons Learned Financing vertical integration and growth at UCCCU has not been an easy journey. After more than seven years, the processing plant is still less than half complete. Each year, more and more members show impatience and displeasure with the amount of time it is taking to build the facility. Over time, the union has also had to deal with increased diversity in membership the interests, goals and levels of patience within the farmer membership are all highly varied. Furthermore, the market is changing and new processing facilities are being built close to the cooperative. Not only is this likely to disrupt current processors in Kampala, but it also raises some concerns on UCCU s viability for integration. Despite these concerns, dairy farmers resolve is strong and there is ongoing commitment to see the dream of owning a processing facility become a reality. There are several key lessons that can be taken from UCCCU s integration experience: Solidarity and commitment to overcome common grievances is often an essential starting point for cooperative formation and growth. Significant growth (e.g., building a processing facility) funded only through member contributions is a long and challenging process. Furthermore, the time to put such efforts in place may allow other market entrants opportunities that change the landscape of the market. As a cooperative expands, diversity of members and member interests also increase, creating alignment and management challenges for a large union structure. The Decision Not to Integrate Vertical integration is not an easy process. The strategy is often risky and expensive. Sometimes cooperatives decide to integrate based on reasons that do not have sound economic or business merit. A couple notable examples include: 1. A desire to own a tangible asset, such as a building or production facility, to increase status. There is sometimes a compelling human nature to own something tangible; however, doing so could compromise a cooperative s strength. 2. Attempting to capture more value without the required expertise. For example, a marketing dairy cooperative that integrates in processing needs to develop many new skills, including operations management, equipment procurement, quality management, marketing, etc. Sometimes a cooperative will underestimate the complexities and specific skills needed to successfully manage a larger integrated business. 282 Agricultural Producer Organization (AgPrO) Manual

289 AgPrO Training Module 10: Growing the Business Case Study: Limuru s Growth Lessons From Integration to De-integration Cooperative Structure The case focuses on an integrated dairy cooperative located just outside Nairobi, Kenya and provides an interesting study on vertical integration. Unlike most dairy cooperatives, Limuru is a centralized structure with a single association owned by approximately 9,700 members, 6,000 of which are currently active. The cooperative owns a limited liability company with 48 percent of the shares belonging to producer members. Leading up to Vertical Integration For nearly 32 years, Limuru served the traditional function of collecting, bulking, cooling and marketing raw milk. The cooperative grew by expanding service provisions and became well known for breeding services and artificial insemination, which helped increase member productivity and patronage to the cooperative. Liberalization of the dairy sector in the early 1990s saw the slow collapse of the dominant player in the market and allowed many different organizations (both cooperatives and private enterprises) the opportunity to integrate. The Decision to Integrate Limuru made the choice to follow many others in the industry at the time. It moved to create a reliable outlet for member produced raw milk and to position itself for growth. Like others that chose to integrate, one of the primary drivers was market failure and few and inconsistent buyers. To facilitate the integration, Limuru formed an LLC by keeping 52 percent of the shares and making the remaining 42 percent available for purchase by members. The cooperative also took out a government loan to finance part of the processing facility and invest in trucks for distribution. After completion of the processing facility and investment in trucks for distribution, the cooperative controlled roughly 80 percent of the value chain. Rough Waters Investment in the processing plant allowed Limuru to create new value-added products such as yoghurt and ghee. In the following 10 years, the dairy industry faced many challenges, including mismatched in supply and demand. Prices remained low and many farmers failed to find outlets for surplus milk (formal or informal). Management never assumed that there would be a possibility of low demand for dairy products (including competition from substitute products) and expected a quick return on the investment in processing. No strategic plan was put in place to address the supply and demand dynamics in the market. Limuru faced a changing competitive landscape as well as difficulties with the governance and leadership of the cooperative. The latter was particularly problematic and member loyalty continued to provide challenges to a consistent supply. 283

290 De-Integration For a number of years, the cooperative processing plant ran at well under capacity and losses continued to mount. Recognizing the crisis, Limuru management made a tough decision to go back to its roots as a service cooperative. Bewtween 2012 and 2013, the cooperative began to lease its processing plant and concentrate on its original function of collecting, bulkng and marketing milk. Challenges and Lessons Learned While many factors contributed to the de-integration of the cooperative, the decision to quickly follow others in the market and integrate in the 1990s may not have been entirely well thought out. Some of this is evidenced by the lack of a strategic business plan and the assumption of large debt load. Hindsight provides some interesting lessons, including: Market dynamic change and strategic business plans need to be adjusted accordingly Management and governance of an integrated structure requires a unique set of skills and expertise Member loyalty and patronage are essential elements for the success of an integrated structure Growth can lead to lack of attention to the changing dynamics of a cooperative. An important consideration when growing a business is to recognize the impact this has on membership and the structure of the organization. In particular, the type of growth that also increases membership or changes membership make-up may significantly affect how a cooperative business operates. Often, when membership grows, a cooperative becomes more diverse. Similarly, diversity in membership will happen over time as the composition of a cooperative evolves. Many cooperatives form as a way to resolve market failures and member grievances (e.g., lack of reliable buyer or fair prices for products). As the cooperative grows, the original rationale may change and so does the make-up of cooperative membership. The membership becomes more diverse across many different dimensions (e.g., age, size of farm, service needs, ability to pass farm to children, etc.). To accommodate these differences, a cooperative may have to adjust its structure, including changing bylaws, voting rights and the ways in which surplus is distributed to members. This module will not go into detail on changes that occur in membership as a cooperative grows or managing the complexities of evolving membership. However, it is important to note because a cooperative s success managing growth relies on its ability to recognize changing member makeup and to tweak the business/structure as necessary to accommodate these changes. 284 Agricultural Producer Organization (AgPrO) Manual

291 AgPrO Training Module 10: Growing the Business Section 3: Financing Growth A cooperative enterprise can grow by financing investments through retained earnings, through additional member contributions to equity, or by obtaining financing from external sources (e.g., loans or non-member investors). Organic Growth: A critical decision for a cooperative enterprise is how much to set aside for investments in the business. Like any business, a cooperative needs to make choices about the amount of capital necessary to support ongoing operations as well as what is needed to invest in future growth. There is always a natural tension between the desire for immediate returns (dividends) and benefits transferred through better prices and reinvestment for long-term growth. Finding the right balance is important and highlights the need to have a well thought out strategic business plan (see Module 7B). External Investment: One of the challenges cooperatives face is the inability to quickly raise additional capital. If the investment is not possible using retrained earnings, then the cooperative must choose to raise additional capital from members or seek external financing. Raising additional equity from members is often also difficult, as the membership may not have the means to contribute what is needed (see UCCCU case study). This is often the case with larger types of investments (e.g., vertical integration and processing capabilities). In this case, a cooperative faces the choice to seek out debt or create a structure that allows for external equity investment. Cooperatives have succeeded in creating more complex arrangements to meet growth and financing needs, but the details are beyond the scope of this module. For more details on creating investable businesses, please refer to training module

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293 AgPrO Training Module 11: Workbook Training Module 11 Workbook Agricultural Producer Organization (AgPrO) Manual Prepared by Land O Lakes International Development Funded by The United States Agency for International Development 287

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295 Cooperative Name Dairy Cooperative Performance Workbook Land O'Lakes International Development Month, Year 289

296 Land O'Lakes Cooperative Performance Workbook INTRODUCTION There are several intended uses for this workbook: 1) To provide benchmark and periodic monitoring of data on the performance of dairy cooperatives that are part of a Land O'Lakes dairy development program; 2) to identify specific areas of improvement needed by these co-ops; 3) to monitor improvements in these areas; 4) to compare performance across the coops in the program; and 5) to compare performance across Land O'Lakes programs in different countries. Parts of the workbook were adapted with permission from the Organizational Capacity Assessment Tool developed by the Marguerite Casey Foundation. DESIGN OF THE WORKBOOK The workbook contains this introduction and instruction section, a general information page, six worksheets, a summary table, a summary chart and an action plan. If you are using a computer, click on the tabs at the bottom of the screen to view each worksheet. Note that the workbook is designed to assess performance and to plan improvements at each cooperative four times per year (quarterly). Thus, the workbook tracks changes in performance on a quarter-by-quarter basis as well as from year-to-year. Each cooperative is rated in six performance areas: 1. Leadership: the extent to which the co-op's leaders inspire, prioritize, make decisions, provide direction and innovate. 2. Adaptive Capacity: the ability of the co-op to monitor, assess and respond to internal and external changes. 3. Management: the ability of the co-op to ensure effective and efficient use of organizational resources. 4. Operations: the capacity of the co-op to implement key organizational and programmatic functions. 5. Supply, Processing and Marketing: the extent to which the co-op is effectively carrying out its business functions. 6. Productivity and Financial Performance: measurement of how well the co-op is doing on a number of productivity and financial indicators. WHO SHOULD COMPLETE THE WORKBOOK? The workbook is designed to be completed by Land O'Lakes field staff in consultation with management personnel, board members, and members of the cooperative and with others knowledgeable about the cooperative. INSTRUCTIONS FOR LEARNING HOW TO USE THE WORKBOOK Prior to using the workbook, Land O'Lakes field staff should carefully read through the entire workbook, noting all the questions they have about the meaning of different rating criteria, how 290 Agricultural Producer Organization (AgPrO) Manual

297 AgPrO Training Module 11: Workbook to use and interpret the Summary Table and the Summary Chart, and how to fill out the Action Plan. They should then be trained by a Land O'Lakes staff member who has experience in using the workbook in the field. The training session should include a role play in which each trainee interviews the trainer who plays the role of the cooperative representative. The trainer then determines whether or not the trainee is ready to use the workbook in the field. Where possible, the field agent should also accompany an experienced staff member on a visit to a cooperative to assist him or her in filling out the workbook. STEPS TO COMPLETE THE WORKBOOK Step One: Rate the Cooperative For each measurement criterion (located on worksheets 1-6), identify the description that best indicates the cooperative's status or level of performance. The workbook can be completed manually or on a computer. If you are filling it out by hand, enter the appropriate rating (Level 1, 2, 3, 4 or N/A for not applicable, though there are almost no instances when N/A should be used) for each of the performance criteria in all six sections of the workbook. To input your selections by computer, click on the yellow cell to the right of each criterion. Then, select the "down" arrow and choose from the list that appears. Rate all criteria with a number; failing to do so will adversely impact the summary scores. A section for comments about your ratings is included next to each criterion on the worksheets. Use this section to include any clarifying information about the selections you made. Note that there are four columns in which ratings can be entered. These correspond to each of the four quarters of the year. Step Two: Select Priority Areas for Improvement If completing the workbook manually, copy the rating for each criterion in the appropriate box in the Summary Table. If using a computer, the ratings will automatically be transferred to the Summary Table. On the Summary Table worksheet, select three to seven performance areas that the co-op is most in need of strengthening over the next three months. The selection of these priority improvement areas should be done jointly by Land O'Lakes field staff and co-op board members and staff. Mark an "X" in the "priority" column next to the three to seven areas you choose. Step Three: Prepare the Action Plan List the three to seven areas that you chose as improvement priorities for the co-op in the Action Plan section of the Workbook. Then follow the instructions at the beginning of the section to complete the co-op's Action Plan. 291

298 292 Agricultural Producer Organization (AgPrO) Manual GENERAL INFORMATION Name of Cooperative Location of Cooperative (Distcict, Town, Address, etc.) Land O'Lakes Program/Country Name and Title of Person Completing Workbook Dates Workbook Was Completed Dates Action Plan Was Completed or Revised Others Involved with Completing the Workbook and Action Plan Name Title Name Title 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Name Title Name Title Name Title

299 1. LEADERSHIP Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 1.01 Mission: Is there a mission statement? Where is the statement located (visiable)? No written mission or limited expression of the organization s reason for existence (lacks clarity or specificity); either known by very few in organization or rarely referenced. Some expression of the organization s reason for existence that reflects its values and purpose, but may lack clarity; fewer than half of staff and board members know what the mission statement is. Clear expression of organization s reason for existence which reflects its values and purpose; more than half of staff and board members know what the mission statement is. Clear expression of organization s reason for existence which describes an enduring reality that reflects its values and purpose; almost all staff and board members, and most general members know what the mission statement is Overarching Goals: What are the goals? Where are they written? Inconsistent and imprecise knowledge within the organization of overarching goals and what they aim to achieve. Goals lack at least two of the following four attributes: clarity, boldness, associated measures or timeframe for attainment; goals known by fewer than half of staff and board members, or only occasionally used to direct actions or set priorities. Goals lack only one of the following attributes: clarity, boldness, associated measures, or time frame for measuring attainment; goals are known by more than half of staff and board members and are often used by them to direct actions and set priorities. Clear, bold set of (up to three) goals that the organization aims to achieve, with specific timeframes and concrete measures for each goal; goals are universally known by staff and board members as well as by most general members; goals are consistently used to direct actions and set priorities Overarching Strategy: Is there a strategic plan? What is the implementation strategy? Strategy is either nonexistent, unclear, or incoherent (largely a set of scattered initiatives); strategy has no influence over day-to-day behavior. Strategy exists but is not clearly linked to mission and overarching goals, lacks coherence or is not easily actionable; strategy is known by fewer than half of staff and board members and has limited influence over day-to-day behavior. Coherent strategy has been developed and is linked to mission but is not fully ready to be acted upon; strategy is known by more than half of staff and board members, and day-to-day behavior is partly driven by it. Clear, coherent mediumto long-term strategy in place that is both actionable and linked to overall mission and overarching goals; strategy is universally known by staff and board members and by most general members; it consistently helps drive day-to-day behavior at all levels of the organization. AgPrO Training Module 11: Workbook

300 294 Agricultural Producer Organization (AgPrO) Manual 1. LEADERSHIP Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 1.04 Shared Beliefs & Values: Is there a common purpose? 1.05 Board Composition & Commitment: Are all membership groups represented on the board, including, women and youth? Do board members have a wide range of skills? Are there regular meetings with good attendance (benchmark based on type of cooperative and industry)? No common set of basic beliefs and values (e.g., social, cultural, economic, etc.) exists within the organization. Membership with limited diversity in fields of practice and expertise; drawn from a narrow spectrum of constituencies relevant to the organization; little or no relevant experience; commitment to organization s success, vision and mission is unclear; meetings are sporadic and/or attendance is sometimes poor. Common set of basic beliefs and values exists with fewer than half of staff and board members; beliefs and values are only partially aligned with organizational purpose and constituents' norms, or are rarely harnessed to produce impact. Some diversity in fields of practice and expertise; membership represents a few different constituencies relevant to organization; some evidence of commitment to organization s success, vision and mission; regular meetings are wellplanned and attendance is adequate; occasional subcommittee meetings. Common set of basic beliefs and values held by more than half of staff and board members; helps provide a sense of connection to the organization; beliefs and values are aligned with organizational purpose and constituents' norms, and are occasionally harnessed to produce impact. Good diversity in fields of practice and expertise; membership represents most constituencies relevant to the organization; solid evidence of commitment to organization s success, vision and mission; regular, purposeful meetings are wellplanned and attendance is consistently good; regular subcommittee meetings. Common set of basic beliefs and values exists and is widely shared by almost all staff and board members and by more than half of the general members; helps provide a sense of connection to the organization and a clear direction for behavior; beliefs and values clearly support organizational purpose, are in line with constituents' norms, and are consistently harnessed to produce impact. Membership with broad variety in fields of practice and expertise, and drawn from the full spectrum of constituencies relevant to the organization; includes functional and issue area expertise; proven track record of learning about the organization and addressing its issues; consistently demonstrated commitment to the organization s success, mission and vision; regular, purposeful meetings are wellplanned and attendance is consistently strong; regular meetings of focused subcommittees. 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating

301 1. LEADERSHIP Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 1.06 Board Governance: Are board roles and responsibilities clear, with written descriptions of who does what and why? What is the relationship between the board chair, manager and treasurer? Are individuals trusted to do their jobs with necessary oversight (is there any micromanagement)? Is there timely financial reporting? Roles of board and management are unclear; board rarely scrutinizes budgets, holds manager accountable, or operates according to formal procedures. Roles of board and management are clear; board functions according to by-laws, reviews budgets, and occasionally sets organizational direction and targets, but does not regularly review manager performance, monitor potential conflicts of interest, scrutinize audits, or review organizational documents. Roles of board and management are clear and function well; board reviews budgets, audits and other organizational documents; size of board set for maximum effectiveness with formal nomination process; board co-defines performance targets and actively encourages manager to meet targets; annually reviews manager s performance, but board is not prepared to hire or fire manager. Board and management work well together from clear roles; board fully understands and fulfills fiduciary duties; size of board set for maximum effectiveness with rigorous nomination process; board actively defines performance targets and holds manager fully accountable; board empowered and prepared to hire or fire manager if necessary; board periodically evaluated Board Involvement & Support: Does the board provide oversight and leadership? Is it involved in checking up on and giving direction to management? Board provides little direction, support, and accountability to leadership; not fully informed about material and other major organizational matters. Board provides occasional direction, support and accountability to leadership; generally informed about all material matters in a timely manner; input and responses often solicited. Board provides direction, support and accountability to leadership; fully informed about all material matters; input and responses actively sought and valued; board is a full participant in major decisions. Board provides strong direction, support, and accountability to leadership and is engaged as a strategic resource; communication between board and leadership reflects mutual respect, appreciation for roles and responsibilities, shared commitment and valuing of collective wisdom Representation of Primaries on a Union Board (Integrated Cooperatives): Are all primary cooperatives represented on the Board? What is the criteria? Is there a frequent roll-over in this representation? There is limited representation to a few primaries drawn from a narrow spectrum; a few dominant primaries take key positions on the board; system to roll over representation is unclear; meetings are irregular and/or attendance is sometimes poor. Some level of representation, but more than half of primaries have no place on the board; board represents a few different primaries relevant to organization; some evidence of commitment to organization s systems, occasional meetings and attendance is adequate. Good representation of primaries on the board; primary co-ops are grouped and represent most others relevant to the organization; solid evidence of commitment to organization s systems, vision and mission; regular, purposeful meetings are well-planned and attendance is consistently good. Representation of all primaries, drawn from the full spectrum of co-ops relevant to the organization; clear systems in place for grouping primaries and rotating representation; consistently demonstrate commitment to the organization s success; purposeful meetings are well-planned and attendance is consistently strong. AgPrO Training Module 11: Workbook

302 296 Agricultural Producer Organization (AgPrO) Manual 1. LEADERSHIP Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 1.09 Manager Experience & Standing: What relevant qualifications does the manager have? Does he/she have experience in managing similar organisations? 1.10 Manager Organizational Leadership / Effectiveness: Does the manager have good communication skills? Does he/she report to and assist the board to build better systems? Does he help develop the skills of other staff members? Narrow background and range of experiences; limited experience in cooperative management; little evidence of innovative thinking; limited recognition among peer organizations. Some difficulty building trust and rapport with others; micromanages projects; shares little of own experiences as developmental/ coaching tool; inconsistent attention to organizational vision. Background and range of experiences reflects some depth; some relevant experience in cooperative management; some evidence of innovative thinking and understanding of the sector; occasional recognition among peer organizations. Responsive to opportunities from others to work together; generally confident in others ability to be successful; shares own experience and expertise; visible commitment to organization and its vision. Broad background and range of experiences; significant experience in cooperative management; clear evidence of innovative thinking; solid understanding of the sector; some recognition as a leader/shaper among peer organizations. Actively and easily builds rapport and trust with others; effectively encourages others to succeed; shares relevant experience and expertise, yet gives others freedom to work their own way, try out new ideas, and grow; shows constant commitment to organization and its vision; inspires others around vision. Extraordinarily diverse background and experiences; extensive and varied experience in cooperative management; exceptional evidence of innovative thinking and approaches; comprehensive and deep understanding of the sector; regularly recognized as a leader/ shaper among peer organizations. Constantly establishing successful, win-win relationships with others, both within and outside the organization; delivers consistent, positive, and reinforcing messages to motivate people; finds or creates special opportunities to promote people s development; lives the organization s vision; compellingly articulates path to achieving vision that enables others to see where they are going. 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 1.11 Manager Analytical & Strategic Thinking: Does the manager have a clear vision for the development of the organisation? Does he/she assist members to see opportunities? How does the manager deal with challenges? Somewhat uncomfortable with complexity and ambiguity; some ability to analyze strategies. Able to cope with some complexity and ambiguity; able to analyze and periodically generate strategies. Quickly assimilates complex information and able to distill to core issues; welcomes ambiguity and is comfortable dealing with the unknown; develops robust strategies. Possesses keen and exceptional ability to synthesize complexity; makes informed decisions in ambiguous, uncertain situations; develops strategic alternatives and identifies associated rewards, risks and actions.

303 1. LEADERSHIP Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 1.12 Manager Financial Judgment: Can the manager do a costbenefit analysis; read an income statement and balance sheet; create a gross margin and particle budget; prepare financial reports? Has difficulty considering financial implications of decisions; limited understanding of basic financial concepts. Draws appropriate conclusions after studying the facts; understands basic financial concepts; gives some consideration to financial impact of major decisions. Uses sound financial judgment; has a solid understanding of financial concepts; regularly considers financial impact of all decisions. Demonstrates exceptional financial judgment; has deep understanding of complex financial concepts; has keen sense of financial impact of all decisions Ability to Motivate & Mobilize Members: What actions are being taken to involve membership? Are general members involved in decision making? How often are general meetings held? Those with potential to be most affected by organization's work have limited knowledge of organization; organization meetings are sporadic and poorly attended; organization has difficulty motivating members into action. Those with potential to be most affected by organization's work have some knowledge of organization; meetings held regularly, but attendance varies widely; organization has ability to motivate a small core group of members into action. Those with potential to be most affected by organization's work are knowledgeable and likely to be engaged with organization; meetings held regularly and are generally well-attended; organization has ability to motivate a segment of members into action. Those with potential to be most affected by organization's work see organization as inspiring and motivating; they are excited to be involved; meetings held regularly and are routinely wellattended; organization has ability to motivate a broad range of members into action. Please proceed to Worksheet 2. AgPrO Training Module 11: Workbook 297

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305 2. ADAPTIVE CAPACITY Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 2.01 Strategic Planning: Is there a strategic plan? If so, who prepared it? Is the plan referenced and used as a guide? How often is it updated? Limited ability and tendency to develop strategic plan, either internally or via external assistance; if strategic plan exists, it is rarely or never referenced. Some ability and tendency to develop high-level strategic plan either internally or via external assistance; strategic plan sometimes directs management decisions. Ability and tendency to develop and refine concrete, realistic strategic plan; some internal expertise in strategic planning or access to relevant external assistance; strategic planning carried out on a near-regular basis; strategic plan used to guide management decisions. Ability to develop and refine concrete, realistic, and detailed strategic plan; critical mass of internal expertise in strategic planning, or efficient use of external, sustainable, highly qualified resources; strategic planning exercise carried out regularly; strategic plan used extensively to guide management decisions Evaluation / Performance Measurement: Is planned vs. actual performance measured? If so, how often? Do board minutes record information on performance measurement? Very limited measurement and tracking of performance and progress; all or most evaluation based on anecdotal evidence; no external performance comparisons made; organization collects some data on program activities and outputs (e.g., number of farmers served), but has no measurement of outcomes (e.g., the extent to which farmer income has increased). Performance partially measured and progress partially tracked; some external performance comparisons made; organization regularly collects solid data on program activities and outputs, and has begun to measure outcomes. Performance measured and progress tracked in multiple ways on a regular basis; effective internal and external benchmarking occurs but may be confined to select areas; multiple indicators used in evaluation, with primary focus on outcomes; some attention paid to cultural appropriateness of evaluation process/ methods; social impact measured, but longitudinal (long-term) or independent nature of evaluation is missing. Comprehensive, integrated system (e.g., balanced scorecard) used for measuring organization s performance and progress on continual basis; internal and external benchmarking part of the organizational culture and used by staff in target-setting and daily operations; clear and meaningful outcomes-based performance indicators exist in all areas; careful attention paid to cultural appropriateness of evaluation process/ methods; measurement of social impact based on longitudinal studies with independent evaluation. AgPrO Training Module 11: Workbook

306 300 Agricultural Producer Organization (AgPrO) Manual 2. ADAPTIVE CAPACITY Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 2.03 Evaluation & Organizational Learning: Are records and data analysed to see where strengths and weaknesses are? Are there plans to strengthen the organization? What steps have been taken to develop information systems and to include evaluation results in these systems Partnerships & Alliances: What partnerships and alliances are being developed? Is there any formal documentation about them? Performance data rarely used to improve program and organization; little experience with evaluation beyond capturing information to report to funders; information systems not in place. No partnerships or alliances with other coops, for-profit, nonprofit or public sector entities. Performance data occasionally used by staff and board to improve organization; some staff time devoted to evaluation efforts, as required by funders, however staff and board do not typically see evaluation as integral to organization's work; information systems not in place. Early stages of building relationships and collaborating with other co-ops, for-profit, nonprofit or public sector entities; if relations do exist, some may be precarious or not fully win-win. Learnings from performance data distributed throughout organization, and often used by staff and board to make adjustments and improvements; some staff time devoted to documenting organization's work; some information systems in place to support on-going evaluation. Some key relationships with a few types of relevant entities (e.g., coops, for-profit, nonprofit, public sector) have been built and leveraged; action around common goals is generally short term. Systematic staff and board practices of making adjustments and improvements on basis of performance data; resources are devoted to thoroughly documenting organization's work and capturing the complete story of its impact; evaluation processes fully integrated into information systems. Strong, high-impact, relationships with a variety of relevant entities (local, state, and federal government as well as co-ops, for-profit, other nonprofit, and community agencies) have been built, leveraged, and maintained; relationships anchored in stable, longterm, mutually beneficial collaboration. 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 2.05 Members and Non- Members: What percentage of farmers who supply milk to the cooperative are co-op members? 40% or less % 61-80%. 81% or more.

307 2. ADAPTIVE CAPACITY Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 2.06 Member Involvement: How often are general membership meetings held? Who attends? What is discussed? See records of dates and attendance lists: what were the results of these meetings? Member involvement is limited; planning involves little member input; members not trained or supported in their involvement. Members offered a range of roles in the organization; volunteer positions of leadership open to members, but rarely filled by them; paid staff responsible for planning; constituent work mostly task-oriented; members trained or supported in their work on an ad-hoc basis. One or two systems in place to actively recruit and involve members; members take on a variety of roles in the organization, including volunteer positions of leadership; paid staff take a large role in planning, but members are involved and help define some desired outcomes; training provided to members in some of the skill areas needed to affect change. More than two systems in place to actively recruit and involve members; members take on a wide variety of roles in organization, including volunteer positions of leadership; paid staff work collaboratively with members to plan and lead much of the organization s work and define desired outcomes; training is provided to members in all of the skill areas needed to affect change. Please proceed to Worksheet 3. AgPrO Training Module 11: Workbook 301

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309 3. MANAGEMENT CAPACITY Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 3.01 Staff: What is the background of staff? Do they have any relevant training and experiences with similar business? Do they show drive and ambition for the organisation? No or very limited prior experience in cooperative or for-profit business; staff drawn from a narrow range of backgrounds and experiences; limited track record of learning and personal development; energy and commitment is sometimes lacking. Some prior experience in cooperative or forprofit business; staff drawn from somewhat diverse backgrounds and experiences; decent track record of learning and personal development; energetic and committed. Significant prior experience in cooperative or for-profit business; staff drawn from diverse backgrounds and experiences, and bring a broad range of skills; good track record of learning and personal development; highly energetic and committed. Extensive and varied experience in cooperative or for-profit business; staff drawn from extraordinarily diverse backgrounds and experiences, and bring a broad range of outstanding capabilities; outstanding track record of learning and personal development; contagiously energetic and committed Dependence of Staff on Manager: What depth of experience and skills does the organisation have? Is there a clear HR system? Can the organization operate without the manager present? Are systems and roles clearly specified? Very strong dependence on manager; organization would cease to exist without his/her presence. High dependence on manager; organization would continue to exist without his/her presence, but likely in a very different form. Limited dependence on manager; organization would continue in similar way without his/her presence but organizational operations would likely suffer during transition period; no current member of management team could potentially take on manager role. Reliance but not dependence on manager; smooth transition to new leader could be expected; operations likely to continue without major interruption; senior management team can fill in during transition time; several members of management team could potentially take on manager role Shared Goals / Performance Targets: Are there clear goals/ performance targets? Are they documented, realistic, and quantifiable? Targets are non-existent, few, vague or confusing, or either too easy or impossible to achieve; not clearly linked to overarching goals and strategy; targets largely unknown or ignored by staff. Realistic targets exist in some key areas, and are mostly aligned with overarching goals and strategy; may lack aggressiveness, be shortterm, or lack milestones; targets are known and utilized by some staff. Realistic yet demanding targets exist in most areas, and are aligned with overarching goals and strategy; primarily quantifiable and focused on outcomes; typically multi-year targets, though may lack milestones; targets are known and utilized by most staff who use them to broadly guide work. Realistic yet demanding targets exist in all areas; targets are tightly linked to overarching goals and strategy, quantifiable, outcome-focused, have annual milestones, and are long-term in nature; all staff consistently utilize targets and work diligently to achieve them. AgPrO Training Module 11: Workbook

310 304 Agricultural Producer Organization (AgPrO) Manual 3. MANAGEMENT CAPACITY Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 3.04 Financial Planning / Budgeting: Is there a budget drawn up annually? Are there systematic and regular comparisons of budget to actual? How is cash flow managed? What is the review process? 3.05 Financial Operations Management: Does a member of the board oversee and check records regularly (daily/weekly/ monthly)? Is there an independent, outside audit? How often? No or very limited financial planning; general budget developed; only one budget for entire organization; performance-to-budget loosely or not monitored. Financial activities not consistently documented or reported; appropriate checks and balances not in place; activities not well tracked to budget. Limited financial plans, updated on an ad hoc basis; budget utilized as operational tool; used to guide/assess financial activities; some attempt to isolate divisional (program or geographical) budgets within central budget; performanceto-budget monitored periodically. Financial activities consistently documented and reported; appropriate checks and balances exist; activities tracked to budget Solid financial plans, updated regularly; budget integrated into most operations; reflects organizational needs; solid effort made to isolate divisional (program or geographical) budgets within central budget; performance-to-budget monitored regularly. Established internal controls govern all financial operations; activities fully tracked, supported, and reported; some attention paid to cash flow management. Very solid financial plans, continuously updated; budget integrated into all operations; used as strategic tool; budget developed from process that incorporates and reflects organizational needs and objectives; well-understood divisional (program or geographical) budgets within overall central budget; performance-to-budget closely and regularly monitored. Robust systems and controls govern all financial operations and their integration with budgeting, decision making and organizational goals; cash flow actively managed, annual independent audit. 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 3.06 Financing and Access to Financial Services: Is share capital paid up? Are annual subscriptions paid up? Is there any other access to financial services? The co-op is doing a poor job in two or more of the following areas: Internal resource mobilization; farmer payment systems; cash management; fixed deposit investments; and/ or loans, grants and credit schemes. The co-op is doing a poor job in one of the following areas: Internal resource mobilization; farmer payment systems; cash management; fixed deposit investments; and/ or loans, grants and credit schemes. The co-op is doing an adequate job in all of the following areas: Internal resource mobilization; farmer payment systems; cash management; fixed deposit investments; and/ or loans, grants and credit schemes. The co-op is doing a good or very good job in all of the following areas: Internal resource mobilization; farmer payment systems; cash management; fixed deposit investments; and/ or loans, grants and credit schemes.

311 3. MANAGEMENT CAPACITY Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 3.07 Operational Planning: Are there operational plans and documented procedures and rules? Are these operational plans linked to the strategic plan? Operations run purely on a day-to-day basis with no short- or long-term planning activities; no experience in operational planning. Some ability and tendency to develop high-level operational plan either internally or via external assistance; operational plan loosely or not linked to strategic planning activities and used roughly to guide operations. Ability and tendency to develop and refine concrete, realistic operational plan; some internal expertise in operational planning or access to relevant external assistance; operational planning carried out on a nearregular basis; operational plan linked to strategic planning activities and used to guide operations. Concrete, realistic, and detailed operational plan developed and regularly refined; critical mass of internal expertise in operational planning, or efficient use of external, sustainable, highly qualified resources; operational planning exercise carried out regularly; operational plan tightly linked to strategic planning activities and systematically used to direct operations Organizational Processes: Is there a system in place for reporting on controls (e.g., milk reconciliations, stock controls, cards, etc.)? Limited set of processes (e.g., planning, reviews, internal information dissemination) to ensure effective functioning of the organization; use of processes is variable, or processes are seen as ad hoc requirements ( paperwork exercises ); no monitoring or assessment of processes; meetings sometimes lack effective facilitation. Basic set of processes in core areas for ensuring efficient functioning of organization; processes known, used, and accepted by a portion of staff; limited monitoring and assessment of processes, with few improvements made in consequence; meetings are effectively facilitated, though sometimes run longer than necessary. Solid, well-designed set of processes in place in core areas to ensure smooth, effective functioning of organization; processes known and accepted by many and often used and contribute to increased impact; occasional monitoring and assessment of processes, with some improvements made accordingly; meetings are effectively facilitated and do not run longer than necessary. Robust, lean, and welldesigned set of processes in place in all areas to ensure effective and efficient functioning of organization; processes are widely known, used, and accepted, and are key to ensuring full impact of organization; continual monitoring and assessment of processes, with systematic improvements made accordingly; meetings are effectively facilitated and all participants are highly engaged throughout. AgPrO Training Module 11: Workbook

312 306 Agricultural Producer Organization (AgPrO) Manual 3. MANAGEMENT CAPACITY Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 3.09 Decision Making Processes: Who makes decisions? How is milk issued and received? 3.10 Knowledge Management: How is information how captured and disseminated? What records are available (e.g., membership register, by-laws, constitution, directors' job description, minutes of meeting)? Are the minutes circulated? Decisions made largely on an ad hoc basis by one person and/or whomever is accessible; highly informal; authority is vague and changing; staff is unaware of social/ cultural power differences between themselves and their constituents. No formal systems to capture and document internal knowledge. Appropriate decision makers known; decision making processes fairly well established, but often break down and become informal; social/ cultural power differences addressed in a limited fashion (e.g., a one-day training). Systems exist in a few areas but are either not user-friendly or not comprehensive enough to have an impact; systems known by only a few people, or only occasionally used. Transparent and structured lines/systems for decision making exist; dissemination of decisions generally good; general awareness of social/ cultural power differences and on-going plans to address them. Well-designed, userfriendly systems in some areas; not fully comprehensive; systems are known by many people within organization and often used. Transparent and structured lines/ systems for decision making exist, and involve broad participation as practical and appropriate (sometimes including constituents); dissemination and interpretation of decisions is both good and consistent; specific awareness of social/ cultural power differences and established systems in place to mitigate them. Well-designed, userfriendly, comprehensive systems to capture, document, and disseminate knowledge internally in all relevant areas; all staff are aware of systems and trained in their use; systems used frequently. 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating

313 3. MANAGEMENT CAPACITY Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 3.11 Recruiting, Development & Retention of Management: How is the manager selected? Is there a written employment contract? Are there periodic performance reviews (yearly or how often)? Is the board involved in these reviews? Does the manager participate in training programs? Standard career paths in place without considering managerial development; very limited training, coaching and feedback; infrequent performance appraisals; no systems/ processes to identify promising new managers. Partially tailored development plans for some promising staff members; personal annual reviews incorporate development plan for each manager; some formal recruiting networks in place. Recruitment, development, and retention of key managers is priority and high on manager s agenda; individually tailored development plans for some promising staff members; relevant training, coaching/ feedback, and consistent performance appraisals are institutionalized; wellconnected to potential sources of promising new managers; attention paid to recruitment and promotion of managers that reflect the diversity of the community and constituents. Well-planned process to recruit, develop, and retain key managers; manager takes active interest in managerial development; individually tailored development plans for all promising staff members; relevant and regular internal and external training, coaching/ feedback, and consistent performance appraisals are institutionalized; wellconnected to potential sources of promising new managers; recruitment and promotion methods ensure that management team reflects the diversity of the community and constituents Recruiting, Development & Retention of General Staff: Is there an HR plan? How are staff selected? Are there employment contracts? Performance reviews? Board reviews of staff? Does coaching and training occur? Please proceed to Worksheet 4. Standard career paths in place without considering staff development; limited training, coaching and feedback; no regular performance appraisals; no initiatives to identify promising new staff. No active development tools/programs; feedback and coaching occur sporadically; performance evaluated occasionally; sporadic initiatives to identify promising new staff. Limited use of active development tools/ programs; frequent formal and informal coaching and feedback; performance regularly evaluated and discussed; regular concerted initiatives to identify promising new staff; attention paid to the recruitment of staff that reflect the diversity of the community and constituents. Management actively interested in general staff development; thoughtful and targeted development plans for key employees/positions; frequent, relevant training, coaching/ feedback, and consistent performance appraisals are institutionalized; continuous, proactive initiatives to identify promising new staff; recruitment methods ensure that staff reflect the diversity of the community and constituents. AgPrO Training Module 11: Workbook

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315 4. OPERATIONS Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 4.01 Staffing Levels: Are all staff positions filled? Who has been with the organization the longest? How long? How frequent is staff turnover? Are there attendance problems? Some positions are unfilled, inadequately filled, or experience high turnover and/or poor attendance. Critical positions are staffed, though some inappropriately; attendance problems are limited; high turnover is sometimes a challenge. Critical positions are adequately and appropriately staffed; attendance problems are rare; turnover is limited. All positions are adequately and appropriately staffed; attendance problems are extremely rare; turnover is limited; vacancies filled immediately Member and Non-Member Communications Strategy: Is there a strategy for communicating with members and non-member milk suppliers? Are there written communications? What are the key messages? No communications plan or articulated communications strategy in place; key messages not defined or articulated; messages about organization are inconsistent. No communications plan or articulated communications strategy in place, but key messages defined; communications to members and nonmember milk suppliers are fairly inconsistent. Communications plan and strategy in place; key messages defined; communications to members and nonmember milk suppliers are generally consistent and coordinated. Communications plan and strategy in place and updated on a frequent basis; members and non-members and their values identified, and communications to members and non-member milk suppliers customized; communications always carry a consistent and powerful message Computers, Databases & Management Reporting Systems: Is the reporting system manual or computer-based? Does the organization have any computers? If so, what are they used for (e.g., accounts, records, databases)? No use of computers in day-to-day activity; no systems for tracking members, non-member milk suppliers, staff, program outcomes and financial information. Limited use of computers in day-to-day activity; electronic databases and management reporting systems exist in only a few areas; systems perform only basic features, are awkward to use, or are used only occasionally by staff. Solid hardware and software infrastructure contributes to increased efficiency; electronic database and management reporting systems exist in most areas for tracking members, non-member milk suppliers, staff, program outcomes, and financial information; commonly used and help increase information sharing and efficiency. State-of-the-art, fully networked computing hardware with comprehensive range of up-to-date software applications; greatly enhances efficiency; sophisticated, comprehensive electronic database and management reporting systems exist for tracking members, non-member milk suppliers, staff, program outcomes, and financial information; widely used and essential in increasing information sharing and efficiency. AgPrO Training Module 11: Workbook

316 310 Agricultural Producer Organization (AgPrO) Manual 4. OPERATIONS Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating Integrated Financial Management Systems, Integrated Co-ops: Is there a common financial recording and bookkeeping system for all the primary coops in the Union? Are these systems then consolidated periodically to produce financial statements and analysis? 4.04 Buildings & Office Space: Is the building and infrastructure adequate in terms of location, hygiene, water supply, electricity, back-up generator, waste disposal, storage, safe storage of chemicals, etc.? No use of a common recordkeeping system in day-to-day activity; each co-op uses its own method of tracking records, nonmember milk suppliers, staff and financial information. Inadequate physical infrastructure, resulting in loss of effectiveness and efficiency (e.g., unfavorable locations for members and employees, no possibility of confidential discussions, insufficient workspace for individuals, no space for teamwork). Limited use of some common systems by a few co-ops; some co-ops use computer excel sheets and others use manual recording systems; systems perform only basic features, are awkward to use or are used only occasionally. Physical infrastructure can be made to work well enough to suit organization s most important and immediate needs; a number of improvements could increase effectiveness and efficiency. Some primary co-ops use common accounting software with increased efficiency; In most primary co-ops, financial records are relayed to headquarters financial office for tracking records of members, supplies, suppliers and financial information; financial records can be consolidated. Fully adequate physical infrastructure for the current needs of the organization; infrastructure does not impede effectiveness and efficiency; decor partially reflects cultural traditions of constituents. All primary co-ops are using a common accounting software system; efficient submission of financial information electronically to the HQ accounting office; accounts are consolidated and financial reporting systems exist for tracking income, expenses and equity; financial statements are produced on-time and are used to analyze financial and business performance regularly and periodically. Physical infrastructure well-tailored to organization s current and anticipated future needs; well-designed to enhance organization s effectiveness and efficiency; favorable locations for members and employees; plentiful space encourages teamwork; layout increases critical interactions among staff; decor clearly reflects and affirms cultural traditions of constituents. 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 4.05 Legal Status: Is the co-op legally registered? if so, is it registered as a co-op or another kind of organization? Where is it registered? Is it following tax and other statutory requirements? Unincorporated, no plans to incorporate. Unincorporated, in the process of becoming incorporated as a cooperative or other appropriate legal entity. Incorporated but there are problems with corporate status or can't produce documents confirming incorporation. Incorporated, no apparent problems with incorporation status, incorporation documents in order. Please proceed to the Summary Table to review your responses and select priority capacity elements for your organiza

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318 312 Agricultural Producer Organization (AgPrO) Manual 5. SUPPLY, PROCESSING AND MARKETING Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 5.01 Extension: Does the organization have an extension officer or a link to an extension agent? If so how effective is this approach? How often does the agent visit members and non-member milk suppliers? Are there group trainings? How useful are they? 5.02 Input Supplies: Does the organization assist in input supply (e.g., veterinary supplies, feed, seed, etc.)? 5.03 Pasture Development: How many members and non-member milk suppliers grow feed for cattle? How many conserve feed? No or very limited extension services to co-op members and nonmember milk suppliers; co-op doesn't encourage or provide such services. Co-op not involved in providing input supplies (e.g., stock feed, veterinary supplies, cleaning chemicals, cans and buckets) to members and non-member milk suppliers. Co-op has very little involvement in helping members and nonmember milk suppliers to develop forage crops and is providing no assistance with conservation; less than 10% of members and non-member milk suppliers are carrying out these activities. Limited extension services to co-op members and nonmember milk suppliers; co-op somewhat involved in encouraging and/or providing such services. Co-op plays minor role in providing input supplies to members and non-member milk suppliers. Co-op provides limited assistance to members and non-member milk suppliers in developing forage crops and in conservation; 10-25% of members and non-member milk suppliers are carrying out these activities. Co-op encourages and/ or provides extension services, but there are opportunities for improvement. Co-op actively provides input supplies to members and non-member milk suppliers, but could be doing more. Co-op provides assistance in helping members and non-member milk suppliers to develop forage crops and to improve conservation; 26-75% of members and non-member milk suppliers are carrying out these activities, but improvement is needed. Co-op doing a good job of encouraging and/ or providing extension services. Co-op is very active in providing input supplies to members and non-member milk suppliers, and there are no significant supply problems. Co-op does a good job developing members' and non-member milk suppliers' forage crops and assisting them with conservation; more than 75% of members and nonmember milk suppliers are carrying out these activities. 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 5.04 Veterinary Services: Percentage of farmers accessing preventive animal health care (dipping, deworming, vaccinations). Co-op does very little to educate and/or assist members and non-member milk suppliers to access preventive veterinary services; less than 10% of members and non-member milk suppliers use these services. Co-op plays a limited role in educating and/ or assisting members and non-member milk suppliers to access preventive veterinary services; 10-25% of members and non-member milk suppliers have access to these services. Co-op plays a fairly active role in educating and/ or assisting members and non-member milk suppliers to access preventive veterinary services; between 26-75% of members and nonmember milk suppliers have access to these services, but improvement is needed. Co-op is very active in educating and/or assisting members and non-member milk suppliers to access preventive veterinary services. More than 75% of members and nonmember milk suppliers have access to these services.

319 5. SUPPLY, PROCESSING AND MARKETING Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 5.05 Artificial Insemination: Percentage of farmers using AI 5.06 On-Farm Training in Milk Hygiene: Percentage of farmers receiving milk hygiene training. Less than 10% of members and non-member milk suppliers using AI on cattle. Less than 10% of members and non-member milk suppliers have received on-farm training in milk hygiene. Between 10% and 25% of members and non-member milk suppliers using AI on cattle. Between 10% and 25% of members and non-member milk suppliers have received on-farm training in milk hygiene. Between 26% and 75% of members and non-member milk suppliers using AI on cattle. Between 26% and 75% of members and non-member milk suppliers have received on-farm training in milk hygiene. More than 75% of members and non-member milk suppliers using AI on cattle. More than 75% of members and non-member milk suppliers have received on-farm training in milk hygiene Practices at the Milk Collection Centers: What number tests of raw milk? Use of steel cans? Hot water? Cleaning chemicals? Serious problems with one or more of the following activities at the MCC: quality control tests; correct milk handling at MCC; use of milk cans; or other operating procedures. Minor problems with more than one of the following activities at the MCC: quality control tests; correct milk handling at MCC; use of milk cans; or other operating procedures. Minor problems with one of the following activities at the MCC: quality control tests; correct milk handling at MCC; use of milk cans; or other operating procedures. No current problems with any of the following activities at the MCC: quality control tests; correct milk handling at MCC; use of milk cans; or other operating procedures Infrastructure Development: What infrastructure is available? No chiller, just bulking warm milk. Bulking and chilling milk with cooling tank. Bulking, chilling and a standby generator. Bulking chilling, standby generator, and good waste disposal, adequate storage Installed Capacity: What % used daily? Less than 25% of daily capacity utilized Less than 50% daily capacity utilized Less than 75% daily capacity utilized Over 75 % daily capacity utilized Marketing: Percentages of sales to processors total sales? Is the organization producing any value-added products profitably? What volume(s) are being produced? The co-op board and manager are not aware of retail prices and prices offered by other processors. No formal contract with processor. No investigation of value added products The co-op and manager are partially aware of other markets. There is a formal contract, but it is not understood. May be involved in processing and marketing one or more value-added products, but there are serious problems in production, marketing, and/or profitability. Reasonably aware of market, understand contract partially. The co-op or its union is involved in processing and marketing one or more value-added products, but there are minor problems in production, marketing and/or profitability. Please proceed to the Summary Table to review your responses and select priority capacity elements for your organization. Fully aware of the market and the contract and how to obtain maximum out of it. The co-op or its union is profitably processing and marketing one or more value-added products with no current problems. AgPrO Training Module 11: Workbook

320 Comments 314 Agricultural Producer Organization (AgPrO) Manual

321 6. PRODUCTIVITY AND FINANCIAL PERFORMANCE Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 6.01 Productivity: Ratio: Capacity Utilization Formula: Sales or Production/Installed capacity. Calculated quarterly. Indicates the portion of what is being utilized. Low capacity utilization increases the costs of production Productivity: Ratio:% rejection at MCC Formula: Volumes rejected/ Volumes received. Calculated quarterly. Indicates the level of poor quality milk within the catchment area. It serves as a signal towards addressing specific milk handling and quality issues. Counts towards on-farm production losses to the individual farmer. 0-25% 26-50% 51-75% or 91% % >41% 11-40% 6-10% 0-5% Productivity: Ratio: Rejections from sales Formula: Volumes spoiled and rejected by market/ Milk available for sale. Calculated quarterly. It is a measure of the amount of milk that loses quality or is spilled within the MCC. Computed as one of the operational expenses. This spillage, sourage and/or returns should generally not exceed 5%. >41% 11-40% 6-10% 0-5% AgPrO Training Module 11: Workbook

322 316 Agricultural Producer Organization (AgPrO) Manual 6. PRODUCTIVITY AND FINANCIAL PERFORMANCE Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 6.04 Profitability: Ratio: Net profit margin Formula: Net profit/sales Calculated quarterly. Measures profitability over a specific time period after considering all business operations. It is the bottom line. A ratio less than 0% means the owners' equity is being reduced. Indicates level of safety in price. The sales price can be reduced up to the margin without causing loss Liquidity: Ratio: Current ratio Formula: Current Assets/Current Liabilities Calculated quarterly. Indicates sufficient ability to pay the short term-liabilities. Shows sufficiency of working capital allowing operations to continue until debtors pay up. Generally a ratio of 2 is considered about right. < - 4% - 4 % to 0 % >0-4% >4% 0-50% % or >250% % 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 6.06 Solvency: Ratio: Debt ratio (Leverage) Formula: Total Liabilities/Total Assets Calculated quarterly. It is concerned with whether assets sufficiently cover liabilities. Too much use of borrowed funds means the organization is "leveraged". Care must be taken not to acquire too much debt. >70% 60-70% 50-59% <50%

323 5. SUPPLY, PROCESSING AND MARKETING Criteria LEVEL ONE LEVEL TWO LEVEL THREE LEVEL FOUR 1st Quarter Rating 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating 6.07 Efficiency: Ratio: Payroll to Milk Sales Formula: Annual cooperative payroll divided by net milk sales. In order to maximize the efficient use of human resources, it is important to ensure that a correct balance should be struck between labor costs and sales per employee. A high number indicates lower productivity of employees Capital Structure: Ratio: Equity to Total Assets Formula: Total Equity/ Total Assets Calculated quarterly. Indicates proportion of assets financed by owners equity. Helps to know whether borrowing has been used to finance assets. >31% 21-30% 10-20% <10% 0-20% 21-34% 35-50% >50% Please proceed to the Summary Table to review your responses and select priority capacity elements for your organization. AgPrO Training Module 11: Workbook 317

324 Comments 318 Agricultural Producer Organization (AgPrO) Manual

325 Performance Areas and Criteria 1st Quarter Rating 2nd Quarter Rating 3rd Quarter Rating Cooperative Performance Summary 4th Quarter Rating Priority Areas to Improve (3-7 X's) Criteria Averages Y2D Performance Areas and Criteria 1. LEADERSHIP 4. OPERATIONAL CAPACITY 1.01 Mission Staffing Levels Overarching Goals Member Communications Strategy Overarching Strategy Computers, Databases & Management Reporting Systems 1.04 Shared Beliefs & Values Buildings & Office Space Board Composition & Commitment Legal Status st Quarter Rating 2nd Quarter Rating 3rd Quarter Rating 4th Quarter Rating Priority Areas to Improve (3-7 X's) Criteria Averages Y2D Board Governance Quarter Averages Board Involvement & Support SUPPLY, PROCESSING AND MARKETING 1.08 Manager Experience & Standing Extension Manager Organizational Leadership / Input Supplies Effectiveness 1.10 Manager Analytical & Strategic Thinking Pasture Development Manager Financial Judgment Veterinary Services Ability to Motivate & Mobilize Members Artificial Insemination Quarter Averages On-Farm Training in Milk Hygiene ADAPTIVE CAPACITY 5.07 Practices at the Milk Collection Centers Strategic Planning Infrastructure Development Evaluation / Performance Measurement Installed Capacity Evaluation & Organizational Learning Marketing Partnerships & Alliances Quarter Averages Member & Non-Members PRODUCTIVITY AND FINANCIAL PERFORMANCE 2.06 Member Involvement Capacity Utilization Quarter Averages Percentage of Milk Rejected by MCC MANAGEMENT CAPACITY 6.03 Percentage of Milk Rejected by Buyers Staff Net Profit Margin Dependence of Management Team & Staff Liquidity on manager #REF! 3.03 Shared Goals / Performance Targets Debt ratio Financial Planning / Budgeting Inventory Turnover #REF! #REF! #REF! #REF! 3.05 Financial Operations Management Capital Structure Financing and Access to Financial Services Quarter Averages #REF! #REF! #REF! #REF! 3.07 Operational Planning AVERAGE RATING OF ALL PERFORMANCE AREAS #REF! #REF! #REF! #REF! #REF! Organizational Processes Decision Making Processes Performance Area AVG Q1 AVG Q2 AVG Q3 AVG Q4 AVG Y2D 3.10 Knowledge Management Leadership 0% 0% 0% 0% 0% 3.11 Recruiting, Development, & Retention of Adaptive Capacity 0% 0% 0% 0% 0% Management 3.12 Recruiting, Development, & Retention of Management Capacity 0% 0% 0% 0% 0% General Staff Quarter Averages Operational Capacity 0% 0% 0% 0% 0% 5. Supply, Processing and Marketing 0% 0% 0% 0% 0% 6. Productivity and Financial #REF! #REF! #REF! #REF! #REF! Performance IDEAL 100% 100% 100% 100% 100% AgPrO Training Module 11: Workbook

326 100% Quarterly Cooperative Performance Table 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1. Leadership 2. Adaptive Capacity 3. Management Capacity 4. Operational Capacity 5. Supply, Processing and Marketing 6. Productivity and Financial Performance AVG Q1 0% 0% 0% 0% 0% 0% 100% AVG Q2 0% 0% 0% 0% 0% 0% 100% AVG Q3 0% 0% 0% 0% 0% 0% 100% AVG Q4 0% 0% 0% 0% 0% 0% 100% IDEAL 100% Year-To-Date Cooperative Performance Table 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1. Leadership 2. Adaptive Capacity 3. Management Capacity 4. Operational Capacity 5. Supply, Processing and Marketing 6. Productivity and Financial Performance Score 0% 0% 0% 0% 0% 0% 100% IDEAL 320 Agricultural Producer Organization (AgPrO) Manual

327 AgPrO Training Module 11: Workbook 100% Quarterly Cooperative Performance Table 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1. Leadership 2. Adaptive Capacity 3. Management Capacity 4. Operational Capacity 5. Supply, Processing and Marketing 6. Productivity and Financial Performance AVG Q1 0% 0% 0% 0% 0% 0% 100% AVG Q2 0% 0% 0% 0% 0% 0% 100% AVG Q3 0% 0% 0% 0% 0% 0% 100% AVG Q4 0% 0% 0% 0% 0% 0% 100% AVG Q5 0% 0% 0% 0% 0% 0% 100% IDEAL 321

328 Cooperative Action Plan Name of Cooperative: Detailed Location of Cooperative: Land O'Lakes Program/Country: Name and Title of Person Completing Workbook: Date Action Plan Was Completed: Date(s) Action Plan Was Evaluated and Revised: INTRODUCTION The Action Plan identifies three to seven performance criteria that are most in need of improvement for each co-op; describes the step(s) to be taken by the co-op related to each criterion; and identifies who will be responsible for taking these steps. The Action Plan is based on a three-month timetable. Progress in carrying out the action steps will be evaluated at the end of three months, at which time the Action Plan will be revised for the next three-month time period. In filling out the Action Plan, use additional pages as necessary. PERFORMANCE CRITERIA TO BE IMPROVED For each of the Performance Criteria listed on the following pages, summarize the problem(s) in need of improvement, list the action step(s) to be taken to make the improvement(s), list one or more measurable results that are expected from the action step(s), identify the person(s) with primary responsibility for carrying out the action steps, and enter the date by which the action steps(s) are to be completed. 322 Agricultural Producer Organization (AgPrO) Manual

329 AgPrO Training Module 11: Workbook Cooperative Action Plan PERFORMANCE CRITERION ONE: a. Summary of the problem: b. Action step(s) to improve performance: c. Measurable result(s) from action step(s): d. Person(s) responsible for implementing action steps: e. Date by which action steps are to be completed: f. Evaluation of results of action step(s) -- to be filled out at the end of 3 months: 323

330 Cooperative Action Plan PERFORMANCE CRITERION TWO: a. Summary of the problem: b. Action step(s) to improve performance: c. Measurable result(s) from action step(s): d. Person(s) responsible for implementing action steps: e. Date by which action steps are to be completed: f. Evaluation of results of action step(s) -- to be filled out at the end of 3 months: 324 Agricultural Producer Organization (AgPrO) Manual

331 AgPrO Training Module 11: Workbook Cooperative Action Plan PERFORMANCE CRITERION THREE: a. Summary of the problem: b. Action step(s) to improve performance: c. Measurable result(s) from action step(s): d. Person(s) responsible for implementing action steps: e. Date by which action steps are to be completed: f. Evaluation of results of action step(s) -- to be filled out at the end of 3 months: 325

332 Cooperative Action Plan PERFORMANCE CRITERION FOUR: a. Summary of the problem: b. Action step(s) to improve performance: c. Measurable result(s) from action step(s): d. Person(s) responsible for implementing action steps: e. Date by which action steps are to be completed: f. Evaluation of results of action step(s) -- to be filled out at the end of 3 months: 326 Agricultural Producer Organization (AgPrO) Manual

333 AgPrO Training Module 11: Workbook Cooperative Action Plan PERFORMANCE CRITERION FIVE: a. Summary of the problem: b. Action step(s) to improve performance: c. Measurable result(s) from action step(s): d. Person(s) responsible for implementing action steps: e. Date by which action steps are to be completed: f. Evaluation of results of action step(s) -- to be filled out at the end of 3 months: 327

334 Cooperative Action Plan PERFORMANCE CRITERION SIX: a. Summary of the problem: b. Action step(s) to improve performance: c. Measurable result(s) from action step(s): d. Person(s) responsible for implementing action steps: e. Date by which action steps are to be completed: f. Evaluation of results of action step(s) -- to be filled out at the end of 3 months: 328 Agricultural Producer Organization (AgPrO) Manual

335 AgPrO Training Module 11: Workbook Cooperative Action Plan PERFORMANCE CRITERION SEVEN: a. Summary of the problem: b. Action step(s) to improve performance: c. Measurable result(s) from action step(s): d. Person(s) responsible for implementing action steps: e. Date by which action steps are to be completed: f. Evaluation of results of action step(s) -- to be filled out at the end of 3 months: 329

336 330 Agricultural Producer Organization (AgPrO) Manual

337 AgPrO Training Module 12: Resource Guide Training Module 12 Resource Guide Agricultural Producer Organization (AgPrO) Manual Prepared by Land O Lakes International Development Funded by The United States Agency for International Development 331

338 332 Agricultural Producer Organization (AgPrO) Manual

339 AgPrO Training Module 12: Resource Guide Preface Field staff may find themselves in need of additional resources or guidance relating to Land O Lakes practices. AgPrO Training Module 12: Resource Guide contains descriptions of Land O Lakes publications that relate to the technical needs of producer groups as well as cross-cutting issues they may encounter. The images of the document covers are hyperlinked to the resource location. 333

340 GENDER RESOURCES INTEGRATING GENDER THROUGHOUT A PROJECT S LIFE CYCLE There is a large, global evidence base which demonstrates that engaging women and men on gender issues is an essential component of effective development work, particularly when an aim of this work is to increase agricultural productivity, food security, and nutritional outcomes. In parallel to this growing evidence base, donor requirements and expectations for gender integration into all technical approaches are rapidly increasing as well. To conduct effective, responsible development work and to remain competitive, it is essential for Land O'Lakes to incorporate gender at all stages, from proposal writing to field implementation to communications to monitoring and evaluation. This document provides guidance on how to accomplish this objective. Integrating Gender throughout a Project s Life Cycle A guidance document for international development organizations and practitioners GENDER ANALYSIS TOOLKIT The purpose of this toolkit is to provide Land O Lakes International Development with a practical, user-friendly and widely applicable method to 1) understand factors that influence power and gender 2) analyze different economic sectors using a gender lens. It focuses on different aspects of household and community gender differences, including access to power, assets, labor roles, participation, and decision making. Through the use of this toolkit, the following objectives should be achieved: 1. Clear understanding of how various factors affect power dynamics, and the different ways imbalanced power dynamics create vulnerable populations; 2. Clear understanding of how laws, policies and sociocultural norms affect power dynamics pertaining to gender (from legal and community-level perspectives); 3. Clear understanding of how power dynamics pertaining to gender impact a specific sector. 334 Agricultural Producer Organization (AgPrO) Manual

341 AgPrO Training Module 12: Resource Guide ENTERPRISE AND ECONOMIC STRENGTHENING RESOURCES ECONOMIC STRENGTHENING TOOLKIT The Economic Strengthening Toolkit provides the tools necessary to strengthen the knowledge, skills, and assets necessary to reduce risk and promote economic growth among vulnerable populations. The toolkit facilitates the identification and provision of a variety of economic growth support to clients based on their level of vulnerability, avoiding use of a one size fits all approach. This toolkit was developed to build the capacity of organizations serving people in need of livelihoods support. Intended users may include community-based social support agencies, national and international NGOs, agriculture cooperatives and producer associations, the private sector, government agencies providing extension services and safety net programs. In addition, the toolkit is designed to help people to achieve specific milestones and objectives as vulnerable households move toward greater economic empowerment. APPROACHING FINANCIAL INSTITUTIONS FOR INVESTMENT REFERENCE GUIDE The manual presents information on how Cooperatives and/or SMEs can successfully prepare for approaching a Financial Service Provider (FSP) for commercial investment. This is important due to the various external and internal barriers that Cooperatives and SMEs face in accessing commercial finance, such as being viewed as risky or products not meeting needs or enterprises. The guide is designed to also build the capacity of program staff on this topic and assist field implementers in understanding the types of interventions and approaches used for SME development. 335

342 COOPERATIVE READINESS TO INTEGRATE TOOL The Cooperative Readiness to Integrate Tool is a set of four diagnostic questionnaires that are designed to help cooperatives and development professionals better understand cooperative health and organizational readiness to integrate forward or backwards into the value chain. The tools were developed through expertise of Dr. Michael Cook and Dr. David O'Brien from the University of Missouri. The tools focus on four key dimensions: 1) Macro environment (including law and regulation) 2) Competitive landscape 3) Firm performance 4) Motivations and health of the member household The tools are being stress tested and refined through CDP expansion country work. 336 Agricultural Producer Organization (AgPrO) Manual

343 AgPrO Training Module 13: Developing an Exit Strategy Training Module 13 Developing an Exit Strategy Agricultural Producer Organization (AgPrO) Manual Prepared by Land O Lakes International Development Funded by The United States Agency for International Development 337

344 338 Agricultural Producer Organization (AgPrO) Manual

345 AgPrO Training Module 13: Developing an Exit Strategy Preface Training Module 13: Developing an Exit Strategy gives an overview of the importance of developing exit strategies from early on in a project and discusses a few types of exit strategies field staff could utilize. An example planning matrix for developing exit strategies that provides guiding principles and key points to consider is included at the end of the module. The target audiences for this module are: Land O Lakes program and field managers, cooperative and business development specialists and extension officers Government cooperative development officers Cooperatives and other producer groups Other development partners, including government agencies, nongovernmental organizations and private sector partners. 339

346 Section 1: Exit Strategy Overview A program may use a variety of tools and techniques to build capacity and support the development of small and medium enterprises and cooperatives. For example, promoting the development of service providers and linking producer organizations to them from the beginning of a program helps ensure a cooperative s sustainability and profitability by the time assistance ends and into the future. Field staff should work closely with service providers to ensure cooperative management knows where services can be procured, the estimated cost, and how to engage the provider. The steps and timeline for profitability should be built into the memorandum of understanding or partnership agreement, and further refined in the cooperative s business plan. One must also consider intended outcomes and goals of the program and should work with partner organizations from the beginning to design and develop a plan for transition and exit. There are four key components of an exit strategy: Each program concentrates its development assistance on training and technical support and minimizes financial dependency of producer groups; Wherever possible, the program links cooperatives and farmers with existing public and private service providers, such as business development service (BDS) providers; The program assists cooperatives to develop effective business plans, financial and business management systems, and profitable operations so that they can continue to operate at a high level after the program is completed. The program encourages cooperative members to develop their farms into profitable businesses and to be active and knowledgeable owners of their cooperative. It is a good idea to have two or more exit strategies: one based on the project s originally scheduled end date, another on a two- or three-year extension and a third assuming a longer timeframe. For example, a Field Tips Build an exit strategy (or alternative exit strategies) into the initial MOU with farmers and into each business plan As each business plan is revised, update the exit strategy Include in each business plan a clear path to profitability that includes specific steps/actions Implement a training program for cooperative members, directors and staff that results in their being able to run the business successfully by the time assistance is projected to end Develop operational systems and internal controls so that the business can function sustainably Instill in members, directors and staff an ability to engage in strategic planning in an uncertain business environment. That is, equip them to make decisions based on careful analysis of the business strategy based on the original end date could set the goal of having a certain number of primary dairy cooperatives organized and providing milk to a specific number of secondary cooperatives that are operating cooling centers and marketing services. A strategy based on a two- or threeyear extension might have higher targets for the number of primary and secondary cooperatives. 340 Agricultural Producer Organization (AgPrO) Manual

347 AgPrO Training Module 13: Developing an Exit Strategy Section 2: Types of Exit Strategies A program may utilize different types of exit strategies. There are a few different general approaches. (Note: The following content has been borrowed and modified from the C-SAFE regional learning spaces initiative.1) 1) Phasing Over occurs when programs transfer to local institutions and partners who continue to build the capacity of businesses in the ecosystem that the development program was previously supporting. To do this successfully, the program must also build the capacity of the local institutions that will be longer term supporters of institutional development. 2) Phasing Down is a gradual reduction in program activities over a specified time period. Program activities may continue, but are undertaken sustainably through increased support of local BDS providers and by the cooperative businesses that were initially supported by the development program activities. 3) Phasing Out is withdrawal from a program once complete sustainability is obtained. This is the ultimate goal: creating self-reliance in farmer businesses that are being supported by the program. The approaches outlined are not necessarily mutually exclusive and may also be combined. For instance, phasing down may be combined with phasing out or phasing over approaches. Points to Consider What is the current financial performance of the producer organizations that are being supported? What are long term prospects and outlook for profitability and growth of the producer organizations? Do the organizations have sufficient institutional and human resource capacity? What are risks and potential shocks (market, environment, political, etc.) that could set back the progress of an organization s development. A planning matrix is one tool that the program can use to help develop exit strategies. The matrix below is adapted from C-SAFE s Planning Matrix for Exit Strategies through an HIV/AIDs Lens and applied more broadly to producer organization development. 341

348 Example Planning Matrix for Exit Strategies 13 To begin planning matrix: 1) Identify and name program objectives 2) Identify and name parts of the program and the components that need to be sustained COMPONENT KEY QUESTIONS GUIDING PRINCIPLES CHALLENGES 1) Plan early How will program be phased down? Will there be a handoff to local organizations? What is the appropriate timeline to accomplish? What are indicators that will help influence how to adapt program approaches and exit strategy over duration of the program? What are the specific actions that will help reach target indicators? 2) Develop partnerships and local linkages With what types of organizations should the program partner? What are partners expected to bring to the program and what will program offer to partners? How will the partners work together to achieve the exit strategy? Flexibility different factors may require course correction or changes in thinking on an exit approach Ongoing program reviews and revisions Transparency with partner organizations regarding funding, life cycle and program objectives Participation of diverse stakeholders in the ecosystem Consider complementary partners Work to help bring external resources under local control Advocate for longer term needs of partner organizations Balance commitments that are outlined in the proposal and work plans with flexibility as conditions change Allow for appropriate time to develop capacity Be responsive to producer organizations needs and changes in market Difficulty finding suitable local resources Additional funding may not be 100% aligned with original program objectives Resist temptation to bring in another funder to continue work that is not on a path to create selfsufficient memberowned businesses 14 Practical Guide for Developing Exit Strategies in the Field, a product of the C-SAFE Regional Learning Spaces Initiative, Sept Allison Gardner, Kara Greenblott and Erika Joubert 342 Agricultural Producer Organization (AgPrO) Manual

349 AgPrO Training Module 13: Developing an Exit Strategy 3) Build local and organizational and human capacity 4) Mobilize local and external resources 5) Phasing of different activities What are existing capacities? What capacities need to be built or enhanced? How will program monitor and track improved capacity? Identify the required enablers and inputs to sustain an effective ecosystem Who can provide the inputs and/or services? Are local providers available? Are there parts of the program activities that are already sustainable without additional inputs? What are key elements of program? How will various components be phased out? What does timeline look like? What is implementation plan for graduating program components? How will the phase down or phase out be monitored? Use PM2 tool to help assess, monitor and track organization capacity Seek out qualitative input from other stakeholders and partners Build on the progress already made Focus on local procurement Facilitate bringing external resources under local control and management Advocate for long term needs of the stakeholders within the ecosystem / value chain Be flexible sequence and timing of activities may change over the course of the program Monitoring requires high engagement and frequent followup Incentive structures may be misaligned and require correction Difficulty finding adequate local resources Sources of external funding may not be 100% aligned with original program objectives / goals Resist temptation to seek outside funding of inputs to cover flawed parts of the ecosystem without addressing root causes of sustainability barriers Allow sufficient time to see results and obtain data that will influence sequencing and timing 343

350 Land O Lakes strives to play the role of facilitator and catalyst as opposed to direct implementer or service provider. At the end of the project, the cooperative should know exactly where to procure the services that were provided by project staff. Therefore, investing time up front to think through program objectives, timeline and exit strategies will benefit the project and the cooperative s clients by ensuring a smooth transition once program funding ends. Furthermore, a properly thought-out exit strategy will build profitable, sustainable organizations and more viable ecosystems in the economy. 344 Agricultural Producer Organization (AgPrO) Manual

Facilitating local level dairy innovation platforms for smallholder farmers Report

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