This past Friday I invited my cooperative’s Board of Directors to my house for a meeting. The objective was to go over the financial analysis report that I wrote so that 1) they could see how to do a financial analysis for the future and 2) they could actually use the information right now to make certain policy changes. I also had a list of a few recommendations of my own to offer, based on the analysis. I can say that as a PC Business Advisor, meetings like this feel good.
Since the Board is made up exclusively of coop members, on average they have very few years of education and little experience managing/overseeing businesses. Though to their credit, they have received some related training in the past from various NGOs and they naturally have years of agricultural, hands-on know-how.
Given this situation, I obviously didn’t want to give a meeting that was too technical or complicated that they’d have trouble understanding, because what would be th
e point? So I decided to also invite my main work partner in the coop, Lucas, to give me a hand with my explanations (see pic). Though also a member himself, Lucas is educated and worked for years as an accountant at a bank in San Pedro Sula, the industrial capital of the country. Currently he’s the coop’s General Administrator and Accountant, a sort of jack of all trades in terms of the coop’s money transactions (not to be confused with the General Manager, who I’ll mention later). Thus, he’s the right guy to help me out with this kind of meeting because he understands both perspectives. Plus, he’s a great guy and a good friend of mine and of all the members.Our meeting obviously got started a solid two and a half hours late and lasted three hours instead of the planned two. I am a PCV however, and after months of practice I’ve become used to this sort of cultural delay; so, overall I think the meeting was a success and is a step forward for the coop. Here are some notes about the things we talked about. I’d be happy to hear what all you business folks out there have to say:
1. Expand sales:
The company has reported losses for the past two years. Anybody even faintly familiar with how businesses work could tell you that it is thus necessary to expand sales and cut costs in order to turn the losses around (the main solution being to expand sales). The coop is very lucky because our buyer, one of the largest coffee companies in Canada, wants to buy everything that we can produce. Great! What’s the problem then? See number two…
2. Reduce financial restrictions and costs:
The reason we haven’t been able to radically take advantage of this special, amazing deal with our buyer is that we don’t have the sufficient working capital. In fact, we’re taking out loans from a Honduran bank every year just to be in operation. They charge upward of 18% interest and have a limit of only L3 million (about $150,000), which buys only about two truck container’s worth of coffee (and last year we exported 13 containers). This year, since coffee prices are at a 15 year high, we can buy even less coffee with our fixed loan. What’s more is that people are timid to sell their coffee to us as opposed to our competitors because we can’t offer them as many cash advances and loans since we don’t have the cash on hand.
Thus, naturally, priority number one for the coop is to seek out institutions that offer lower interest rates and higher limits in the short-term and prioritize auto-capitalization for the long-term. The idea is that with more sales come greater profits. The Manager needs to be searching for these institutions and filling out the paperwork while the Board of Directors needs to designate a majority of year-end’s profits to a capitalization fund.
3. Personal finance training for members:
In a related vein, I recommended that the Board of Directors initiate a program to teach the coop members basic personal finance strategies. For example, let’s learn how to write a budget, how to begin to save, how to find the discipline not to spend all your cash right away etc etc. As it stands now, almost every member is taking out cash advances and/or loans from the coop every year before the coffee harvest just to be in operation, losing a grand portion of their profits to interest payments (see a theme developing here?). So the idea of personal finance classes is to 1) reduce the liquidity burden of the coop in the short-term and 2) help the coop members make more money in the long-term. We could even offer special incentives to the members who are willing and able to wait for their payments, like a low-interest bonus.
If we can get our members to wait before they get paid for their coffee until after we sell it to Canada (and receive that precious cash transfer), then we could in the end buy more coffee. Thus, the Board of Directors needs to get the rest of the members on board with the program then set the dates and I’ll be there ready to jump into action with beautifully planned charlas.
4. Expand our gross margin:
Gross margin is an accounting term that means the difference between Sales Revenues and Costs of Goods Sold. It is the company’s gross profit before you take out operating, financial, and “other” costs. In other words, it’s the average profit margin (markup) for all the goods/services the company sells. For our coop the gross margin is practically fixed at $10 per 100 pounds of coffee sold because of the yearly contract we sign with our Canadian buyer. The amazing thing about the gross margin is that even small percentage changes can drastically affect bottom-line profits. So, the coop should be looking for ways to both diversify its products/services and its buyers (because such sales hopefully carry lower costs and/or they earn higher differentials).
Last year, for example, we took a first step in this direction: we rented out our large, fancy machines and our exporting license to other coops and to big producers in the off season, earning a new source of revenue when our factory would otherwise have been idle. We also sold a mini-container of specially prepared coffee to a new buyer in Spain for a higher differential. Finally, members expanded production on three of the five passion fruit parcels the coop owns and began selling directly to the big buyer Horti Fruti, Wal Mart’s Central American produce subsidiary. Going into the future, the Board of Directors should be emphasizing these specialty sales as a way to expand the coop’s gross margins.
5. Limit Admin salaries, remunerations:
I took a bold stance on this one. In Latin business culture, generally speaking, there is relatively wide “power distance,” meaning that there’s a fairly rigid hierarchy in the workplace. Japan and Korea would be on the wide-distance extreme while the US is on the close-distance extreme. My coop tilts towards Japan in that the General Manager of the coop is sort of held on a respectful pedestal. He can (and does) order a factory worker to bring him coffee and almost all the coop members use the formal Usted with him. To top it all off, he comes from a wealthy family, so there’s all that social hierarchy stuff too, which comes into play with the humble coffee producers that make up the Board. All this being said, the Manager gets paid a high salary, drives a company car with all gasoline paid, and gets his entire cell phone bill paid. Not to mention, Honduras has radical workers’ benefit laws that tack on an additional 25% to his salary, just like that. Plus, the coop has sent him to Europe twice on “networking” trips.
So, although it is important to retain an educated and qualified General Manager with a vision towards the future and motivation to get the company there, the coop has had losses for two straight years. There’s got to be a balance. In my recommendation to the Board, I suggested that they negotiate some limits on his benefits, seeking a monthly maximum on what the coop will reimburse for gas and phone bills. I also mentioned a bonus system that will be paid out only if the company is profitable or if it meets certain benchmark increases in sales. And, all of this must be spelled out and signed in a contract, be it long-term or yearly. This will be the most difficult recommendation for the Board to follow because it will be culturally awkward for them to negotiate it; but it’s their job to do so, in my opinion.
6. Cut discretional costs:
Although the real difference between profits and losses will have to come mostly from expanding sales and reducing high financial costs, the English expression that says that “every penny counts” matters too. The coop spends a good deal of money that it probably shouldn’t on buying lunches for every member for every General Assembly meeting, which is 56 members at least once, sometimes twice a month. Plus, there’s a whole expense category for “Customer Service” that has steadily grown over the past three years, which is basically code for picking up the tab for visitors, mostly from outside agencies like IHCAFE and Care, organizations that should be paying for their own damn food in the first place. And the coop pays quite a bit of money on travel allowances for people running errands for the company, which basically means ‘here, eat lunch and dinner on the coop’s dime’ all while the Manager is riding around in the company car, living in Santa Barbara, where most errands are done.
I guess I get kind of worked up about these discretional expenses when I think about the losses the coop has racked up. Anyway, I recommended that the Board put an end to all this, despite the cultural consequences (it’s considered rude not to “invite” someone to food). But I stand firm in my North American hardness: the mission of this cooperative is not to give free food to members; it’s to pay fair prices to farmers and make profits that will be invested in community projects. Maybe, I suggested, the Board of Directors could offer to partially reinstall these expenses if the company achieves profitability, as a sort of incentive or bonus to those involved.
There you have it: six recommendations that will put the company on the road to “in the black.” I shall stop ranting … now.
