"TRUTH" TALKS TO INVESTORS

NZ Truth, Issue 1079, 29 July 1926, Page 8

"TRUTH" TALKS TO INVESTORS

MIXING TRADE WITH THE BUSINESS OF TILLING THE SOIL

The Farmers 9 Co-op. Organisation of N.Z. Shows How It Is Done

(By "Fiat Lux.") < This concern was founded m that fateful year 1914, and consequently has. had to face most extraordinary trading conditions during its few short years of life.

HTHAT it has come through alive is I remarkable, but that it should come through with a. comparatively small percentage of capital loss (£37,180 out of £172,900 paid up) is indeed a tribute to the dogged pluck and perseverance of the directors and management and to the loyalty and faith of its shareholders. . This writer frequently challenges the obviously unsound financial management of many so-called co-operative concerns, but it does not always follow that an adverse profit and loss balance constitutes poor management. It is quite possible that, where established concerns insist upon making un.duly high profits out of the farming community, the farmers should retaliate by starting their own concern. They enter, business not necessarily with, the idea of making big profits for shareholders so much as to bring prices down to a decent level and keep them there. Tp achieve this objective takes biff capital and years of hard work. During this . time, however, farmers grnerally are obtaining many concessions and advantages from all trades and businesses, which realize that the man on the land is no longer a "pigeon to be plucked," but a person who wants a fair deal and who will kick, unmercifully if he doesn't get, it. If, then, a proportion of capital is lost m establishing a business it must be held as justifiable expenditure. ! While this argument holds good, tho length of time necessary to establish such a business must not be unduly prolonged. ' Adverse Conditions % There must be an end to trading losses, however, and m the case under review the period has, through adverse world- wide 'conditions oVer which the management had no control whatever, been extended tor years, but now the tide of affairs, has changed and profits are again m evidence. Dealing with the balance-sheet of March 31, 1926, the paid-up capital amounted to £.172,900, which is £ 17,319 better than a year ago". This is surely a sign that the ■ farmer shareholders have enjoyed better times during the year, and that they have renewed faith and confidence m their concern. The nominal capital amounts to £500,000 divided into 50,000 shares of £10 each, of which 24,069 have not boen allotted. .'- The shares are divided into three Tserles — A, B and C — but, not having the articles of association, this writer ...cannot give the rights and privileges /which each class enjoys. . ,Of the shares which have been allotted-^ £259,310 ' w0rth— £206,455 has been called up, and there has been paid to date £165,959, leaving the sum ol" £40,496 representing calls m arrears. '.-.•■'' ■Against this, however, ' payments m advance of calls . have been received to the amount of £ 6941. ' Call Arrears Regarding these arrears of calls, this writer is of the opinion that the company should use every endeavor to get these m during the coming sea.% son. Converting these arrears into cash would enable the company to discharge the major portion of its bank overdrafts and thus effect an annual saving of about £3500 -in interest. When it is remembered that £9000 wculd provide a 5 per cent, dividend this point will be better appreciated. Comparing the shareholders' funds with those of the previous year, the amount has advanced by a total of £25,727. * Of this sum £17,319, representing the increase m the paid-up capital, has already been commented upon. The balance of the increase is accounted for by the creation of a bad debts reserve of £8419. This is an. amount which has been set aside from the profit and loss account to take care of , any debts now on the books and which may ultimately not be collected. It is a very wise provision, and one which should be added to each year m addition to writing off bad accounts which have been" incurred during the year. Reserve By building 1 up such a reserve, tho writing off of accounts which m prosperous times look and are really good risks, but which m slump- times become hopeless, would not affect curtent profite, since they would be written off direct to the reserve account. Dealing with liabilities other than shareholders' funds, the first item is mortgages, which at £12,450 have been reduced by £1950 during the year. The total of mortgages compared with the value of the firm's properties is small, but no .doubt the banks are also secured over the real estate. '• It' would be sound' policy for the company to consolidate its indebted- j ness by paying off this liability just as soon as possible. . The next item, fixed deposits £48,730, j is a real bugbear, and although it is £6003 less than last year, this critic looks upon the item as the most dangerous liability m the balance-sheet. Overdrafts . Bank overdrafts at £55,427 have been, reduced by £16,928 during the year, and it is evident that shareholders- call money, is being utilized I specifically for this purpose. : , j Bank overdrafts have their definite •place m the scheme of things commercial, but the semi-permanent capitalization of a company most decidedly is not one of them. Bills payable £1565 is a new item compared with last year's accounts, but m 1924 there was a small item of £400 odd under this heading. It can be concluded that the company finds its banking limits sufficiently elastic to pay its merchants' accounts regularly and so secure all available cash discounts. Vendors' credits at £31,956 have increased £3229. This may be accepted as indicating increased business and not an accumulation of credits, . since auctioneering firms generally make a

practice of rendering prompt account sales together with covering cheques. Tiade creditors at £7592 have decreased by £2075, and are not unduly large at this sum. Accrued interest £3122 is less by i£43 than previous figures, and will serve to give shareholders some idea of the cost of running a business on borrowed money. Together with transient liabilities I such as deposits, bank overdrafts, etc, this item would be wiped out if the company was, as it should be, operating- on its own capital. Dealing with the company's assets, the. first item is property, which includes both* freehold and leasehold land, buildings and yards of a total value of £68,660, which is £91 less than last year, although £4102 has been written off for depreciation. ' Hence it is clear that some £4000 has been spent m additions during the period since the total value has been maintained.. It is difficult to hazard an opinion as to why this should be, .but probably like many other concerns the management has m the past considered depreciation of properties something to be provided for only if profits are plentiful. It is to be hoped that this idea has now been thoroughly exploded and that m future this item will be regularly depreciated annually as it should be. Depreciation Plant and machinery at £7562' 1s £3838 less than last year, but nearly £8000 has been written off m the period, for depreciation. Obviously insufficient provision has been made for this item m the, past, and one cannot help wondering when company managements will realize that depreciation upon an adequate scale must be provided. . Stocks m hand are valued at £34,031, which is £5643 less than last year. It is evident from the profit and loss account that full provision has been made for all stocks of doubtful value, no less than £4282 having been reserved for this purpose. Regarding stocks of seeds these have very properly been submitted to independent examination, and the report thereon is an absolutely unqualified one as to value , and freshness which must serve to inspire confidence m the company's operations. Secured book debts at £104,424 are higher by £2572 than previously, | whilst the unsecured, debts amount to a further £86,378, and although a decrease of £7148 has been effected m this item the tw6 totals — i.e., secured and unsecured— equal £190,802, which seems to this writer to be- altogether oiil of proportion to the company's .trading resources. Every effort, therefore, should be made to secure this asset. Helping Hand It must of course be remembered that this financing will have helped many a lame dog over the stile, . but agricultural banking — and that is what it amounts to— is not within the scope of the company's legitimate business. Perhaps the Bank of New Zea- : land's long term loan scheme will help m this direction by relieving such companies of the necessity of making semi-permanent advances to clients. Shares m other companies remain at £4900 and represent investments at cost m concerns with allied interests. War loan has been reduced by £4"98, and now stands at £266, whilst cash In hand at £242 is £1496 less than a year ago. The adverse balance of profit and loss £37,180 has been brought to this figure by an addition of £19,664. The published accounts give the net piofit for the year at £9739, but •against this some £29,403 has been written off for bad debts reserve for doubtful accounts, depreciation of plant, machinery, property arid stocks, and interest on calls paid m advance. Presumably all these charges' are accumulations which should have been written off m previous years, and provided the writing has been done m a thoroughly liberal manner and the earnings can be maintained, the company should be able to show good returns m the' future^ "Glaring Errors'' The profit and loss account has this year been drawn up on quite different lines from previous accounts, making it impossible to prepare an intelligent comparative statement, but m the opinion of "Fiat Lux" some glaring errors have been perpetrated m the setting out. For instance, the account is divided Into two sections, and the balance of the first section is carried down as "To net profit carried down, £9739," and m the second section all - the extraordinary writings off (totalling £29,403) are shown. To even a trained observer m published accounts it would appear at first glance that the year's profit was £9739, but upon a closer examination it is apparent that for some reason no bad debts, depreciation of plant, property or stock or interest on calls paid m advance have been debited against the current year's earnings. This is entirely wrong and misleading, and must react to the detriment of the management when the 1927 figures are published. Regarding the disposal of the £37,180 adverse balance m the profit and loss account, "Fiat Lux" strongly advises the shareholders to wipe this out by reducing the paid-up capital by £50,000, carrying the difference to a general reserve account, which can be used to meet any further extraordinary losses. . FOLLOW I N G~ AN~ACC1 ID E NT. Costly delay, loss of work, business neglected, progress handicapped; no matter what the accident ia; a broken shop window; a tramcar, train, or motor accident; • it means loss to you unless you are covered with an "M. & G." Accident Policy. The Mercantile and General Insurance Co., Ltd., transact Motor-car, Personal Accident, Employeis' Liability and Plate Glass Insurance, and settles claims promptly. Head Office. Panama Street. Wellington. Branches and Agents everywhere. Subscribed capital, £250,000.*