planning can take place until operating results 

are known at the end of the year. 

Uncertainty can also occur if the cooperative 

is using a per-unit capital retain. The amount of 

capital generated can vary because the retain 

unit, usually based on physical volume of the 

product handled, can fluctuate widely. 

With a base capital plan, however, the 

amount of equity capital needed is decided in 

advance by the board of directors based on 

careful financial planning. Then, the method for 

getting the needed capital is established, 

whether from direct member investment, perunit capital retains, retained patronage refunds, 

or some combination of methods.

Equity redemption decisions are often just 

as inconsistent as in the capital-gathering 

phase because the amount approved for 

redemption is based on what is left over after 

other capital needs are met. This allows little 

flexibility in trying to fulfill the cooperative principles of user-controlled and user-financed.

A base capital plan also brings better control to the equity redemption process. The 

redemption amount is included as part of the 

capital requirements identified in next year’s 

financial plan. It is set up as a capital need right 

along with fixed asset purchases, long-term 

debt repayment, etc. 

The financial planning required to make a 

base capital plan operate correctly is more 

involved than with other programs of equity 

accumulation and redemption. The result, however, is a better capitalized cooperative that has 

control of its financial future and can adjust its 

capital require-ments in a planned and logical 

fashion to meet changing needs.

.

How a Base Capital Plan Operates

Three elements are required for setting up and 

operating a base capital plan: (1) the base period, (2) the measurement unit, and (3) the current investment level.

A responsive and impartial equity accumulation 

and redemption program is an important tool 

for helping cooperatives become and remain 

adequately capitalized. A well designed and 

operated base capital equity plan serves as 

just that kind of equity management tool.

What Is a Base Capital Plan?

A base capital plan is an effective financial 

management tool for cooperatives to use in 

achieving the appropriate level of equity, not 

only to capitalize the business, but also to balance member investment to make it proportional to use.

Through the systematic collection and 

repayment of member investment, a base capital plan provides a method for managing a 

cooperative’s equity capital levels. By doing so, 

a member’s investment in the cooperative is 

maintained in proportion to use, supporting the 

user-financed principle in the cooperative. 

Another principle, user-control, is also fulfilled.

Why a Base Capital Plan 

Is Different 

In many cooperatives, the method used for getting equity capital doesn’t necessarily relate 

directly to current capital needs. For example, if 

the primary source of equity is from retained 

patronage refunds, operating results decide the 

amount of capital available for the business to 

use in financing capital needs. Very little capital 

1

Understanding Cooperatives:

Base Capital Financing 

of Cooperatives

Cooperative Information Report 45, Section 12

Cooperatively owned and operated 

businesses face the constant challenge of obtaining sufficient equity 

capital to properly finance their 

organizations. 

United States

Department of

Agriculture

Rural Development

Cooperative

Programs

May 1995
1. Base Period

An initial requirement is to establish a base 

period—the length of time over which a member’s patronage or use of the cooperative is 

measured in relation to all other members. This 

provides the measurement base for finding out 

proportional owner-ship, financing, and control. 

Base periods vary among cooperatives, but 

generally range from 1 to 10 years. A short 

base period (from 1 to 3 years) is effective in 

adjusting for rapid changes in levels of patronage. A longer period (from 8 to 10 years) can 

help smooth out year-to-year swings in patronage levels. A 1991 survey showed the average 

base period for agricultural cooperatives with 

base capital plans was 7 years.

2. Measurement Unit

Another tool in determining proportional membership investment levels is the measurement 

unit. It is used with the base period to quantify 

the patronage level of each member in relation 

to all others. Measurement units, like base periods, will vary with the type of cooperative and 

commodities handled or services offered.

The measurement unit can be a physical 

unit of product supplied or marketed, or it can 

be a percentage of the value of the product. 

The important factor for a measurement unit is 

that it represents a common denominator that 

applies to each member’s use of the cooperative.

For example, in a fruit and vegetable processing operation, the measurement unit 

maybe a ton of product delivered, such as with 

tomatoes or peaches. In a dairy cooperative, 

the measurement unit is generally a hundredweight (cwt.) of milk. If a product is fresh-marketed, the physical unit is often the packed 

carton, as with oranges. A physical unit is easy 

to use and understand.

Supply and service cooperatives can also 

use a per-unit capital retain based on a physical unit of product sold to its members, such as 

a ton of feed or fertilizer.

The percentage of value method is a little 

more complicated, but has an advantage over 

the physical unit of measurement. A set per2

centage is applied to the price of the product 

for each year in the base period to find out the 

proportional value of a member’s use of the 

cooperative during the base period. This method takes into account the possibility that higher 

commodity values require more equity to support them. 

3. Current Investment Level

Once the measurement unit and the base period are decided, the cooperative has the means 

to calculate the equity investment level that 

each member must have to satisfy the proportional ownership (financing obligation) requirement. This is compared to the member’s 

current capital investment in the cooperative. 

This identifies which members are over-invested and which ones are under-invested in terms 

of capitalizing the cooperative according to 

use. From this information, a program can be 

developed to equalize each member’s investment according to use. These adjustments, 

depending on how large the disparity is 

between members, may take several years to 

accomplish. This length of time may be necessary to avoid placing too large a financial burden on any single member at any one point in 

time.

Table 1 shows possible disparities and what 

adjustments in capital levels must be made to 

correct them. A 5-year base period is used for 

the example and shows that three members are 

under-invested (A, D, and E) and two members 

are over-invested (B and C). If members A, D, 

and E contribute the amount of capital they are 

under-invested, this provides the funds needed 

to repay the over-invested members who would 

then be brought down to a fully invested level. 

At that point, equity capital is equalized and 

each member is capitalizing the cooperative in 

proportion to use.

Implementing a Base Capital Plan

With the base period established, the measurement unit identified, and proportionality of 

investment decided, the cooperative now has 

the fundamental tools to set up and operate a 

base capital plan.

The cooperative has set 

a financial target to 

meet its capital needs 

for the year and developed a program to 

achieve the desired 

results.

100

50

50

25

25
Determining Equity Capital Needs

As part of its annual financial plan, a cooperative should identify its capital requirements for 

the coming operating year. Begin by projecting 

the ending net worth level for the current fiscal 

year. Next, estimate the capital resources to be 

generated in the coming year. This includes 

estimates of patronage and nonpatronage 

income to be retained, per-unit capital retain 

amounts, and/or other miscellaneous sources 

of equity capital. Capital outlays should be 

identified next, including fixed asset purchases, 

long-term debt payments, and any special circumstances under which equity is redeemed 

separate from the base capital plan. When this 

information is known, the amount of additional 

capital needed for the coming year is established.

Required Levels of Investment

Next, recalculate each member’s required 

investment level based on the coming fiscal 

year’s capital needs. Each member is notified 

of this obligation and the method for making 

the adjustment. If a member is already overinvested, no additional equity investment may 

be required for the coming year, or the member 

may be entitled to a repayment of capital.

For the under-invested member, the situation 

is quite different. If the required investment 

shortfall is small, the cooperative’s planned 

patronage retain or per-unit capital retain for the 

coming year may be sufficient to satisfy the 

new requirement. If not, the member may have 

3

capital retained at a higher rate than the member who is closer to being fully invested, or be 

asked to make a direct cash investment to 

achieve parity. 

The different methods used by cooperatives 

to adjust capital levels for over- and underinvested members are quite diverse and beyond 

the scope of this publication. Each base capital 

plan, while containing the elements discussed, 

becomes a customized capital plan for the 

cooperative. Most base capital plans get modified from time to time to fine-tune the plan for 

the benefit of the membership and the cooperative. Dramatic changes in capital needs may 

also require significant modifications.

Advantages and Disadvantages

As with any capital program, base capital plans 

have advantages and disadvantages. Most 

often, the advantages outweigh the disadvantages compared with using other types of capitalization programs.

Advantages

u Links a member’s investment in the cooperative directly to use, and provides a mechanism 

for maintaining that relationship.

u Keeps ownership and control of the cooperative in the hands of current users, and in proportion to that use.

u Permits the cooperative to systematically 

adjust capital up or down to meet changing 

equity capital needs.

u Members view their investment as a true 

Three elements are 

required for setting up 

and operating a base 

capital plan: (1) the base 

period, (2) the measurement unit, and (3) the 

current investment level.

Base

Period

Measurement

Period

Current

Investment

Level

Base

Capital

Plan

Table 1 - Example of current equity investment level compared with base period usage of

cooperative, 5-year patronage base period

Allocated equity Average 5-year base Amount over (+) or

investment level period patronage under (-) invested

Total Percent Percent of 

Member dollars of total total patronage Percent Dollars

A 10,000 10 15 -5 -5,000

B 30,000 30 25 +5 +5,000

C 35,000 35 20 +15 +15,000

D 20,000 20 30 -10 -10,000

E 5,000 5 10 -5 -5,000

Total 100,000 100 100 0 0
This circular is one of a continuing series that provides training information and presentations for education 

resource persons who may or may not be familiar with the cooperative form of business. This series provides the 

basic background material they need and in a form that can be readily adapted, with limited preparation time, to a 

lecture or other presentation.

The U.S. Department of Agriculture (USDA) prohibits discrimination in all of its programs and activities on the basis 

of race, color, national origin, age, disability, and where applicable, sex, marital status, familial status, parental 

status, religion, sexual orientation, political beliefs, genetic information, reprisal, or because all or part of an individual's income is derived from any public assistance program. (Not all prohibited bases apply to all programs.) 

Persons with disabilities who require alternative means for communication of program information (Braille, large 

print, audiotape, etc.) should contact USDA's TARGET Center at (202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write to USDA, Assistant Secretary for Civil Rights, Office of the Assistant Secretary for Civil Rights, 1400 Independence Avenue, S.W., Stop 9410, Washington, DC 20250-9410, or call toll-free 

at (866) 632-9992 (English) or (800) 877-8339 (TDD) or (866) 377-8642 (English Federal-relay) or (800) 845-6136 

(Spanish Federal-relay). USDA is an equal opportunity provider and employer. 

because it can be overcome with effective and 

ongoing education and communication programs.

Conclusion

Base capital financing provides cooperatives 

with a flexible and effective financial management tool. Members provide capital according 

to use to ensure that ownership and control are 

kept in the hands of current users. 

Base capital plans are more complex to 

administer than more common equity programs, but their advantages as a complete 

equity management program far outweigh the 

disadvantages.

More cooperatives should seriously consider 

adopting a base capital plan. An in-depth study 

should be conducted to decide how a base 

capital plan might operate and what benefits it 

would provide in financing and capitalizing the 

cooperative.

Cooperatives interested in exploring the possibility of using a base capital plan can obtain 

assistance from several sources: the cooperative’s accounting firm, financial consultants specializing in cooperatives, and university 

extension specialists. The Cooperative Services 

program, of USDA’s Rural Business-Cooperative Service, has publications available on the 

subject, and can provide technical assistance 

on the many considerations that go into developing a base capital plan. n

investment compared with money withheld from 

sales proceeds or from patronage refunds that 

may or may not be redeemed on a timely basis.

u Requires the board and management to do 

a careful job of budgeting and financial planning at least annually. Although smaller cooperatives may not have the expertise or 

resources to develop detailed financial plans, 

some effort is necessary to decide capital 

needs and set investment levels for the coming 

fiscal period.

u Permits the board and management to proactively manage the cooperative’s capital.

u Permits a member who is phasing down 

operations or withdrawing from membership to 

have equity returned over a reasonable period.

Disadvantages

u Initial capital investment requirements can 

financially burden new members. This may act 

as a barrier to membership, but programs can 

be designed to allow new members to achieve 

required investment levels on an installment 

basis over a multiple-year period.

u The plan does not work well if there is a constant and large membership turnover because it 

strains the cooperative’s ability to accumulate 

sufficient capital reasonably and dependably.

u A base capital plan can be harder to understand when compared with more traditional 

capital programs such as the revolving fund 

method. This complexity should not be viewed 

as an obstacle to adopting a base capital plan, 

4

To see this and 

other USDA cooperative publications online, visit: 

http://www.rurdev.

usda.gov/rbs/pub/

cooprpts.htm 

To order hard copies, e-mail: 

coopinfo@wdc.

usda.gov

or telephone:

1-800-670-6553.

Most often, the advantages outweigh the disadvantages compared 

with using other types of 

capitalization programs.