Financial Reviews THE BUTTER BUSINESS

NZ Truth, Issue 1144, 3 November 1927, Page 15

Financial Reviews THE BUTTER BUSINESS

Ue Shannon Co-operative Dairy Company, Limited

BALANCE-SHEET UNDER REVIEW

(By "Fiat Lux.")

For the year ending June 30, 1927, the Shannon Co-oper-ative Dairy Coy. Ltd., had a very lean time. Only a careful analysis of the profit and loss account discloses the fact that the company lost £1315 on its butter business for the year. IN addition to this loss of £1315 the directors recommended that the

usual dividend of 6 per cent, on paid-up capital should be paid, and this would absorb a further £247, bringing the loss for the year to £ 1562 — less the small profit of £175 on the store business. Reducing these factors to everyday parlance, it means tha,t shareholders have been overpaid slightly less than %d. per lb. on the season's supply of butter -fat. Where, as m this case, a company has a substantial amount of undivided profits brought forward from previous years, there is no good and sufficient reason why such undivided profits should not be used for the purpose of equalizing butter-fat payments as has been done by this company. In fact, all dairy companies could with advantage build up a "Butter-fat Payment Equalization Reserve," which would prove of great benefit should the industry ever again suffer such a setback m market prices as m the past season. Even so, why should not shareholders be issued with accounts which

plainly and clearly disclose the facts of the case?

"Fiat Lux" has frequently pointed out that the tendency with published accounts seems to be to hide, rather than to disclose, information, and there is every reason for the investing public objecting to this modern tendency.

In the case under review, as the company conducts two entirely different businesses, this critic contends that a separate profit and loss account should be presented for each business and the yearly balance of each account should then be transferred to a profit and loss appropriation account.

This latter account should also hold the balance of profit brought forward from year to year.

Many accountants and lousiness people have an entirely wrong conception of a profit and loss account.

Such an account is intended to show the profit or loss for a given period, and should therefore never have either a debit or a credit balance brought forward.

The balance of this account should always show the net financial result of the trading for the period it relates to, and it certainly should not be necessary to analyse it to get this information.

Unfortunately the correct use of a profit and loss account seems to be the exception rather than the rule today.

Assuming, however, that the directors of a company elect to have their

accounts published m such a form that the true results of the period's operations are obscured, then "Fiat Lux" believes that a moral duty at least i 3 cast upon such directors to disclose the results m their report to shareholders.

In the case of the Shannon Dairy Co., Ltd., such disclosure ;does not appeal' to have been made. It certainly is not referred to m the directors' report published with the annual accounts, and from a brief newspaper report of proceedings at the annual meeting it would appear that this point was not brought up there either.

Dealing with the matter of the company's general store business, the results of which raised the ire of so many speakers at the general meeting, this writer is firmly convinced that the principle of farmers or any other section of the community running their own general stores is quite wrong. Business training and experience are essential to the success of such ventures as the liquidation records of this Dominion would show. Dairy-farmers m particular can tax more profitably employ their time m improving their output of milk m both quantity and quality than m running a business of this kind. It was pointed out by one shareholder that although the Shannon Co-

operative Dairy Company's prices were the same as the Farmers' Union Trading Co., Ltd., Auckland, the Shannon Company's net profits represented a much lower percentage on sales. It was contended that the direct cause of this was either indifferent buying or too high a ratio of expense. Now this is quite unfair to the store management if the usual custom of handling bulk goods, such as fertilisers, on a small commission basis is followed. Furthermore, the huge direct buying of the Farmers* Union Trading Co., Ltd., coupled with the absence of any inland transport charges, would make an enormous difference m the percentage of both gross and net profits. These are points of supreme importance m making a comparison of retail prices and resultant gross and net profits, and a knowledge of them should temper any adverse criticism. "Fiat Lux" has been fortunate m being supplied with copies of the Shannon Co-operative Dairy Company's published accounts for the past five years and from these has abstracted the necessary figures to compile the corn-

pany's store trading accounts and store profit and loss accounts for each year of the period.

The percentages of gross and net profit for each year are also shown.

The figures are extremely interesting, particularly the percentages of gross profit, which it will be observed have remained steady around 10 per cent, each year.

The net profits, however, show a marked fluctuation from 2.4 per cent, m 1923 descending to 0.6 m 1927.

One further point on this subject — the freights shown m the profit and loss account are presumably inwards charges and if so should be included m the trading account.

If this were done with the 1927 figures it would lower the gross profit to approximately 7% per cent., which is altogether too low a percentage to work upon.

The outstanding feature of the company's balance-sheet is the fact that over one-half of the paid-up capital has been reinvested m other companies.

The nominal capital is £6000, of which £5139 has been subscribed and paid up to 16/-, equal to £4162. Against this the company has invested £300 m the N.Z. Farmers' Fertilizer Co., Ltd.; £2007 m the N.Z. Dairy Producers' Freezing Co., Ltd.,; and £50 m the N.Z. Exporter Newspaper Co., Ltd.

Evidently these investments are unremunerative, since the profit and loss

account shows income from investments at £23/1/10 for the year.

This works out at less than 1 per cent., so that the company paying 7 per cent, on its bank overdraft is losing over 6 per cent, per annum on its investments.

If these investments are necessary m the interests of the company, why do not the shareholders find the money required by raising additional capital instead of leaning on the bank permanently at 7 per cent.?

It has to be pointed out that the company has been working on overdraft since the end of the 1923 season.

The 1926-1927 season has been a very poor one for the dairy industry, but 1927-1928 promises to show an improvement.

The Shannon Co-operative Dairy Co., Ltd., should take advantage of the opportunity thus afforded of putting its financial house m order — particularly on the accounting side, which is deplorably weak.