1.1. BACKGROUND OF THE STUDYThroughout human history, groups rather than individuals have always undertaken some activities simply because this was a better and more economical way of doing things(Parnell, 1999) History tells us that man cannot successfully live by himself and for himself alone. The interdependent and mutual help among human beings have been the essentials of social life, spirit of association are important to human progress.
Through the history of human life, cooperation cannot be seen separately. There is practically nothing, which a man by himself alone can achieve but much acting together with others (Kulandaiswamy and Krishnaswamy, 2000). In every human social, economic and cultural activity, cooperation plays the major role. Cooperating with others has often proven to be a satisfactory way of achieving one’s own objectives while at the same time assisting others in achieving their objective, (Cropp, 1980)The historical development of cooperative cannot be observed detached from economic forces and social upheaval (Christensen, etal.1936). The cooperative enterprise created in a place where and time that economic stress and social crisis existed to solve the problems.
In most African countries, modern cooperatives were the result of colonialism. The colonial powers specially British and France introduce cooperatives in Africa countries through their direct and indirect rules (Schwettmann, 2014). Farmer cooperatives introduced in sub-Saharan Africa (SSA) for promoting production of cash crops by peasant farmers. After independence (after colonization rules), many countries government as well as donors promoted cooperatives to intensify the participations of people at grass root level and also to supply agricultural credit, input and commodity markets(Shimelis, 2010). The newly independent governments of many African countries were used cooperative as a tool to implement African socialism(Jurgen, 2014). These organizations obtained various support both financially and technically. Moreover, they had given marketing and supply monopolies for agriculture commodities and supply inputs.
However, in most African countries members or farmers have been forced to be the member of the organizations and cooperatives becomes a mass organization of the ruling party and carried out government functions. The cooperative movement in Ethiopia, the spirit of self-help and cooperation, has a long history as part of the farming community. Various traditional self-help co-operatives still exist. They are institutions with an organizational base that are indigenous at local level, such as Debo, Iddir, and Iqub. These traditional informal cooperatives could be a base for the development of the formal cooperatives(Tekeste, 2014).Collective efforts through cooperative organization have been chosen by many of the disadvantaged groups to increase their benefits from the opened market system.
Cooperatives in Ethiopia are mainly economic entities performing economic functions, contributing a lot to economic development of the country (V.Natarajan, 2014). Cooperatives especially Agricultural multipurpose cooperative unions serves as a bridge between the government and the lower level community as well as their members organization to achieve government strategies by supplying agricultural technology, consumer goods, value additions and involving input and out marketing. In short, they have mandate to improve the life standard of their members by providing them quality products and services.
They are essential people organizations that operate business in rural areas where Government and Non-government organization hardly participate.The Federal Government of Ethiopia declared proclamation number 147/98 and amendment number 402/2004 by the Council of Ministers for the establishment of cooperative societies to bring all types of cooperative societies under one umbrella(Federal Negarit Gazeta, 1998).This is an important instrumental documents in the cooperative movement of the country. Moreover, in Amhara region the first proclamation No.134/2006 later a revised proclamation No.220/2014 was issued. Within the document, Cooperative Federation is consists of a group of unions, Union is composed of more than one primary cooperatives society that have similar objectives; and primary cooperative is an association of people with similar objectives (FNG, 2012). Specially, the Multi-purpose Cooperatives Unions and primary multi-purpose cooperative are organized in the rural area owned by farmers to support various activities.
Thus, their major functions are supplying farm inputs like fertilizers, selected seeds, pesticides, farm equipment’s, and new technologies on cash as well as credit bases. Moreover, searching for market outlets to members and Agro processed part of farmer’s product. Besides, they deliver basic consumer goods and house furniture at reasonable price to owners and the community as a whole to meet their need and stable the market.
(Tekeste, 2014). Similarly, in Amhara region cooperatives play a vital role in realizing members Scio-economic issue and attaining the Millennium Development Goals. In it, 68 unions and 12938 various forms of primary cooperatives are found, of which 3,647 primary cooperatives were the members of 68 unions, (Amahara Cooperative Promotion AgencyBureau, 2017). In addition to this, in North Shoe Zone 9 unions and 1200 different primary cooperatives are found.
Among the 9 unions 4 are multi-purpose cooperatives, having 208 primary cooperatives members and 86,297,550 capitals. Cooperatives particularly multi-purpose cooperative has been conducting verities of activities. In order to run the operation properly finance is the vital resources. Finance is the lifeblood of a business. Circulation of blood is necessary for maintaining life in human body(Ramachandran.
R and Srinivasan, 2010).Finance may bedefined as the provision of adequate amount of money when it is required. As a management function, it has a wider meaning. Finance function is concerned with the procurements of funds and their effective utilization. Finance is necessary to run the business, purchase fixed asset, raw material, produce goods and services and make to sale them. Totally, finance is the central issue in the business and without finance, the operation of the business will close. Moreover, without finance the target objective of the business will never achieved.(C.
Paramasivan, 2014). Hence, conducting a study on financial performance of multi-purpose cooperative unions is very important in North Shewa Zone to identify the efficiency problem and to take corrective action, to know the financial position and solvency of the unions. Moreover, to sustain the service provided to the members as well as contribution to the national economy through a strong enough profit.1.2. STATEMENT OF THE PROBLEMSince agriculture is the bases for Ethiopian economy and overall growth of the country, all aspects of the economy are highly associated with agricultural sectors.
According to the annual report by National Bank of Ethiopia(NBE, 2014) the Ethiopian economy continued to register a notable growth. In 2014/2015, the real GDP growth was 10.2 percent. Accordingly, the agricultural sector holds 6.4% of the county gross domestic product (GDP).
As agriculture continues to be an important sector to the Ethiopia economy, the cooperative sub-sectors providing vital support and play a crucial role for the transformation of agricultural sectors. In Ethiopia where farm holdings are small, application of modern technology is very low and production is mainly of subsistence nature with low marketable surplus, cooperatives play a central role in providing smallholders with access to inputs (fertilizer, selected seed, and chemicals), marketing member’s grain, supplying consumer’s goods and agro processing member’s product. Cooperatives are promoted by Ethiopian government as a means to bring the highest development in the society by collecting and mobilizing the scattered finance, material and manpower resources. Moreover, they play the maximum role in the process of implementing of different developmental policies and strategies issued by the government, submit the needed input and industry product at reasonable price to members and to have their product as well as services better price in domestic and foreign market, to play the appropriate role in the free market economic system. (The Federal Democratic republic of Ethiopia Cooperative proclamation 1998) and The Amhara National Regional State Revised Cooperative Societies Establishment Proclamation,NO.2014).
Hence, as result of proclamation support and the real existing situation forced cooperatives to bring a dramatic growth in number, membership size, capital and operational diversity at a country, regional as well as Zonal level.Cooperatives viewed by the government as a means of strong tools to lift poor from poverty and it is expected to contribute the growth and transformation plan. In general, cooperatives need to be continuously serving their members and contribute to the country national economy. (Tekeste, 2014). In order to overcome the responsibilities of cooperatives especially cooperative union used high financial resources from various source (members contribution, government loan, donation). So that, evaluating and knowing the financial performance of these multipurpose cooperative unions in North showa zone helps to sustain the service provided by them and the contribution to the national economy.
Moreover, it is to know the efficiency, liquidity, solvency, profitability of the unions and overall financial performance trends. Unless the financial performance of these unions health, terminate the service provided to their members and failed the contribution to the development of national economyA number of researches have been conducted by various researcher indifferent times regarding financial performance of multi-purpose cooperative unions. For instance,in Tigray region on Eight multi- purpose cooperative unions by(Tekeste, 2014), inOromiay region LumeAdama multi propose cooperative union by(V.
Natarajan, 2014), inTigrai region Werie multi-purpose cooperative union by(Yemane, 2010), in OromiaBecho district at Worda level etc)(Dejeni, 2014). No attempt is so far made to examine the financial performance of multipurpose cooperative unions in Amhara Region North Showa Zone. Thus, the researcher motivated to undertake this research study on the financial performance of multipurpose cooperative unions to examine and realize the real gap, in North Shewa Zone. Therefore, examining the financial performance of multi-purpose cooperative enables to seek possible strategies to alleviate problems that have been found to be solid to date. Accordingly, with respect to the issue of financial performance of multi-purpose cooperative unions, the study attempts to seek answers to the following basic research questions. Are these multi-purpose cooperatives unions efficiently utilized the asset? Do these unions can finance their loans? Is the profitability of these unions enabling to sustain as organization? Which factors are significantly influences on the financial performance of the unions? Are the union’s financial positions enables to meet its current obligation? What are the trends of various elements of the financial statements of these multi-purpose cooperative unions?1.3.
GENERAL OBJECTIVESThe General Objective of the study is to examine and analyze the financial performance of multipurpose cooperative unions in North Shoe Zone.1.3.1. SPECIFIC OBJECTIVESThe specific objectives of the study are to: Examine and compare the operating efficiency of the unions. Find out and compare the overall profitability of each union. Identify the significant influencingfactors on financial performance.
Assess and compare the solvency position of each union. Analyze and compare the liquidity position of each union. Investigate the past financial performance trend and prospect the future financial operations.1.4.
SIGNIFICANCE OF THE STUDYThe study will particularly expected to have the following importance, It enables cooperative officials, workers, union’s board, and management to understand the problems and suggest way to improve the financial performance of each union. It enables to take corrective action based on the study. It might be serves as a springboard for cooperative experts to carry out further study on similar issues. It might as a knowledge base for policy makers.1.5. THE SCOPE OR DELIMITATION OF THE STUDYThere are nine different cooperative unions in North Shewa Zone, of which the study conducted only in four multi-purpose cooperatives unions (namely Wodera, Menze, Kessem and Yifat). This is because, the unions have similar natures and possible to analyze their performance by different measurements and possible to compare each other.
Moreover, the researcher is restricted to these unions due to having close information, geographical proximity and easy access to get data. The study delimited to financial performance analysis based on comparative analysis, ratio analysis, and common size analysis. Regression model also employed to identify variables that have significant influence on financial performance of the unions to measure the ten years (from 2007 – 2016) financial performance of the unions. However, Cash flow, trend analysis and Cost-volume-profit analysis and other variables were not in focus to measure the performance of the unions. Moreover, the study left further detail for other researchers.1.6.
OPERATIONAL DEFINITIONCooperative: refers to an autonomous association of persons united voluntary to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise(ICA, 1995)Finance: refers to the art and science of managing money. It includes financial service and financial instruments. Finance also referred as the provision of money at the time when needed. Finance function is the procurement of funds and their effective utilization in business concerns.
Financial performance: refers to the act of performing financial activity to which financial objectives being or has been accomplished. It is the process of measuring the results of a firm’s policies and operations in monetary terms.Unions: refers to Farmer’s cooperative unions are formed by two or more primary societies who have similar activities to undertake those activities, which are beyond the capacity of primary societies.
Iqub: refers to an association of people having common objectives of mobilizing resources, especially finance, and distributing it to members on rotating basis.Edir:refers to an association of people that have the objective of providing social and economic insurance for the members in the events of death, accident, damages to property, among others.1.7. Organization of the StudyThis study organized into five chapters. The first chapter presents introductions of the Study.
The second chapter presents literature review. Chapter three presents the methodology and research design, chapter four presents presentation and data analysis. Finally, Chapter five presents Conclusion and recommendation of the study.CHAPTERTWOREVIEW OF RELATED LITERATURE2. DEFINATION AND CONCEPTA number of businesses organized in the forms of cooperative. The diversity of cooperatives and their variability creates absence of universally accepted definition of a cooperative (Ivan Emelian off, 1942). Mostly, two definitions are commonly used.
According to international cooperative alliance, (ICA) (1995) cooperative is an autonomous association of persons united voluntary to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. Another definition of cooperative is adopted by the United States department of Agriculture (USDA) (1987) state that cooperative is a user – owned, user controlled business that distributes benefits based on use. The definition captures user owner ship, user control and proportional distribution of benefits.A cooperative enterprise is a unique form of business. It is different from traditional shareholder owned enterprise or investor owned firm, and the conventional not for profit or non – profit entity(Mazzarol, 2009)Cooperatives are member-controlled association for producing goods and services in which the participating members share the risk and profits of a jointly established and owned economic enterprise (Koopmans, 2006). According to Birchall (2004), the co-operatives enterprise are association that are voluntary and members are free to enter or leave, democratic in nature with all members having one vote, independent of government ownership and are owned solely by its membership. Moreover, they are associations of individual persons who can be both real people and “legal persons” that might be other organizations and work for the benefit of members.
It cannot be used for a purpose other than the benefit of its members without ceasing to be a co-operative. In short cooperatives are organized to serve members needs and are focused generating members benefits rather than return to investors. These members driven orientation differ from other business.
More over the basic principles and values makes different cooperative from other business(Cropp, 1980).Different scholars provide different definition regarding cooperatives. However, for this research paper and as an institution the researcher took the ICA definition of cooperative.2.1. Cooperative PrinciplesThe principles are means by which co-ops can apply the co-operative values.
There are seven ICA principles, and co-ops are free to change them as needed. The ICA adjusted cooperative principles in 1937, 1966 and 1995 (Hoyt, 1996). In 1995, the ICA released a Statement of Co-operative thatcan be identity and defined the characteristics, values and the principles. These principles and values are central to the cooperatives.Moving away from these principles brings into question a co-operative’s meaning and legality and diminishes co-operative character over time (Cote, 2000). These principles and values are key to differentiate cooperatives from other forms of businesses.
2.1.1. Cooperative Principles126.96.36.199 Principle of Voluntary and Open MembershipThe first ICA principle states co-operatives are voluntary organizations; open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political, or religious discrimination.
188.8.131.52. Principle of Democratic Member ControlThe second ICA principle, 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-operatives members have equal voting rights (one member, one vote), and co-operatives at other levels are organized in a democratic manner.2.
Principle of Member Economic ParticipationThe third ICA principle is member’s economic participation. Members contribute equitably to, and democratically control the capital of their co-operative. At least part of that capital is usually the common property of the co-operative.
Members usually receive limited compensation, if any, one capital contributed as a condition of membership. Members allocate surpluses for any or all of the following purposes: developing their co-operative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the co-operative; supporting other activities approved by the membership.2.1.1.
4. Principle of Autonomy and IndependenceThe fourth ICA principle states that 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 co-operative autonomy.
Principle of Education, Training and InformationAccording to the fifth ICA principle, co-operatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their co-operatives. They inform the general public– particularly young people and leaders – about the nature and benefits of co-operation.2.
1.1.6. Principle of Co-operation among Co-operativesThe sixth ICA principles suggests: co-operatives serve their members most effectively and strengthen the co-operative movement by working together through local, national, regional, and international structures.
184.108.40.206. Principle of Concern for CommunityThe seventh ICA principle presents: co-operatives work for the sustainable development of their communities through policies approved by their members.2.2. Theoretical and Empirical Studies of Cooperatives2.
2.1. Theoretical ReviewOrganizational structure of cooperative and their activitiesThe organization of cooperatives in Ethiopia can be established into five levels. At the grass root,voluntary members establish the primary cooperative societies. The primary cooperatives have also joined-up to established farmers’ cooperative unions. At regional level cooperative federations are found, which offer specialized services. Ethiopian cooperative league is also expected to be the apex body for the cooperative movement(FCA, 2013).Primary Cooperative Societies: Individual farmers are organizing primary cooperative societies on voluntary basis.
Farmers who live and work in the same working area with the same occupation can form a primary cooperative society. They are controlled and managed by the general meeting and represented management committee. According to their mission provide service to their members. Multi-purpose cooperative mostly provide services like marketing of agricultural products of their members for better price, supply of agricultural inputs, provision of financial credit service, and supply of different consumer goods to their members(FCA, 2013). Unions: Farmer’s cooperative unions are formed by two or more primary cooperatives that have similar mission and carried out similar activities, which are beyond the capacity of primary cooperatives societies.
They have their own geographical boundary. Farmer’s cooperative unions managed by general assembly whose members came from the member primary cooperative societies. Unions are managed and controlled by democratically elected board and internal control committee. The day-to-day activities of the union run and managed by haired general manager and employees. They provide service, which is beyond the capacity of primary cooperatives like input output marketing in bulk, storage service agro-processing, agro-mechanization, and supplying consumer goods. (Amahara cooperative promotion agency, 2014).Federations: Two or more unions, which have similar activities, form farmers’ cooperative federations. The primary cooperative societies can also be members, if they are engaged with similar and interrelated activities.
It is formed at regional as well as at national level to undertake specific activities, which might not be cost effective at union and primary level like import and export activities. The supreme body here is also the general assembly whose members are elected from member unions and primary societies, as the case may be. Managers and other staff undertake the day-today activities of the federation with frequent follow-up of the board of directors and general assembly. Federations at national level have not yet formed in Ethiopia (FCA, 2013).Cooperative League:The highest organizational body of cooperatives known as cooperative league. It does not directly involve in production and service giving activities. It will serve as a mouthpiece of cooperatives in the country. It facilitates the horizontal and vertical relationship of cooperatives at national level.
It represents the cooperative movement in the country at the International forum. The members of the cooperative league can be primary co-operatives, and unions and federations. It has not yet been formed in our country.(FCA, 2013).
Cooperative StructureOrganizational structurerefers to how the work of individuals and teams within an organization are coordinated. In order to achieve organizational goals and objectives, individual work needs to be coordinated and managed. Structure is a valuable tool in achieving coordination, as it specifies reporting relationships (who reports to whom), describes formal communication channels, and describes how separate actions of individuals are linked together. Hence, in order to coordinate the work of individual and team with in cooperative organization the following structure positioned.
Figure 1: Organizational Structure of CooperativesFinancial performance:Performance measurement is defined as the process of measuring efficiency and effectiveness. Effectiveness is compliance with customer requirements, and efficiency is how the organization’s resources are used to achieve customers’ satisfaction levels(Tekeste, 2014). It refers to the act of performing financial activity to which financial objectives being or has been accomplished. It is the process of measuring the results of a firm’s policies and operations in monetary terms. It is used to measure firm’s overall financial health over a given period and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation (MillerAlan, 2001)Any business organization can be defined in terms of three basic interests: ownership, control and beneficiary. Only in the cooperative are all three interests vested directly in the hands of the user i.e.
the cooperative owned by the people who use it, it is controlled by the people who use it and the benefits generated by the cooperative argue to its users on the basis of their use. These interests are commonly referred to as the contemporary cooperative principle, which makes the performance of cooperative better than the other business organization (Folsom, 2002).Multipurpose cooperatives: It refers to multipurpose cooperatives unlike single purpose cooperative undertake diversified activities. Multipurpose cooperatives, which functions on the basis of a fully integrated framework of activities, planned according to members requirements identified at the grass root level, taking the socioeconomic life of the farmer members in its totality (Chukwu, 1990).Financial performance identifies the financial strengths and weaknesses of the cooperatives by properly establishing financial statement (Meigs, 178)).Financial statements provide information about cooperative assets; liabilities; equity, income and expenses, cash flows, including gains and losses that are useful to a wide range in making economic decisions(IAS, 2011).
Most of the time basic financial statements employed to measure financial performance are balance sheet and income statement. 220.127.116.11.
Financial Statements AnalysisFinancial statements are the summary of the accounting process, which provides useful information to both internal and external parties. John N. Nyer also defines it “Financial statements provide a summary of the accounting of a business enterprise, the balance-sheet reflecting the assets, liabilities and capital as of a certain data and the income statement showing the results of operations for a range of time. Financial statements generally consist of two important statements .i.
e. the income statement or profit and loss account and balance sheet or the position statement.Financial statement analysis involves the examination of both the relationships among financial statement numbers and the trends in those numbers over time. One purpose of financial statement analysis is to use the past performance of a company to predict how it will do in the future. Another purpose is to evaluate the performance of a company with an eye toward identifying problem areas. In sum, financial statement analysis is both diagnoses— identifying where a firm has problems—and prognosis—predicting how a firm will perform in the future(W.W.
Financial statement analysis issued to predict a company’s future profitability and cash flows from its past performance and to evaluate the performance of a company with an eye toward identifying problem areas ((Alberch9e-co5-202-253-low.pdf)18.104.22.168.1. Balance SheetPosition statement is also called as balance sheet, which reflects the financial position of the firm at the end of the financial year.
Or, the balance sheet is a summary statement of what a company owns (or is owed) and what a company owes (or what others own) at a specific point in time. Position statement helps to ascertain and understand the total assets, liabilities and capital of the firm. One can understand the strength and weakness of the concern with the help of the position statement. This statement is very important to measure the financial position of cooperative unions in this research(WWW2.gsu.ed.)2.2.
1.1.2. Income statementThe income statement, also called an earnings statement or a profit and loss statement, is an accounting statement that matches a company’s revenues with its expenses over a period of time, usually a quarter or a year. Income statement reflects the operational position of the firm during a particular period.
Normally it consists of one accounting year. It determines the entire operational performance of the concern like total revenue generated and expenses incurred for earning that revenue. Income statement helps to ascertain the gross profit and net profit of the concern. This statement also will use to measure the financial performance of the unions (WWW2.gsu.ed.).
Analysis of Financial Statement is also necessary to understand the financial positions during a particular period.Analysis of financial statement may be broadly classified into two important types based on material used and methods of operations. Based on the material used, it is also classified in two, .i.e. external and internal. The external analysis made by the outsiders of the business based on the published statement.
Whereas internal analysis made by the businesses within the department. The other analysis method is based on method operation. In this method,financial statement analysis may be classified into two major types such as horizontal analysis and vertical analysis. The horizontal analysis financial statements are compared with several years and based on that, a firm may take decisions.
Normally, the current year’s figures are compared with the base year (base year is consider as 100) and how the financial information are changed from one year to another. The second analysis is vertical analysis. Under the vertical analysis, financial statements measure the quantities relationship of the various items in the financial statement on a particular period(WWW2.gsu.
ed.)22.214.171.124. TECHNIQUES AND TOOLS OF FINANCIAL STATEMENT ANALYSISFinancial statements give complete information about assets, liabilities, equity, reserves, expenses and profit and loss of an enterprise. Financial statement analysis interpreted mainly to determine the financial and operational performance of the business concern. A number of methods or techniques are used to analyze the financial statement of the business concern.
The following are the common methods or techniques, which are widely used by the business concern(Shodhganga.inflibent.ac.in)126.96.36.199.1.
Comparative statement analysis:is an analysis of financial statement at different period. This statement helps to understand the comparative position of financial and operational performance at different period. The analysis used in this study to compare the performance of each union at different period.
It usually applies to the two important financial statements, namely, balance sheet and statement of profit and loss prepared in a comparative form. The financial data will be comparative only when the same accounting principles used in preparing these statements. Comparative figures indicate the trend and direction of financial position and operating results. This analysis is also known as ‘horizontal analyses(W.
3. Common Size Analysis: Other important financial statement analysis techniques are common size analysis inwhich figures reported converted into percentage to some common base. In the balancesheet the total assets figures is assumed to be 100 and all figures are expressed as a percentageof this total. In the income statement total sales figures is assumed to be 100 and all figures are expressed as a percentage on this total. It reflectsthe relationship of each item with the base value of 100%.In this analysis financial statement themselves cannot be compared across an industry or across time because of measurement differences (Shodhganga.inflibent.ac.
4. Ratio Analysis: Ratio analysis is a commonly used tool of financial statement analysis. Ratio is a mathematicalrelationship between one numbers to another number. Ratio is used as an index forevaluating the financial performance of the business concern. An accounting ratio showsthe mathematical relationship between two figures, which have meaningful relation witheach other. Ratio can be classified into various types. Classification from the point of viewof financial management is Liquidity Ratio, Activity Ratio, Solvency Ratio, and Profitability Ratio.
This ratio plays a great role in the analysis of financial performance of this unions and will use redundantly in this study(WWW.Pearson canada).188.8.131.52.4.1.
Liquidity Ratio:It is also called as short-term ratio. This ratio helps to understand the liquidity in a business, which is the potential ability to meet current obligations. It measures the ability of business paying current liability and part of long-term debts as it matures. Current asset should always greater than twice-current liability(Gittinger, 1982)).
In this study, the liquidity ratio will use to measure the ability of the union paying current liability through current asset (W.W.W.Swlearning.
184.108.40.206. Activity Ratios Measures the degree of efficiency with which the company utilizes its resources or it is also called asset turnover ratio. This ratio measures the efficiency of the current assets and liabilities in the business concern during a particular period.
This ratio is helpful to understand the performance of the business concern. The greater the turn over the more effectively the company is at producing benefit from investment. This analysis will see in this study. Inventory turn overIn accounting, the Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. It is calculated to see if a business has an excessive inventory in comparison to its sales level(WWW.accounting for management.
org/inventory turn over ratio).Measure the number of times per year the company sells its inventory. Total asset turn overThe asset turnover ratio is an efficiency ratio that measures a company’s ability to generate sales from its assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a company can use its assets to generate sales( WWW.Myaccountingcourse.
com).Measure the relation between a birr of sales and a birr of asset on the yearly basses. It measures the overall activity of the company.This ratio measures how efficiently a firm uses its assets to generate sales, so a higher ratio is always more favorable.
Higher turnover ratios mean the company is using its assets more efficiently. Lower ratios mean that the company is not using its assets efficiently and most likely have management or production problems.The total asset turnover ratio is a general efficiency ratio that measures how efficiently a company uses all of its assets. This gives investors and creditors an idea of how a company is managed and uses its assets to produce products and sales.2.2.
220.127.116.11. Financial leverageRatioThe relationship between cooperative assets and debt position can be evaluated with leverage ratios. Whenever a cooperative finances a portion of asset with any type of financing such as debts, the cooperative is said to be using financial leverage. Financial leverage management ratio measures the degree to which a cooperative is employing financial leverage and recommends the debt ratio to evaluate financial performance.
(Gitter, 1982). Debit ratioIt measures the amount of total debt firm used to finance its total assets. It is an indicator of financial strength of the unions. It provides information about the solvency and the ability of the firm to obtain additional financing for potentially attractive investment opportunities.
Higher DTAR means the unions have financed most of its assets through debt as compared to the equity financing. Moreover, higher DTAR indicates that the unions areinvolved in more risky business. It compares total cooperatives debt obligations owed against the value of total assets. This ratio expresses what amount of total cooperatives assets is owed to creditors.
In other words, it is the creditors? claims against the assets of a business. This ratio is one way to express the risk exposure of the cooperatives business. It measures the extent to which the total asset of the unions has been financed using borrowed fund(Abdi, 2010) Debt to equity ratioDebt-to-equity ratio is the key financial ratio and is used as a standard for judging a company’s financial standing. It is also a measure of a company’s ability to repay its obligations. When examining the health of a company, it is critical to pay attention to the debt/equity ratio. If the ratio is increasing, the company is being financed by creditors rather than from its own financial sources which may be a dangerous trend. Lenders and investors usually prefer low debt-to-equity ratios because their interests are better protected in the event of a business decline.
Thus, companies with high debt-to-equity ratios may not be able to attract additional lending capital. Measure the relative proportion of entity’s equity and debt to finance the union’s activity(Chunilal, 2014). 2.
Profitability Ratio It is the net result of a number of polices and operations of the businesses.Profitability Provide the overall evaluation of performance of the company and its management. This ratio used to measure the overall profitability of a firm on the extent of operating efficiency it enjoys. This ratio establishes the relationship between profitability on sales and the profitability on investment turnover. Although there is other profitability ratio, the most important ratio for this research paper is the net profit margin ratio, return on investment, return on equity, gross profit margin ratio,. In the study, the analysis will serve to measure the profitability of the unions (e.book.
narotama.ac.id).A.Net profit margin ratioThe net profit margin is the ratio of after-tax profits to net sales.
It reveals the remaining profit after all costs of production, administration, andfinancing have been deducted from sales, and income taxes recognized. As such, it is one of the best measures of the overall results of unions. The measure is commonly reported on a trend line, to judge performance over time. It is also used to compare the results of unionswith its competitors(Chunilal, 2014). Measure the profitability of the unions on a per birr basis of net sales. Return on investmentReturn on assets indicates the profitability on the assets of the firm after all expenses and taxes (Van Horne, 2005).
It is a common measure of managerial performance (Westerfield, 2009). It measures how much the firm is earning after tax for eachdollar invested in the assets of the firm.This ratio measures the company’s profitability per birr of investment in the total assets. Return on capitalIt measures how much the union is earning after tax for eachdollar invested in the firm. In other words, ROE is net earnings per dollar equity capital (Samad, 2000).Measures how the efficiently the union generate profit from invested capital.
Return on equity indicates the profitability to member’s primary cooperatives after all expense andtaxes (Van Horne, 2005). It is also an indicator of measuring managerial efficiency (Ross, 2005). Largely, higher ROE means better managerial performance;Gross Profit RatioGross margins reveal how much a company earns taking into consideration the costs that it incurs for producing its productsor services.
Gross margin is a good indication of how profitable a company is at the most fundamental level, how efficiently a company uses its resources, materials, and labour. It is usually expressed as a percentage, and indicates the profitability of a business before overhead costs; it is a measure of how well a company controls its costs.GrossProfit Ratio shows the relationship between gross profit and net sales. This ratio calculated as by dividing the Gross Profit to net Sales(Chunilal, 2014).2.2.
1.3. Advantage and Limitation of Ratio analysis2.2.1.
3.1. AdvantageRatio analysis is widely used as a powerful tool of financial statement analysis. It establishes the numerical or quantitative relationship between two figures of a financial statement to ascertain strengths and weaknesses of a firm as well as its current financial position and historical performance. It helps various interested parties to make an evaluation of certain aspect of a firm’s performance. The following are the principal advantages of ratio analysis: 1. Forecasting and Planning:The trend in costs, sales, profits and other facts can be known by computing ratios of relevant accounting figures of last few years. This trend analysis with the help of ratios may be useful for forecasting and planning future business activities.
2. Budgeting: Budget is an estimate of future activities based onpast experience. Accounting ratios help to estimate budgeted figures. For example, sales budget may be prepared with the help of analysis of past sales.
3. Measurement of Operating Efficiency: Ratio analysis indicates the degree of efficiency in the management and utilization of its assets. Different activity ratios indicate the operational efficiency. In fact, solvency of a firm depends upon the sales revenues generated by utilizing its assets.4. Communication: Ratios are effective means of communication and play a vital role in informing the position of and progress made by the business concern to the owners or other parties. 5. Inter-firm Comparison: Comparison of performance of two or more firms reveals efficient and inefficient firms, thereby enabling the inefficient firms to adopt suitable measures for improving their efficiency.
The best way of inter-firm comparison is to compare the relevant ratios of the organization with the average ratios of the industry. 6. Signal of Corporate Sickness:A company is sick when it fails to generate profit on a continuous basis and suffers a severe liquidity crisis. Proper ratio analysis can give signal of corporate sickness in advance so that timely measures can be taken to prevent the occurrence of such sickness. 7.
Simplification of Financial Statements: Ratio analysis makes it easy to grasp the relationship between various items and helps in understanding the financial statements.18.104.22.168.
2 The limitation of Ratio analysis1. Different Accounting policy The application different accounting policy or change in accounting policy may violet the comparison among unions and address to a wrong conclusion .Example some company may use historical cost model of depreciation, and others may use revaluation cost model depreciation method. Dueto the application of different revaluation method the profit or the financial performance of the two or more companies may differ.
2. Ratios is not the exact measure Ratio analysis provide clue about the financial performance of the firm,but not the exact measure of the performance and difficult to say exactly to say high, low or satisfactory. Hence, it needs carful interpretation.3. Ratio analysis based on summarized information Financial statement is the summary of accounting records. During summarization of the accounting records,some important fact or data may be left and as aresult, the ratio analysis may base on some limited financial statement information .
Hence the result of the ratio analysis may not be genuine result.4. Interpretation of the ratioIt is difficult to say perfectly and conclude that the result of the ratio analysis is high,low and satisfactory.It depends on the interpretation of the researchers. The high debt to total asset ratio may be good in avoiding deficiency of working capital problem, but on the other perspective high debt to total asset ratiois risky for creditors as well as debtors.5.
Technology changeWhen comparing performance over time with in the same industry. Change in technology and its application makes difference in the financial performance among firms .Example, the firm that update its self with the changing technology financially can perform better than not update itself with the changing technology.
6. Historical informationFinancial statements provide historical information. In order to use ratio analysis for various measurement, mostly the data are more than one year and have historical nature. Hence, it does not provide the current condition and may not important to measure.
2.2.2 Empirical Studies of CooperativesThe research conducted on financial performance of multi-purpose cooperative unions. The study carried on eight multipurpose cooperative unions. The researcher collected data from three successive audit report period. The researcher used a quantitative data and used different financial ratio analysis tools. The researcher conclude that the unions satisfactory level of financial position. The liquidity ratio of the union was not sound enough under the studied period, the borrowing power of the unions and profitability of the union were lower than the average. The asset utilization of the union is not satisfactory and the unions have to sale additional share capital and unproductive fixed asset to increase own fund(Tekeste, 2014). Hardesty and Salgia (2002) ”made extensive studies of the comparative financial performance of agricultural cooperatives and investor-owned firms including 5 cooperatives from the dairy sector, 14 cooperatives from the farm supply sector, 11 cooperatives from the fruit and18 vegetable sector and 11 cooperatives from the grain sector totally 41 cooperatives in California. Financial performances were evaluated through profitability, leverage, liquidity and asset efficiency for 1991 to 2002. Return on Equity (ROE), Return on Assets (ROA), Debt-Equity Ratio (DER), Current Assets (CA), Current Liabilities (CL), Operating Margin (OM) and Asset Turnover Ratio (ATR) were used. They indicated that cooperatives in all four sectors were less leveraged, while results regarding the relative profitability and liquidity of cooperatives were not decisive”(Dejeni, 2014). The researcher collects secondary data from audit report.Based on the data drawn from balance sheet, income statement, cash flow and fund flow statement over the period 2009 – 2013 indicate that the union was goods in the growth of share capital under the studied period and in the period the union did not pay the dividend properly to members during the studied period. Besides, the union liquidity position under the studied period was not good. It means that the union unable to cover its current obligation by the current assets. (Low quick ratio). In addition to this, the union solvency was unsatisfactory(V.Natarajan, 2014). A study conducted on six primary multipurpose cooperatives in 143 respondents. In the study,using descriptive statistic, OLS econometrics model employed and various financial ratio methods used in the studies. The study revealed that most of the cooperatives current ratio less than the standard and the cooperatives liquidity financed by borrowing funds. The cooperatives maintain good management efficiency with regard to utilization of asset to generate profit.(Dejeni, 2014)The study conducted on ”performance of rural cooperatives on agricultural inputs and outputs marketing, the results of this study revealed that the liquidity ratio (current ratio) of the cooperatives in the study area was below the desirable rate. The cooperatives’ current asset base is their members i.e. cooperatives should make the members contribute certain amount of money as additional share capital. And this money, which is contributed as additional share capital, will improve the cooperatives liquidity position. In the meantime, the contribution also improves the operating working capital of the cooperatives rather than depending on external sources. It wasfound that the debt ratio shows the financial risk i.e. as debt becomes an increasing percentage of the cooperatives’ financing source, the cooperatives face inability to meet debt obligations. This ratio showed that the cooperatives have shortage of their own capital to meet their objective of rural development, so the government should be the source of capital until they become strong and this is common in most developing countries as the government is the major initiator of cooperatives. The profitability ratio measures how effectively the cooperatives’ management is generating profits on sales, total assets, money they borrowed and members’ investment (share capital). The cooperatives in the study area performed below the desirable rate i.e. even their profitability ratio could not reach bank interest rate with which they borrowed money from financial institution. Increasing the qualified manpower in the field, upgrading the management capacity of the cooperatives’ management body (board of directors and other employed workers) through education and trainings, improving the financial capacity of the cooperatives and the participation of the farmers in the cooperative are among the possible solutions”(Gashaw, 2017)The researcher used secondary data from 55samples. Thesample were selected purposively. The researcher used a regression model and classical assumption test to analysis the relation between dependent and independent variable. The study was conducted from the period 2008 to 2012.The researcher conclude that Return on asset,Return on equity and Net profit margin has a positive significant effect on income growth, whereas Debt to equity ratio and current ratio has a significant negative effect on income growth. The researcher also recommend that, in order to increase profitability, reducing cost, managing debt, regulate the source of external fund in the expansion firms operation and increase profitability.(Mohd Heikal, 2014) The researchers conduct a study on factor affecting financial performance and used secondary data from the period 2007-2012 and concluded thatleverage ratio and firm age have significant effect on financial performance,whereas liquidity firm size and managerial ownershiphas no significant effect on financial performance.(Deitiana, 2015)The research conducted with a title factors influencing the company profitability and used secondary data from the financial statement that covers from the period 1999-2009and used regression model to test the connection betweenprofitability of the studied firm through return on asset and management of available resources. The researcher concluded that, there was a strong dependent relation between company performance and management of the availableresource. Inventories,debtlevel,financial leverage and efficiency of capitals has a positive impact on financial performance ,whereas fixed asset ratio has a negative impact and leads to lower return(Burjia, 2010).The study conducted on influencing factors on financial performance of Firm.The researcherexamined the influence of capital structure, firmsizeand working capital in on financial performance and used a descriptive survey research design. The researcher concluded thatcapital structure of firm largely influenced the success of the firm. Further, it was inferred that firms used both equity and debt financing but with an inclination on debt financing. Equity capital though not heavily relied on, resulted to an enhanced financial performance of the firms. Therefore, concluded that firms’ capital structure is important for the financial performance of the firms but firms should blend equity with debt with an inclination on debt financing.(M.N.Kamu, 2015)The study conducted on the assessment of the performance and challenges of multipurpose cooperative union in its course of development.The researcher collected data from members primarycooperative .The researcher used financial statements from audited reports as a source of secondary data. The study covered from establishment to 2004, By doing so the study revealed that theunion should direct its assets and liabilities in an effective manner. It should keep optimal level of assets and liabilities. If it is unable to do so, it may become less liquid able to meet its current obligations and thus it exposeto bankruptcy. Maintaining optimal level of assets and liabilities canbe achieved through employing professionals and byproviding continuous training to the management bodies of the union(Yemane, 2010)The study conducted on factors affecting financial performance offirms during the financial cries period.The researcher used market to book ratio (market value of equity to book value of equity) as a dependent variable and eleven-ratio analysis have been taken as independent variables. i.e., (current ratio,acidity ratio, inventory turnover ratio, account receivable ratio, total asset turnover ratio, Debt to equity,Debt to total asset,net profit margin,operating profit margin,return on asset, return on equity ratio). A multiple regression model also applied.The researcher concludes that liquidity position of a firm has a positive impact or positively affects financial performance.However high debt to total asset ratio has a negatively affect financial performance.(Anwar, 2014)2.3. CONCEPTUAL FREAM WORKFinancial performance deals with measuring the results of the firm’s policies and operations in monetary terms (Tekeste, 2014).Business entities, in this paper cooperative union, activities and operation measured in monetary terms that expressed in the union’s balance sheet and income statement. The union’s balance sheet holds the list of current asset and non- current asset. On the other hand, the liabilities parts also include the current and the non-current liabilities. Moreover, the capital balance holds reserve, contributed capital and unappropriated capital. These balance sheet and income statement items monetary balances are the result of the unions operation and polices. The items of the statements balance measured by comparative, Common size and ratio analysis to determine the financial performance of the unions whether it is high or satisfactory or low. Moreover, regression model used to identify the variables that significantly influence the financial performance of the unions.Hence, the balance sheet and income statement lines items are relevant to measure the performance in various techniques. There for, from the above empirical analysis and different research observed the balance sheet and income statement line items ratio used as an independent variable to measure the financial performance (dependent variable).Figure 2Conceptual frameworkCHAPTER THREE3.1. Description of the Study Area3.1.1. An Overview of Amhara National Regional StateThe Amhara National Regional State is one of the regional states in the Federal Democratic Republic of Ethiopia found in the Northwestern part of the country. It is located roughly between 13° 45′ North latitude and 35°20′ to 40°P 25′ East longitude. Theborders of the region are adjacent to Tigray region in the North, Oromia region in the South, Afar regionin the East, BenishangulGumuz region in the Southwest, and Sudan in the Northwest. The statedivided into 10 administrative zones. The administrative zones areEast Gojam, West Gojam,Awi, North Gonder, South Gonder, Wag Himra, North Wollo, South Wollo, North Showa, andOromia(Bureau of Finance and Economic Development, 2013).It also embraced 133 woredas (119 rural and 14urban).Based on the traditional agro-ecological zones, the region has four climatic zones, namely, wurch (4 %), Dega (25%), Woina-Dega (44%) and Kolla (27%). The region has an average annual rainfall of 200 to 1600 millimeter and has a mean annual temperature of 10 to 25°c (Bureau of Finance and Economic Development, 2013) 2006).In 2013, the population of the region expected to be 19.62 million (9.83 million male and 9.79 million female), 89.7% of the population exists in rural areas (CSA, 2013). In the region, there are 12938primary and 68 secondary level cooperatives of different types with a combined capital of birr 1876779.44 million & 847823337 million respectively in 2016(Amhara Region CPA 2016). The majority of cooperatives are multi-purpose agricultural cooperatives. Table 1 shows the type of cooperatives, number of members and the amount of capital of primary and secondary cooperatives.(Amahara Regioncooperative Promotion Office, 2016)Table 1Types number, membership, and capital of primary cooperative in Amhara region of December 2016No. Type of Cooperatives No.unions No. cooperatives members Number of Members Capital Male Female Total 1 Multipurpose 1332 1386032 258612 1644644 7443795512 Irrigation 34 8443 1297 9740 34971053 Horticulture 65 4934 1257 6191 2527064 Seed birding 29 5252 941 6193 12490165 Dairy farming 25 1202 260 1462 70422076 Been Farming 13 7374 2508 9882 48456517 Truism 23 3498 346 3844 24970268 Consumer 76 20565 15026 35591 872305310 Coffee producer 21 1248 107 1355 63000011 saving and credit 2139 1313657 450398 1764055 73755881 Total 3757 2752205 730752 3482957 8478233373.1.2. An Overview of North Showa ZoneNorth Showa Zone is one of the 10th administrative zones, established under the Amhara nationalregional state. It covers a total area of about 15,954.92sqare km, which accounts 10.6% of the total area of the region. The administrative zone is circumscribed in the North by South WolloZone, in the East by Afar region, in the South and South west by Oromiaregion and North East and East by OromiaZone. Its geographical location falls between 8°,43?,16?-10°,44?,11? latitude and between 38°,39?,40?-40°,5?,32?longitudes. The administrative zone divided in to 22 rural and 5 town AdministrationWoredas. The Zone has 438kebeles, out of which 52 are urban and 386 are rural. Based on the traditional agro-climatic classification, North Showa Zone has four climatic divisions, namely, Dega,Wurch, Woina-Degaand Kola. In most parts of the Zone, the annual rainfall amount varies between 721.1 to1012mm, which is in most cases sufficient for a variety of crops to grow.The total population of the Zone in 2017 was 1,143,267 males and 1,083,418 females totally 2,226,585 peoples are found. Most of the populations found in regular area and involved in mixed farming.(North Showa Zone Planning Department, 2017).The major economic activity of the Zone isagriculture. In order to intensify and support the agricultural activities of the zone verities of cooperatives are organized.In the zone there are 1,112 agricultural cooperatives and 435 non-agricultural totally 1547 cooperatives are established. In order to perform the task beyond the primary cooperatives,nine different cooperatives unionsestablished.Among the nine unionsfour are multipurpose, 1milk, 1seed birding, and 3saving and credit association. The four multipurpose cooperatives found in different areas of the Zone. Kessem multipurpose cooperative union is located in Arertitown and serves two woredas,Yifat located inShewarobit town and serves 5 woredas, Menze located in Mehalmieda town serves 5 woredas and Wodera located in DebireBirehan town serves 12 woredas. These unions totally held 338 primary cooperatives with151,292 male 39,089 female totally 190381members with74,220,004.21 birr capitals.Table 2Types,membership, and capital of unions in North Showa zone as of December,2017No. Type of Cooperatives No.unions Number of member cooperatives No. cooperatives members Capital Male Female Total 1 Multipurpose 4 203 105420 22880 128300 70579305.732 Milk union 1 5 304 112 416 382619.663 Selected birder 1 8 505 78 583 3250004 Saving and credit 3 122 45063 16019 61062 2933078.82 Total 9 338 151292 39089 190381 74220004.21 Figure 3Administrative boundaries of Amhara, Region, North Showa Zone and location of unions in the Zone