Credit Control and Charity Research - Essay Example

Credit Control And Charity Research s Query The risk related to any form of financing is Financial risk. The business dictionary explains it as “the likelihood of loss inherent in financing methods which may affect the yields by weakening the ability to provide adequate returns “ The health of a firm can be negatively affected if the financial risk is not controlled (Jorian, 2001). As it cannot be prevented is should be administered. In the given scenario about Regeneration Through Charity Limited (RTE), it faces a situation whereby they purchase furniture from a new supplier and before the order being placed, it has been asked to give a fifty percent down payment. The supplier`s background is unknown to RTE and so there is huge risk involved in making the payment early. What if payment is not done, supplier waives off from his liability, the goods promised are not provided? The above questions are examples of financial risk that the company features. Different methods to reduce the financial risk on such a transaction by the company can be use of credit checks, references, negotiations and use of middle man(Escrow). To reduce financial risk RTE can do a credit check on the customer’s financial history. To verify credit worthiness these are checks on the customers financial position (Gruening, 2000). To see whether a party is capable enough of making the loan payments, these checks are carried prior to accepting loan requests. Credit Bureaus run these credit checks and to verify financial data, various financial institutions are contacted. The company`s credit score is then a measure of the company’s credit worthiness – and therefore a low credit score means high financial risk. To reduce their financial risk RTE can make use of references that are provided to them by customers. The mechanism is simple. A list of references is exchanged at or before the contract .Reference is one who confirms that the details provided by a particular person are legal or not. Verifying the details by all references prior to making the payment can actually minimize Regeneration Through Charity Limited`s exposure to financial risk. By this they will not expose themselves by paying anything that should not be paid. A true picture of the supplier can be obtained as the references are often people and companies with good reputation (Weiss, 2000). Other option on hand to the company to reduce financial risk is negotiating. In the current case the supplier asks for fifty percent initial payment. New terms can be set between RTE and supplier which are beneficial to RTE. There is an option that the supplier might agree to lower the initial amount of payment to be made if the overall contract price is increased by a little margin. The exposure to financial risk would be reduced significantly and the fifty percent of the contract would be less at stake. Query 2 To : The Board of Trustees, Regeneration Through Charity Limited From : (Your Name) Date : 16/01/2012 Subject : All You Know About Charity Filing Requirements The amount of donation a charity obtains is how a charity runs and how it is administered. Donations are received from from very large to very small portions of amounts and other valuables. However the amount or assets that are given to a charity should be confirmed and approved by the donors to make sure they are being being used for the purpose that they were fiven for. Accountability for charity thus begins from here only. Many times the fund are raised by charities for expenditure purposes; how when and where these funds are used is a completely different question and usually the amounts dealt by charities are unusually high for example and can reach up to millions of pounds. In older times no one could really be sure of where the money was used; whether it was used for the reasons it was raised for or whether the funds were misappropriated by the workers or trustees of that charity. RTE is like a nonprofit and a charity organization and for organizations like these, the generation of profits is not always the only reason why they are still there in the business (Kidd, 1985). It’s basically, for them the feeling of betterment for the society or maybe a fulfillment of a social cause and thats the reason such charities existence and carry out their operations as a charity. The value for money concept states that organizations function well if they are able to achieve the 3 E`s – that is effectiveness, efficiency and economy. Charities and other nonprofit organizations are often said to function really well if they are able to attain these three Es. The main definition for Economy is that you use the cheapest available resources by keeping the cost minimal of the resources. If the RTE makes sure that it uses the cheapest possible resources that are available to manage its operations then RTE would be considered as economic. Efficiency now comes in and it needs to be achieved. The term efficiency can be put in this way that it’s the achievement of maximum amount of output from a stated level of resources or maybe an achievement of a given level of output from the least possible. Regeneration Through Charity Limited needs to make sure that they are effective enough in their operations. When charity comes in line with its objectives that is it meets its goals for which the charity is in existence then it is referred to as effective and refers to effectiveness. By law, Trustees Annual report needs to be prepared also by the trustees. This information is vital to submit as Annual return. Where an income of the charity is over £ 25,000 per year the Trustees Annual report needs to submitted. The trustees need to sign a declaration in this report that there are no cases of misbehavior, breach or some other kind of cases that might have require to brought to the attention of the Charity Commission that have occurred over the past year. At the time of the submission of the Annual return the trustees who still have not reported any such incident if taken place, is supposed to report it to the Commission. It is very important on the part of trustees to not fail to make this declaration that it would render the annual return to be incomplete and trustees will be defaulted on their legal duty of not filing the return. Any incident that may cause harm to the charity or the organization should be reported as soon as possible to the Charity commission and don’t wait to disclose it till the time of filing on Annual Return and is considered a good practice. A lot of details about the company are given in the contents of Trustees Annual reports. The company name and its registered company number are mentioned in the report. This company number is used to exclusively recognize the company. Furthermore it has name of the charity`s trustees, its secretary`s name, the bankers name and the address of the principal business location of the charity (Charitys Digest, 2009). The aim and objectives of the company are also mentioned in the Trustees` report. A financial overview of the charity is mentioned along with the reasons why the charity exists these are all in this clause. The report further contains future plans for the charity. While potential donors decide to donate money to the charity this clause is used. Therefore well framing of this clause is important as it also helps the company to fund its operations. The report also consists of duties of the trustees that needs to be fulfilled. This clause is important as it determines what the trustees’ duties are and so could be used to determine if the trustees have achieved to perform their duties. In case a suit is brought against the trustees then it will be this document that the court will use to determine what the duties of the trustees were and if they failed to fulfill them. Last element of the report is the balance sheet of the charity along with supporting notes to accounts. The record of assets and liabilities and the information to potential donors about the health of the company lies in the balance sheet and the Balance sheet show all the assets and liabilities of the company (ICSA, 2009). Report also contains an income and expenditure account of the charity that reflects how the charity raises its finance and how the amount raised is then raised by the charity. The income and expenditure account shows that how the funds have been obtained and then used and so no funds are misused. Query 3 Charities and companies are two complete different types of structures and thereby have different reporting regulations and requirements. This passage discusses the differences in detail. Corporations have to draw draw up their set of financial statements under the guidance of the IAS, the International Accounting Standards and the IFRS, the International Financial Reporting Standards. However financial statements for charities do not have to be drawn up in compliance with these standards. Charities need to follow rules given by the Charity Commission of the UK. Corporations have over the years issued balance sheets with supporting notes to the financial statement which depict the health of the company (Saul, 2011). The balance sheet for a charity however is different. Charity balance sheet show very less or nil figures for cash and inventory as most of their holdings are in the form of assets, usually fixed in nature. Cashflow statements are also required to be produced by companies which simply show the amount of cash coming into and going out of a business. It further shows how that money is used. No such requirements however exist for a charity. There are various circumstances when companies are required to make return to the company house, usually every year. Such situations include when new shares are issued, directors or secretaries are changed or fired, the share capital and the capital structure of the company changes etc. Charities however do not have to follow such requirements. Generally, charities have much more relaxed reporting requirements However, charities do submit an income an expenditure account every year. It is submitted to the Charity Commission while submitting the Trustees Annual Report. Even thought companies do not have to draw up such an account, they do have to draw up something similar in the for of a trading, profit and loss account. Companies are also required to publish a statement of changes in equity alongside their set of financial statements every year. It actually forms a part of the financial statements. This requirement is compulsory under the IFRS and the Ias. The statement of changes in equity simply shows how and where changed in the equity have taken place during the current year (Lloyd,2009). References JORION, P. (2003). Financial risk manager handbook. Hoboken, N.J., Wiley. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=86030. GREUNING, H. V., & BRAJOVIC BRATANOVIC, S. (2000). Analyzing banking risk a framework for assessing corporate governance and financial risk management. Washington, D.C., World Bank. http://site.ebrary.com/id/10290041. KIDD, H. (1985). Companies, charity, and tax: USA and UK : three essays. [England], CAF. SAUL, JASON. (2011). The End of Fundraising Raise More Money by Selling Your Impact. Jossey-Bass. (2009). Charities digest 2010. London, Waterlow Publishers. LLOYD, S., & FAURE WALKER, A. (2009). Charities, trading and the law. Bristol [England], Jordans. INSTITUTE OF CHARTERED SECRETARIES AND ADMINISTRATORS. (2009). Managing conflicts of interest in charities. ICSA. WEISS, A. E. (2000). Easy credit. Brookfield, Conn, Twenty-First Century Books. Read More