Credit Control and Charity - Coursework Example

Credit Control And Charity Research Southampton Solent Query Financial risk can simply be explained as the risk associated with any form of financing. The business dictionary explains financial risk as “the probability of loss inherent in financing methods which may impair the ability to provide an adequate return”. If financial risk is not taken care of then it might have a very negative effect on the health of a firm. Consequently financial risk needs to be managed as it can obviously not be averted completely. In this given scenario the charity, Regeneration Through Charity Limited (RTE) is facing a situation whereby they are purchasing furniture from a new supplier and have been asked to provide a fifty percent down payment before the order can be processed by the furniture company (Great Britain, 2008). In this case RTE has no information about the suppliers background and making such a huge payment at the very start would be a huge risk. What if the supplier defaults or runs away? What if he doesnt provide goods of the quality that were asked for? All these questions link to the financial risk faced by the company. Several methods can be employed by Regeneration Through Charity Limited to reduce the financial risk on this transaction. The most common methods include the use of credit checks, references, the use of a middle man (also known as escrow) and negotiations. Lets look at all of them one at a time. RTE can perform a credit check on the customers background to reduce their financial risk. Credit checks are checks on companys financial status to determine credit worthiness. They are often carried out prior to giving loan or making an advanced payment to determine if the other party is capable enough of carrying out their part of the transaction properly. Credit checks are often are often run through the help of credit bureaus, bank information and calls to other financial institutions for verifying financial information (Credit Control, 1979). RTE can verify the companys credit worthiness by determining the companys credit score. RTE can also make the use of references provided by the customer (supplier) to minimize their financial risk. How this mechanism would work is some what simple. At or before the two parties get into a contract, they exchange a list of references. A reference is someone who can verify that the details provided by a certain person are legitimate or not. What Regeneration Through Charity Limited can do here to minimize their exposure to financial risk is to verify the details of the supplier through all the known references prior to making any payment to the supplier. This would make sure they dont get themselves exposed by paying for something that isnt right. Since the references mentioned are often companys and people of high repute so the information that would be obtained is highly likely to be credible and give a correct picture of the suppliers position. Yet another possibility available to Regeneration Through Charity Limited to reduce their exposure to financial risk is to negotiate the terms of the contract with the supplier. The supplier has asked for a fifty percent initial payment from the Charity before it proceeds with the order. What RTE can do is go sit down with the supplier and set new terms which are some what beneficial to them. Is is a possibility that the supplier might agree to lower the initial amount of payment to be made if the overall contract price is increased a little maybe. Even though this would be a little expensive to the charity but their exposure to financial risk would be greatly reduced as now at least fifty percent of the contract amount would not be at stake. Query 2 To : The Board of Trustees, Regeneration Through Charity Limited From : (Your Name) Date : 16/01/2012 Subject : Why filing requirements are necessary and what do they contain A charity is usually run and managed through the amount of donation that it obtains. These donations might range from being very small in amount to very large in nature. The donors however, need to make sure that the amount that they are giving to the charity are used for the purpose that their were given for. This is where the need for charities being accountable comes in from. Often times what happens is that since millions of pounds are raised by charities for expenditure purposes, where they are supposed to be used and how they actually are used are somewhat very different. In the previous era, where there was literally no check on charities, one could never really make sure whether the money that the charity raised was even used for the reasons that were promised or it if the funds were misappropriated by the trustees or workers of that charity. For non profit organizations or charities like RTE, profit generation is often not the main reason whey they remain in business. For them its the achievement or fulfillment of a social cause why they carry out their functionality and exist as a charity. Charities and other non for profit organizations are often said to function well if they achieve the 3 Es – effectiveness, efficiency and economy. This is known as the value for money concept. Economy simply means minimizing the cost of the resources by using the cheapest possible resources. RTE would be considered economic if it makes sure that it uses the cheapest possible resources available to manage its operations. Then comes in the concept of efficiency. Efficiency can be understood in term of achievement of maximum amount of output from a given level of resources or achievement of a given level of output from the least possible input. Lastly charities like Regeneration Through Charity Limited need to make sure they are effective. Effectiveness refers to making sure the charity meets all its objectives for which it is in existence. Trustees are also required by law to produce the Trustees Annual Report. It is required to submit this information as part of the Annual Return. Trustees Annual Report has to be submitted in case where the charity has an income of over £ 25,000 per year. The trustees need to sign a declaration in this report that no serious cases of misconduct, breach or any other sort of cases that might have need to brought to the attention of the Charity Commission have occurred over the past year. However if such an incident has taken place but the trustees still havent reported it to the Commission then they may do so at the time of the submission of the Annual Return (Charity Commission, 2009) . Failure to make this declaration is such essential on the part of the trustees that it would render the Annual Return to be incomplete and trustees with be considered to have defaulted on their statutory duty of filing the return. However, it is considered good practice to to report to the Charity Commission any incident which may cause harm to the charity as soon as possible and not wait to disclose it till the time of filing on Annual Return. The contents of Trustees Annual reports contain a lot of detail regarding the company. It mentions the company name and mentions its registered company number (Devine, 1904). The company number is used to uniquely identify the company. It further contains the name of the charitys trustees, its secretarys name, the name of its bankers and the principal business address of the charity. The Trustees report also mentions the aims and objectives of the company. This clause mentions the reason why the charity exists and also gives a financial overview of the charity. The report also further contains the future plans for the charity. This clause is often seen by potential donors when they decide to donate money to the charity. Therefore its essential that this clause is really well framed as its this clause that helps the company fund its operations. The report also contains the duties of the trustees. This clause is really important as this determines what the duties of the trustees are and this document could be used to determine if the trustees have failed to complete their duty. In case a suit is brought 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. The final part of the report contains the balance sheet of the charity along with supporting notes to accounts. The balance sheet simply shows the assets and liabilities of the company and lets the potential donors know about the health of the company. The report further also contains an income an expenditure account of the the the charity which shows how the charity raises finance and how the amount raised is subsequently raised by the charity. The aim of a an income and expenditure account is to show that no funds are embezzled as it clearly lists down how the funds have been received and subsequently used up. In this case the charity has a turnover of £2.5 million. In this case the trustees need to complete part A of the of the annual return which contains information about the charity, part B which contains information about the financial health of the company, part C which contains the charitys main objectives and its achievements and send a copy of the audited accounts, examiners reports and Trustees Annual report to the Charity Commission. Query 3 As charities and companies are two different bodies, therefore they even have separate reporting requirements. Lets start off discussing the very basics fitst. Companies are required to prepare a set of financial statements under the IFRS (International Financial Reporting Standards) and the IAS (International Accounting Standards). However no such standards exist for the preparation of accounts of a Charity or other non profit organizations. Charities simply comply with the regulations laid by the Charity Commission of the UK (Bourne, 2008). Companies as well as charities often publish a balance sheet along with notes to the accounts which give an insight of the financial health of the company. However there are many differences which can be observed between the two balance sheets. Usually charity balance sheets do not contain inventory or much cash balances. Most of their holdings are in the form of fixed assets (Macan, 1985). Companies are also required under to law to produce a statement of cash flows which simply shows how much cash flows in and out of the business and how it is used up. However no such requirement exits for a charity. Other than that, companies are also required to make a return to the company house every year when new shares are floated, directors are changed, annual general and special meeting take place, the company address is changed, the companys total share capital changed etc. However charitys as such do not have to comply with such harsh disclosure requirements. For them the disclosure requirements are somewhat relaxed and they do not have to submit these returns every year. Charitys have to submit an income an expenditure account every year to the Charity Commission alongside submitting the Trustees Annual Report (Great Britain, 1994). Although such a requirement does not exist for companies but somewhat an equivalent of this is submitted by the companies in the form of a trading profit and loss account. Lastly charities unlike companies are so not required to publish a statement of changes in equity statement (Dine, 2007). Companies under the IFRS and IAS are required to produce this statement in every financial accounts as it shows what movement in the reserves taken place over the year. References DINE, J. (2001). Company law. Basingstoke, Palgrave. GREAT BRITAIN. (1994). Charity Commission news. London, [Charity Commission. MACAN, H. (1895). The Charity Commission: its past, present, and future. London, Office of The Technical World. BOURNE, N. (2008). Bourne on company law. New York, Routledge-Cavendish. DEVINE, E. T. (1904). The practice of charity; individual, associated and organized. New York, Dodd, Mead & company. (1979). Credit control. Hutton, Brent, Essex, England, House of Words. http://proquest.umi.com/pqdweb?RQT=318&pmid=11436. GREAT BRITAIN. (2008). Charity reporting and accounting: the essentials. Liverpool, Charity Commission. GREAT BRITAIN, & QUEEN MARGARET UNIVERSITY. (2009). Charity reporting and accounting: taking stock and future reform. Liverpool, Charity Commission. Read More