Financial Appraisal of Charities and Finacial Companies - Term Paper Example

Financial Appraisal After pondering upon the current situation that your charity faces, I concur to your apprehensions regarding 50% down payment to Vital Office Furniture Limited with which you are not much familiar with. It is in fact a good practice to be very vigilant when beginning a relationship with a new supplier. This is because there are several risks associated with it such as poor quality products, delays as well as frauds, all of which contribute to the overall financial risk. In order to mitigate such risks, the primary step should to be to conduct a thorough analysis of the supplier. Therefore, you need to get as much information about Vital Office Furniture Limited as possible to evaluate its credibility. You could find out about its integrity and reliability from the market and other customers of this supplier. After collecting the pertinent information, if you intend to go ahead with Vital Office Furniture Limited as your supplier, then you must be assertive and clear in putting forward your requirements. According to Allen, Doyle, Lehr & Fisher (2011), as long as the product or service is acquired, purchaser is in charge of the interaction with the supplier. Consequently, you should sign a very transparent contract with the supplier company stating your terms in a very comprehensible manner. You should agree with the supplier’s payment requirements only if the supplier reciprocates by agreeing to your conditions. You should be very blatant and practical when stating your terms in the contract. Some of the conditions you could state in this agreement could be launch of a lawsuit against the supplier company if it fails to delivery products on time or indulges in fraud. This would send a strong signal to the Vital Office Furniture Limited that RTE Charity is serious in its demands. Consequently, the financial risks would lessen to a great extent in this manner. A more naive alternative could be to develop a cooperative relationship with the supplier company, explaining to it your reservations in a humble manner and requesting to reduce the down payment from 50% to at most 30%. Another approach could be to diversify the risk by obtaining some goods from Vital Office Furniture Limited while other goods from other suppliers, thereby reducing the overall financial risk. Whichever approach you adopt, you should be prepared with a detailed recovery plan. As stated by Wu & Blackhurst (2009), you should develop contingent recovery plans for different types of disruptions that might occur in the supply process. In the modern business world, characterized by turbulence and uncertainty, it is binding on every organization to build scenarios and crisis plans to deal with the unexpected situations. Subsequently, you need to be equipped with risk control and recovery measures in case the supplier company fails to uphold the contract and you incur heavy financial losses. In such a situation, you should be able to switch to alternate suppliers and at the same time, able to drag the guilty supplier to court to minimize your financial losses. According to Charity Commission (2007), all charities are supposed by law to maintain financial records and set up accounts. The requirements vary for charities with different levels of cash inflows and outflows. However, there are some fundamental filing requirements which apply to all charities, regardless of their income levels. In most cases, all the charities, whether small or large, are required to register with the Charity Commission of their country. The accounting documentation which the charities are required to preserve include items such as cash books, gift aid records, receipts, invoices and all other relevant items pertaining to account and finance. As far as the preparation of charity accounts is concerned, there are two basic methods for it. They are the Receipt and Payment Basis and the Accrual Basis. Small charities with incomes less than £100,000 are specified by the Charity Commission to use the Receipt and Payment Basis whereas larger charities, such as yours, with an annual turnover of £2.5 million, are required to use the Accrual method for creating accounts. As explained by The Chartered Institute of Public Finance and Accountancy, (2010), the Accrual method involves reporting the business transactions in exactly the time phase in which they take place. For instance, the cost of consuming facilities such as water and electricity is reported in the period in which they are consumed rather than in the period in which the cash payment is made. The rationale behind this method is that revenues should be recorded not in the period in which cash is received but in the period in which the revenue is actually earned. Similarly, the expenses follow the revenues and are recorded in the period in which the transaction in reality takes place. As stated by the Charity Commission (2007), the Statement of Recommended Practice: Accounting and Reporting for Charities (SORP) makes clear the procedure of developing accounts through the Accrual mechanism. Thus, the primary components of your financial statements are supposed to be Statement of Financial Activities (SOFA), Balance Sheet and descriptive notes which act as an addendum. SOFA should reflect the financial effects of the business functions which took place all over the year such as funds, operating costs, incoming assets, in addition to increases and decreases in the investments. Moreover, cash adjustments as well ought to be a part of the SOFA. The balance sheet which you put in order must demonstrate your financial position at your company’s financial year conclusion. It should incorporate in sequence, the company’s records related to assets, liabilities and funds which you hold at the year’s end. You must also prepare explanatory notes to be an adjunct to your financial statements. The purpose of developing these notes is to provide the vital details behind the transactions which occurred during the year. For instance, in these notes you should mention any significant non-cash activities which took place during the year, such as exchange of land for building or details regarding any lawsuit or case in which you are currently engaged. As illustrated by Hopkins (2005), a charity should use any reasonable methodology which is in compliance with the accounting standards of SORP to estimate the value of the goods and services that are not involved in commercial transactions. This could be done by using fair market value of similar or analogous goods. On the whole, the rationale is to provide users with information which gives a fair view and is in accordance with the accounting policies of the charity and the accounting standards of the SORP. If you receive a request to publicly publish the accounts, then you should conform to it. The annual report presents the activities and the feats which the charity accomplished during its financial year. It highlights measures adopted by the charity throughout the year for public welfare. Your main purpose in preparing the Annual report should be to support the accounting and financial details and enhance the knowledge of the readers about the major aims and objectives of the charity and how successful it has been in achieving the specified goals and targets. The report should not only meet legal requirements but should also put on view a fair analysis of your charity’s ambitions, performance, successes, along with the difficulties and challenges you faced in accomplishing them. Hayton (2002) states that the annual report must contain details of the guiding principles that the charity trustees’ use for choosing people and organizations that are supposed to benefit from the charity’s funds. Hence, you also need to mention in your report the total number and value of grants specified for various charitable uses. In essence, the annual report should provide answers to all those questions which are not explainable by the accounts and financial statements. The annual report brings transparency into your charity’s accounts by forming a crystal clear image of the charity which supplements the financial data. The donors are interested in knowing how the donations were utilized by the charity for the betterment of the public activities. The founders are quite keen to know about the progress the charity has made. Similarly, the report is of great substance for the trustees and the members as well. Therefore, your report should be designed in such a way that it addresses the concerns of all the stakeholders. You must also be aware that a charity’s annual report is not only significant to the trustees, founders, members or donors, but for the common man as well. This is because a common man certainly possesses interest in the activities and functions of the charity because the operations of a charity are ultimately intended to be for the benefit of the public. You should come up with such an annual report that is not only attractive but also accurate, pertinent and precise. A good Trustees’ annual report helps in appealing to the potential donors and consequently in attracting funds by enhancing the value of the charity. Therefore, it is very important that the annual report is prepared in a very meticulous and professional manner. I also advise that you should seek help of professionals in preparing the technical aspects of the report. There exist many fundamental differences between charities and companies. These differences are also reflected in the filing requirements as well as annual reports. As suggested by Stittle (2003), charity annual reports usually have additional and specialized needs over and above the more conventional requirements of those of limited companies. A charity does not have shareholders like a company. Instead it has trustees who may also serve as board of directors. The shareholders are also the owners in a limited company but as far as the trustees are concerned, though they are not the owners of the charity, but their responsibilities and duties are far greater than that of shareholders. An immense amount of responsibility lies on the shoulders of the trustees in a charity. Unlike a company, where the focus is on maximization of shareholder wealth, the charity aims at maximizing the benefits it can deliver to public by efficiently managing the funds and gift aids which it receives. Moreover, the trustees do not receive any dividends in charity whereas shareholders do get their due share in a company. Since there are no dividends in a charity, therefore the entire turnover, after clearing the expenses, is retained by the charity for future use. As a result, the statements made by charities comprise neither of profit and loss reports nor of owner’s equity. As a substitute, they prepare Statement of Financial Activities (SOFA). SOFA has been designed by SORP to especially facilitate the accounting and reporting requirements of charities. Zietlow, Hankin & Siedner (2007) further support this fact by stating that financial aim of charities is target liquidity, not shareholder wealth or heavy monetary profits. In contrast to companies, where monetary results are the prime basis for evaluating the company’s success, charities’ success is determined by several other performance indicators in addition to financial results. These indicators include intangible results such as reducing the level of poverty in the town, contributing to the welfare of the masses; raising the standard of living of the underprivileged and helping the needy children attain education. Another significant difference is related to investments. In companies, investors usually invest to earn a return on their investment whereas in charities, funders do not invest to gain a return on their investment, but to contribute to the public benefit by facilitating the charity in its efforts. Similarly, the charities also do not invest in plant, property and equipment for the sake of future monetary profits and gains, but to accomplish the charities needs and noble goals. Hence, the financial statements of charities do not include accounts such as Gain or loss in investment, which on the other hand are a crucial part of the accounting and financial reporting in companies. While the assets are analysed as fixed and current in companies as well as charities, a distinction arises in matters of funds. Companies usually do not receive funds, while charities survive on funds. Thus, various types of funds are grouped in the balance sheet of the charity in addition to assets and liabilities. Bibliography ALLEN, R. L., DOYLE, J. D., LEHR T. M. & FISHER, W. B. (2011). Reducing Risk and Maximizing Investment through IT Asset Management. Bloomington: iUniverse. Charity Commission, (2007). CC15 - Charity Reporting and Accounting: The essentials. [online] Available at: http://www.charitycommission.gov.uk/publications/cc15.aspx#4[Accessed 14 January 2012]. HAYTON, D. J. (2002). Extending the boundaries of trusts and similar ring-fenced funds. The Hague, Kluwer Law International. HOPKINS, B. R. (2005). Nonprofit law made easy. Hoboken, N.J., John Wiley & Sons. Top of Form STITTLE, J. (2003). Annual reports: delivering your corporate message to stakeholders. Aldershot, Hampshire, Gower. Bottom of Form The Chartered Institute of Public Finance and Accountancy, (2010). Understanding Reports on Charity Financial Statements. [online] Available at: http://www.cipfa.org.uk/panels/charity/download/CIPFA_CPG_Understanding_Reports_Charity2010.pdf [Accessed 14 January 2012]. WU, T., & BLACKHURST, J. (2009). Managing supply chain risk and vulnerability tools and methods for supply chain decision makers. New York, Springer. Top of Form ZIETLOW, J. T., HANKIN, J. A., SEIDNER, A. G., & HANKIN, J. A. (2007). Financial management for nonprofit organizations: policies and practices. Hoboken, N.J., John Wiley & Sons. Inc. Bottom of Form Read More