Saturday, June 4, 2016
What is a Letter to the Stakeholders?
Stakeholders and Other Interested Parties,
At the end of 2014 we find University Financial Services (UFS) in a very bad position financially. Although UFS has provided invaluable services to the community and helped many interns achieve experience in their chosen careers it finds itself in an awkward position of losing money. UFS is not a going concern which is the expectation that a company will have a long life (Kieso, 2012 pg. 54). UFS is not in a position to meet either its current or long term obligations.
Those who are considered stakeholders are many. This would include, students (interns), the community, and UFS’s sponsors. The management and directors of UFS owe these stakeholders an accounting for the organizations financial problems. The problem comes in two parts. First the association of UFS with University Consulting, another non-profit organization sponsors and management problems within UFS.
The employee pay scale in University Consulting was out of line with the revenue earned. Revenue was in the area of $500,000 while wages were in the $700,000 area. The same held true for UFS but not to the extent of University Consulting. As a matter of fact UFS was originally a department of University Consulting. In an effort to alleviate the ever growing problem UFS broke away from University Consulting forming its own non-profit organization.
UFS currently has a deficit of $70,765 (see Financial Highlight section of report). To alleviate this debt and to safeguard the concerns of the stakeholders of the organization UFS should petition the Federals courts for a Chapter 7 Bankruptcy. A Chapter 7 Bankruptcy serves the goals of allowing a debtor to make a fresh start and ensures equitable treatment to the creditors (Jentz, 2010 pg. 423). The stakeholders most affected by this bankruptcy would be the interns, who have not been paid due to the deficit. This bankruptcy would allow for an equitable settlement of unpaid wages while allowing the UFS to reorganize with a business plan that better meets the projected revenues allowing them to become an ongoing concern again. It would also eliminate the need to liquidate the assets of UFS.
Chief Financial DirectorUniversity Financial Services
Net Income - 70,765
This Income Statement illustrates the economic woes of UFS. The organization lost $70,765 in 2014.
Accounts Receivables 16,637
Total Assets -52,872
UNIVERSITY FINANCIAL SERVICES FINAL
Accounts Payable 379
Payroll Liabilities 8,823
Total Liabilities 9,202
Retained Earnings -8,231
Owner Investment/Draw 16,905
Net Income -70,765
Total Equity -62,073
Total Equities and Liabilities -52,872
Income Statement and Balance Sheet from: Director of Finance.
Again the Balance Sheet shows the economic woes of UFS.
As UFS emerges out of bankruptcy a clear plan must be in effect to avoid the financial pitfalls that plagued the organization from the start. The first step would involve establishing a budget. A budget is normally associated with a for- profit company but according to the text, Managerial Accounting, a budget is necessary for a non-profit organization as well. A budget is useful in that it displays the organizations business plan in financial terms. The object of a budget is to set plan goals, achieve the plans and revue and compare the plans to actual performance (Warren, 2007 pg. 968). A big challenge that a non-profit faces is that some terms of grants awarded the organization have specific terms as to have the money is spent. These are called “restricted funds”. An example of this would be a grant award that is specifically designated to hire accountants to develop a program for start-up non-profits. The monies in this grant can only be used for wages to pay the accountants working on the program. It could not be used to pay others wages. Another example would be a grant for new computers. Only new computers could be purchased with the grant money (Hoyle, Chap 16, 2013).
The new budget must be tied to expected grant revenue. All expenditures must be tied to this revenue forecast. Now UFS serves another function than helping the community. That is the education and experience opportunity to interns from UFS.
It could be said that it’s the primary purpose of the virtual company in that it is the mission of University to educate students to enter the workplace. The problem this causes is that, unlike a normal non-profit that can lay off employees as the revenue dictates, UFS must employ all students who are required to enter the program. An answer would be to have a sliding pay scale that changes in relation to the revenue on hand and the number of students involved in the internship. By adopting this plan UFS would be grounded in the real world as its expenses should never exceed its revenue.
Smaller decisions about the operation of UFS would revolve around payroll taxes. Unemployment taxes are not required by the IRS for a non-profit organization. In order to keep payroll expenses down, remembering that payroll was the major expense before reorganization, UFS needs to decide to pay them or not. In the real world this would mean that an employee that was laid off, which happens frequently as grants are lost, would not receive any unemployment. In the virtual world of UFS it would mean that tax specialist would not have the experience of filing the state and federal returns associated with unemployment withholding.
The IRS requires a non-profit organization to file a yearly return. It is filed on a form 990 or 990EZ. This requirement is for any tax exempt organization that has annual gross receipts in excess of $50.000. Running a loss, UFS, would not be required to file an annual tax return. It is felt a return not should be filed for 2014 because the organization was insolvent. With the reorganization of the company UFS should file an annual return even if the gross receipts do not total $50,000. Because the IRS will revoke the tax exempt status of a non-profit if it fails to file, it is recommended that a Form 990 be filed to let the IRS know that UFS is now a going concern.
At this time UFS is in talks with University Consulting to establish rates for the work performed assisting them with their financial needs to include payroll. UFS should also strive to obtain grants and other funding so they are not solely reliant on University Consulting. The development of a grant writing position would help towards these ends. Although not part of a financial service, grant writing is a high paying position in the real world and in much demand. Without a grant writer many non-profits would not be able exist.
UFS has much to offer the public on its own. Many new non-profits start off with good intentions but fail because of a lack of knowledge of accounting fundamentals. According to Don Griesmanns Non-Profit blog, he lists a number of reasons non-profits fails. Among them is not staying current with state and federal regulations, to include tax filings, no business plan, inadequate fiscal controls and poor budgets. UFS could provide assistance in all these areas.
Kieso, Kimmel, Weygandt. Accounting Principles. John Wiley and Sons Inc. 111 River St, Hoboken NJ. 2012
Kieso, Weygandt, Warfield. Intermediate Accounting. John Wiley and Sons Inc. 111 River St, Hoboken NJ. 2009
Hoyle, Schaefer, Doupnik. Advanced Accounting. McGraw-Hill, Irwin, 1221 Avenue of the Americas, New York. NY 2013
Jentz, Miller, Business Law. McGraw-Hill, Irwin, 1221 Avenue of the Americas, New York. NY 2013. 2010
Nobles, Scott, McQuaig, Bille. College Accounting. South-Western, Cengage Learning. 2013
Pany, Whittington. Principles of Auditing and Other Assurance Services. McGraw-Hill, Irwin, 1221 Avenue of the Americas, New York. NY 2012
Warren, Reeve, Duchac. Managerial Accounting. Thompson, South-Western. 2007
Bieg, Toland. Payroll Accounting. South-Western, Cengage Learning. 2012
Anderson, Pope. Federal Taxation 2013, Prentice Hall. One Lake Street, Upper Saddle River, NJ. 2013
University Finance Service Income Statement and Balance Sheet: Mazza, Tammy. MT390-1 Experimental Learning Career Engagement Dec. 24, 2014
Circular E, Employers Tax Guide. Retrieved from: http://www.irs.gov/pub/irs-pdf/p15.pdf
Annual Exempt Organization Return: Who Must File. Retrieved from http://www.irs.gov/Charities-&-Non-Profits/Annual-Exempt-Organization-Return:-Who-Must-File
28+ Reasons Non-profit Startups Fail. Retrieved from: http://dongriesmannsnonprofitblog.blogspot.com/2012/05/why-do-start-up-nonprofits-fail.html
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