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NONPROFIT MANAGEMENT

 

CASE COLLECTION INVESTING IN EXCELLENCE

 

David Bury

 

Stephen Procter University of San Francisco

 

College of Professional Studies

 

Institute for Nonprofit Organization Management

 

2130 Fulton Street

 

San Francisco, CA 94117-1047

 

Copyright 1999, University of San Francisco

 

Permission granted to purchaser only to reproduce for classroom use.

 

Unauthorized duplication of copyrighted material is a violation of federal law.

 

CS-0035 INVESTING IN EXCELLENCE

 

David Bury

 

Stephen Procter Case Abstract

 

The president of Promusica's board of directors has never been able to

 

make the artistic director understand how Promusica needed to work

 

in "the real world." Conversely, the artistic director feels he cannot

 

get the president to share his urgent sense of Promusica's artistic

 

mission. Over time Promusica has accumulated a large debt. With an

 

expensive concert and recording contract coming up on the schedule,

 

the standoff cannot be allowed to continue. PLEASE NOTE: The material contained in this case does not

 

necessarily represent actual people or conditions. INVESTING IN EXCELLENCE The Artist and the Accountant

 

As president of Promusica's board of directors, Jack Fleming had had more than his share

 

of headaches with Morrie White. Morrie was Promusica's artistic director, and in Jack's view

 

had an "artistic temperament." Jack was a good businessman, and just could not get Morrie to

 

understand how Promusica needed to work in what Jack called "the real world." Conversely,

 

Morrie felt he could not get Jack to share the urgent sense of artistic mission that animated

 

Promusica. They were at a standoff. Now that Promusica had a large debt, Jack felt that the

 

situation could not be allowed to continue.

 

Jack thought that maybe someone else could get through to Morrie, and asked Herman

 

Steinberg, the life-long personal friend and successful businessman with a CPA, to meet with

 

Morrie. The meeting was not going well.

 

"Where the hell do you get off," Morrie exploded. "I mean, come on! You may know

 

how to run your bagel factory, but you can't tell me how to run an orchestra. It's a bad joke, a

 

really bad joke."

 

Herman drew a deep breath. "Unfortunately, it's no laughing matter, Morrie. It looks to

 

me as if you are trying to destroy the very thing you care most about. Here you've created

 

something wonderful--a great orchestra. All I want to do is help you save it, yet every time I

 

make a point or ask a question, you blast me. Any reasonable person wouldn't put up with it.

 

Maybe we should just agree to disagree. Then we could stop arguing and let the board sort it

 

out."

 

"The board! The board doesn't know shit," said Morrie, ". . . doesn't know shit about

 

music, doesn't know shit about what this organization is all about. Jack Fleming is a complete

 

jerk. The fact that he is president of the Promusica board is just another really bad joke."

 

"You're talking about my friend," said Herman. "Jack puts a lot of time and energy into

 

Promusica and all the other organizations he volunteers for. He cares a lot."

 

"That's it," said Morrie. "He'll put time and energy into meeting and into talking and into

 

saying what ought to be done. But he never does anything. When you need help Jack calls a

 

meeting to talk about it. Great.

 

"Then he comes up with brilliant ideas like, 'Let's cancel the concert with Serkin and the

 

Pavarotti recording. That will save us the $85,000 we need.' Absolutely brilliant! Cancel

 

Promusica's two most important contracts ever. If I thought that way there would be no Bury and Procter--Investing in Excellence

 

Page 2

 

Promusica at all, or, at best, I'd still be driving taxi at night to get enough money to pay the

 

musicians for doing chamber music in some god-forsaken union hall."

 

Everyone acknowledged that the Promusica Ensemble was Morrie's creation. Ten years

 

ago the ensemble was little more than an idealistic notion shared by him and a small group of

 

freelance musicians. Morrie's devotion, perseverance and musical acumen in combination with

 

the high caliber of the musicians he brought together had somehow enabled the organization to

 

survive a decade; indeed, now it was on the verge of becoming recognized nationally as a

 

first-rank ensemble.

 

"Look, Morrie, even an accountant in the bagel business knows that artistic genius is a

 

rare and wonderful thing, and no one doubts that it has taken your particular genius to make

 

Promusica what it is. But I have to tell you that the world is filled with geniuses who have gone

 

bust."

 

"Yeah," replied Morrie, "and I have to tell you that it's also filled with shitty, third-rate

 

orchestras. This is a fantastic young orchestra, something that could become one of the great

 

orchestras of our time, hell, of all time! And what does Jack do when all that is right within our

 

reach? He chickens out. He turns and runs. You call that leadership?"

 

"But Morrie, that's just the problem: it's not in our reach. We just don't have the money.

 

It's not there. If you extend your reach too far beyond your means, you're courting disaster.

 

Total financial disaster."

 

"We're talking leadership, not money," said Morrie. "Six months ago when Jack and the

 

board approved this year's budget, they knew they needed to make the series at Carnegie Hall

 

work. They knew we had to subsidize the recording project. They knew that we needed to

 

invest in this year to get the big payoff. They knew all that, and they knew they needed to raise

 

half a million dollars to make it happen.

 

"So now we're $85,000 short, and what are they doing? Turning and running. Following

 

Jack like a bunch of brainless lemmings. That's not even the worst of it. If you really look at it,

 

they haven't done a damn thing all year. It's Margaret who has raised all the money. Without

 

her we'd be $185,000 in the hole."

 

Herman adjusted his necktie and cleared his throat. "It would be one thing, Morrie, if we

 

were dealing with $85,000 or even $185,000, but that's not really the situation. The fact is,

 

you've been deficit spending--what you call 'investing'--for the last five years. Just look at the

 

books. You 'invested' $43,000 in '90. Your 'investment' grew to $156,000 at the end of '91, and

 

by the end of last year you were at $278,000. Morrie, an organization with an annual budget of

 

$800,000 just can't carry a $350,000 debt. Then add the whole IRS problem on top of that. It

 

will be the end of Promusica. I guarantee it." Bury and Procter--Investing in Excellence

 

Page 3

 

Morrie was pacing the width of the small room. His voice hardened. "I've heard enough

 

of this. Anyway, I've got to go meet that jerk from Sony. I'll tell you this, though: Your

 

guarantee may be good in the bagel business, but from where I sit it's full of holes. It's my

 

guarantee that has taken Promusica to the top of the music business, and I guarantee that if I call

 

Serkin's agent to cancel, we're through. Goodbye, Carnegie Hall. Goodbye, Lincoln Center.

 

Goodbye, Promusica. Our credibility is gone. We might as well close up shop, because no one

 

will touch us."

 

Morrie opened the door to leave. "You're the money wizard. Make it work. It's got to."

 

The door slammed behind him. Herman put his head in his hands and wondered what in the

 

world he could possibly tell the board next Tuesday.

 

The Board Meeting

 

Jack spoke loudly and with authority: "Let's turn to the first item on the agenda, the

 

executive director's report. Margaret, would you please report on your meeting with the IRS."

 

Margaret Etherington, Promusica's executive director, sat at the far end of the table. "Of

 

course. I'd be pleased to. I am very happy to tell you that my meeting yesterday with Mr.

 

DeAngelis, the IRS agent in charge of our case, went very well, indeed. He is an extremely

 

pleasant, courteous man who seemed sincerely concerned about our predicament. When I

 

explained how we started Promusica, how everyone associated with it, especially the musicians,

 

had worked so hard in the first few years to make it work, and how in recent years it has gained

 

such renown, he seemed to take a personal interest in our situation.

 

"I suppose the most important point is that he agreed not to take any legal action against

 

us." The board members broke into spontaneous applause. "You are supposed to save that for

 

the musicians," said Margaret.

 

"Any great performance deserves applause," said Jack.

 

Margaret, directing a smile toward Jack, responded, "Well, let me suggest that you hold

 

your applause, because that was only the first movement. The second movement is all about

 

conditions, conditions that the IRS insists upon, and I'm afraid they are quite rigorous. First, we

 

must remain current with our withholding payments. That, of course, is to be expected.

 

"The second condition is somewhat more onerous. We must pay all back taxes, interest

 

and penalties over the course of the next two years in accordance with a schedule that Mr.

 

DeAngelis and I worked out together. The interest and penalties alone amount to more than

 

$35,000. When one adds the back taxes the total two-year payment exceeds $109,000. I am

 

afraid that that figure seriously strains our finances." Bury and Procter--Investing in Excellence

 

Page 4

 

"Yes, there's no doubt about that," said Jack, "but let's keep this thing in perspective. The

 

fact that you were able to avoid legal proceedings is a substantial accomplishment. And then on

 

top of that to arrange a two-year payment plan--it's better than we had any reason to expect. I

 

really don't know how you keep pulling off these little miracles."

 

The smile returned to Margaret's face. "Surviving thirteen years of convent school

 

makes one believe in miracles."

 

"Well," said Jack, "keep the faith, because miracles are about the only asset this

 

organization has right now. Perhaps we should turn our attention to the other side of the balance

 

sheet, and look at Herman's report. This should be done in executive session, so I have to ask

 

Morrie and Margaret to leave the room."

 

After they had left Jack continued. "You have all received Herman's report. I hope you

 

have had a chance to study it and consider its implications. Before we begin our discussion of it

 

I would personally like to thank Herman for all the work he has put into this. It turned out to be

 

a much bigger project and under more trying circumstances than either of us could have

 

imagined when I first asked him to give us some help. So please know how much we appreciate

 

your work.

 

"Now, could you lead us through this by summarizing our financial position, and, based

 

on what you have learned, give us your recommendations as to how we should proceed?"

 

"I'd be glad to," said Herman. "Well, to begin with, cash flow is terrible. But there are

 

two problems which, in the big picture, are even more disturbing. As you can see in the

 

summary on page seven, it's not a pretty picture. We begin with the accumulated deficit, and

 

then add what I call the hidden liabilities--subscription money from next year's series that has

 

been spent in this fiscal year and the back payments owed to the Union Pension Fund.

 

"Then, if you look at the figures at the bottom of the page you can see that in addition to

 

the accumulated deficit, we have an estimated deficit for this year. I've added to that the figures

 

owed to the IRS that Margaret just told us about, and we're looking at a total debt of more than

 

$512,000 (Illustration I).

 

"The bottom line is that an organization of this size can't function with that magnitude of

 

debt unless it's being funded by someone. Unfortunately, that's not the case here. We have

 

already borrowed to the limit of our ability. The hard truth is that Promusica is simply not

 

viable financially.

 

"Now, I'm not sure how much detail you want me to go into, so why don't I stop here,

 

and if you want to ask questions or discuss any specific aspects of the report I'd be glad to try Bury and Procter--Investing in Excellence

 

Page 5

 

and respond."

 

"Herman," said Jack, "does your comment about our financial viability mean you think

 

we should shut Promusica down? How do you feel we should deal with this situation?"

 

"You know, Jack, if you had asked me that question two weeks ago, I would have given

 

you a straight-forward answer. Basically, I would have said you have two options: drastically

 

cut your programs until you can put the organization on firmer financial footing or close up

 

shop. I would have recommended the latter.

 

"But you asked me how I feel you should deal with the situation, and to be frank, my

 

feelings are saying something else. They're saying that you've got something really special here,

 

maybe even more than special--extraordinary, maybe great. So many people have put so much

 

into this thing--Morrie, Margaret, the musicians, all of you--and it has so much potential. Even

 

though the numbers are bad, it's hard for me to imagine telling you to turn your backs on the

 

whole thing. There is even some degree of truth in Morrie's position about the importance of the

 

Serkin concert and the recording project. So, if you want to know how I feel, well, I hope you

 

can find some middle ground where, through a combination of cutting and fundraising,

 

Promusica can be put back on its feet."

 

Jack seemed shocked. "Herman, I asked you to take on this project because you are the

 

most hard-headed businessman I know. Now is no time to go soft. There are just too many

 

risks. As board members we're lucky we aren't being sued by the IRS, and we still may be liable

 

for some of the debts."

 

"What you say is true," said Herman. "But on the other hand, you don't eliminate all

 

those risks by shutting down. You'll still be liable for the IRS payments. If you could cut some

 

of the losses, like the Serkin concert--there's $60,000 right there--and if you could get a better

 

financial grip on the organization, perhaps you could pull it back from the brink over the next

 

few years."

 

For the next hour the board debated various options, and eventually settled on a plan to

 

cancel the Serkin concert, fund the recording with their own contributions, and substantially

 

scale back plans for the coming season.

 

Margaret and Morrie were called back into the room. Through the explanation of the

 

board's decision Morrie sat stone-faced. When Jack finished he turned to Morrie and asked,

 

"Any reactions?"

 

Morrie looked up and spoke softly: "I won't accept it."

 

"What?" exclaimed Jack. "I don't think I heard you." Bury and Procter--Investing in Excellence

 

Page 6

 

"I said I won't accept it. It would be the end of Promusica. Cancelling the Serkin

 

concert will be the end of Promusica."

 

Jack was furious. "What the hell do you expect us to do, Morrie? We've taken this thing

 

as far as it can go."

 

Morrie looked directly at Jack and said, "Well, I think you have three options. You can

 

decide to go ahead with the Serkin concert. You can fire me. Or you can all resign."

 

After the commotion subsided Jack asked if anyone had a suggestion how to proceed.

 

Someone recommended they go into executive session. Morrie and Margaret left the room. She

 

was sullen. Morrie turned to her and said, "I'm sorry. I just couldn't help myself." They sat and

 

waited in silence.

 

Twenty minutes later Jack opened the door, walked over to Morrie and told him what the

 

board had decided. Bury and Procter--Investing in Excellence

 

Page 7

 

ILLUSTRATION I Organization Financial Analysis

 

prepared by Herman Steinberg

 

for the

 

PROMUSICA BOARD OF TRUSTEES Beginning Year Balance

 

Income

 

Expenses

 

Surplus+/DeficitYear-End Balance

 

Note #1: 90 91 ($7,500)

 

$627,324

 

$662,824

 

($35,500)

 

($43,000) ($43,000)

 

$587,231

 

$700,231

 

($113,000)

 

($156,000) 92 Current

 

Projected Year-end

 

($156,000) ($278,000)

 

$637,951

 

$742,316

 

$759,951

 

$827,316

 

($122,000)

 

($85,000)

 

($278,000) ($363,000) Hidden Liabilities, Not Showing on Balance Sheet 1. IRS Obligations

 

Interest & Penalties------Back Taxes Due------------Total Due IRS-------------- $35,000

 

$74,500

 

$109,500 2. Back Payments Due

 

to Union Pension Fund------ $12,374 3. 1990 Subscription

 

Sales Income--------------- $27,500 Total $149,374 Projected Year End---------- $363,000 Additional Liabilities

 

from Note #1.------------- $149,374 Actual Accumulated

 

Deficit------------------- $512,374 Summary

 







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