In the past, real estate departments were often under-utilized in the corporate hierarchy. Now, however, executives are keenly aware that having a sound corporate real estate strategy in place can pay huge dividends.
In order to operate most efficiently, some companies are outsourcing a portion of their real estate needs.
“Companies are outsourcing to maximize the use of internal resources on the core business functions and leaving noncore business items for outside experts to manage,” says Ed Schreyer, senior vice president of CB Richard Ellis.
Smart Business spoke with Schreyer about how corporate real estate is evolving, the impact of Sarbanes Oxley and how changes within the real estate structure are affecting industry players.
What has been the greatest change over the past few years in how corporate real estate is being handled?
The traditional corporate real estate department primarily operated in a reactionary role. These departments historically reported through purchasing or supply chain management and the role was simply to execute transactions and preserve physical assets. They were viewed as a necessary evil by senior management and primarily a cost center that demonstrated or created no annual profit to the bottom line.
Magnified by the challenges to drive additional shareholder value and bottom-line revenue, companies are now empowering corporate real estate departments to become proactive and strategic to assist in these new initiatives. In order to effectively achieve this goal, there is a shift for corporate real estate to report directly to a CFO or through finance instead of procurement or purchasing as in the past.
What other internal changes are companies making to achieve these savings?
To facilitate portfolio-wide cost savings, corporate real estate decisions are becoming centralized. The structure is becoming aligned with upper management to drive the process back to the divisions or branches versus the opposite.
Historically, most corporate real estate departments worked within a decentralized decision-making portfolio structure. Many key decisions were left up to divisional or branch managers, and then run through corporate real estate in the latter stages of the project. There was also a disconnect between corporate levels as upper management failed to communicate new corporate objectives to the real estate department. Centralizing the real estate allows companies to implement company standards including space allotment per employee, image of facility, desired lease language clauses and insurance liability issues.
How has Sarbanes-Oxley impacted corporate real estate?
Over the past few years, ‘post-Enron,’ corporations have been somewhat handcuffed, or, at a minimum, fearful to utilize any creative off-balance sheet or alternative financing vehicles other than the standard. We are seeing a shift as most companies have established their Sarbanes-Oxley compliance processes and are now becoming more comfortable with alternative financing structures.
One of the innovative financial vehicles being used is the Port Authority lease. Once only used for public benefit initiatives, the Port Authority lease has been made more flexible in an effort to trigger corporate growth initiatives. While the Port Authority is just one example of new financing alternatives, it is very attractive to corporations with the ability to provide a very low fixed rental rate and complete financial transparency. These transactions can be much more complex to manage, but with the large financial savings potential, this trend will continue to gain momentum.
Outsourcing of certain real estate functions continues to be a growing trend. Why?
While companies have cut back in personnel to operate in the most efficient manner possible, corporate real estate departments have witnessed significant downsizing. As previously witnessed, companies will rely on more outsourcing to assist in their overall initiative. This outsourcing includes items such as transaction management, project management, facilities management, portfolio administration and a host of other internal functions covered within the corporate real estate department.
What effect, if any, will these changes have on investors and landlords of space?
These changes within the corporate real estate department structure will continue to affect landlords, developers and investors. To improve speed to market, real estate needs will be more clearly communicated upfront. Lease audits to determine the accuracy of operating expenses will be commonplace. The need for flexibility in space will be more important than ever. Quality construction and project management will be a necessity. Companies will look for landlords to provide such services in an effort to maximize their time and efficiency.
ED SCHREYER is a senior vice president of CB Richard Ellis. Reach him at (513) 369-1331 or firstname.lastname@example.org.
China is the fastest-growing importer and exporter for the United States. Chinese citizens are experiencing greater earning power, which in turn has led to huge demand for consumer products and services. The economic strength and population provide opportunities for American companies interested in doing business in China.
“There are three ways for American manufacturers to do business and make money in China: sourcing, manufacturing and selling,” explains Helen Huang, vice president and chief representative of the Comerica Bank Shanghai Representative Office, which opens this summer. “Most American companies understand the advantage of reducing costs via a China strategy, and more are realizing the opportunity to sell in China to its 1.3 billion people who now have more spending power.”
Smart Business spoke with Huang about the reasons behind China’s economic emergence, how a company should proceed if it is interested in doing business in China and what types of opportunities she foresees in the future.
What are some of the driving factors behind the tremendous economic growth that China has enjoyed?
The low labor costs and availability of skilled workers combined with favorable government policies have enabled China to become the No. 1 destination for foreign investment. In addition to exports, another important factor behind the tremendous growth is the need for massive infrastructure within China itself.
Also, China’s stable political environment has played a role. Since the 1970s, China’s government has changed its focus from political movements to economic growth. The central government has implemented policies encouraging trade, foreign investment and economic growth while maintaining stability.
In what ways does the Chinese business environment differ from the United States?
Historically, the Chinese economy was totally state controlled. Today, government at different levels can still have a big impact on businesses. The Chinese legal system is still evolving. The rights of each party in the economy are not clearly defined, and it is not easy to enforce one’s rights. Signing a contract doesn’t necessarily mean you are protected by the laws. If you don’t understand the culture, there will be misunderstandings. A typical Chinese is not as direct as a typical American. It may mean ‘no’ even when you don’t hear that word.
What advice would you give to a company that is interested in doing business in China?
In general, U.S. businesses should understand that China is a very different culture including the way in which business is conducted. You need patience, an open mind and a long-term view. It is probable that you need a local partner or consultant who understands Chinese culture and its business practices.
In addition, the regulatory environment is very different in China. Understanding government policies relevant to your industry and the type of business that you want to set up should be a very important part of research and planning of your strategy.
How can a company find suitable business service providers in China?
You can ask for referrals from your bank, CPA, attorney, and others who have had experience doing business in China. A credit reference system is not necessarily available. You will probably find that good business service providers come from introductions from a trusted source who knows the providers.
How should a company evaluate locations to set up an office or manufacturing facility?
Currently, most foreign investment takes place in three regions: Yangtze River Delta, Pearl River Delta and Bohai Rim. These three regions are the most developed areas in China with the best infrastructure, the most sophisticated business environment and the best trained professionals. Obviously, these regions are significantly more expensive than inland areas.
When evaluating locations, there are many factors that a company should take into consideration. Labor cost is one of them, but not the only one. Other important factors include close proximity to highways, ports and airports; close proximity to customers and suppliers; and local government incentives to foreign direct investment.
Over the next several years, what types of opportunities do you anticipate for American manufacturers in China?
China will remain an attractive location for manufacturing due to its low labor costs and improving infrastructures. The cost has been going up in coastal areas and Chinese currency is expected to continue to appreciate against the U.S. dollar, but manufacturing costs will still be much lower than in the U.S. The provincial and local governments are eager to attract foreign investments and therefore have very favorable incentives.
HELEN HUANG is vice president and chief representative of the Comerica Bank Shanghai Representative Office. Reach her at email@example.com or contact Glenn Colville in Comerica International Trade Services at (925) 941-1931 or firstname.lastname@example.org.
Effective strategic communication is a critical component for the success of any business. A clearly defined message serves as the backbone of a company’s identity and articulates its future vision.
Edward Clift, assistant professor of communication at Woodbury University, believes it is a mistake to consider communication as a separate entity that exists apart from the fabric of a company.
“Strategic communication seeks to align an organization’s goals with its communication practices,” he says. “It is about creating a coherent mindset that values differences, handles conflict constructively, operates according to larger ethical principles of community and minimizes the destructive effects of bias and stereotyping.”
Smart Business spoke to Clift about using strategic communication to motivate employees, the importance of having a clearly defined strategy and the dangers of poor communication.
What are some effective methods of communication that can be integrated into a company by the CEO?
Communication, even when it’s not the subject of a CEO’s self-reflection, saturates all organizations. It is what defines corporate identity. Once the CEO starts to self-reflect about communication practices, then corporate communications can become subject to modification and improvement.
I recommend that CEOs start at the top by learning how to listen before they lead. Concentrating only on the effectiveness of communication, however, will limit the growth of the company. One should focus instead on maximizing the full potential of all interactions so that the company can find ways to direct its own change.
How can effective strategic communication help motivate employees and aid retention?
The idea behind strategic communication is to align corporate interests with the full range of messages distributed to the public, employees, the media and others. Employees want to understand how their labor contributes to the success of a company, and this alone will motivate them and increase retention.
Because of flatter of management in the corporate world, employees are increasingly responsible for their own oversight. The employees that survive in such a world are those who grasp the strategic mission of the business and make it their own. An effective strategic communication policy will help employees identify and understand the vision of the company.
How can a CEO or business owner be sure that employees are satisfied with the company’s communication program?
People are satisfied when they feel like they’ve contributed to the environment that they work in. You want to build an organization that is open to the input of all the employees. This can be designed into the corporate communication policy, but it has to begin by recognizing that people are sometimes scared of their own ability to influence the world.
You not only need to create the avenues but also find ways to encourage participation in those communication practices. Concrete ways to measure how satisfied employees are would include feedback forums, participant observation, anonymous surveys and quality control indicators.
Why is it important for senior management to have a clearly defined communication strategy?
No company can compete in the Information Age unless it reflects upon its own communication practices. If you develop a well-defined communication strategy, you can link your corporate goals to your way of knowing and interacting with the world as a business.
The relative success of one business over another is in large part attributable to the communication strategies it chooses to implement. This is why many investment professionals choose to buy the management team of a company rather than the product; they want to know that the communication strategy internal to the corporation is aligned with their business goals.
What are the dangers of poor communication in business?
The goal of a CEO is to create a coherent vision of a company that articulates a mission that matches what it is doing. Otherwise, you say one thing while doing another, and people don’t trust you.
This is one reason why many corporate reorganizations and mergers fail. You can’t just make a structural change and expect the communication practices to also change.
The dangers of poor communication do not end at the door of the company. Huge external risks face all organizations, but especially those operating on a global stage. These include natural disasters, forced changes in ownership or management, powerful stakeholders, ideological challenges and direct attack.
Strategic communication dictates that any business become conscious of these potential perturbations to its viability. It should then use its observations to strategically design a robust set of internal and external communication practices.
EDWARD CLIFT is an assistant professor of communication at Woodbury University. Reach him at (818) 252-5197 or through the university’s Web site, www.woodbury.edu.
Finding a suitable property and negotiating lease terms is a serious undertaking. After all, occupancy-related expenses represent one of the largest outlays that most businesses face.
In order to get the most bang for your real estate buck, says Ken Murawski, managing director of CB Richard Ellis, it is important to get a quality broker into the fold early on when you are just beginning to think about your future real estate needs. “A professional can assist at this time by conducting a space needs analysis and helping to establish strategies to minimize space requirements and costs,” he explains. “The sooner a commercial agent is brought into the process, the more value he or she can provide.”
Smart Business spoke with Murawski about the services that commercial real estate agents provide, how to find a suitable broker and the current Cincinnati market.
How can a company benefit from retaining a commercial real estate agent?
A company will always benefit by retaining a commercial real estate professional because he or she understands the ‘real estate game’ just as the landlords in the real estate business. Commercial agents acting as fiduciaries for the company work to ensure that the best deal is attained. And, since occupancy-related expenses rank just behind labor as the second-highest fixed cost of running a business, a solid real estate decision and a solid business decision must be one and the same.
What types of services does a quality broker bring to the table?
A quality broker will bring myriad value-added services to the table for the benefit of the company. These include market knowledge and research, comprehensive property analysis, financial modeling, space optimization analysis, lease negotiations and project management services. These are all things that a company is not typically set up to handle itself. When a company does try to handle a lease or purchase by itself, it will likely leave money on the table for the landlord or seller.
Does the size of the real estate transaction factor into the level of service that is provided?
No, the size of the deal does not really matter. A commercial real estate professional will lead the process and create the necessary leverage for the company to ensure its real estate goals are achieved. In many cases, the value that professionals provide is perceived to be even higher by smaller tenants, mainly due to the company’s lack of knowledge of the market and the process, as well as its lack of internal resources.
How should a business go about finding a good broker?
The commercial real estate business is very much a relationship-based business. All of our professionals work extremely hard every day to build relationships with company owners and decision-makers.
A company selecting a commercial agent should interview several qualified professionals and/or firms and solicit their feedback on such things as market rates, comps, experience, their process for tenant/buyer representation and other resources such as project management and financing. It is very important for a company to not only hire a firm that understands real estate, but look for one that also understands their business and their goals.
What is the current environment for commercial real estate in Cincinnati?
The current environment is stable. In the office sector, although overall absorption of office space is very flat, many Class A buildings have experienced reductions in vacancy. The submarkets along the I-71 corridor namely Kenwood, Midtown, Blue Ash and Fields Ertel/Mason all have seen positive absorption. In Blue Ash, Citicorp recently signed a lease to take 195,000 square feet at The Landings, which is the largest suburban lease in the past five years.
The downtown market vacancy rate jumped up earlier this year due to Convergys vacating 350,000 square feet in the 600 Vine Street Building. Overall, CBD vacancy is at 16.10 percent, which has caused some landlords to lower their rates and provide more concessions. There is currently about 1 million square feet of new office projects under construction.
On the industrial side, the market has maintained relatively steady activity. In 2006, more than 2 million square feet of new industrial space was constructed in the marketplace, which has caused overall availability rates to go to 6.27 percent. Overall, sales and leasing activity is on pace for about a 35 percent reduction from 2005 levels. Although deal velocity has simmered year to date, we have recently seen an improvement in activity as some of the newly constructed buildings come online with larger contiguous spaces available.
KEN MURAWSKI is managing director of CB Richard Ellis Cincinnati. Reach him at Ken.Murawski@cbre.com. or (513) 369-1349.
The ability to prevent fraud is crucial when competing in a competitive marketplace. Check fraud, in particular, can have a major impact on a company’s bottom line. Certainly, the use of ACH (Automated Clearing House) transactions to transfer and process electronic funds is on the rise. According to the Electronic Payments Association, 14 billion payments were made in 2005 through the nationwide ACH network, an increase of approximately 16 percent over 2004.
Safeguarding against check fraud both traditional and electronic requires diligence and determination, but new technologies are making the process simpler and more cost-effective.
“Financial institutions offer tools that allow customers to protect their assets for a relatively low cost,” says Lynnell Harris, senior vice president of Comerica Bank. “It’s very much a win-win situation.”
Smart Business spoke with Harris about methods that can be used to help prevent check fraud, the benefits of Positive Pay and what distinguishes ACH Positive Pay from other fraud-protection products in the marketplace.
What types of companies are most susceptible to check fraud?
All types of companies. In today’s environment, anyone who sends out checks or transacts business with partners or consumers is subject to fraud and should take precautions. Companies across America, regardless of their size, are at risk.
What are some methods that companies can utilize to help prevent fraud?
There are a variety of safety measures and financial tools. For example, employees can help protect sensitive information by making sure items such as checks, account numbers, bank statements and other sensitive financial information are locked up and stored away. A system of checks and balances can be employed within the company to ensure appropriate access and approval authority.
In today’s environment, electronic transfers offer more control, as systems enable companies to set up various layers of authority based on dollar amounts or transaction types. Other tools include online account review and Positive Pay.
How does Positive Pay work?
Essentially, the bank delivers information to the customer regarding checks or ACH transactions that will be posted against his or her account. The customer then has the opportunity to review the information and determine if they are valid items. The customer authorizes the posting of the transactions and notes any unauthorized transactions. When notification is returned to the bank prior to the deadline, unauthorized transactions are returned to the depositing/originating financial institution.
Tools such as Positive Pay significantly mitigate risk for the company without requiring a huge investment in technology.
How can a business utilize ACH Positive Pay to accept or reject ACH transactions before they are posted?
In a manner similar to checks, the bank will present to the customer, before posting, all ACH transactions. The customer then has the opportunity to identify any unauthorized ACH activity. The customer authorizes the posting of the transactions and notes any unauthorized items prior to the notification deadline. The bank will return those items before posting to the customer account.
What distinguishes the ACH Positive Pay service from other fraud protection products?
Solutions that enable a business to protect and control electronic activity on its accounts isn’t commonplace. Debit blocking provides one level of protection but doesn't offer the full range of decisions that true ACH Positive Pay solutions do. By reviewing and making decisions on all ACH activity before it posts to the account, ACH Positive Pay offers a greater degree of control and information management.
If a business detects suspect items using either Positive Pay or ACH Positive Pay, what course of action can it take?
The first step would be to contact its financial institution prior to the Positive Pay notification deadline and advise which items should be returned. Typically, the information regarding suspect items is available first thing in the morning. Customers pull information electronically, review it and authorize payment of the valid items. If there is an unauthorized item, they would notify their bank in that response. The bank would then return those unauthorized transactions before they post to the customer’s account.
LYNNELL HARRIS is senior vice president of Comerica Bank. Reach her at (714) 424-3895 or email@example.com.
If desktop computers serve as an organization’s brain, then a business-critical server functions as its backbone.
Acting as a lifeline to a trove of data, servers play a crucial role in today’s technologically driven society.
There are two key components to business-critical servers, says Hormazd Dalal, president of Castellan Inc. “The most critical component is the hard drive, because that is where your data is stored,” he says. “The next most vulnerable is the power supply, because those tend to fail.”
Should either key component fail, having server redundancy is an astute investment. This safeguard allows for continual operations in the event that a hard drive or power supply goes on the blink.
Smart Business spoke with Dalal about server redundancy, how often new servers should be purchased and the importance of warranties.
What is server redundancy?
Redundancy is making sure that if a key component in the server fails, a redundant piece of hardware ensures it will keep running. In the case that a drive fails, your data is still intact because the server will continue running on one drive. In the case of power supplies, if one power supply fails, the server continues to run and your network stays up.
Why is it so important to have server redundancy in place?
Your mission-critical server will typically affect several people if it goes down, so a server needs redundancy, while a desktop computer doesn’t. If a desktop component fails, then one user will be out of business. If a server component fails, then access to data is lost in its entirety, which will affect the entire company. For example, if an e-mail server does not have redundancy and one of those components fails, then the entire company is without e-mail.
What aspects of a server are most important when creating redundancy?
You should mirror your drive. This can be done either RAID 1, which is two drives mirrored, or RAID 5, which is three drives mirrored. This way, if one drive fails, the server continues to run and your data is still intact. The big manufacturers all offer dual power supplies, so that if the power to one supply fails, the server continues running. In most cases, the server will give you a warning saying that the component has failed, but will continue to run, which gives you enough time to call the manufacturer and arrange for a replacement part.
How does a business know when it’s time to buy a new server?
Typically, the life of a server is three years. Most manufacturers only sell a three-year warranty, which is an indication of when they think the items will start failing. After that, if you try and extend the warranty, it’s extremely expensive. It’s much like a car warranty: they don’t offer it after 50,000 miles because around that time, the components start to fail. The time frame for buying a new server depends on the critical nature of the server. If it’s a server that isn’t doing a mission-critical application, like e-mail, for example, it’s not as important. The servers that a business relies on should be changed every three to four years.
How important is it to have a warranty in place for servers?
It is essential to have a three-year warranty for parts and labor. When you purchase a parts-and-labor warranty for your server, you can have the manufacturer ship a part out or have a tech bring a part out within four hours or the next business day, depending on what you purchased.
We recommend a four-hour response time for mission-critical servers. The redundancy is useful, but the warranty is the icing on the cake because it allows you to replace a part in a timely manner.
What are some additional considerations for purchasing a server?
It depends on what you need. Today’s applications are all memory-intensive, memory being random access memory (RAM), not storage. We recommend at least four gigabytes of RAM and more if it’s a database server or if it’s running multiple applications.
The speed of the processor is important, although today’s processors are fast enough to run many server-based applications. SCSI hard drives are faster than SATA RAID hard drives. Your fastest SATA RAID drive today is 7,200 rpm. SCSI hard drives are 10,000 rpm to 15,000 rpm. This means that the ability to retrieve and write information back to the server is much faster.
HORMAZD DALAL is president of Castellan Inc. Reach him at (818) 789-0088, ext. 202, or firstname.lastname@example.org.
In a business environment that operates at full throttle, it can be easy to overlook long-term strategies in favor of short-term objectives. This pursuit of doggedly chasing quarterly numbers often involves a reduced headcount where fewer employees are given larger workloads. As a result, employees can become resentful, believing they are nothing more than a cog in a machine.
The concept of slow leadership, says Andre van Niekerk, dean of the School of Business at Woodbury University, strives to bring humanity back into the workplace. “Slow leadership is about returning work to its role as a forum for expressing yourself and finding pleasure as well as a financial reward in your employment,” he explains.
Smart Business spoke with van Niekerk about slow leadership.
What is slow leadership?
Slow leadership is a movement to remind the world that work has purposes and meaning in our lives beyond the purely economic and financial ones; and that time and space must be allowed in the working week for people to express their creativity, the pleasure they take in using their abilities to the full, their desire to learn, and their needs for social interaction.
What factors in the contemporary workplace have led to the advent of slow leadership?
Too many people today are facing work pressures that go far beyond a level that still lets them retain enough time and energy for enjoying the nonwork aspects of their lives. A rigid insistence on achieving their employer’s continually escalating financial objectives first often at the expense of nearly everything else robs work of much of its meaning. Employees are reduced to economic functionaries: ‘human resources’ to be optimized and exploited as ruthlessly and obsessively in pursuit of greater profits as any inanimate corporate resource.
How can the principles of slow leadership develop a company’s long-term foundation?
Conventional leadership what I term ‘hamburger management’ because it relies on a very limited menu, high speed, and the cheapest possible ingredients looks only to short-term objectives. Indeed, research has shown that the vast majority of managers today are willing to compromise the long-term strategies and needs of their business in order to fulfill quarterly quotas. As a result, businesses are mortgaging their futures to meet unreasonable demands for short-term results.
Slow leadership offers ways to retain high levels of productivity without putting the short-term cart before the long-term horse. People can’t exist on hamburgers alone. They don’t provide a balanced, healthy diet, let alone one that is a basis for a fully enjoyable life.
How does slow leadership benefit employees?
Work is an important source of satisfaction in learning, exercising your skills, earning the regard of your colleagues and developing a balanced sense of self-esteem. All of this is undermined when people find themselves driven to cut corners and rely on quick fixes, because the organization has reduced headcounts so much that there is no time to do any better.
People want to produce quality work. But if they are driven to focus on meeting numerical targets by any means possible, they will lose pride in what they do and a sense that anyone cares about their lives. The result is alienation, frustration and lack of interest in anything other than the pay check.
What are the first steps that management should take when implementing slow leadership?
Stop basing decisions on often spurious numerical summaries of organizational activity. Look to the long-term need to increase value and provide a stable basis for genuine growth. Then make it clear to everyone that creativity, insight and fresh thinking are to be the basis for future increases in productivity, not driving everyone to do more and more in less and less time with current methods.
The deep well of creative ideas in any work force is usually ignored. If you encourage people to help you grow the business and treat them as civilized human beings, they will surprise you with what they can offer.
Once a change has been made, how can a business owner determine its effectiveness?
Slow leadership is about finding ways to be successful and still retain a civilized workplace. What you should see are more effective and productive people, a higher quality of output and service, a happier team of employees and much lower turnover. Cutting jobs and forcing those who remain to work longer hours only provides a short-term boost to profitability. Taken too far, it begins to eat into the firm’s capacity for long-term survival.
Slow leadership takes the view that the only sustainable basis for building higher productivity is the creative thinking of everyone involved. And that needs time and space to operate the very things that thoughtless, ‘hamburger managers’ keep removing in a frantic search for greater and greater short-term profits.
ANDRE VAN NIEKERK is dean of the School of Business at Woodbury University. Reach him at (818) 252-5284 or email@example.com.
Body scans afford people the opportunity to detect early warnings of cancer, cardiac disease and other abnormalities lurking beneath the skin. Typically, the process involves scanning the body with a form of X-ray energy that generates cross-sectional images.
Body scanning technology has come a long way since the first generation of CT scanners emerged in the mid-1980s, says Michael Yeh, director of the UCLA endocrine surgery program and assistant professor of surgery.
“In the present day, we have high-resolution, rapid scanners that are much more comfortable for patients,” he ays. “In my field, I frequently consult with patients who have had an abnormal growth found on a body scan.”
Smart Business spoke with Yeh about the diseases most commonly revealed with scans, how abnormal findings should be handled, and the importance of performing a risk-to-benefit analysis when considering further intervention.
What are some of the various scanning methods?
The various body-scanning methods available are ultrasound, computed tomography (also known as a CT or CAT scan), MRI (magnetic resonance imaging), and the fourth one, typically done for cancer, positron emission tomography or PET. Of those, the one that is most commonly performed is a CT.
What types of diseases are most commonly discovered by scans?
It’s a wide range. The principal body areas of interest are the chest and abdomen. Vascular disease, that is, disorders of the blood vessels, may be found. These include aortic aneurysms, which are abnormally enlarged vessel segments that usually arise in older men, particularly if they have ever used tobacco. Small nodules in the lungs are occasionally discovered. It is quite common to find benign tumors or masses, such as cysts, in the liver and/or kidneys.
My area of specialty is in the endocrine glands of the body: thyroid, parathyroid, adrenal and pancreas. A significant number of findings on body scanning occur in these endocrine glands.
The likelihood of having an abnormal growth on a scan increases with an individual’s age. For instance, approximately 4 percent of body scans performed on people aged 60 years will reveal an abnormal mass in one of the adrenal glands. This is considered a common problem by medical standards.
How helpful are body scans in detecting cancer in its early stages?
Routine body scanning holds the promise of detecting a cancer at an early stage, when it might be more effectively treated. However, one cannot definitively diagnose a cancer on a scan alone. What you need is a tissue diagnosis that is, usually a biopsy of some kind. In some instances, this can be done with a needle, and in other cases surgery is required.
A scan may detect a neoplasm or tumor. Tumors fall into two categories: benign or malignant (cancerous). Nobody has studied this formally, but the great majority of tumors that are found on body scans are almost certainly benign. This raises a bunch of questions. When an abnormal growth is detected on a scan, we are obligated to investigate the tumor further to determine whether or not an intervention is needed. The questions that a patient will want answered are: Is this a cancer? How will we find out? Does it need to be removed surgically?
How big a part does the physician’s judgment play in interpreting scans?
Most of the scans are interpreted by expert radiologists. When they see an abnormal mass, they alert the primary care physician or the clinician who ordered the scan. Then it’s up to the judgment of the physician, through discourse and dialogue with the patient, to decide what needs to be done next.
I’ll give you a few possible scenarios. The first is a young, healthy patient with an abnormal finding. In that case, you’re almost always going to be aggressive about making a diagnosis and potentially recommending surgery. That’s because a tumor, if left alone, will have plenty of time to grow and potentially cause problems down the road.
On the other hand, if you’re dealing with an older patient (say greater than 70 years) who has significant chronic illnesses such as heart disease, liver disease or lung disease, then the decision must be weighed carefully. In this second case, it comes down to a risk/benefit analysis because the patient may not tolerate an operation very well.
My job is to go over the ratio of risk to benefit with each patient and only offer patients an operation if I think they stand to gain from it.
Director of the endocrine surgery program, assistant professor of surgery UCLA
MICHAEL YEH is director of the UCLA endocrine surgery program and assistant professor of surgery. Reach him at (310) 206-0585 or firstname.lastname@example.org. For more information visit www.endocrinesurgery.ucla.edu
When it comes to selling a business, the perception of risk significantly impacts value. The less risk involved, the higher the selling price will be. One way to think of it, says Ted Collins, CPA, ABV, manager of business valuation for Vicenti, Lloyd & Stutzman LLP, is to think of the home buying process. You hire a home inspector to assess the condition of the house and tell you what needs fixing. You then notify the seller that your offer is less than asking price because of the leaking roof, termites and cracked driveway.
“Had the seller fixed the problems ahead of time, the buyer might not have had as many reasons to ask for a reduced price,” explains Collins.
Smart Business spoke with Collins about how risk impacts value, how business valuation professionals determine risk and why identifying risk is important even if an owner is not planning on selling his or her business.
Why is risk an important concept for private companies?
Each day in the public marketplace, companies are either rewarded for achieving their target profits or punished for falling short. Managers of public companies have a public scorecard of shareholder value, which is reflected in the stock price. Private companies, on the other hand, don’t have this type of scorecard until the time of sale. If a private company waits until then to focus on the perception of risk, much value can be lost.
How does risk impact value?
Risk impacts value by changing the perception of an investor or acquirer. Whenever an investment is deemed riskier than another, an investor demands a greater return on that investment. Investors are essentially buying the future potential of a business to generate the required return.
The financial theory of present value holds that future dollars are worth less than today’s dollars because you can invest today’s dollars and earn a return. To determine what to pay for a business, an investor uses a required return on investment to discount those future dollars to present day value. The more risk involved in the business, the higher the rate of return, which then discounts the value of the business further.
How do business valuation professionals look at risk?
Risk is very subjective in nature. Valuation professionals attempt to look at it from a hypothetical investor’s perspective in order to reduce some of that subjectivity. We look at risk through three windows: the macro environment, industry and the company-specific risk.
In the macro environment, we consider risks such as the direction of interest rates, trade policies and demographics.
Questions that will be raised about the industry include: Is competition increasing? Are customers leaving to new industries and technologies?
Finally, we consider the company itself. How well do the data benchmarks compare with the industry? How are its systems used to generate revenue? Are the systems operating efficiently? What makes this company different from its competition?
A valuation professional then makes a determination of what a hypothetical investor might expect as a return, given all of the known risks.
What steps should a private company take to minimize risk?
The purpose of minimizing risk for a privately held company is to build value for an eventual sale. If the owner is thinking of selling the business in the next five years, the company must develop a strategy to minimize a buyer’s perception of risk.
Owners of privately held companies may have issues that they’ve always been meaning to correct, but they’ve never identified them as a high priority. There may also be issues that have never been considered. To paraphrase the poet Robert Burns, ‘There is power in seeing ourselves as others see us.’
A valuation professional can help a business owner see his or her business from a buyer’s prospective and point out issues that may affect value before a buyer gets a chance to. Given enough time, the owner can either fix the issue or mitigate it on their terms and timetable, rather than at a stressful sale time when the risk of losing a buyer is present.
What if the owner is not planning on selling?
This process is useful even if an owner is not planning on selling, because it serves to strengthen the company for the day when it will be transferred to either an heir or to key employees.
Identifying risk is not an abstract idea; it often gets to the core of what makes a business thrive. This is why you see companies with chief value officers in charge of managing value. Outside of servicing customer needs and enhancing employee effectiveness, protecting and building the value of a company is critical to its long-term success.
TED COLLINS, CPA, ABV, is manager in the Business Valuation Group for Vicenti, Lloyd & Stutzman LLP. Reach him at (626) 857-7300 or TCollins@VLSLLP.com.
“The new law allows you to make a direct contribution out of your IRA to a charity and you don’t have to pay tax on the distribution like you did before,” says Mary Ann Quay, co-managing partner of Vicenti, Lloyd & Stutzman LLP.
Smart Business spoke with Quay about how retirement plans and charitable contributions are affected by the Pension Act and what additional changes in tax law she anticipates.
What provisions does the Pension Protection Act of 2006 make?
The Pension Act consists of a number of provisions intended to strengthen the funding rules for defined benefit pension plans. Its intent is to ensure the solvency of the plans by requiring greater contributions by employers, and thereby, avoiding future insolvencies. It also includes provisions related to charities and charitable donations.
How are retirement plans affected by this change in tax law?
Starting after 2007, the current funding system for single employer-defined benefit plans will be replaced with one that changes the way minimum contributions are calculated. Multi-employer plans will have new rules as well. Many of the changes are very technical in nature they affect things like the way that interest rates are calculated and the minimum amounts of funding but they all have the goal of strengthening the funding so that the pension plans will be more likely to be solvent in the future.
What amendments have been made as far as charitable deductions go?
The big change for charitable contributions that the charities are excited about has to do with the allowing tax-free IRA distributions to charities. In the past, if you wanted to make a contribution to a charity out of your Individual Retirement Account, you were required to withdraw the funds, pay the taxes on it and then you could use what was left to make a contribution. This provision is only applicable to taxpayers over age 70, and it expires at the end of 2007. Another change is that the rules for deducting charitable contributions have been tightened up, especially for noncash gifts. It’s going to be more important than ever to document every gift that is given.
How does the Section 179 deduction benefit business owners and what is the amount that can be deducted?
Section 179, which was not changed by this new law, allows businesses to immediately expense or write off up to $100,000 related to purchases of machinery, furniture, computers or other equipment that normally would be depreciated over time. This gives an immediate tax benefit for equipment purchase. There are limits and the very large and very profitable companies can’t take advantage of this. But for many companies, it’s a huge tax benefit. The deduction of up to $100,000 per year can be taken up through the year 2010.
When making a decision to write off assets, why is it important to compare how an accelerated write-off will affect taxes in future years?
It’s really important to plan the year you want the deduction. Taking it all in the first year may reduce your taxable income down to a very low tax bracket which is great for this year, but then it means that you don’t have any write-off in future years and you could end up being in a higher tax bracket. Some companies, especially if the current year where the purchases were made is not a large tax year, may not want to make the election so they can defer the deduction into the future by depreciation. This way, the deduction will be used in a year when their tax bracket is higher.
In the future, what additional changes in tax law do you anticipate?
It’s really difficult to predict. It would not surprise me if there were more changes related to pensions even after this Pension Act, because this one is going to have the effect of inhibiting employers from doing defined benefit pension plans. We’ll see pensions decrease in the future, and there may be even more things that try to encourage other types of retirement plans. Other than that, it seems like there may need to be some kind of laws that increase taxes due to the high spending that’s been going on.
MARY ANN QUAY is co-managing partner of Vicenti, Lloyd & Stutzman LLP. Reach her at MQuay@vlsllp.com or (626) 857-7300.