Leslie Stevens-Huffman

The recent uptick in sales is like a breath of fresh air for beleaguered business owners — unless they don’t have enough cash to meet rising expenses while they wait out a typical invoicing cycle.

A conventional line of credit may seem like the prefect solution, but since an owner’s personal and business finances are intertwined, those who fell behind on mortgage payments or bills during the recession may not qualify.

“Owners need short-term funding to carry receivables and hire staff now that the economy is improving,” says Paul Herman, small business lending manager at California Bank & Trust. “Their best bet is a short-term line of credit (SLC) since bankers primarily focus on a company’s cash flow cycle during the underwriting process.”

Smart Business spoke with Herman about the opportunities to grow your business by tapping a short-term line of credit.

What is an SLC and when are they advantageous?

Essentially, an SLC is bridge financing. Savvy executives tap the line to pay expenses between the time revenue is generated and receivables are collected. For example, they may need cash to purchase supplies or inventory to handle seasonal spikes or new contracts before the goods are finished, delivered and paid for. Contractors frequently use an SLC to pay bonding and insurance premiums so they can bid on new projects, and veteran attorneys and doctors often use the funds for operating expenses when they launch a new practice.

You can draw on the line as needed and repay the funds at will as long as you meet the terms of your agreement and attend periodic reviews with your bank.

How does an SLC differ from other loans?

It’s assumed that owners will pay down a short-term line as cash is received, so bankers are primarily concerned with how quickly a company converts receivables into cash when they consider an SLC request.

Long-term debt is typically used to purchase equipment, buildings or other fixed assets, so bankers must consider depreciation as well as a company’s profitability to assess its ability to service the loan. In fact, stable but slow growth is often a key indicator of a company’s ability to service debt over the long term, while an SLC is the perfect solution for cash flow shortages resulting from a growth spurt.

Are there risks associated with an SLC?

No loan is risk free. However, prudent owners can avoid default or cash shortfalls by following these best practices:

  • Accurate forecasting — Some owners are so afraid of taking on debt that they run out of cash because they don’t ask for a large enough line. This won’t happen if you accurately forecast your company’s growth and cash conversion cycle. In fact, it’s better to ask for the maximum limit since you have the option of drawing the funds as needed.

  • Be disciplined — Only use the funds to close short-term cash flow gaps. Otherwise, you may run out of money and have to liquidate assets to pay bills or meet payroll.

  • Be responsible — Bad debt, delinquent customers or risky business practices can leave well-intentioned owners holding the bag. Are you ready, willing and able to accept responsibility for managing your company’s credit, cash flow and an unmonitored credit line?

How can a business maintain the quality of its assets and increase borrowing capacity?

Owners often emphasize sales, but what good is top-line growth if the margins are bad or you can’t collect your hard-earned money? Even tenured customers may encounter a cash crunch as the economy rebounds, especially if they wait too long to secure short-term financing. Be disciplined about verifying a customer’s credit worthiness, keep an eye on receivables and don’t forget to make timely collections calls.

Finally, don’t ignore your balance sheet because a business can’t survive with high debt and little equity. Grow assets as well as revenue, and make sure your balance sheet reflects the norms for your industry.

What do bankers consider when evaluating a request for an SLC?

In addition to reviewing traditional underwriting criteria like business and personal credit scores, bankers want to know whether you have the means and ability to manage and repay a line of credit.

They’ll look at your industry experience, the viability and diversification of your customer base, along with the ebb and flow of your company’s cash flow during previous cycles. Will your customers pay on time? Can your business survive if one customer defaults? Do you have enough personal assets or sources of secondary support to pay your bills while you wait for an invoicing cycle to conclude?

Bankers may be able to use government guarantees to overcome minor risks, and you could qualify for a conventional line of credit down the road if you use an SLC as a stepping stone to build your credit score and your company.

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Paul Herman is the small business lending manager at  California Bank & Trust. Reach him at Paul.Herman@calbt.com.

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It’s not surprising that the cost of labor was cited as the second-largest executive concern in CFO Magazine’s Global Business Outlook Survey, as the total cost of employee compensation often accounts for 40 percent to 70 percent of a company’s operating budget. The challenge is in finding a way to attract, motivate and retain top performers without breaking the bank.

“You can’t succeed by taking a one-size-fits-all approach,” says Jed DeVaro, Ph.D., chair of the Department of Economics, College of Business and Economics, at California State University, East Bay. “Companies need to analyze historical data, elicit employee preferences and strategically allocate expenditures to maximize their return on employee compensation.”

Smart Business spoke with DeVaro about the process of aligning employee compensation with critical business goals.

How can aligning compensation boost the success of major business initiatives?

While compensation alone won’t ensure the attainment of the business plan, customized, strategic alignment of total rewards increases the likelihood of success. The key is taking a data-driven approach so that pay and benefits are allocated toward the positions and workers that yield the greatest return, require in-depth training or who are difficult to source.

Most companies are sitting on a treasure trove of historical data, making it possible to ascertain the cost and output for each position at specific tenure levels and strategically apportion compensation to yield the best return. For example, you probably need to pay market rates for software engineers and project managers because unplanned turnover of these scarce professionals can increase development costs and the productivity of these professionals increases over time. However, you may be able to pay below market for customer service agents who reach maximum productivity levels within a few weeks.

In addition, a review of previous successes and failures helps companies tweak designs and allocate expenditures toward programs that have successfully attracted, retained and motivated top performers in the past.

How can early stage companies gather the necessary data to calibrate compensation?

While the basic tenets of the compensation alignment process remain constant, early stage companies need to adapt their approach due to a lack of historical data and their need to attract and retain nontraditional candidates. For example, startup firms often want energetic risk-takers who are willing to accept a smaller salary in exchange for stock options.

It’s important to gather current market intelligence instead of waiting until turnover occurs or relying on third-party wage surveys that are often out of date. Human resources can help ascertain competitive positions and employee preferences, and proactively design an effective plan by following up with lost candidates, conducting exit interviews and informally surveying referred candidates.

What kinds of compensation practices can boost employee retention and productivity without breaking the bank?

Employers often think they have to pay top dollar to attract, retain and motivate employees, when these innovative, budget-friendly techniques are equally effective.

  • Positive work environment. Being nice to your employees may not be the first thing that comes to mind when you consider compensation strategies, but workers are less likely to leave or become disenchanted if they feel appreciated and appropriately challenged. Salary usually comes in second or third in surveys of employee preferences, while a positive work environment is often their top priority.

  • Reasonable hours. Even if you can’t give large raises or bonuses, you can boost hourly pay for salaried employees by reducing their work hours and letting them go home instead of scheduling a two-hour meeting for 4 o’clock on Friday.

  • Customized benefits. Instead of offering the standard fare, optimize benefits expenditures by creating programs that resonate with your employees and your prospective talent pool. For example, young tech workers may prefer career development, training and certification stipends, while more mature workers with family obligations value flex time and a robust retirement program.

  • Team incentives. Group incentives boost overall performance by encouraging top performers to mentor and train neophyte or less-skilled workers. Team incentives aren’t a substitute for individual rewards, but they serve as a rising tide that raises all boats.

  • Deferred compensation. When strategically applied, deferred compensation can help employers retain scarce-knowledge workers or control the exodus of retirees to coincide with long-term business cycles or shifting labor market conditions. Examples include unvested stock options, which act as a cost lever by slowing or hastening the departure of employees.

What else can employers do to maximize their return on total compensation?

First and foremost, listen to your employees because they will tell you what they value and whether they’re motivated by raises, bonuses or other perks. Informal conversations are the best way to gather intelligence because employees can become disgruntled if employers conduct surveys and then disregard their opinions. Second, ensure that top performers receive the largest raises and bonuses relative to actual, observable differences in productivity. Awarding raises based on discretionary criteria or a manager’s desire for reciprocal favoritism in 360-degree surveys can result in pay inflation or compression and erode the efficacy of a pay-for-performance program.

Finally, treat employees well. It’s easy for executives to lose sight of the fact that compensation goes beyond salaries and benefits. A positive work environment and a windfall of free time may be more valuable than working 60 hours a week for a nominal raise.

Jed DeVaro, Ph.D., is chair of the Department of Economics for the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-3289 or jed.devaro@csueastbay.edu.

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Is cash more important than profits? It actually may be, as profitable companies fail every year simply because owners don’t have enough cash to pay their bills.

The problem is so pervasive that the U.S. Small Business Administration cites insufficient capital as the No. 2 reason that small businesses fail. And insufficient cash flow may keep owners from making advantageous hires or acquisitions, or even from receiving a paycheck.

“It’s easy to lose track of cash when you are under stress and juggling multiple responsibilities,” says Pamela Glass, project manager and mobile and online banking expert with California Bank & Trust. “Fortunately, cash flow management doesn’t have to be a burden or an afterthought thanks to the availability of online and mobile banking.”

Smart Business spoke with Glass about the ease and advantages of managing cash flow through mobile and online banking.

What types of transactions are available through mobile and online banking, and what are the benefits?

Almost any banking transaction can be initiated over the Web or from a smartphone using a mobile application, giving business owners the opportunity to seize control and hang onto their cash longer. For example, instead of waiting to go to the bank, owners can make deposits any time and control the timing of invoice payments from anywhere in the world using their mobile device.

They can transfer money from a general account into a payroll account right before payday, schedule vendor payments, or pay sales and payroll taxes on the due date by initiating ACH transactions. Essentially, they have the ability to view and manage their company’s cash position at their fingertips 24/7.

How does online banking improve the accuracy and convenience of cash flow forecasting?

Business owners don’t have to wait for their monthly statements to arrive to close the books or reconcile accounts. Now, they can forecast cash flow, analyze trends and make advantageous moves by downloading transactions and e-statements over the Web. They can then import the information into accounting programs such as QuickBooksTM or Quicken®.

Having instant access to credit card transactions, loan balances, deposits and invoice payments helps business owners estimate cash conversion cycles, identify cyclical revenue trends and spot opportunities to put excess cash to work. Some owners have used the information to improve cash flow by offering clients discounts or other incentives for quick payments, while others have offset seasonal downturns by offering customers complementary services. Still others have launched month-end sales to reduce inventory and raise cash before large invoices come due. Online banking evens the playing field between small and large businesses by giving owners access to the same data and sophisticated analytical tools enjoyed by Fortune 500 CEOs without the hefty price tag.

How can owners use online bill pay to improve cash flow?

Online bill pay gives owners the tools and the confidence to negotiate discounts by making bulk purchases or paying bills on time. Because they always know their company’s cash position, owners can schedule payments in advance, wire funds or tap a line of credit to pay invoices. In addition, they can cancel or delay a payment if there’s an issue with a vendor’s product or service, and they can control cash outflow by giving employees specific authority levels and approving transactions online. Online bill pay reduces fraud, the number of errors and late payment penalties by making it easy for multiple people to review and approve every transaction.

How can business owners control cash by monitoring transactions online?

Owners can improve cash flow by tracking incoming wire transactions and initiating collections calls to tardy customers, or they can discuss a client’s payment history and terms during a visit by accessing data from their smartphone. Essentially, there is no reason to wait for payment when clients can pay invoices electronically or via credit card, and owners have the ability to monitor transactions online. But if a client wants to pay by check instead, owners have the ability to deposit the funds into their bank account on the spot from their smartphone.

From a business owner’s perspective,time is money, so one could say that online banking is a windfall. Employees can initiate transactions, balance accounts and make deposits right from the office, and owners can pay down loan balances, check credit lines or approve transactions from cabs, airports or coffee shops. Visits with a banker can center on strategy, revenue-generating opportunities and relationship building instead of on routine banking transactions.

Is online banking more expensive than traditional banking services?

Online banking costs no more than traditional services. In fact, it is more cost effective when you consider the cost of checks, postage, gasoline, employee time and travel. How much will you save by reducing days sales outstanding by a few days, paying down debt or avoiding fees and penalties by paying your bills or taxes on time?

Do business owners need a connection to process mobile or online transactions?

Online banking is accessible over the Internet or mobile Web. Mobile banking is available through providers such as AT&T, Verizon, T-Mobile and Sprint on a variety of devices, including BlackBerry, iPod Touch, iPhone and Android*. Given the convenience and ease of online and mobile banking, there is no reason why cash flow management can’t be a simple, daily activity.

Pamela Glass is a project manager and mobile and online banking expert with California Bank & Trust. Reach her at pamela.glass@calbt.com.

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It’s become so difficult to create mindshare for a product or service that companies are increasingly counting on celebrities to do the heavy lifting. Celebrities now appear in about 15 percent of U.S. advertisements, and AdAge estimates that companies invest $50 billion each year on corporate sponsorships and endorsements.

But do the rewards of celebrity endorsements justify the cost or the risk? There’s no doubt that some campaigns have been very successful, but the jury is still out on the overall effectiveness of celebrity advertisements. Some experts estimate that Tiger Woods’ debacle cost shareholders of the companies he endorsed up to $12 billion.

“We have a celebrity-driven culture so the ads make a lot of sense in a cluttered marketplace,” says Jagdish Agrawal, Ph.D., interim dean and professor of marketing for the College of Business and Economics at California State University, East Bay. “But executives need to proceed with caution because hitching your brand to a celebrity is expensive and can be fraught with danger.”

Smart Business spoke with Agrawal about the dos and don’ts of celebrity endorsements.

How do celebrity endorsements work and are they really effective?

While celebrities are capable of creating brand awareness or projecting a certain image, studies show that they have a limited impact on sales. Consequently, executives must set realistic goals and select the right endorser to ensure a campaign’s effectiveness. For example, hiring an attractive actress to promote a beauty and cosmetics line is a good idea since customers automatically assume that the endorser is credible. Or, using a rugged, professional athlete to tout a line of jeans is a viable strategy as long as his or her persona supports the product’s brand and desired image. In fact, studies show that a company’s stock price rises when a new endorsement deal is announced as shareholders anticipate a boost in sales. But the stock price typically retreats within a few weeks as the deal’s luster starts to fade.

However, a celebrity is capable of driving sales if he or she is a recognized expert in his or her field, and if the celebrity takes an active role in the product’s development and promotion. Tiger Woods successfully designed and marketed a line of golf clubs, and several celebrity chefs have used their expertise to design and promote gourmet cookware and accessories.

When should companies consider celebrity endorsements?

Celebrity endorsers are particularly effective when it is hard to distinguish one product from another or when a company needs instant credibility to penetrate a new market. Studies show that people pay attention when they see a celebrity and tend to remember a product or service that a celebrity pitches. For instance, using a glamorous actress to promote a luxury resort or expensive jewelry line is a good idea since customers use feelings or emotions to make those types of purchases. But when customers base buying decisions on research and facts companies are better off using a noted expert instead of a diva. A tennis aficionado may listen to Maria Sharapova’s recommendations about a racquet’s tension and flexibility but will scoff at that advice if it comes from Kim Kardashian.

What are the keys to selecting the right spokesperson?

The celebrity must resonate with your audience and be viewed as someone who would use your product or service. Therefore, consider a spokesperson’s age, image and strategic brand alignment when making your selection. For example, soft drink and snack companies often engage up-and-coming recording artists to attract youthful customers or they may try to evade the advertising doldrums by taking a tongue-in-cheek approach and hiring someone like Betty White. On the other hand, financial services companies need to garner prospective customers’ trust so they tend to hire veteran actors or former news anchors who exude wisdom and integrity. After all, you probably wouldn’t buy securities from Justin Bieber but you might listen to Sam Waterston or Tom Brokaw. Aside from the strategic match, do your homework because you don’t want to hire a celebrity who may be involved in a scandal down the road.

How can companies avoid the fallout from celebrity missteps or scandals?

Hiring multiple endorsers helps companies avoid the fallout from a scandal since customers won’t associate their brand with a single promoter. For instance, Nike wasn’t fazed by Tiger Woods’ marital problems because it was able to run other ads, but his unforeseen issues blindsided Accenture and decimated its entire campaign. Hiring a celebrity for his or her expertise rather than image or personality is another way to avoid the fallout from a scandal, since professional reputations built on experience and success can generally withstand the impact from a personal miscue.

What else should executives know before shelling out funds for a celebrity spokesperson?

Sometimes a CEO or CFO knows a celebrity and tries to sway the decision. Instead, let the ad agency do its job since it understands the complex nature of endorsements and knows which celebrity has the image and personality to resonate with your customers. Also, don’t overestimate the return or effectiveness of a celebrity advertising campaign. It’s not a magic cure-all for lagging sales or a bad product; it’s just another way for a good company with a quality product or service to stand out in a crowd.

Jagdish Agrawal, Ph.D., is the interim dean and professor of marketing for the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-3291 or jagdish.agrawal@csueastbay.edu.

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After toiling for years to build a successful enterprise, business owners have earned the right to leave on their terms and retire. However, nearly half of owners fail to achieve their timing or financial goals because they focus on day-to-day operating challenges instead of creating viable exit strategies.

“Procrastinators usually end up dying with their boots on, when they could be enjoying the fruits of their labor by planning ahead and orchestrating a seamless transition,” says Greg Chiampou, director of Business Advisory Services for Contango Capital Advisors, which operates as CB&T Wealth Management in California.

Smart Business spoke with Chiampou about the process of creating a proactive exit strategy.

When should owners initiate the planning process and who should be involved?

Ideally, owners should begin to plan five to seven years before they want to leave because it takes that long to stage for an ownership change. It also may take up to three to five years to establish a complementary estate plan. Planning ahead gives owners time to groom successors or implement structural changes that enhance a company’s value and maximize sale or transfer proceeds by reducing tax liabilities. Assemble a transition planning team that includes a certified exit planner, CPA and attorney, who may get support from an insurance adviser, business appraiser and financial planner.

Why is goal setting paramount and what should the goals address?

The owner’s goals serve as the plan’s foundation so the owner must decide when he or she wants to leave, who will take over the business and how much money he or she needs to support his or her lifestyle. Then, the planning team can flesh out the details and assess the feasibility of the owner’s objectives by using models to test the plan’s elements. For example, testing may show an owner will have to sell to a third party instead of transitioning ownership to children or employees in order to derive enough proceeds to generate an annual income of $500,000.

Who should perform the valuation and cash flow projections?

Since the business is usually the owner’s largest asset and its value is a critical element of the strategy, owners need an accurate, objective appraisal. Engaging a certified appraiser or valuation specialist doesn’t have to be expensive, and the peace of mind generally is worth the investment. Verify business and personal cash flow estimates by asking a CFP to review the accuracy of the financial assumptions.

How can business owners enhance their company’s value before a sale or transfer?

Tactics that can boost a company’s value include:

  • Mitigating concentrated risk: Expose concentration risks such as a limited customer base, suppliers or products by giving owners the opportunity to secure long-term sales or supplier contracts, or increase vendors and product offerings before a sale.

  • Separating assets: Strategically transfer ownership of major assets like a warehouse, office complex or franchise agreement to a separate LLC, which can boost overall value.

  • Conducting audits: Identify and rectify financial discrepancies, environmental hazards or legal vulnerabilities by auditing your finances, property and legal profile.

  • Documenting operating procedures and retaining critical talent: Confirm continuity with organizational charts, documented procedures and secure key players. Buyers won’t pay full price if critical operating procedures, employees and institutional know-how could depart with the owner.

  • Staging: Prepare to tell prospective buyers how sales growth and earnings can be maintained and possibly expanded. Ensure your office or production facilities look like they deserve the asking price. While purchasing new equipment or furniture can boost a company’s image and value, don’t take on significant new debt ahead of a sale.

How can owners minimize the tax liabilities resulting from a sale or transfer?

Aside from the actual purchase price, taxes have the biggest impact on the proceeds from a business sale or transfer. Ask an exit adviser and CPA to review your strategy and suggest ways to reduce or eliminate capital gains and estate taxes. For instance, converting a C-corp to a S-corp can eliminate double taxation on the sale of business assets, and estate taxes can possibly be eliminated by gradually gifting shares to your children or transferring ownership to a family limited partnership or limited liability company. In fact, highly appreciated assets can be converted into a lifetime income without paying capital gains tax when the asset is sold by setting up a charitable remainder trust.

What should owners consider when developing a contingency plan?

Even the best succession plans can be thwarted by the defection of key employees or customers, the sudden death of a partner, an unanticipated cash shortage or a scion’s desire for a different career. That’s why every organization needs a contingency plan that provides solutions to game-changing problems and events. Examples include buy-sell agreements that govern should an owner die or decide to leave, employee-retention bonuses backed by insurance and a mentoring program for successors. Given these tools and a little time, a team of skilled advisers can ensure that business owners exit smoothly.

Wealth management services are offered through Contango Capital Advisors, Inc. (Contango), which operates as CB&T Wealth Management in California. Contango is a registered investment adviser, a nonbank affiliate of California Bank & Trust and a nonbank subsidiary of Zions Bancorporation. Some representatives of CB&T Wealth Management are also registered representatives of Zions Direct, which is a member of FINRA/SIPC and a nonbank subsidiary of Zions Bank. Employees of Contango are shared employees of Western National Trust Company (WNTC), a subsidiary of Zions Bank and an affiliate of Contango.

Investment products and services are not insured by the FDIC or any federal or state governmental agency, are not deposits or other obligations of, or guaranteed by, California Bank & Trust, Zions Bancorporation or its affiliates, and may be subject to investment risks, including the possible loss of principal value or amount invested.

Greg Chiampou is director of Business Advisory Services for Contango Capital Advisors. Reach him at greg.chiampou@contangoadvisors.com. Reach California Bank & Trust at www.calbanktrust.com.

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Online banking is convenient, but it’s easy for cybercriminals to gain access to your accounts when you process transactions over the Internet. Organized criminal gangs are using malware and phishing schemes to steal approximately $1 billion from small and mid-sized companies across the United States and Europe each year, and the problem has become so pervasive that a recent theft of $100 million from a business account barely registered on the FBI’s radar.

The good news is that it’s possible to enjoy the convenience of online banking without exposing your company to unnecessary risk by taking advantage of a bank’s products and services and exercising some basic precautions.

“Cybercriminals pose a real and serious threat,” says Barry Langer, first vice president and customer relations manager for Corporate Services at California Bank & Trust. “Executives need to educate themselves and understand the risks, then take some basic steps to safeguard banking transactions.”

Smart Business spoke with Langer about balancing risk and convenience by protecting your bank accounts from the most common forms of fraud.

How are cybercriminals attacking business accounts?

Companies incur risk whether they’re writing checks or processing online payments, but the greatest threat occurs in cyberspace. When an unsuspecting employee opens an authentic-looking email or document from an imposter, wily cybercriminals can steal user names and passwords by downloading malware such as the Zeus virus onto computers. Cybercriminals can also embed viruses in Web sites, innocuous Word documents such as resumes or simulated email alerts from social networking sites such as Facebook. Unfortunately, employees often fail to recognize an attack because the virus is programmed to evade network security, giving fraudsters access to your accounts. Worse yet, anyone can purchase the Zeus Trojan for about $700.

How can companies minimize risk and the possibility of fraud when processing online banking transactions?

Your employees need to serve as the first line of defense, but they need training to recognize cybercriminals’ tricks and tactics and thwart potential attacks. In addition, companies need to notify their bank immediately if they suspect a breech.

Businesses should also:

  • Eliminate outside risk. Don’t rely solely on security software, antivirus programs and firewalls. Protect your system from viruses and malware by stopping employees from downloading documents stored on external flash drives or CDs, or accessing outside email accounts. Better still, keep viruses from invading your network by using a dedicated computer strictly for banking transactions because most viruses are transmitted via email or while surfing the Internet.

  • Reconcile accounts. Nip fraudulent activity in the bud by reconciling your business accounts daily.

  • Take advantage of bank products and services. Your bank can help you prevent fraud by providing education, best practices and tools such as antifraud software.

  • Implement a dual authentication security process. This is another way to prevent online payment fraud, as different people create and approve each transaction. While the duplicate process requires additional time and staff, it reduces the opportunity for someone to initiate or approve fraudulent payments.

How can companies minimize the risk of paper or check fraud?

Unless companies use a fraud prevention service such as Positive Pay, forgers can wash payees’ names from stolen checks and substitute their own, alter the amount or use software to duplicate checks. With the Positive Pay service, companies send a check issue file to their bank and it is matched against checks presented to identify discrepancies or suspect checks.  Checks that do not match the check issue file are presented to the company for examination. While it’s not free, Positive Pay has the ability to lower costs by reducing unauthorized transactions, potential losses and legal fees.

Positive Payee Match provides another layer of security, as your bank also matches the name of the payee against the roster of issued checks. You can also review the front and back of exception items online and quickly make payment/return decisions from the convenience of your office.

If you don’t want to provide a check issue file, you can monitor presented checks online and return them immediately by utilizing an alternate service called Reverse Positive Pay.

How can companies prevent ACH fraud?

Savvy companies are reducing risk without sacrificing convenience through a service called ACH Positive Pay, which enables you to view and make decisions to accept or reject ACH items before they post to your account. If reviewing every transaction is too time consuming, simply create a filter and review and approve transactions above a specified dollar limit.

How can executives spearhead fraud prevention efforts?

Executives must set the tone by acknowledging the seriousness of the threat and prioritizing risk mitigation over convenience when processing banking transactions. Small to mid-sized businesses are particularly vulnerable to cyber attacks, so executives at those companies should utilize the risk assessment tools and best practices provided by your bank. Remember, an ounce of prevention is worth a pound of cure because a single attack can easily cost your business hundreds of thousands of dollars.

Barry Langer is first vice president and customer relations manager for Corporate Services at California Bank & Trust. Reach him at (213) 593-3838 or Barry.Langer@calbt.com.

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What do golf tournament payouts and executive compensation have in common? More than you might think. For starters, both offer rewards based on relative — as opposed to absolute — performance, and research shows that the bigger the purse, the harder people play.

Moreover, a review of executive compensation reveals that the economic theory of tournaments may justify the blueprint and the level of executive pay, and this is just one of the ways that economists are using sports data to test business theories.

“We can learn a lot about human nature, motivation and beating the odds by studying copious data from the world of sports,” says Dr. Stephen Shmanske, professor emeritus of economics at California State University, East Bay.

Smart Business spoke with Shmanske about what business leaders can learn from economists who use sports data to test market efficiencies and business theories.

Why are economists studying sports?

An abundance of accessible, high-quality data has made it possible for economists to study the management, turnover, performance and compensation of professional athletes and correlate the results to a wide range of economic and business theories. For example, economists can review the results of golf or tennis tournaments to determine the optimal way to structure sales contests or other incentives.

An early study looked at the impact of pay discrimination, in which economists compared whether men and women perform differently based on prize structure. The researchers found no differences in performance when the participants were vying for the same purse.

What does an in-depth analysis of sports gambling reveal about market efficiencies?

Various analyses have revealed that stock and gambling markets are equally efficient because all relative information is captured and considered when the betting line or stock price is set. In other words, the company’s management team, competitive position and future earnings are considered when investors decide how much to pay for a share of its stock.

Likewise, odds makers consider each golfer’s strengths and weaknesses and the course layout when they set the tournament betting line. The odds and share price shift based on changes in demand or circumstances leading up to the event. Because both markets are efficient, you’ll need luck or inside information to consistently beat the odds.

What is the Tiger Woods effect, and what can economists learn from this phenomenon?

A study examined whether Tiger skewed the odds or the wagering volume when he played in a tournament, which is similar to a thin market versus thick market effect. Although more people bet on Tiger when he’s the favorite, and they bet on the field when he’s not, those scenarios were consistently factored into the odds. If greater amounts are wagered on a tournament, it might allow the casino to offer more favorable odds, much as transactions costs, measured by bid-ask spreads, are lowered in thick markets. The study concluded that gambling markets are efficient because odds makers consider Tiger’s participation.

What can we learn about profitability by studying golf wagering and bettor biases?

One of the themes in existing literature concerns whether there are identifiable biases in bettor behavior or in posted odds that can lead to positive profit strategies. Studies show that there’s no way to increase profitability by taking shortcuts, employing arbitrage betting techniques or contrarian betting algorithms because the markets are efficient. In fact, there’s no secret market intelligence or formula that increases profitably when taking risk, because the favorites generally return less on every dollar wagered but win more. You need luck to beat the house and anyone who says they have a surefire system is mistaken.

What can we learn about predicting winners and losers?

Certainly every fan has an opinion about who might win or lose a tournament but the odds makers have access to the same information. They factor in players’ injuries, outing tendencies and even the weather forecast when they set the line, and they’re right most of the time. It’s like trying to predict whether the price of a stock will rise or fall by monitoring the trading activities of insiders when the information is released to everyone after a transaction. It may be possible to consummate an advantageous stock purchase if you have exclusive information about a new contract or product release, but while you might make more money, you could wind up in jail.

How are economists using sports data to test other business theories?

The theory of tournaments is often applied to compensation since economists can see how various structures and payouts impact individual motivation and performance. For example, top golfers tend to focus and put forth their best effort because sinking a put or managing to birdie the next hole can earn them an additional $100,000. While lower performers may only earn $200 for shaving a shot or two off their score so they’re inspired to preserve and improve their technique, in hopes of earning a bigger payout next year. Similarly, vice presidents are inspired to go above and beyond because they want to ascend to the CEO’s chair. What we can conclude is that the size of the prize does not guarantee absolute performance in any one match, but it does raise the absolute standard over time.

Dr. Stephen Shmanske is professor emeritus of economics and director of the Smith Center for Private Enterprise Studies at California State University, East Bay and the author of Golfonomics. Reach him at stephen.shmanske@csueastbay.edu.

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It’s not surprising that the cost of labor was cited as the second-largest executive concern in CFO Magazine’s Global Business Outlook Survey, as the total cost of employee compensation often accounts for 40 percent to 70 percent of a company’s operating budget. The challenge is in finding a way to attract, motivate and retain top performers without breaking the bank.

“You can’t succeed by taking a one-size-fits-all approach,” says Jed DeVaro, Ph.D., chair of the Department of Economics, College of Business and Economics, at California State University, East Bay. “Companies need to analyze historical data, elicit employee preferences and strategically allocate expenditures to maximize their return on employee compensation.”

Smart Business spoke with DeVaro about the process of aligning employee compensation with critical business goals.

How can aligning compensation boost the success of major business initiatives?

While compensation alone won’t ensure the attainment of the business plan, customized, strategic alignment of total rewards increases the likelihood of success. The key is taking a data-driven approach so that pay and benefits are allocated toward the positions and workers that yield the greatest return, require in-depth training or who are difficult to source.

Most companies are sitting on a treasure trove of historical data, making it possible to ascertain the cost and output for each position at specific tenure levels and strategically apportion compensation to yield the best return. For example, you probably need to pay market rates for software engineers and project managers because unplanned turnover of these scarce professionals can increase development costs and the productivity of these professionals increases over time. However, you may be able to pay below market for customer service agents who reach maximum productivity levels within a few weeks.

In addition, a review of previous successes and failures helps companies tweak designs and allocate expenditures toward programs that have successfully attracted, retained and motivated top performers in the past.

How can early stage companies gather the necessary data to calibrate compensation?

While the basic tenets of the compensation alignment process remain constant, early stage companies need to adapt their approach due to a lack of historical data and their need to attract and retain nontraditional candidates. For example, startup firms often want energetic risk-takers who are willing to accept a smaller salary in exchange for stock options.

It’s important to gather current market intelligence instead of waiting until turnover occurs or relying on third-party wage surveys that are often out of date. Human resources can help ascertain competitive positions and employee preferences, and proactively design an effective plan by following up with lost candidates, conducting exit interviews and informally surveying referred candidates.

What kinds of compensation practices can boost employee retention and productivity without breaking the bank?

Employers often think they have to pay top dollar to attract, retain and motivate employees, when these innovative, budget-friendly techniques are equally effective.

  • Positive work environment. Being nice to your employees may not be the first thing that comes to mind when you consider compensation strategies, but workers are less likely to leave or become disenchanted if they feel appreciated and appropriated challenged. Salary usually comes in second or third in surveys of employee preferences, while a positive work environment is often their top priority.

  • Reasonable hours. Even if you can’t give large raises or bonuses, you can boost hourly pay for salaried employees by reducing their work hours and letting them go home instead of scheduling a two-hour meeting for 4 o’clock on Friday.

  • Customized benefits. Instead of offering the standard fare, optimize benefits expenditures by creating programs that resonate with your employees and your prospective talent pool. For example, young tech workers may prefer career development, training and certification stipends, while more mature workers with family obligations value flex time and a robust retirement program.

  • Team incentives. Group incentives boost overall performance by encouraging top performers to mentor and train neophyte or less-skilled workers. Team incentives aren’t a substitute for individual rewards, but they serve as a rising tide that raises all boats.

  • Deferred compensation. When strategically applied, deferred compensation can help employers retain scarce-knowledge workers or control the exodus of retirees to coincide with long-term business cycles or shifting labor market conditions. Examples include unvested stock options, which act as a cost lever by slowing or hastening the departure of employees.

What else can employers do to maximize their return on total compensation?

First and foremost, listen to your employees, because they will tell you what they value and whether they’re motivated by raises, bonuses or other perks. Informal conversations are the best way to gather intelligence because employees can become disgruntled if employers conduct surveys and then disregard their opinions. Second, ensure that top performers receive the largest raises and bonuses relative to actual, observable differences in productivity. Awarding raises based on discretionary criteria or a manager’s desire for reciprocal favoritism in 360-degree surveys can result in pay inflation or compression and erode the efficacy of a pay-for-performance program.

Finally, treat employees well. It’s easy for executives to lose sight of the fact that compensation goes beyond salaries and benefits. A positive work environment and a windfall of free time may be more valuable than working 60 hours a week for a nominal raise.

Jed DeVaro, Ph.D., is chair of the Department of Economics for the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-3289 or jed.devaro@csueastbay.edu.

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Most companies want to grow, the issue is just how and when. And determining an advantageous growth strategy can be challenging for executives. Less than 1 percent of companies ever reach $250 million in annual revenue and fewer still eclipse $1 billion. Unless you judiciously evaluate your options and select the right growth strategy, your small business may stay that way.

“Some companies boost revenue through organic growth while others diversify their products/services or build strategic alliances,” says Yi Jiang, assistant professor and associate director of MBA for Global Innovators for the College of Business and Economics at California State University, East Bay. “The key is understanding your options and selecting a growth strategy that fits your situation.”

Smart Business spoke with Jiang about growth strategies and what executives should consider when making a selection.

How have growth strategies evolved over time?

History and experience have altered our thinking about growth strategies. For example, vertical integration was a popular diversification strategy in the 1960s and 1970s. Companies decided to boost profits by expanding into upstream or downstream activities, thereby seizing control of the entire supply chain.

Oil companies were among the first to embrace vertical integration. They ventured beyond traditional petroleum exploration activities by purchasing refineries and distributors. However, the strategy’s popularity waned when several large, multinational companies were accused of monopolistic practices and their diversification efforts were thwarted by U.S. and European anti-trust regulations. In addition, many companies struggled to manage a slate of unfamiliar entities.

As a result, smart companies turned to building a network of complementary offerings to create synergistic expansion opportunities and economies of scope. For example, Amazon boosted e-book sales by introducing Kindle, and Sony grew from a tape-recorder company to an entertainment provider with a wide range of movie and music products, which helped it to edge out Toshiba in the format war.

What kinds of companies should focus on organic growth?

Niche companies with limited market penetration should focus on building brand equity before incurring additional risk by venturing beyond their core competencies. Organic growth maximizes existing resources and helps companies gain market recognition without diluting their brand. Organic growth is a good way to show the strength of innovation to investors who are interested in paying more for a strong brand with a loyal customer following and continuous growth potential.

The downside to organic growth is time. Executives have to be patient, committed to the company culture and willing to make additional investments without succumbing to the instant revenue gratification that accompanies cultural divergence.

When should executives consider strategic alliances?

Strategic alliance is a viable expansion strategy when the joined forces in technology development and market dominance benefit all players in the coalition. Google TV is an example of a collaborative effort in which a few strong players have united to make an even stronger team. Google, LG, Sony and Samsung are contributing technology and resources and joining market power in an effort to develop a smart television platform that may revolutionize the home entertainment industry.

The bottom line is: Why risk being left behind when you can be part of a winning team?

Are companies changing the way they view and integrate acquisitions?

We used to believe that fully integrating acquisitions was the best way to lower operating costs and reap the union’s financial rewards. But assimilation is tricky and executives often failed to meld disparate cultures and people.

Instead of making integration mandatory, companies should selectively and strategically integrate parts of an acquired organization. They may combine rudimentary functions such as distribution and accounting, while allowing areas of strength to flourish autonomously.

For example, Disney wanted to strengthen its market position with young boys by acquiring Marvel Comics’ cast of super heroes such as Iron Man, Thor, Captain America and the X-Men. However, if Disney execs were to force the influence of Disney’s culture on Marvel, Marvel’s brazen creativity would be stifled.

What should executives consider when selecting a growth strategy?

Time and timing are key considerations because organic growth and synergistic expansion tend to be slow and safe, while an acquisition or merger is risky but jumpstarts new growth. History shows that growth is rarely sustained when it results from knee-jerk reactions to unanticipated competitor moves or industry changes. Executives need time to build consensus and socialize their ideas, and half-hearted alliances or acquisitions often fail because it takes commitment and tenacity to work through the inevitable challenges.

CafePress, a San Mateo company that debuted on Nasdaq last month, has been growing slowly and steadily through both organic growth and acquisition. CafePress committed many years in organic growth and developed the strength in print-on-demand services. The acquisitions helped it to diversify the portfolio and establish a network of partners and customers. Without clear positioning and dedication, CafePress may have jumped into other services and diverted from its competence.

Lastly, even the best marriages sometimes fail. So with alliance or acquisition, executives should hope for the best but plan for the worst by developing an exit strategy to end the relationship and still be friends.

Yi Jiang is an assistant professor and associate director of MBA for Global Innovators for the College of Business and Economics at California State University, East Bay. Reach her at (510) 885-2932 or yi.jiang@csueastbay.edu.

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You need operating cash to grow your business, but securing a traditional commercial loan hasn’t been easy, especially for small business owners. Bank loans to businesses grew 10 percent in 2011; however, commercial lending has not returned to pre-recession levels, largely because companies that experienced a decline in sales or profitability can’t meet today’s strict underwriting standards.

Fortunately, Small Business Administration (SBA) loans are a worthwhile financing option for small to mid-sized companies. An SBA loan typically offers longer terms and more competitive interest rates than other commercial loans and, best of all, bankers can be more lenient when considering your request because the government guarantees up to 75 percent of the loan amount.

“An SBA loan is a sensible option for businesses that experienced a decline in sales and profits during the recession,” says Santiago “Chico” Perez, SBA sales manager for California Bank & Trust. “Bankers can consider your financial projections, along with historical data, when evaluating your loan application.”

Smart Business spoke with Perez about the growth opportunities for small to mid-sized business through an SBA loan.

When should small business owners consider an SBA loan?

New ventures traditionally have a hard time securing working capital, but you may get $100,000 to $5 million through a government-backed SBA loan, as long as you’ve run a similar enterprise in the past and propose a viable business strategy. You can also use SBA funding to expand by purchasing another company or using the proceeds to procure equipment or inventory to fulfill a new contract. Businesses that use an SBA loan to pay off or restructure an existing mortgage or other business debt can free up cash for other investments, such as hiring or purchasing supplies.

How do SBA loans differ from traditional commercial loans?

Generally speaking, SBA loans can offer more favorable terms than traditional commercial loans. For example, you only need 10 percent down to purchase real estate and you don’t need to come up with a lot of cash because the SBA lets you roll the fees into the loan balance. SBA loans feature higher loan-to-value ratios, longer repayment periods and no balloon payments; consequently, companies often qualify for higher loan amounts because they can amortize the purchase of buildings over 25 years or equipment over the remaining economic life, and therefore need less cash flow to service the debt. In addition, owners can use the funds to buy raw materials, as well as finished goods or equipment, which gives manufacturers the flexibility to expand into new markets.

How does the SBA’s underwriting criteria differ from traditional commercial loans?

Bankers will review standard requirements such as financial statements and credit reports, but some criteria differ from traditional commercial loans.

*Projections. Bankers can consider future sales as well as historical data when evaluating your loan application, but be sure your projections are realistic and correlate with your current financials and forecasts. For example, earnings won’t automatically double if you purchase a larger facility or new equipment. Instead, explain how the equipment will boost the bottom line by lowering operating costs or how you’ll use the extra space to increase revenue by adding a new production line. Finally, substantiate your claims by furnishing copies of customer agreements and contracts.

* Resumes. Tout your management team’s industry experience and track record, particularly if you plan to start a new business.

* Ownership. Owners with more than a 20 percent stake in the business must submit signed personal financial statements and tax returns.

* Down payment. Lenders must determine the source of a borrower’s down payment, even if the funds have been deposited into an escrow account.

* Collateral. The need for collateral hinges on the loan purpose and program, so be sure to review the underwriting criteria at SBA.gov and specifically state the need and purpose for the funds in your proposal.

* Tax returns. Owners must supply three years of tax returns, financial statements and balance sheets instead of two to qualify for an SBA loan.

Does the SBA offer other support to small business owners?

The SBA provides myriad tools and support to help business owners create a loan proposal and navigate the underwriting process. Small Business Development Centers offer free assistance with financial, marketing, production and feasibility studies, and many centers engage local CPAs, retired executives and consultants to advise small business owners.

The SBA also provides mentorships, free counseling and business plan expertise through a nonprofit organization called SCORE, which helps business owners across the country with various aspects of their business.

What else can owners do to successfully navigate the SBA lending process?

Loan approval hinges on an accurate, thorough proposal, so it behooves you to take your time and seek expert advice because you only get one chance to make a great impression. Bankers want to hear the story behind your numbers, so be ready to explain how you overcame adversity during the recession and how you’ll use an SBA loan to take your business to the next level. Help your banker understand your customers and add value  to your proposal by including links to your company’s website, LinkedIn page or Facebook page in your loan proposal. Finally, it may be possible to accelerate the process by selecting an approved Preferred Lender’s Program lender because they have the authority to approve your loan without submitting the entire package to the SBA.

Santiago “Chico” Perez is the SBA sales manager for California Bank & Trust. Reach him at santiago.perez@calbt.com.

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