As we pass the mid-year point of 2007, it’s a good time to perform a status check on the various financial processes your small company has in place to meet the reporting requirements you’ll face. Staying up-to-date with the ever-changing landscape of financial reporting standards can be a challenge.
Smart Business asked Sheldon D. Zimmerman, CPA, audit principal of Tauber & Balser, P.C., about the top financial reporting challenges for CFOs of small SEC filers.
When will small public companies be required to comply with Sarbanes Oxley?
The Public Company Accounting Oversight Board (PCAOB) recently adopted Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements, to replace its previous internal control auditing standard, Auditing Standard No. 2. The new standard, known as AS5, is less burdensome for smaller public companies and will put small businesses on track for compliance with section 404 of Sarbanes Oxley, possibly as early as this summer.
AS5 is principles-based and written to be simpler than AS2, which has been criticized as being too difficult to adhere to, especially for smaller public companies.
The Securities and Exchange Commission is expected to approve AS5 this summer, which would require compliance for small businesses [market capitalization of less than $75 million]. Companies would have to begin complying with the management assessment portion of 404, although full compliance would not begin until March 2009.
What are some of the other financial reporting challenges for CFOs of small companies?
There are a number of areas on which small company CFOs should focus, including:
Uncertain tax positions FASB’s (The Financial Accounting Standards Board) FIN No. 48, Accounting for Uncertainty in Income Taxes, became effective for public companies beginning the first quarter of 2007. Many have already started the process, however, we have seen a number of cases where the process has been implemented in a rather cursory manner, so there will need to be fine-tuning before the end of this year.
XBRL Interactive data technologies based on eXtensible Business Reporting Language (XBRL) provide a way to improve the timeliness, accuracy and accessibility of business information. The SEC and other regulators around the world are launching initiatives to encourage companies to report in XBRL.
Complex debt and equity transactions Many smaller companies have complex debt and equity structures that typically contain complicated provisions such as beneficial conversions. Since these transactions are so complex, they need to be evaluated by the accountants to make sure the company’s management team understands the financial statement implications before they enter into the agreements.
Fair value FASB issued a new standard this year, Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value. The standard aims to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Statement No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities.
The standard requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The new statement does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FASB Statements No. 157, Fair Value Measurements, and No. 107, Disclosures about Fair Value of Financial Instruments. Statement No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after Nov. 15, 2007.
Guarantor’s accounting and disclosure requirements for guarantees These disclosure requirements, along with variable interest entities, require a careful analysis of the underlying relationships that don’t necessarily involve ownership interests. But if companies issue a guarantee or make advances, which, in essence, funds the losses of another entity, they may be required to consolidate those as if they were a subsidiary.
SHELDON D. ZIMMERMAN, CPA, is an audit principal at Tauber & Balser, P.C., providing accounting and auditing services to private and public companies. He is experienced in bankruptcy matters, corporate restructurings, lender negotiations and cash-flow enhancements. Additionally, he has experience with strategic initiatives involving acquisitions along with hands-on experience in managing the finance and treasury operation of a large corporation. Reach him at (404) 814-4958 or email@example.com.
No business would knowingly implement a process to produce mediocre results. Instead, everyone focuses on best practices and continuous improvement of the processes in place. The challenge with continuous process improvement is to make the best better.
Smart Business asked Chris Wagner, vice president of marketing at InfoCision Management Corporation, about the process of continually improving a company’s marketing efforts and building a quality assurance (QA) program. “Good is not good enough today,” Wagner says. He advocates a regular review of all processes and raising the bar each time an existing metric is met.
Isn’t it a challenge to recognize that yesterday’s ‘best’ is today’s so-so process?
It sounds a bit harsh, but the demands of today’s business world call for out-performing the competition and yourself. The only way to run a quality, nimble operation is to keep raising the bar. Our company does this quarterly by providing an employee incentive for each component. Remember that quality matters in terms of results.
How does process improvement work?
Any process can be described as a triangle with these three sides: QA, training and execution.
The bottom line on the triangle is execution, or operations. This represents your output. That’s the place to start. As a company, we spent many years and millions of dollars building this side of our triangle. The goal is to directly correlate performance and execution. In a lot of companies, quality is measured after the fact. In a call center, you may have agents with very high QA scores and slightly lower performance, or vice versa. You have to balance their skills out with performance evaluation and coaching.
Second, you have to build a statistically legitimate QA program. This is for trend analysis. The closer your P-score is to zero, the more your costs increase. We try for plus/minus 5 percent reliability. Our QA program has three tiers: the production floor, where employees and managers work together; a QA manager who works with employees; and a corporate, internal QA group that monitors and calibrates quality daily.
Lastly, be sure you have a clear path out of the QA department to the training side of the triangle. You should continuously improve programs. Use tools like video, web-enabled training and local universities that offer employees degrees either for general or job-related improvement.
Where do you look first to increase productivity?
In order to improve, you need better employees, so look at performance and education in two areas: new-hires and production. We have a 30-day training period, after which people are expected to meet certain goals.
It is important to monitor the ability of your workforce to accomplish goals. Examine the potential of the top 30 percent. In our company, we average the top and second third of performance levels every quarter, and that measurement becomes our new standard of excellence.
Reset goals as soon as you are able to consistently hit the previous benchmark. For us, that is about quarterly. As soon as you can hit a benchmark consistently, it is time to raise it.
Should the call center take the lead in maximizing ROI for its customers or the business using the call center?
If a call center understands its customer’s key metrics, it can take the lead based on those benchmarks. The customer has to give its outsourcing partner incentives. However, be certain that the incentives boost productivity and sales and tie into true ROI, or they will become goals in and of themselves.
When does process improvement fall into the danger of tweaking for the sake of tweaking?
I don’t think it ever does. Any business constantly hires new people, adds new products, sets new goals and finds new customers. Even if you maximize the potential in one sector, you need to keep your eyes open for improvement in others
Any sports coach will tell you that the hardest time to improve is when the team is winning. But it is also the most important time. It is easy to get attention when you are the underdog, but there is a real danger of getting complacent when you are on top.
Is a big announcement required for changes? Does a process change lose some impact if it is simply inserted into the routine?
It is really larger than that. No real change can be seen as ‘just another idea from management.’ A change has to tie into the company culture to be effective. The best way is to link the change to compensation. Reward the top performers of the company for achievement. The key is buy-in from upper management. Change needs to be passed through the organization and not be seen as ‘the flavor of the month.’
CHRIS WAGNER is vice president of marketing at InfoCision Management Corp. Reach Wagner at (330) 668-1400. In business for 25 years, InfoCision Management Corporation is the second largest privately held teleservices company and a leading provider of customer care services, commercial sales and marketing for a variety of Fortune 500 companies and smaller businesses. InfoCision is also a leader of inbound and outbound marketing for nonprofit, religious and political organizations. InfoCision operates 28 call centers at 12 locations throughout Ohio, Pennsylvania and West Virginia. For more information, visit www.infocision.com.
Five years ago, Michael Gerster realized the old business model at WIKA Instrument Corp. had clearly expired. It was losing market share to Chinese manufacturers, was failing to efficiently meet customer demands and was wasting money with large amounts of obsolete inventory.
“The Chinese and other low cost manufacturers ... are eating our lunch and the bag it comes in,” says Gerster, president of the company.
He clearly needed to make some changes if his company wanted to compete. His prior company had been in the process of exploring lean manufacturing, so when he left in 1998 to come to WIKA, a pressure and temperature instrumentation manufacturer, he brought a basic curiosity about it with him. Upon starting at the company’s U.S. headquarters in Atlanta, he started sending his people to lean manufacturing seminars, but they always came back with the same response.
“I don’t know what’s in it for us, Michael.”
But in 2001, that finally changed. WIKA worked with one particular company that was able to really explain the benefits it would experience from going lean.
“The results were so earth-rocking that everybody was instantly convinced that this is going to be the future for us, and the way we wanted to do business,” Gerster says.
So he and management began working with the outside company to make changes, but even with people on board, implementation is much more difficult. The entire plant was rearranged so everybody had to do things differently and embrace a different thought process.
“Two or three years followed where we moved the furniture,” Gerster says. “We broke all of these departments a-part and created manufacturing cells.”
But after all of that, he realized the new layout wasn’t very efficient, so af-ter 18 months, they finished moving everything again to optimize efficiency.
His patience and persistence have paid off. As a result of all the changes that have taken place during last five years, productivity increased by double digits, market share doubled, and they’ve saved 20 to 30 percent of space. WIKA’s lead time has also dropped from about six weeks to just five to 10 days. That all yields real results the U.S. headquarters’ profits and revenue doubled in the last five years, bringing the entire global revenue to $480 million and the Atlanta plant’s revenue to $100 million last year.
“We are well-conditioned for the future,” Gerster says. “There are things that are under our control and there are things that are not under our control, and even the things that are not under our control, we have a level of agility that we can react to those real quick.”
Making major changes in a company requires a lot of planning, communication and work to succeed. Here’s how Gerster conquered some of the challenges of driving change through an organization.
The first stage of any change is having a reason to do so, which starts with knowing how your company competes.
“Clearly understand the value proposition to the customer,” Gerster says. “When you compete in a batch world with other customers, same lead times, same quality service, etc., the only thing you have to differentiate yourself is price. Then if you have a competitor coming through globalization that brutally undercuts you in price, you lose your value proposition to your customer.”
He spends about one-third of his time with customers and says to ask questions, “then shut up and let him talk” to learn their needs.
Gerster asks about what challenges they face, their biggest expenses, how WIKA can help their profitability beyond lowering price, and what they expect from suppliers.
While these questions help surface spoken demands, sometimes you have to dive deeper to find needs they don’t even think about.
“If you ask the right questions, you’re going to find, hopefully, unarticulated demands that the customer would have never told or asked you to do,” Gerster says. “If you offer that to the customer, all of a sudden the light bulb goes on and they say, ‘Yeah, that would be important for us.’”
After listening, WIKA made some changes. To start, it changed its methodology in pricing to be customer-friendly.
“If you tell a customer, ‘Here’s a price for five pieces, and here’s a price for 50 pieces, and here’s a price for 500 pieces,’ you are enticing the customer to do the wrong thing because he’s going to have one eye on the low price,” Gerster says. “Then he’s buying more than he actually needs and puts the rest in his inventory.”
Inventory costs a company a lot of money to maintain, often negating the lower price it paid, so whether a customer needs five pieces or 500, WIKA charges the same price. WIKA also realized it could save customers time, money and manpower by monitoring their inventories for them by linking their IT systems and automatically shipping when a product was low.
None of this would have happened if Gerster hadn’t tried to create a true partnership, which he says many companies don’t understand.
“Nobody ever really understood what partnership means,” Gerster says. “In the past, it was who had the lowest price. If there’s no dependency between the customer and the supplier, and the supplier and the customer, then you don’t have a relationship.”
Real relationships are key to a successful business. “The customer must, at some level, depend on WIKA in a good sense, not in a blackmailing sense to meet their goals while leveraging the capabilities of an agile supplier,” Gerster says. “That creates a dependency, and that dependency cannot be thrown out or competed with just because somebody walks in there with a lower price because we offer more than a lower price.”
When making changes within an org-anization, leaders must get buy-in from everyone in the company, otherwise the changes won’t yield success.
“The top management support is the oxygen that is blown into the candle all the time to keep it alive,” Gerster says. “At the same time, the whole organization has to become more self-sustained. In other words, the employees have to pick up the DNA and the way we want to do business.”
Doing that is pretty straightforward. “You must be honest, and you must give people a reason why change is imminent,” Gerster says. “In order to do that, you should have some urgency.”
But that’s not enough. Top management has to follow up with the low-level employees. He attributes Toyota’s success to this.
“Those guys know what they are talking about because they know what’s going on, on the shop floor, and they make sure things are right on the shop floor,” Gerster says. “If you make sure things are right on the shop floor, everything else will fall together. Don’t start at the top start at the bottom.”
It’s also important to keep the senior team excited and focused. That will filter down the organization and help employees buy in to changes.
“People on the shop floor have seen many different programs over the years, and they know, management says yeah, yeah, yeah, and then six months later, nobody talks about it anymore,” Gerster says. “It needs constant nurturing through top management, and top management needs to be excited about it, and they should be because it brings you the results you’re looking for, but they don’t trust it, and they let it go too quick.”
Leaders need to get and keep everyone on board through continuous training and mentoring, and if they don’t like those activities, let them go. He also keeps them in the loop by standing in front of everyone each quarter and giving a state of the company address. He both looks back at what the company has accomplished and also spells out the top five issues needing work as they move forward.
“That’s a certain set of information that I repeat over and over again,” he says. “Then you just need to engage with people. You need to tell people that while they are changing, mistakes are going to happen, and it is OK to fail.”
Most people have had a moment where they look at a policy or procedure and say, “That’s complete nonsense. Why do we do it that way?”
Around WIKA, Gerster rewards people for asking that question because it shows they’re paying attention and looking for improvement. He calls it the “Utter nonsense” award, and it comes with a $100 reward. It’s a way of getting people to continuously improve the company.
“Sometimes you set up business processes and never look at them again until they kick you in your rear end,” Gerster says. “What we’re trying to do is set up a process that looks at everything and anything continuously and try to capture opportunities for im-provement.”
Offering incentives to those who choose to get involved and offer ideas motivates and ignites enthusiasm. For example, Gerster’s lean transition completely re-energized his people and propelled WIKA forward.
“It’s an employee-driven process, and it puts people on steroids,” he says. “The morale is totally different than what it was years ago. Give the people responsibility. ... Just trust them, and they will deliver for you.”
It’s also crucial to watch what you reward. “Often, people get a bonus for increasing sales or increasing profitability, but they only measure the sales or only measure the profitability, so at the end, you either have it or you don’t, or you’re somewhere in between,” Gerster says. “You need to focus on the internal activities that drive sales and drive profit, so you know much earlier if you are on track or not.
“If you focus on these activities, you don’t worry about sales or profitability because you know it’s going to come together anyway, because you’re doing the right thing. You’re looking through the wind-shield and not through the rear mirror.”
WIKA also sets benchmarks for employees by averaging the previous two years’ performances and then raising that number slightly. If they hit the new goal, the company splits its profits 50-50 with employees, so they reap the benefits of their hard work.
“You need to define an expected outcome for a certain business process, and you need to make sure you raise the expectation every now and then in order to push the limit and start people thinking, ‘How do I do better?’” he says.
When they get a cut, they’ll look at how to be more efficient to increase their share of the prize.
“If people want to make more money here, it’s not about working harder, it’s about working smarter,” Gerster says. “You can’t get it done if you work harder. You need to do it differently.”
While change can often seem slow and people can be skeptical, Gerster says to plunge forward and let success get people on board.
“If the changes work, and they see that it works, and they get a share of it, why would they get frustrated with it?” Gerster says. “They must be part of the success, and we make them part of that success.”
HOW TO REACH: WIKA Instrument Corp., (888) WIKA-USA or www.wika.com
Hire positive people. Frankly, I work too much to have a group of people around me who aren’t fun and positive.
No. 1, without any hesitation, is the attitude. You can tell a lot about the technical skills from their resume. You can test for it. But there’s no replacement for a good attitude. You either have a good attitude a can-do attitude, a positive approach to life, a positive approach to interactions with other human beings or you don’t. I don’t think that can be trained.
Look for physiology. Is it an open physiology or closed? How do they respond? Are the answers canned or not canned? If you present them with a problem in the interview process, is their approach to solving the problem one that they come after with a positive or a negative slant?
By asking the right types of questions, you get an idea fairly quickly as to whether or not people are genuinely upbeat or have a genuine approach to their business versus those that don’t. Ask them about describing difficult situations and how they’ve gotten through those situations.
I love to play the what-if game. Use what-if to put them into a situation where there are different paths and approaches that they can take. The path and approach will indicate whether it’s being approached positively or negatively.
Focus on people. Have constant reminders everywhere you can. Each year, we have a leadership survey where the associates evaluate the managers in areas related to communication, goal-setting, involvement all things that we talk about focusing on the people as opposed to the process.
We do a monthly bulletin to our team and celebrate those people that demonstrate those great characteristics of leadership. The biggest award for any associate is called the Leadership Award, and we celebrate it to the 10th degree.
If we can create that kind of environment where we’re focusing on them, letting them do their jobs as opposed to making them do their job a certain way, you get better buy-in and a better result.
There’ve been times when I’ve had people come to me and say, ‘You’re preaching this, but you’re doing this,’ and help me get corrected. I think it’s only possible because it’s so prevalent in our culture, so people see it, recognize it and can relate to it, and remind us when we get off path.
Identify leaders. We, as a senior management team, reach out and evaluate the talent in the organization. We evaluate things like results but also the intangibles of how they relate to others in the organization below them, at their level, above them, what their organizational influence is, what their intellectual capacity is, what their desires for growth might include.
We’re trying to help them become better leaders. We hope that by identifying and investing in them, they will ultimately be able to apply what they have learned to benefit FOCUS Brands, and even if not, it’s still not a bad thing.
Whether they’re going to be a coach, a parent, a friend, at some point in time, they’ll be leaders in life. I can’t tell you how many times I’ve found helpful leadership in my life that didn’t come from work, so it certainly doesn’t have to be in just a managerial situation.
Have one personality. At the end of the day, I make sure there’s no distinction between how I live my life at home and how I live my life at work. I look at business as just another part of life.
I spend a lot of time with business, and instead of trying to have one persona at work and one elsewhere, it’s a heck of a lot easier to be yourself and treat business the same way you treat people outside of business.
Stay true to your values. We talk about the difference between leadership and principle leadership, and the distinction there is in injecting into leadership the Golden Rule and making sure that while becoming a leader, you’re also staying true to a moral compass that you can be proud of. That goes back to the whole notion of not separating how you act at work with how you act at home.
It is a matter of discipline, transparency and of inclusion. If you are open as these issues come up, and you have to solve them as a team, it’s a lot harder to get a group of 25 people to all agree to do something bad.
Assign a great deal of value to things that may not be financially driven. If someone makes a decision that may appear to be in conflict with the company’s interest financially but is the right thing to do from a human standpoint, you should point those out when they happen and celebrate them. Let everyone else know that you don’t have to compromise to be successful, at least in this organization.
Show instead of just telling. In our culture definition, it says something about guest service. One of the managers of our restaurant got a call from one of the guests and she said, ‘I ordered my sandwich with olives, and they put jalapenos on it.’
He said, ‘Don’t worry I’ll fix it,’ hung up the phone, made a new sandwich and then drove the sandwich to her place of work. What we were able to do was highlight this person’s behavior in the subsequent leadership bulletin, not just to recognize what he did but also to tie that experience directly back to the exact words that relate to it in our culture definition.
Tie the actual activity or behavior with the written word to bring it together for people, so they could see culture in action and better relate to it. They can have real-time, real-life examples of what it means. Being able to see that is probably the best training they could ever get.
HOW TO REACH: FOCUS Brands Inc., (404) 255-3250 or www.focusbrands.com
The next time you order goods from Amazon.com, you may be committing tax fraud. There’s a little-known “use tax” that could cause big headaches for consumers purchasing goods from out of state.
“Georgia law requires that dealers who import tangible personal property from other states for use, consumption or storage in Georgia must register as a dealer and self-report the tax they owe for consuming these products,” says Christopher Compton, an associate with Gambrell & Stolz LLP in Atlanta.
Smart Business spoke to Compton to find out more about state use tax.
How did this tax originate?
The U.S. Constitution puts limits on how a particular state can tax transactions in inter-state commerce. Normally, when you buy something in a sales transaction, the retailer collects the retail tax and you, as a consumer, never think anything about it. But because the U.S. Supreme Court has said you cannot require the retailer to collect sales tax in inter-state commerce, the tax couldn’t be imposed. So, in answer to that, states came up with this idea of a use tax for actually using or consuming a product. Once the product purchased in interstate commerce comes to rest in its final destination that state can then tax the sale.
Who’s affected by this tax?
Obviously, with the rise of mail order and the Internet, these inter-state transactions have ballooned and businesses are ordering a lot of goods and supplies over the phone and Internet. The state says that a dealer must self-report the tax they owe for consuming these products. Now you might think: well, what’s a dealer? A dealer, among other things, is every person who imports or causes to be imported any tangible personal property from any state for sale, retail or use. So effectively, any time you buy something, and you haven’t paid sales tax, then you have to pay a use tax on it.
What are the penalties for failure to comply?
Absent the self-recognition, a tax payer may be committing tax fraud just by doing nothing, under the theory of a fraudulent failure to file a return. In Georgia, tax fraud will hit you with a 50 percent penalty, plus interest, plus the amount of the tax. As of 2006, there is a new criminal provision that makes it a misdemeanor with a $5,000 penalty to file a false or fraudulent return, graduating to a felony and a $10,000 fine on the second offense. So you could order something pretty small and face a $5,000 fine and a criminal misdemeanor.
How can penalties be avoided?
For individuals in Georgia there is a line item on the income tax return that allows you to report your use tax obligation, so you’re relieved from registering and filing tax use returns. I would bet most people never put a number in there. But for a business, on the corporate forms in Georgia, there is no line item like that. If you’re a business entity, you have to go that one step further. To comply, you basically have to take three affirmative steps: recognize,register and report. This means you have to, step one, determine that you owe this tax and then, step two, register in the state and then, step three, actually make the returns to pay the tax. Use tax returns are due either quarterly or monthly, depending on the volume of purchasing you’re doing. There isn’t an exception from filing the tax for smaller amounts of goods, but you can file it less frequently. If you file under a certain amount, then it’s quarterly.
How worried should business owners be?
I think the department of revenue is going to be practical. If you’re importing small amounts, they’re probably not going to come after you with a fraud charge. But there are businesses that order a significant amount of their supplies online.
A lot of people think if the business gets hit with tax liability, it’s just the cost of doing business. But under Georgia law, officers and members of LLCs and responsible persons can be held personally liable. You can’t hide behind a corporate shield.
What can someone do to avoid fines?
Arguably, you can buy from in-state suppliers, and then the retailer would be required to collect the sales tax on it. If you’re going to order online, or through inter-state commerce over the phone, you would have to register with the department of revenue and report your use tax as often as you’re making payment.
I think you have to do a certain cost-benefit analysis. If you’re making maybe $1,000 a year in inter-state purchases, you probably don’t have a big problem. But if a significant amount of money is exchanged, or there’s one big out-of-state vendor that’s sending in a lot of supplies and they’re not paying tax on it, I certainly think it’s something you should investigate with your accountant. The tax is one thing, but nobody wants to be convicted of fraud.
CHRISTOPHER COMPTON is an associate with Gambrell & Stolz LLP. Reach him at (404) 223-2219 or firstname.lastname@example.org.
It never hurts to have someone on the inside, letting you in on the latest ways to save a dollar especially when it’s a tax dollar. According to Chris Hitselberger, senior managing director at CB Richard Ellis, an engineer with tax code experience could be your new best friend. He or she can conduct a cost segregation study to point out places within a building that can be subject to greater depreciation, and lower taxes.
“This is a technique of accelerating the depreciation on a commercial building or multi-family building that will create about $30,000 to $150,000 in tax benefits per million dollars of a building’s cost,” he says.
Smart Business spoke to Hitselberger about what an owner needs to know about cost segregation studies.
What is required of an owner for a cost segregation study?
Although executing a report is quite a detailed engineering endeavor, it doesn’t take much effort from the building owner. The studies are relatively non-intrusive. The building owner provides the tax basis typically the tax basis is the acquisition cost minus the land, since the building depreciates and the land does not or new construction costs in a new construction project. Providing complete and organized blueprints, or a greater level of cost detail than is normally tracked during a construction project, certainly helps.
Is the history of the building purchased relevant?
The age of the building is irrelevant. Every time a new owner takes over a space or a building, it starts a new tax clock. So the building may be 100 years old, but if you just bought it this year, you begin depreciating that building today for the next 39 years, or 27-and-a-half years in the case of a multi-family building.
What are some typical building components in which savings can be found?
Components that are in the nature of supporting the client’s business activity or can be removed without doing significant damage to the building may qualify to be treated as personal property for federal tax purposes. So we look at such things as the electrical system. In the average office, you need one electrical outlet, but there might be four electrical outlets in somebody’s office. One of those outlets writes off over 39 years or 27-and-a-half years along with everything that makes the outlet work: the conduit, the wiring, the circuit breaker, etc. that write off over 39 years. The nature of the intended use of the other outlets is just to plug in office equipment copiers, printers, fax machines, etc. so those outlets, because they support personal property, depreciate as personal property. So there might be a dataport that also plugs into the computer. The dataport and all the wiring write off over five years.
Interior walls or tenant improvements that do not penetrate the plane of the suspended ceilings can be five-year walls. Work cubes made out of permanent walls, drywall and studs, etc. are only 4-feet high, so those are five-year walls. As long as that wall can be considered demountable, meaning you can move that wall without disturbing the suspended ceiling system, it’s probably going to be a five-year wall.
Then everything from the edge of the property to the edge of the building can write off over 15 years. Those are site improvements, such as parking lots, landscaping, sidewalks, exterior lighting, or signage.
By moving these costs into five, seven and 15 years, it creates an accelerated depreciation, which increases the present value of the cash flow that’s created by depreciating the building.
Can a cost segregation study withstand scrutiny from the IRS?
Cost segregation is an IRS recognized technique. In fact, the IRS has created an audit technique guide, which anybody can access. It’s at www.irs.gov. Search for ‘cost segregation’ at this site, and it will take you to the audit technique guide. And it has a lot of interesting information about the history of cost segregation.
Who should take the lead on a cost segregation study?
It’s really the function of an engineer who understands this part of the tax code. Accountants simply aren’t taught how to read blueprints. They’re not taught how buildings are built, which is an essential skill. Accountants certainly play a key role in that they incorporate the results of the study for their clients. They take reported information and incorporate it into their depreciation schedules.
It’s not only the knowledge of engineering and construction procedures, it’s also the knowledge of the tax law. Because even though an engineer may have gone to a seminar that says a chandelier can write off over five years, it’s very important to understand why. You need to know what part of the tax code, or what legal precedent, there is behind your argument to write that chandelier off over five years.
CHRIS HITSELBERGER is senior managing director with CB Richard Ellis. Reach him at (212) 425-4300 or email@example.com.
Born: I was born in a small Georgia town called Woodbury population 1,200.
Education: Georgia Tech, bachelor of science degree, civil engineering
What has been your biggest business challenge?
Always the biggest challenge is finding the best people possible to fill the roles. It’s a service organization. All you’re selling is your people, so you have to have the best people possible to be successful.
What’s the most important business lesson you’ve learned?
Never get so conceited that you believe that you’ll always be successful. You have to accept that there’s some bumps in the road. Not everything goes as one may dream. The economy will go against you. 9/11 will happen. Things that will happen, you will have no control over, and you have to be able to manage yourself through those times.
What was your first job?
When I was 11 years old, I was paid 11 cents an hour putting peach baskets down a chute, and after three weeks I was fired because the guy said I was not serious enough about my job. It had such a serious impact on me losing that job that I have made sure that never in my life that, that ever happened to me again. To be honest, that was a very driving issue with me from that point.
What’s your favorite game and why?
My favorite game today is that thing called Sudoku. I find great pleasure in sitting and doing that because, being an engineer, I enjoy working with the numbers and making them all line up. Anything that’s challenging is what I enjoy.
Insurance is all about risk management and limiting loss. So how do insurance companies limit the risk within their own businesses? The answer is reinsurance — insurance for insurance companies.
“Policyholders transfer their financial risk to their insurance company,” says Tom Hudock, risk manager with Westfield Insurance. “The company retains some of that risk and transfers, or cedes, the remainder to other insurance companies called reinsurers. Reinsurance is primarily insurance for an insurance company. Large self-insured businesses can also purchase reinsurance to reduce their risk.”
Smart Business discussed with Hudock the purpose and the impact of reinsurance in the insurance industry.
Why do insurance companies purchase rein-surance?
When an insurance company issues a policy, it promises to pay for future claims that may occur. In order to deliver on these promises, an insurer must remain financially sound. Reinsurance preserves policy-holders’ surplus (retained earnings).
There are three main reasons why insurance companies purchase reinsurance: capacity, stability and catastrophe protection.
- Periodically, an insurer will purchase
reinsurance on a single large risk, e.g. a $50
million building. This is called facultative
reinsurance. It provides the insurer with
the capacity to insure a risk that might otherwise be declined.
- Treaty reinsurance is another type of
reinsurance that insurance companies buy
to stabilize their underwriting results for
their portfolio of risks. Loss experience
varies from year to year, and reinsurance
helps smooth earnings.
- Insurance companies are exposed to very large losses from catastrophes, like hurricanes and earthquakes, which could result in bankruptcy. To protect its policy-holders’ surplus, an insurer will purchase catastrophe reinsurance that limits its loss from a single event to a predetermined amount.
How does reinsurance work?
The insurance company provides the reinsurer with loss exposure data, claims experience and the amount of risk that the insurer wishes to retain. The reinsurer then determines the reinsurance premium. A portion of the premium that is collected from the policyholder is ceded to the rein-surer in payment for the risk assumed by the reinsurer.
For example, the insurer may retain the first $1 million of loss and the reinsurer(s) may agree to pay the next $4 million. If a policyholder were to incur a $5 million loss, the insurer would pay its policyholder $5 million, and then be reimbursed $4 million by the reinsurer.
How does reinsurance affect business insurance policyholders?
Depending upon the size, location and type of risk to be insured, a business may have difficulty finding affordable insurance due to the availability and/or the cost of reinsurance. Smaller insurance companies depend more on reinsurance than the large national insurance companies. In some cases, even the largest insurer may not be willing to offer insurance due to the lack of reinsurance.
For example, a business occupying the Sears Tower in Chicago may not be able to buy terrorism insurance because reinsurance for a terrorist event is not available.
How is reinsurance related to industry cycles?
The reinsurance industry also goes through hard and soft markets. In the two years following the World Trade Center attacks in 2001, total losses — including from hurricanes and other long-tail liabilities — exceeded $50 billion, and capital losses from the global fall in equity values exceeded $180 billion. This created a hard market for reinsurance in which demand for reinsurance exceeded supply, causing premiums to rise. This contributed to the hardening of the primary insurance market.
Due to the increase in reinsurance rates, and because 2006 was a very profitable year for reinsurers due to a mild hurricane season, there are signs that the reinsurance market may be softening. This will ease pressure on primary insurers’ pricing.
What else should businesses know about reinsurance and industry cycles?
Most reinsurers write business worldwide, while most U.S. insurers only write business in the United States. The U.S. insurance and reinsurance cycles are linked together but do not move perfectly in sync. Softness in reinsurance pricing contributes to the depth and length of the soft market for primary insurers. Usually, the market does not begin to harden until reinsurer pricing rises.
TOM HUDOCK, CPCU, ARM, ARe, risk manager, can be reached at (330) 887-0654 or firstname.lastname@example.org. In business for more than 159 years, Westfield Insurance provides commercial and personal insurance services to customers in 17 states. Represented by leading independent insurance agencies, the product we offer is peace of mind and our promise of protection is supported by a commitment to service excellence. For more information, visit www.westfieldinsurance.com.
It’s a lesson Zalesky carries with him to this day, and it is also a cornerstone of the culture at CMI Market Research, the marketing and research firm he founded.
Smart Business spoke with Zalesky, president of CMI, about why accountability can make or break you as a CEO.
Q: What are the key skills that a business leader needs?
No. 1 is a vision for the future.
It’s critical that we can look into the future, see what our clients are going to need and transfer that vision to my key executive team so they can begin a collaborative plan for the future with initiatives, resources and staffing.
Another thing is keeping those critical client relationships fostered. Not on a day-to-day basis but on a semiannual basis, so they understand they are very important to us.
They have the critical time we need inside this organization. I also need to foster my staff in ways that say, ‘You are very important to our future, and we are going to do everything in our power to mentor and grow you.’
Lastly, financially I need to make certain this organization is on course for growth and has the resources to do it.
Q: How do you do that?
We’ve been growing at a compounded 20 to 30 percent rate for the last four years. We quickly realized the opportunity for us to collegially interact was occurring infrequently.
So we have regular activities where we get together as a company from a team-building standpoint now, where we relax and share time in a nonbusiness way. We try to work on professional development for all of our staff. Whether it’s training seminars that are external to the company, or internal training on a regular basis, we’re really trying to foster those opportunities so they can see this is the best place to be culturally rather than anywhere else.
Q: How did you set up that culture?
I played Division I college sports, and it became apparent that you’re allowed to compete. I roomed during camp with the gentleman I was competing with for the starting position. It became quite apparent that you can compete in a very healthy way and still be friends. The organization here is collaborative, but you still need to be accountable to each other on what we say we’re going to do for our clients in terms of time and deliverables. It’s OK to have those discussions that say, ‘You’re not doing what you promised you would do’ in a way that’s honest, fair, respectful, and we live up to those expectations of each other.
Titles and egos stay at the door. We gain respect in this organization based on the ideas and actions we can bring to bear, not on some title we’ve been bestowed.
Q: How involved in operations should a leader be?
A leader can’t be involved in the day-to-day operations in any great way. It is a battle that growing companies face and I face constantly.
You moved from being the technician and knowledge source to the leader. In that process, there can be voids or gaps, but you need to be working on the business rather than in the business. That requires growing and nurturing a senior staff that can do the things that need to be done.
Q: What is the greatest challenge you’ve faced in business?
Evolving from a researcher to a president and CEO. It meant acknowledging the fact that I have to lead with a vision and focus the organization on being accountable for developing initiatives and plans to move us forward.
Q: How did you overcome that challenge?
I live with change and I’m comfortable with change, but when you’re moving into an arena you’ve had no experience in, you need to find others who have already done it. I’ve been fortunate to join a Vistage CEO group of peers to hear from others what it was/is like to forge that path. [Vistage International is the world’s largest CEO membership organization.]
There are 18 CEOs, from companies with revenues anywhere from $10 million to $85 million organizations of similar size. We learn from each other and get the opportunity to share best practices.
I belong to an industry association, and I sit on the board. It’s comprised of presidents in the research business. That, while very meaningful because of issues related to my field, is not going to help me grow my business from a strategic sense. The day-to-day issues a CEO/president faces are dealt with within my Vistage group.
HOW TO REACH: CMI Market Research, (888) 311-0936 or www.cmiresearch.com
Be lean to grow. We run a very lean company. There’s enough gravy in the casserole to please everybody, so we don’t have to break it off and have somebody get the short end of the stick.
We have to make a living. We have to make a profit. If we don’t run it lean ourselves, every franchisor in the country scratches their head and says, ‘OK, well, how do we get more money? We’ve either got to grow more quickly, and that’s not always workable, or I’ve got to work my franchisees out of more money.’
It makes sense to live a little leaner fly coach on airplanes. Split hotel rooms. Not make more than $50,000 on your salary that’s including myself and haven’t since Day 1. Everything we do is frugal and works.
A lot of CEOs out there like to high-step, and they probably got a corner office with a lot of glass and oriental rugs and think they’re hot junk. I don’t play that game. We’re not too hung up on titles around here. We’re more like a law firm a lot of partners that work together every day.
At the end of the day, we want our customers to be raving fans of ours. The bottom line is, if we’re not fair and we’re not lean and we’re not looking at the business the right way, we probably could make more money, but it wouldn’t be as long of a term project and long-lived. It’d be more short-lived, and more people would be unhappy with us.
Buy your buy-in from employees. I didn’t have to give too damn much advice I gave them stock. They have to earn it over a five-year period of time, and once they’re vested, they’re full partners and they’ve got full benefits, but until then, they’ve got profit-sharing and the same percentage.
So many companies these days just pay people pretty well, but I think they’re using them. Unless you make somebody a partner, they’re not truly going to have job security or a future with that company long-term if they ever want to have a beach cottage or do other things or retire at a reasonably early age. I don’t have to say that much. Yes, I’ve strewn out my vision and told them all what I think about fairness and treating people well and running the best company and working your tail off and all the things I talk about, but it gets translated pretty easily, and you don’t have to say it too many times if you own a piece of that company. You just automatically think smartly like that.
If I was just trying to hire a bunch of people, I’d be explaining that every day till I was blue in the face. I just bought my buyin. I bought my people. It works.
Some of them are up at 6:30 and don’t go home till 11 at night. They’re warriors. They get it, and they’re the ones that get the increased amount of stock.
We’ve had to run a few off along the way that are bringing the other guys down. If you’re going to be lazy, and you’re not working your tail off, and you’re not going to work smarter and deliver, then the bottom line is you’re not meant for this company.
You have to pay the piper if it goes down. If this company goes down, I’ve got everything I got tied up into it. It’s a different ballgame, but I’m still willing to share because I want those guys to have the upside.
Everybody’s worked hard, and they deserve to share in the profitability and the ultimate stock of the company one day. I can’t count how many times people e-mail me and thank me, and I say, ‘No, thank you.’ It’s just a great feeling to have everybody in the deal with you, and it wouldn’t feel any better if I made twice as much money and didn’t share it with anybody.
Be blunt. I’m not all that political, and sometimes I may hurt your feelings, but I’ll certainly allow you to hurt my feelings. I’ll fly off the handle and call some idea a moron idea, but I fully expect you to say that to me, and if you don’t, you’re a yes person, and we don’t have yes people around.
We don’t want and encourage those people. We hire honest, hardworking people, but we don’t want yes folks because they’re just brown-nosing fools that aren’t going to get anywhere in life, especially in our company. They work well in another company because the CEO has some big ego.
Sit there and brainstorm, and you get to the damn crust of the problem, and find out exactly all the best ideas. I’ll throw out 10 ideas in a meeting, and eight may be the dumbest ideas ever, but then there’s that one nugget, and you wouldn’t have gotten the one nugget if I had been embarrassed, or we didn’t have some fun with it, or if the CEO yells at somebody and all of a sudden he’s uncomfortable because he can’t go back to me and call me bonehead.
I call people, and they call me, bonehead to my face and behind my back. We’re not full of ourselves. We just know we’re smart enough that people will bet on us, and the rest of it is up to us to work our tail off and hopefully make wise and fair decisions that will benefit everyone. Business is no more complicated than that.
I’ve just gotten to where I am because I work my tail off and was honest with people. If you just absolutely give your word to anybody and never break it, and you do more than you need to do per the contract, you’re going to win.
HOW TO REACH: Raving Brands Inc., www.ravingbrands.com