Technology has opened doors for fraud. Counterfeit checks that are produced on a home printer with basic software can fool a seasoned banker. In many cases, it’s impossible to tell the difference between an honest check and a well-crafted imposter.
“Even the most honorable person who is faced with a financial calamity in his or her personal life may attempt fraud,” says Craig Johnson, president and CEO of Franklin Bank in Southfield, Mich.
The key to preventing fraud includes a combination of segregation of duties, involving a third party to help audit the books and taking advantage of tools designed to lock out opportunities for fraud.
Here, Johnson provides a banker’s perspective on common fraud activity and what you can do to prevent it at your work-place.
How can a dishonest employee manipulate check stock, and what can employers do to make counterfeiting more of a challenge?
Fraud involving checks has increased exponentially over the last several years with the advent of technology and the ability to scan documents. The payee and dollar amount can easily be changed, and a bank can mistake the tampered check for the real thing. As an employer, you can protect yourself by purchasing a quality check stock with watermarking and other security features so banks, customers and vendors will recognize it as an ‘official’ check from your company. Cheaper check stock is much easier to copy. Also, if you produce your own check copy in-house, keep the stock under dual control and away from the general staff. In other words, do not give the key to the check safe to the same person who is responsible for all financial transactions.
What are other ways that businesses are defrauded?
Checks may be intercepted by an employee responsible for billing or accounting, and the payee may be altered. The check can be rerouted into another account and cashed at another financial institution. The check will post as cashed on the company books, but several months later, the supplier who was supposed to receive payment may call and say, ‘We never got paid.’ This is an instant red flag. Employees responsible for issuing checks and balancing the bank statement have an opportunity to issue checks to themselves, fictitious vendors, family, friends, etc. The issuing of checks and the reconciliation of the corporate checkbook should be segregated duties. One way to detect possible fraud is to run a report of employee social security numbers and addresses against your vendor or supplier list. Any ‘hits’ must be thoroughly investigated.
How can technology work to an employer’s advantage?
You can avoid the above scenario by using Internet banking. Set up Automated Clearing House with major suppliers so you can pay them electronically. You’ll have more control over payment timing, and you’ll log a virtual paper trail that cannot be altered by employees at your company or the payee’s organization. If your financial institution offers ‘Positive Pay’ take advantage of this service. By using Positive Pay, it is harder for individuals to counterfeit or alter a stolen check and have it post to your corporate account. If the check number or amount is wrong or if the specific check number has already been paid (duplicate check), the check will be rejected and will require a representative of the company to intervene and make a pay or return decision.
Provide employees with a toll-free number they can call anonymously to report fraud in the company. For a nominal fee, you can subscribe to a service that fields these calls and communicates concerns to a key person at your company. Offering your staff a confidential way to say, ‘Something’s wrong here,’ can go a long way to preventing fraud before it gets out of hand.
What are other fraud red flags?
The last thing an employee will discuss at work is personal financial struggle, but this is almost always the impetus for fraud. Consider the fraud triangle: motivation, opportunity and rationalization. In today’s environment of high gas prices, record foreclosures and, in many cases, uncertain career futures at consolidating companies, there is plenty of motivation for employees. Be observant and know your employees well enough to recognize these obvious changes in their lifestyles. Does an employee never take vacation or leave his or her desk? This could be a sign that he or she must stay on top of fraudulent activities. Requiring employees in key areas to take a one week vacation (consecutive days) each year will help in this area. There is a good chance that if something is amiss that it will be discovered during this time.
CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at firstname.lastname@example.org or (248) 386-9860.
The laundry list of acronyms and lingo for financial products can overwhelm the most astute business owner. How about a GRAT or an ILIT, add a QTIP, LLC and GST transfer, and don’t forget the CRT.
“Having a lot of wealth is complicated,” says Joe Wojcik, senior vice president, regional trust manager, The Huntington National Bank. Wojcik says a wealth management adviser’s role includes translating what he or she knows about tax, accounting and finances for successful professionals who spend most of their time managing their businesses not their wealth.
“The key is client understanding,” he says. Smart Business spoke with Wojcik about why wealth management advisers should be trusted partners who steer you toward the best solutions for your assets.
How does a wealth management adviser translate products and options?
A wealth management adviser looks at all of a client’s variables and helps him or her understand and choose the best financial options. Variables include stocks and bonds, real estate, retirement benefits, insurance, closely held business interests and various types of investments. An adviser shows business owners the menu of products and services and helps them understand it so they can make appropriate decisions. A good adviser offers investment advice, help with income tax planning and estate and trust planning, provide risk management solutions and maximize charitable gifts.
The best advisers invest their time and expertise to take comprehensive looks at all the variables. If the bank offers a solution that fits, the adviser will arrange the transaction. But the bank’s product menu should not set boundaries. If the bank doesn’t offer a particular solution, a trusted adviser will look outside the organization for the right solution.
What does it mean to be a trusted adviser?
Fiduciary comes from the Latin word ‘faith.’ A fiduciary is a person who is extremely loyal and does not put personal interests above that loyalty. Your wealth management adviser should act like a fiduciary, provide valuable advice and build a lasting relationship with you, always putting your interests first. Again, education comes into play. A good adviser wants you to understand what products are available so you can make decisions together as partners.
How does this partnership work in relation to the roles of accountants and attorneys?
Since tax is often 40 percent or more of the equation for successful business owners and other professionals, true wealth management requires substantial tax expertise in cooperation with the client’s tax professionals. You can’t make a decision on financial issues without considering taxes. The key for wealth management advisers is being able to cooperate, coordinate and work as a team with the accountant and attorney. You can think of them as the front end of the financial advising process. Advisers narrow down options for successful clients, and then pull in the accountant and attorney to gather their expertise. From there, the group helps the client implement the determined solution.
Will you elaborate on how managing wealth is an educational process?
Owners who are successful often need a lot of help with financial issues like succession planning because they have always been so focused on their businesses. Advisers explain various strategies to help them realize their goals. Advisers ask the tough questions they might not think about because they are too busy with day-to-day business activities.
For example, maybe a business owner doesn’t stop to think about how the next generation will impact the success of the operation. Advisers help clients and the generation that will succeed them figure out a reasonable structure to be fair and equitable without interfering with the long-term success of the business. Advisers connect with the next generation and educate them on what they will face, such as issues that surround siblings who work in the business versus siblings who do not.
Of course, this is just one example. Education is just as important for more common wealth-oriented products, such as trust funds. Explaining how every product works is the difference between advising and selling to a client.
What lessons have business owners taught you about wealth and success?
Going back to the role a fiduciary plays, integrity, confidence and respect are important characteristics for any adviser you trust. And I find that business owners who display these same traits are the most successful. Those you can trust with a handshake are immensely successful because they are easy to do business with. So when I meet clients who turned $500,000 into $10 million, they share a common trait, and that is integrity. It’s the opposite of what you might expect, with scandals like Enron painting a cold portrait of how business owners realize success. But knowing they are wonderful people, you are eager to do business with them and help them reach their goals.
JOE WOJCIK is senior vice president, regional trust manager for The Huntington National Bank, Akron. Reach him at (330) 258-2360 or email@example.com.
When the owner of a prominent local moving and storage company approached Brentwood Bank’s Joe Verduci for a significant cash withdrawal so drivers could pay for gas, Verduci had another idea in mind. Why not distribute debit cards instead of cash?
“The owner can control what is being spent and track it easier on a day-to-day basis,” says Verduci, assistant vice president and retail banking manager. “Drivers can lose cash or spend it on other things.”
At first, the owner was wary of debit cards. A common misperception is that distributing company debit cards to employees is like giving them permission to spend indiscriminately. But, as long as controls are put in place, debit cards can save the company controller valuable time.
Verduci discussed with Smart Business other ways to optimize financial operations by providing dos and don’ts to help improve efficiency and overcome business growing pains.
What are the greatest concerns that business owners express when you call on them?
One of the biggest complaints has to do with the expense associated with accepting credit cards from customers. Merchant processing fees are a major expense for business owners, particularly those in the retail sector. Some merchant service companies operate like brokers they are middlemen that charge fees for ‘connecting’ the business with a merchant services program. Other programs allow business owners to work directly with the processor. There is no middleman and, therefore, no middleman fee. Do negotiate terms with merchant services representatives, and look at perhaps even cutting out the middleman if there’s no direct benefit to you.
Another issue related to merchant processing fees is that business owners tend to ask processors, ‘What’s the rate?’ But the rate doesn’t include extraneous fees, and these add up. Also, there are costs associated with processing cards that offer ‘points’ programs and other clauses that get hidden in a contract that you should discuss with a processor before you sign on. Do plan for merchant processing fees because they are a reality of doing business with today’s plastic-carrying customers, but don’t allow fees to slip through the cracks by neglecting to read the fine print carefully.
Remote capture is an en vogue service in the banking world. Is it everything it is made out to be?
Remote capture is a valuable service for certain business owners. Those who benefit most from the service do not have the time to make daily deposits during bankers’ hours, or they are not located within a convenient distance from a bank. For example, one owner who travels the region to call on customers stops at his office at the end of each business day. His assistant sets aside all checks received, and the owner takes them home where he has a remote capture tool that allows him to scan all checks. Deposits are made through the Internet at the owner’s convenience.
Others may benefit from either a lockbox account or even an Automated Clearing House (ACH) account, which allows electronic transfers to be made on an automatic basis. One of our clients owns 1,200 apartment units and collects monthly rent from each tenant this way. Tenants agree to pay electronically, which saves the property owner from having to wait for the checks to arrive to deposit them.
What is the best way to fund growth in the current economic environment?
The refinancing boom may be over, but keep in mind that rates are still low and show no sign of moving anytime soon. Now is still a great time to consider consolidating loans, refinancing commercial mortgages, or investigating other financing avenues.
The way not to fund growth is through cash. You must always keep rainy day money, otherwise, you’ll end up digging yourself in a hole if unplanned expenses arise and you have already spent your cash on capital improvements. Do consider refinancing debt if growth is causing growing pains, since rates are still low.
What other misconceptions do you find are common for the business confronting growth?
First, don’t assume you have to settle for off-the-shelf solutions from your bank. Second, do give your banker as much info as possible about your situation. Rather than pigeonholing your needs and prescribing the product-of-the-month as a solution, if your banker has hands-on, real-world experience and is worth his or her salt, he or she can often customize a solution to help you better manage your cash and other financial resources. On paper, products and services all look pretty much the same it’s how they can be applied to your unique situation that will ultimately set them apart.
Finally, don’t fall for the ‘bigger is better’ trap. The best solution isn’t the biggest solution, it’s usually the one that’s the most expertly tailored to suit your business and serviced according to your unique needs. In banking, size is never a substitute for service, and there is no substitute for experience.
JOE VERDUCI is assistant vice president and retail banking manager for Brentwood Bank, Bethel Park, Pa. Reach him at firstname.lastname@example.org or (412) 409-9000.
The government is a major consumer. If you think about it, there isn’t much that government agencies don’t buy.
From highly technical intelligence services to basics like food and lawn service, federal, state and local agencies require the same products and supplies as any large business and then some.
You can take advantage of the volume purchases and tap into this viable sector, but success will depend on the way you position and market your products and/or services and on a thorough understanding of how government agencies contract with private businesses.
“There is a huge market opportunity for private businesses, but many are reluctant to enter the governmental marketplace,” says David E. Shaffer, a director in the Audit and Accounting group at Kreischer Miller in Horsham, Pa., who specializes in government contracting. “Business owners think, ‘Too much red tape,’ or ‘It takes too long to get paid.’ Or, they assume that they cannot compete with larger companies.”
The truth is that if you can provide good, quality services and products at a fair price, plus abide by government contracting requirements, the government’s business can help expand your business.
“We have government contractor clients growing at 15 to 20 percent a year,” Shaffer says.
Smart Business turned to Shaffer for a primer on the country’s largest customer and how to position your business to successfully win government contracts.
Why should a business target the government as a potential customer?
First, government spending is expected to exceed $4,877 billion during the fiscal year that ended Sept. 30, 2007. Federal expenditures comprise 55 percent of this amount, with the remainder being spent by state and local governments. The numbers alone illustrate a significant market opportunity for businesses that provide services and products that the government needs.
The good news is that the government buys a lot of goods and services. So once a business learns the rules and regulations and understands the sales cycle which is exponentially longer than that of a typical customer it will have an edge over its competitors. Once a business learns the rules of contracting and establishes government references, it can expand into other government agencies. Governments like to hire vendors who already understand the unique business environment, so your products and services become more attractive to other agencies once you know the rules.
Larger government contractors have been pushing up the multiples paid for privately held businesses doing business with the government, and larger businesses typically get higher multiples when they are sold.
Finally, government entities have good credit. Businesses can rely on being paid within 45 days or sooner, if you prepare invoices according to the government parameters.
How do you prepare to earn government business?
The people you employ will open the door for potential contracts. If you are serious about working with the government, establish a business plan and consider recruiting personnel experienced in selling to the targeted agency. Like most customers, federal agencies deal with people they feel comfortable with and know will deliver quality work and products. Also, if you are targeting a contract in the intelligence field, such as an agency that needs to outsource ‘top secret’ work, your employees will need special clearances that can only be obtained from the government and can take considerable time to acquire.
You’ll want to develop a business plan that highlights the special products, skills or services that would interest government agencies. How is your business different from competitors? Can your business obtain small business certifications that may get preferential treatment? The government will want a fair price, so consider how you can deliver this and still separate yourself from other providers. If you’re a service provider, the government may inspect your accounting records to determine that you are properly allocating costs since many contracts are based on costs incurred.
Next, target specific agencies and learn their procurement processes and terms. Study historical contracts and budgets. Who are the program managers and current providers? Find out about new initiatives, rules and regulations that govern their procurement opportunities. Meet with government program managers to learn about their needs; but before you do this, know the rules. You can find them in the Federal Acquisition Regulations, and most agencies also have their own rules.
How can a business get its foot in the door?
Speak to current providers to see if there are opportunities to partner with them as a subcontractor. Also, be willing to accept smaller assignments until you prove the quality of your work and earn the trust of the government agency. You may need to dedicate resources specifically to managing government work. Most of all, approach the work with patience. The sales process may range from six to 18 months, and it may take you longer to really learn the ropes. But once you do, you can sell a great volume to the government because it buys so much.
Working with the government may not be an easy process at first there is a learning curve with most new target markets. But once you ‘crack the code,’ you’ll have a competitive advantage over other companies, and government agencies will continue to give you business.
DAVID E. SHAFFER is a director in the Auditing and Accounting group of Kreischer Miller and specializes in government contracting. Reach him at (215) 441-4600 or email@example.com.
Companies need life insurance for various reasons. A policy may be purchased to fund a buy/sell agreement.
Often, it’s to provide supplemental key employee benefits for C-level executives. Also, start-up companies with significant capital expenses and debt and very little cash flow may purchase a term policy to protect against the loss of key members in early years.
The goals and unique business environment of each company will determine what type of life insurance policy is appropriate. And because businesses grow, companies trade hands and people move on, a policy that is suitable one year may need updating a few years down the road.
“It is critical to take stock of your company, assess your goals and review the status of the life insurance policy each year, ” says Richard Gary, associate director, SS&G Financial Services, Inc. in Akron, Ohio.
Smart Business spoke to Gary about what type of policy is appropriate for your corporation and why an annual review is important.
What are the first questions an executive should ask when purchasing a life insurance policy for the company?
First, determine the amount of insurance you need, and then decide how long you will need it. While your answer may be, ‘We need the insurance until the key person dies,’ the question then becomes: What if this person retires and leaves the company? Do you want your insurance policy to live on? How much money will you need to cover the loss of this key person? To replace him or her, you will need working capital immediately.
Perhaps your company consists of multiple, unrelated shareholders; one passes away and the remaining want to buy out his or her stock in the company. Insurance can make this possible. How much will you need? To choose the right company life insurance policy, you have to nail down these two variables: How much and how long?
What types of life insurance are available for corporations?
The two main policy groups are term and permanent insurance. If you answered the question ‘how long’ with a relatively short period of time, a term policy may be appropriate. Term insurance premiums may cost less today, because of the limited life of these policies generally 10-, 15- and 20-year coverage and a significant increase in premiums at the end of the premium guarantee period. Or, if a key person will definitely leave your company within a short period of time say 10 years a term insurance policy is appropriate if there is no deferred compensation plan or buy/sell agreement involved.
How is a permanent policy different from term insurance?
If you answered the ‘how long’ question with ‘for life,’ or you want to insure a key person until he or she is at least 90 years old, you’re wise to purchase a permanent policy. These are long-term contracts, and you may purchase either whole life, universal life or a variable universal life policy. Universal life is based on interest crediting rates. Let’s assume you purchase a policy today at a 5.5 percent interest rate. You then decide how long you want the policy and how many years you want to pay premiums. A computer calculates the premium based on these assumptions and the nonguaranteed costs of the insurance.
There are policies that are funded by various investment sub-accounts. There may be up to 60 different options, and these investments are the cash value of the policy. Review the investment objectives and historical performance for each sub-account and then choose the ones that meet your risk tolerance. You must manage the sub-accounts you choose because these fund the value of your life insurance policy, including the cost of the insurance. This arrangement is just like any long-term investment vehicle.*
How should company executives evaluate the performance of these various policies?
Regardless of your type of policy, you should review an inforce illustration each year to make sure the policy still meets your needs and is tracking the original projections, even if you opted for a policy with guarantees. Meet with the agent who wrote your policy to discuss how the arrangement meets your needs today and tomorrow. If you have a term policy, you may decide halfway through the term that you want to extend the term or convert the policy to permanent insurance. Those with a universal life policy may need to adjust their plan depending on corporate dynamics. If you hold a variable universal life policy, you should review your investment choices each year to determine how they are performing.
Remember, take your time when choosing a policy and think through changes during annual consultations with your agent. The life insurance guarantees are backed by the claims paying ability of the issuing insurance company.
Securities offered through Multi-Financial Securities Corporation, Member FINRA, SIPC, an ING company. SS&G Wealth Management and SS&G Financial Services are not affiliated with Multi-Financial Securities Corporation or ING.
*Variable life insurance frequently involves substantial charges for early withdrawals. Investment sub-accounts value will fluctuate with changes in market conditions. Investors should carefully consider the investment objectives, risks, charges and expenses of the variable life insurance. This and other important information is contained in the prospectus. Please read prospectus carefully before investing.
RICHARD GARY, CLU, is an associate director at SS&G Financial Services, Inc. in Akron, Ohio. Reach him at (330) 668-9696 or RGary@SSandG.com.
There are numerous mortgage lending options available today, but not all lending solutions are viable for executives who want to build a home from scratch. How flexible and attentive is your lender? If you were to design and build a home, would your bank provide a seamless loan process and personalized service?
The fact is, purchasing existing real estate and building a new home are two completely different and unique undertakings and the latter requires a specialist who can usher time-pressed executives through the construction process, offer private client service and, most importantly, ensure privacy.
Vince Cassano, assistant vice president of Brentwood Bank in Bethel Park, Pa., explains the value of a portfolio lender, how construction loans work and why a hybrid construction-to-permanent mortgage that provides a fixed, locked-in rate up front will save executives extra closing costs and streamline the application process and servicing.
“A lot of big banks offer construction loans, but then you have to go through the closing process again to convert this loan into a permanent mortgage,” Cassano says. When purchasing new construction, it pays to seek out a lender that can accommodate this niche and serve as a point person.
Smart Business asked Cassano to explain why new construction deserves special treatment, and how tailored mortgages for custom homes make good business sense for everyone involved.
First, explain the difference between a construction loan and conventional loan. Won’t the first cover an entire building project?
Actually, no. This is where many people get confused. Conventional loans require 20 percent down; the bank finances 80 percent of the value of what is being purchased or built. Conventional loans apply to both new construction and existing real estate. A construction loan is a short-term, interim loan that covers costs of building the home. A builder takes ‘draws’ to continue progress on the home, and these draws are funded by the construction loan. But, once construction is complete and the owner takes occupancy, this loan must be converted into a permanent mortgage. This means two closings, double the fees and twice the paperwork and hassle. Essentially, you must finance your home with two separate loans. Ideally, the owner should seek a lender that will provide a construction-to-permanent loan.
What is a construction-to-permanent loan, and what type of lender provides this option?
A construction-to-permanent loan is a product that portfolio lenders can offer. A portfolio lender typically holds loans until their maturity (or until they’re paid off) and is not looking to sell them to investors in the secondary market. This helps ensure a higher degree of privacy, since the borrower’s information will not be circulating any more than is absolutely necessary. And since the portfolio lender typically is not selling the loan to another party for servicing, and the lender will service both the construction loan and permanent mortgage, borrowers don’t need to do twice the work and pay double the fees for closing. The transition from construction loan to permanent mortgage happens in-house.
Is a construction-to-permanent loan serviced by a portfolio lender also advantageous for the builder?
Absolutely. Once construction begins, the project will require monetary draws to keep the process moving along. The builder needs to pay suppliers and laborers and finance the work-in-progress on a continuous basis. To do that, the builder can contact one person directly at the bank rather than dialing an 800 number and getting the run-around. This is a key benefit of working with a portfolio lender you gain a financial team member, and your builder can count on calling the bank for a draw and receiving the check, often within 24 to 48 hours.
Also, when the home is complete, the builder knows that the owner’s occupancy of the home will not be further delayed by the process of obtaining that permanent mortgage the transition from construction loan to permanent mortgage is seamless.
What qualities should an executive seek in a portfolio lender?
It’s important to partner with a lender that has relationships in the construction industry. Your builder will recommend which suppliers are the best in their fields for roofs, carpeting, cabinetry, etc. But, can the builder also recommend a bank that will expertly handle niche construction loans? Before entering in a relationship with a bank, find out which construction companies the lender typically works with and ask for references.
Before entrusting your business with any lender, find out whether the bank works with custom builders. Ask what will happen to the construction loan after the home is built. (In other words, will you have to ‘reapply’ for a permanent mortgage?) Find out who will communicate with you and with the builder throughout the process. We recommend a portfolio lender who has direct contact with all involved parties and a deep understanding of the construction market.
VINCE CASSANO is assistant vice president of Brentwood Bank in Bethel Park, Pa. Reach him at VCassano@BrentwoodBank.com or (412) 409-9100 ext. 285.
How a business owner spends free time outside the office can be just as important as sales calls and conferences that take place during the workday. Networking opportunities provide an outlet for corporate leaders and employees to mingle with business peers, government officials, political figures and other local decision-makers.
“Networking is an ongoing commitment to your business,” says Craig Johnson, president and CEO of Franklin Bank, Southfield, Mich. “It is not a one-time deal. Networking must be part of your business plan, and you are not always going to see immediate results.”
But if business owners choose community, trade or networking clubs to attend on a regular basis groups that interest them so they will stay involved then the pay-back over time is new clients, strong community ties and relationships with other business peers in the region.
Smart Business asked Johnson why involvement in a variety of networking organizations is beneficial for companies and how to make the most of these experiences.
What types of networking opportunities exist for business owners?
There are various community-oriented organizations that rely on the support and involvement of businesses. When business leaders step up to the plate and participate in a group like the chamber of commerce, the message they send is one of commitment to the region and its welfare. There are various types of networking organizations, and each provides a different opportunity to improve community relations, meet business peers, or gain new clients and vendors. Each attracts a different population of members, so ‘layering’ involvement by choosing a group that falls into each of these categories will expose business owners to the most opportunities.
How do business owners decide where to start?
First, they should define their goals, and these ought to be broad-based. Because each type of networking organization focuses on different objectives and attracts different members, checking out different groups is a wise strategy. For example, if the goal is to attract new clients, the most targeted way to do this is to network at industry events or attend trade shows. As a bank, we attend an annual conference for title companies, financial institutions, insurance companies and conduits. Our goal at this conference is specific: to gain new business. On the other hand, we are also involved in the chamber of commerce. Through this organization, I have developed relationships with executives in the community, many of whom may not need my services. However, over time, these friendships grow stronger as does the likelihood that a fellow member will refer our bank to another friend or colleague. Networking doesn’t always produce instant gratification. Like anything, the time and effort you dedicate to these community groups will determine the benefits gained from involvement.
Why should owners encourage employees to network in the community, as well?
There is a lot of truth to the phrase ‘strength in numbers.’ When many employees from a company give their time to an organization, people begin to notice. This applies to volunteering for nonprofit causes, attending trade meetings, participating in civic groups and joining smaller networking clubs. In fact, several of our employees attend networking luncheons on a monthly basis, where they trade referrals with professionals in different industries.
We apply the same philosophy to community involvement as we do to how we call on prospective clients. For example, we do not assign a single associate to call on every real estate agent at a firm. Many of our loan officers make individual calls to different real estate agents at the same firm. We’re there all the time. Real estate agents notice that our bank is prominent at their business. The real estate agents who don’t do business with us wonder whether they should follow the lead of their colleagues.
The same effect takes place when a company’s employees together decide to get involved in an organization. Before long, its members realize that this business is interested in what goes on outside corporate headquarters. Word-of-mouth is a powerful thing.
Where can business owners start if they want to tap into networking opportunities outside the office?
Chambers of commerce are great places to start. Generally, these groups arrange mixers, programs and meetings focused on many areas of interest. Another venue to explore is special-interest groups like Young Professionals in Finance or Young Entrepreneurs similar organizations that target a specialty. The key is for business owners to choose groups that interest them. Set goals, define your interests and explore various community options. Then save the date on your calendar and stick to it.
CRAIG JOHNSON is president and CEO of Franklin Bank in Southfield. Reach him at firstname.lastname@example.org or (248)386-9860.
Would you be willing to change the approach you take when building a new facility, starting a pension plan for employees or researching a new product? If so, these efforts may be rewarded come tax time through tax credits direct dollar-for-dollar reductions in tax liability.
“Tax credits are especially important to small and mid-sized businesses,” says Mark Anderson, director, Tax Strategies Group for Kreischer Miller in Horsham, Pa. Some credits are promoted by special interest groups, others are created by the government to address a perceived need, and cover a spectrum of expenses.
Most importantly, these credits can impact a company’s effective tax rate. Business owners may choose to make certain businesses decisions where to build or what type of vehicle to purchase knowing that they will win back some of their investment at year’s end, Anderson says.
Smart Business discussed tax credits with Anderson and how business owners can take advantage of credits designed to pay them back at tax time.
Who can take advantage of tax credits?
There are tax credits that cover most every arena, and as a business owner, you likely do not have time to research this information in detail. What’s more, these credits tend to change over time. Some credits have been allowed to expire by Congress, whereas others have been created or amended to apply to broader or narrower audiences. For example, more business owners can take advantage of today’s research credit since it isn’t strictly reserved for laboratory research. Tax law is complex, and the first step to take advantage of tax credits is to partner with an accountant who knows your business so he or she can suggest appropriate tax credits and determine whether you qualify. There are limitations and business planning issues you’ll want to discuss with your accountant as you explore potential tax credits.
What types of tax credits are most common, and what are some recent credits available to business owners?
Tax credits may be industry specific, or they may apply to a general population of business owners. There are tax credits designed to promote the hiring of targeted employment groups, credits that reward companies for conducting research to create new processes, and credits that encourage small businesses to start pension plans for their employees.
The tax credit most business owners are familiar with is the Research Credit, which is designed to help companies fund the type of long-term development that contributes to a competitive market. Also recently modified is the Empowerment Zone and Renewal Community Employment Credit that promotes development in distressed areas. If your business is profitable and located in an Empowerment Zone, you may be eligible for the tax credit. And if you expand in one of these targeted areas, your employment efforts may be rewarded with a dollar-for-dollar tax credit. Also common are employment tax credits, such as the Work Opportunity Credit and the Welfare to Work Credit. If you hire workers in certain targeted groups, you may earn a credit for a portion of the wages you pay them.
On the small-business front, the government hopes that a Small Employers Pension Plan Startup Costs Credit will inspire owners to provide retirement plans for employees. Meanwhile, to encourage companies to adopt energy efficient practices, there are credits that address non-conventional fuels, efficient energy homes and appliances, alternative motor vehicles and others. The list is quite extensive, and your accountant can provide greater detail if these credits apply to your company. This brings to light the importance of sharing day-to-day business with your accountant.
How should business owners prepare their records to take advantage of tax credits?
Most of the records required for these credits may be compiled at the year’s end. There are instances when tax credits may require certification prior to employment. In most cases, information necessary for supporting eligibility for a tax credit can be ascertained at year’s end when you are preparing your tax return.
Are there limitations to the tax reduction a business owner can realize from tax credits?
First, most tax credits are predicated upon having taxable income and paying income tax. Therefore, if your business experienced a loss and you are not paying tax, you are still eligible for the credit, but you will have to wait until a year when you have taxable income to utilize that credit. That said, you must be sure to retain all documentation and discuss planning avenues with your accountant so you can take advantage of the credit when the time is right (and you’re paying taxes).
Another limitation is the percentage by which you can reduce your tax. You can reduce taxes up to 25 percent of your regular tax in excess of $25,000. So if your taxes are $125,000 and you have $25,000 in credits, you can reduce your net tax to $100,000. For more detailed information, consult your tax professional.
How can a business owner study more about tax credits?
Helpful information is as close by as the Internal Revenue Service (IRS) Web site at www.irs.gov. Search for ‘tax credits,’ and you can order publications on particular credits to learn more.
MARK ANDERSON is director of the Tax Strategies Group for Kreischer Miller in Horsham, Pa. Reach him at (215) 441-4600 or email@example.com.
An owner will get the growth itch at several points during a company’s life cycle. Perhaps an opportunity to win business from a prestigious client depends on whether the company can expand operations. Maybe a new product could capture sales from a completely different market untapped potential or purchasing new equipment could increase productivity, volume and, hopefully, sales. Opening another location might also build the brand.
“Common mistakes are investing in equipment too quickly, misjudging the industry, depending on a concentration of customers and, ultimately, not thinking through the reasons for growth and the resources necessary to get to the next level,” says Kim Snyder, AVP, business banking officer for Fifth Third Bank in Cincinnati. Snyder has advised business owners for 18 years, watching garage start-ups expand to become international businesses.
Smart Business asked Snyder to provide insight on how successful businesses grow.
At what stage in business do many owners decide to grow?
Businesses reach various turning points when they must make a decision to grow to the next level. Common milestones for growing companies are when revenue reaches $1 million, $5 million, $10 million, $15 million and $25 million. At each stage, an owner faces different growth challenges and is probably choosing to grow for a different reason. For example, a company that is about to teeter over the $1 million mark may decide to expand operations to accommodate a promising new client who will push the company to the next level. On the other hand, a company that is in the $25 million range may decide to open a second or third location or decide to begin franchising the business. Every industry and business is different, but ultimately, the reason owners decide to grow is to make more money. Either business has flatlined and the owner wants to change to defy competition, or the company needs a new product, or it must find a new niche to increase sales.
What are the signs that a business is prepared, financially and structurally, to go to the next level?
Usually, the business will have a diversified client base, so it doesn’t have all its eggs in one basket. The business has an excellent reputation in its market and people in the industry know the company. It has strong relationships with vendors, and its balance sheet is healthy. This means that the ratio of assets to liability is in line. A company should not have too much debt compared to the equity in the business if the owner is planning to grow. Most important, the owner should have conversations centered on growth with his or her CPA, attorney and banker. These three advisers should know each other and communicate regularly. The owner should bring together this team on, at least, a semiannual basis to discuss the state of the business. Business owners who are prepared to go to the next level have educated their key advisers about the risks associated with growth and collected their feedback during the process.
Who else should an owner include in initial conversations about growth?
First, most owners have conversations about growth with industry peers. They discuss it at trade shows or association meetings places where they network with like businesses, including the competition. They ask questions like ‘How did you do it?’ Just as important is including family in the decision to grow, and many owners forget to discuss the business at home before making decisions that will change family members’ lives. It takes time to grow a business, and the family has to be on board, too.
What should an owner tackle before considering growth?
First, a work chart must be in place so employees understand their roles in the company’s success. Employee buy-in is critical, so owners must include employees in their growth strategies. Involve managers or create a board and bounce ideas off key supervisors; share financials or explain the market so employees understand why the company must grow to the next level. While doing this, owners must sit down and consider any possible pitfalls. For example, if the business opens another location, will the second store sabotage sales at the first one? Will the owner need to hire another manager? How much capital must be invested to drive growth, and will the investment pay off? These are questions that a CPA can help answer. A banker will serve as a quarterback by bringing in advisers within the financial institution to help secure loans or link owners to other services.
What business characteristics do successful ‘on the grow’ companies share?
Many of these businesses take a careful, conservative approach to growth. They research before they make a move they know their numbers, and they rely on their key advisers. If their banker calls or e-mails to gather financials, they don’t lag or delay in reporting the information.
KIM SNYDER, AVP, is business banking officer for Fifth Third Bank in Cincinnati. Reach her at Kimberly.Snyder@53.com or (513) 686-1303.
Ohio businesses have shouldered a weighty tax burden, including a significant personal property tax. “Ohio has been one of the states with the greatest tax burden,” says Mary Jo Dolson, associate director and head of state and local taxes for SS&G Financial Services, Inc. “Prior to the decision to phase out the personal property tax, other states’ overall tax rates were significantly lower, making it difficult for Ohio to attract business.”
The Commercial Activity Tax (CAT) is leveling the playing field for Ohio businesses. The CAT is a low-rate, broad-based tax on a business’s gross receipts. Rather than just taxing Ohio-based companies, the tax is designed to tax all businesses operating in the state of Ohio whether or not the business was incorporated in Ohio.
Smart Business asked Dolson to discuss the CAT as well as other significant tax changes and their impacts on business.
Can you explain more specifically how the CAT works?
CAT is designed to be a broad-based excise tax. Ohio wants to level the playing field, so rather than taxing only Ohio-based businesses, it is applying a low-rate tax to all companies doing business in the state. For example, a company in California that ships and sells at least $50,000 of product into Ohio is also subject to the CAT. The CAT rate, when completely phased in, will be 0.26 percent on gross receipts of more than $1 million and $150 per year for gross receipts of less than $1 million. The CAT will be fully phased in by April 1, 2009. Companies with annual gross receipts of less than $150,000 are not subject to the tax [bright line nexus test].
What businesses will benefit from the CAT?
CAT is advantageous for businesses that have a significant investment in business personal property amounts in the state and a small amount of Ohio destination sales. Previously, businesses with significant personal property located within the state of Ohio were paying significantly higher taxes than businesses with minimal investments in tangible personal property. Tangible personal property includes all business furniture, fixtures, supplies, equipment and inventory. With the CAT, businesses that suffered under the personal property tax may potentially find relief as that tax is phased out. The CAT is being considered a replacement tax for both the personal property tax and the corporate income tax that is also being phased out. However, while leveling the playing field, some businesses will face a larger tax bill than in the past. In particular, companies that did not have a significant personal property tax liability but have significant sales in Ohio may find their overall Ohio tax liability higher under the CAT than under the current taxing structure in Ohio.
What should business owners understand about the phasing-in process of the CAT?
The CAT will be fully phased in on April 1, 2009. Prior to this date, the phase-in rate changes every April 1. As a result of the phase-in of the full rate, the current CAT rate is effective for the period April 1, 2007, through March 31, 2008. The other important item for taxpayers to realize is that the minimum tax is prepaid every year.
On a different note, how does the Ohio residency law change affect businesses?
Prior to the change, anyone with 120 contact days in Ohio was considered a resident. The state changed this contact period limit to 182 days, which is significant, especially for snowbirds who split time between Ohio and southern states like Florida. A contact period is an overnight stay of any kind in your own home, with family in a hotel, etc. So, if you have fewer than 182 contact periods with Ohio, you are not considered a resident and, therefore, are not subject to Ohio state taxes. As a result of the law change, beginning on April 15, 2008, all nonresidents will have to file a statement with the state of Ohio indicating they had fewer than 182 contact periods, and they have a permanent residence outside the state of Ohio. If an individual has an ownership interest in a pass-through entity, they will still have a filing requirement with the state of Ohio, even if they have less than 182 contact periods with the state.
How will Michigan’s tax law changes affect Ohio businesses?
Many Ohio-based companies conduct business in Michigan. Michigan’s single business tax is basically a value-added tax. It starts with federal taxable income and then requires a taxpayer to make significant adjustments to this income to compute taxable income. The single business tax has always been disliked by taxpayers and, as a result, Michigan residents developed an initiative to repeal the tax effective December 31, 2007. As a result, Michigan's governor and Legislature are scrambling this year to enact a new tax.
The last single business tax return will be for the period ending Dec. 31, 2007. Even if you have a fiscal year end, you must still file a return utilizing the Dec. 31, 2007 date. For example, if your fiscal year ends June 30, 2007, you will need to file a single business tax return for the period ending June 30, 2007 plus file a return for the period July 1, 2007 through Dec. 31, 2007.
While no formal decisions have been made, a modified gross receipt/margin tax of 0.8 percent has been proposed plus a corporate income tax at a rate of 5 percent. The gross receipts/margin tax will be figured on gross receipts minus purchases.
MARY JO DOLSON is an associate director in the tax department at SS&G Financial Services, Inc. Reach her at (330) 668-9696 or via MDolson@SSandG.com.