The high-profile arrest of computer programmer Aaron Swartz for illegally downloading millions of academic journal articles resulted in federal charges against him for violations of the Computer Fraud and Abuse Act (CFAA), which highlighted its use as a broad tool to combat hacking. However, varied interpretations of the CFAA have left businesses guessing when it comes to deciding how best to pursue employees who have used their access to steal and misuse confidential information.
“Currently, the law can be applied differently depending on your location. A decision in the U.S. Circuit Court of Appeals for the 9th Circuit makes it more difficult to use the law against current employees who have used their access to obtain information for the purpose of misuse. In contrast, courts in other parts of the country have adopted relatively broad readings of the statute, making it a more viable tool in those jurisdictions,” says Travis P. Brennan, a litigation attorney with Stradling Yocca Carlson & Rauth.
Smart Business spoke with Brennan about the CFAA and protecting sensitive information.
What is the CFAA and how is it applied by businesses?
The CFAA is a federal, primarily criminal, statute, though it does provide for civil remedies for private plaintiffs when someone accesses a computer without authorization or exceeds authorized access to obtain information. One of the questions presented in several cases involving the statute is: If an individual is authorized to access a company’s computer network, does that person exceed authorized access by obtaining information to use for unauthorized or competitive purposes? Some courts have said yes, which turns the statute into a tool to help police improper use of company information, in addition to a tool to help protect against outside hacking.
What are the benefits and limitations of this act?
Filing a claim under the CFAA gets the case into federal court, which is more often better equipped to handle complex disputes. Plaintiffs also aren’t required to prove the information accessed rises to the level of a trade secret. However, the remedies under the CFAA are limited. A private plaintiff has to show it suffered a loss of more than $5,000, and in most instances the recoverable loss is limited to the cost of investigating the unauthorized computer access and fixing related data disruption. That’s important to think about when considering if this is a tool that would bring a tangible benefit.
How does United States v. Nosal affect the use of the CFAA?
That case makes it more difficult to use the CFAA against current employees. The 9th Circuit affirmed a narrower interpretation, in April 2012, when it dismissed criminal counts against employees who accessed information through company-issued passwords while still employed. The court reasoned that the phrase ‘exceeds authorized access’ is limited to violations of access, not restrictions on use.
Other counts in the case dealt with access by outsiders using stolen passwords to obtain information. Some of those counts proceeded to trial and resulted in a recent conviction.
What other tools can companies use to protect their sensitive information?
State law governs the protection of trade secrets and other sensitive information. Most states have adopted some form of the Uniform Trade Secrets Act through which companies can get damages and other relief if they can show information taken contained trade secrets.
Ultimately, it behooves companies to limit or segregate access to sensitive information and have employees sign clear, written policies. If the agreements are violated, there are contractual remedies, as long as you can show harm from the breach.
While the CFAA is worth keeping an eye on, particularly in light of divergent court rulings, in instances where companies have information misappropriated, the first place to look for a remedy is through state law, such as those that govern trade secrets or the relationship between employers and employees.
Travis P. Brennan is a litigation attorney at Stradling Yocca Carlson & Rauth. Reach him at (949) 725-4271 or firstname.lastname@example.org.
Social media: Learn more about Travis P. Brennan.
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The federal financial institution regulators want to avoid a repeat of risky lending practices that contributed to the recent recession. New guidance sets higher standards for borrowers, including private equity firms and companies, seeking leveraged loans.
“This is a proactive move on the part of bank regulators to avoid some of the underwriting pitfalls that institutions encountered prior to the recessionary conditions we had going into 2007 and 2008,” says Dickie Heathcott, a partner at Crowe Horwath LLP.
Smart Business spoke to Heathcott about the guidance — which had a compliance date of May 21 — and what it means for borrowers and financial institutions.
What is the guidance, and do financial institutions have to adhere to its provisions?
Although a guidance isn’t necessarily a rule, it effectively becomes one in the field. Banks have to follow it because that’s what regulators are going to use when they examine the bank.
The guidance, issued by the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC), covers transactions with borrowers who have a degree of financial leverage that significantly exceeds industry norms.
It focuses on sound, levered lending activities, including:
• Underwriting considerations.
• Assessing and documenting enterprise value.
• Risk management expectations for credits awaiting distribution.
• Stress-testing expectations.
• Pipeline portfolio management.
• Risk management expectations for exposures held by the institution.
The guidance applies to all financial institutions supervised by the agencies, but significant impacts are not expected for community banks because few have substantial involvement in leveraged lending.
Are there certain industries where leveraged lending is of particular concern?
Construction and development lending is being looked at very closely because of what’s happened in recent years. This type of lending is generally considered commercial real estate lending.
The OCC and the Fed released a white paper in April with findings from the regulators’ study of bank performance in the context of the 2006 interagency guidance, “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices.” That guidance established supervisory criteria for banks that exceeded 100 percent of capital in construction lending and 300 percent of capital in total commercial real estate lending.
According to the paper:
• 13 percent of banks that exceeded the 100 percent construction-lending criterion failed during the economic downturn from 2008 to 2011.
• 23 percent of banks that exceeded both the construction and commercial real estate criteria failed from 2008 to 2011, compared to 0.5 percent of banks that exceeded neither criteria.
• An estimated 80 percent of losses in the FDIC fund from 2007 to 2011 were attributed to banks exceeding the 100 percent construction-lending criterion.
What does the guidance mean for businesses seeking loans?
Business owners can look for financial institutions to be very cautious in their underwriting. They will not have access to credit like they did in 2006, even though it seems that the economy has stabilized.
Regulators are being proactive; they can see that credit underwriting is loosening up. Quality deals are being priced so thin that financial institutions are looking at areas where they can make more profit, which, of course, brings additional risk.
From a financial institution standpoint, it’s becoming a very competitive environment again. That means pricing more thinly or a loosening of underwriting standards. Institutions may be willing to finance certain types of loans they would have pulled the reins in on completely three or four years ago. The guidance is about ensuring that to the extent institutions enter into leveraged financing again, they do so in a more prudent manner.
Dickie Heathcott is a partner at Crowe Horwath LLP. Reach him at (214) 777-5254 or email@example.com.
Website: For more information on regulatory guidance for financial institutions, visit Crowe’s Regulatory Reform Competency Center.
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Companies looking to grow and needing an infusion of capital have several options, which come with various costs and requirements.
“We look at capital on a sort of continuum, with equity perhaps being the most expensive form primarily because of its diluting impact on ownership of the company. At the other end, there’s self-generated working capital derived from profitable operations,” says Paul Gibson, senior vice president and Eastern Region market manager at Bridge Bank. “In between there are a variety of financing options to assist a growing company.”
Smart Business spoke with Gibson about where small businesses fit along the continuum and options they have available to secure working capital.
What is the least expensive option to get working capital?
There is no cheaper form of capital than self-generated profits. Apple, Inc. is an example of a company that continues to be profitable and has a huge war chest of cash available for any need. But most small and growing businesses are not capitalized like Apple and look to banks to assist in the form of senior debt. This financing is usually based on a bank’s prime lending rate as its index and has a modest margin over, or under, this index. These loans are structured, including a senior secured lien on all assets through a Uniform Commercial Code filing and frequently have financial and/or performance loan covenants. There may be a borrowing formula and an advance rate against receivables as well. There is a direct relationship between pricing and structure, as all pricing is ultimately dictated by risk. When a business can’t adhere to a traditional covenant structure, the looser structure usually translates to increased pricing.
It’s best to determine working capital and growth capital needs first when exploring financing solutions. Next, identify the various capital sources starting at the least expensive and work down until sufficient working capital is obtained. Many times it’s possible to meet all needs with senior debt, but there is a limit to how much is available and that is largely determined by the profile and complexion of the company — overall assets, liabilities, cash flow, liquidity. All of these factors help identify risk.
Many growing businesses find it difficult to obtain traditional senior debt financing because they’re focused on growth at the expense of profitability. Some banks specialize in assisting companies in this dilemma, forging strong relationships long before the mega-banks will.
What’s next if companies can’t obtain sufficient senior debt?
Another potential source of working capital is subordinated debt, also known as mezzanine debt or venture debt. Subordinated lenders do not recover their first dollar in a liquidation scenario until the senior lender has collected its last dollar. This type of financing can take many forms.
With subordinated debt there is generally less structure than with senior debt. The reduced or even lack of covenants and junior lien position contribute to increased risk. Because there’s greater risk, subordinated debt also has a higher price.
Some banks offer these instruments, but more often commercial finance companies, hedge funds and other non-bank lenders offer them. The higher rates they charge are reflective of the higher cost of their capital, usually in investor funds or a bank line.
Why is cheaper not always better?
The true cost of capital shouldn’t only be measured in simple dollars or as the spread of basis points in an interest rate. The least expensive capital isn’t always the best capital because there are more factors than just price, such as opportunity costs, ease of use, flexibility of structure and other intangible benefits. For example, a low-interest loan with a covenant package that’s too restrictive can potentially result in a business disruption when a covenant violation occurs. Balancing pricing and structure relative to individual needs is critical when evaluating multiple loan options.
Most people assume that competition is the primary driver of pricing, but it’s not. Risk determines pricing — whether it’s equity or debt — and competition further refines it. Companies should understand their risk profile. It’s a powerful tool in helping to achieve the best outcome for a business’s financing needs.
Paul Gibson is a senior vice president, Eastern Region market manager, at Bridge Bank. Reach him at (703) 481-1705 or firstname.lastname@example.org.
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Trademark, copyright and intellectual property (IP) laws can vary greatly in foreign markets, so it’s vital to seek local legal expertise before doing business internationally, says Michael J. Ioannou, a partner at Ropers Majeski Kohn & Bentley.
“Local law firms know the system, including the politicians and judges,” Ioannou says. “It’s no different than doing business here. If a Florida company has a problem in San Jose, they could send someone, but they would most likely hire an attorney here. It makes sense to have someone like me who has practiced law here for 32 years and worked in the local courts.”
Smart Business spoke with Ioannou about how companies can avoid legal problems when expanding into foreign markets.
What are some important issues to consider before entering a foreign market?
From a general standpoint, you need to understand the business environment. You can accomplish that in India, for example, through the National U.S. India Chamber of Commerce, Confederation of Indian Industry or the National Association of Software and Services Companies, which caters to high-tech companies.
You also should be checking local laws with the help of a local lawyer in the country or near where you want to do business. So, if you’re going to mainland China, there are good attorneys in Hong Kong that can advise you or connect you to counsel in mainland China that they know well.
What mistakes do companies make when doing business overseas?
They might rush into a market without checking other companies’ rights and get sued for infringing IP rights in the foreign country. Apple thought it had acquired rights to the iPad trademark in China from a Taiwanese company, but courts said a subsidiary of that company still owned the rights in China. Apple paid $60 million in a court-mediated settlement. So one route is to buy the trademark, but you still have to ensure that what you’re buying is legitimate.
It’s the same situation with foreign companies coming into the U.S. A client with a chain of Indian restaurants wanted to expand here and found a restaurant on the East Coast that used the name in interstate commerce first — that’s the test for trademarks, first use — but the restaurant didn’t have the trademark registered. Instead of spending money to argue in federal court that the restaurant didn’t have first-time use, the client bought the restaurant and trademark. It was cheaper than paying legal fees in a later dispute over the name.
How can businesses protect themselves from legal problems?
When entering a country, you want to secure trademark rights for your product there. If you can, obtain patent protection, register and apply for a patent in China or India, for example. A patent in the U.S. is not enforceable in India or China. You can stop someone from shipping goods into the U.S. that infringe on a patent here, but you can’t stop a sale occurring in India or China based on a U.S. patent.
Pharmaceutical companies are having problems getting inventions patented in India because there’s a huge market there for generic drugs. India doesn’t even recognize software patents. One client in India was threatened by a U.S. company for IT support services offered here. It was a U.S. patent, so as long as the function that was within the patent claim was being done in India only, the U.S. company couldn’t claim infringement.
What can companies do to fight patent infringement?
In India, for example, you could file a lawsuit in civil court, but that could take 15 years to reach a resolution. However, the entity that’s infringing laws in India may be doing business in the U.S., which would provide another angle to file a lawsuit here for unfair competition. You also may be able to intercept their goods from coming into this country, depending on the nature of the IP rights being infringed.
But if you have a counterfeiter in Shanghai that’s only selling goods there, you have to use the local courts. Things are getting better in terms of that kind of infringement — that’s why you’re seeing a lot more activity to enforce rights in China, for example. Just be cognizant that you can’t expect a perfect day in court as a foreign company coming into these jurisdictions.
Michael J. Ioannou is a partner at Ropers Majeski Kohn & Bentley. Reach him at (408) 287-6262 or email@example.com.
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
There’s a popular metaphor referred to as “the boiled frog.” Simply put, it says if you drop a frog in boiling water it will quickly try to escape. But if you place a frog in tepid water that’s slowly heated to a boil, the frog will “unresistingly allow itself to be boiled to death.”
With the 2013 tax changes, this metaphor may apply to taxpayers, married and filing jointly, with wages of taxable income of $223,000 to $450,000, says Geoffrey M. Zimmerman, CFP®, Senior Client Advisor at Mosaic Financial Partners, Inc. These households could see their federal marginal tax rate go from 28 to 45.5 percent.
“Executives in this income range may soon find that they are in hot water with the heat on as the marginal tax rates ramp up fairly quickly,” Zimmerman says.
Smart Business spoke with Zimmerman about key tax changes as well as possible planning and investment strategies.
Why are $223,000 to $450,000 income earners unaware of the danger?
The increases come from moving up tax brackets, new Medicare taxes of 0.9 percent on payroll and 3.8 percent on unearned income, and the phase-out of itemized deductions. People earning more than $450,000 have a good idea of what’s coming, but others aren’t as prepared for 1 to 2 percent increases that can add up. For example, if each spouse earns less than $200,000, their employers aren’t required to withhold additional taxes from their paychecks for the 0.9 percent increase in Medicare. But, if their combined income pushes them over the $250,000 threshold in household wages, they may be surprised by an unexpected tax bill.
Additionally, if you live in a state like California where state income taxes have gone up, combined federal and state income tax rates can exceed 50 percent, with capital gains rates reaching 33 percent or more.
What should these taxpayers be doing?
First and foremost, don’t let the tax tail wag the dog. Tax strategies that look great in a silo may actually be detrimental to the big picture. If your strategy puts you in a concentrated position or triggers undue risk, then a sudden bad market movement can be worse than paying the taxes.
This is an opportunity for people to update their financial plan and review how the tax changes affect their goals. Make sure your advisers are talking with one another and coordinating their work and advice.
How can some key planning strategies mitigate these increases?
Look for opportunities related to the timing of cash flows. If you have a big income year where up to 80 percent of your itemized deductions might be lost, defer some itemized deductions to the following year where the income might be lower. In a low income year, look at doing IRA to Roth conversions, realizing capital gains and/or accelerating income.
Take the initiative to engage in tax loss harvesting in taxable accounts, which means you sell a security, harvest the loss and then use that loss to offset a gain in either the current year or carry forward for use in future years. This can be attractive, particularly for investing styles that offer similar but not identical alternatives. One example might be to sell an S&P 500-index fund and reinvesting with a Russell 1000-index exchange traded fund to capture the loss while remaining invested.
Review the use of asset location strategies to improve tax efficiency. Strategically place securities that produce ordinary income or that generally don’t receive favorable tax treatment into a tax-deferred account, while putting tax-efficient investments that generate long-term capital gains or qualified dividends in taxable accounts.
Municipal bonds/bond funds in taxable accounts now may be more attractive, and you also can review opportunities to take advantage of ‘above the bar’ deductions, such as contributions to qualified plans like your pension, 401(k), etc. For senior executives, contribution to nonqualified deferred compensation arrangements may be more attractive, particularly if a transition, such as retirement, is on the horizon.
With the help of good advisers who understand these moving parts and how they fit together, executives can use these strategies and others to make better decisions to move toward the things that are really important to them.
Geoffrey M. Zimmerman, CFP®, is a senior client advisor at Mosaic Financial Partners, Inc. Reach him at (415) 788-1952 or Geoff@MosaicFP.com.
Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.
Service organizations are trusted with some of their customers’ most sensitive information. In order to thrive, these organizations need their stakeholders’ full faith that their internal controls safeguard both financial and nonfinancial information, and are designed and operating effectively. How can service organizations demonstrate that their control systems are protecting their customers? According to the American Institute of Certified Public Accountants (AICPA), Service Organization Control (SOC) reports are the answer.
Smart Business spoke with Jeff Stark, audit partner at Sensiba San Filippo LLP, about SOC reporting and how it helps service organizations provide the broad spectrum of assurance their stakeholders require.
What are SOC reports?
SOC reports are standards created by the AICPA to allow for reporting on controls at service organizations. There are three types of SOC reports: SOC 1, SOC 2 and SOC 3. Together, they both replace and expand on Statements on Auditing Standards (SAS) 70 reports, giving service organizations the tools they need to provide the assurance their stakeholders require.
Though not widely known, SOC reports are becoming essential to the ongoing growth of the technology service sector as more businesses are outsourcing tasks and functions to outside service providers. Since the risk of the service provider becomes the risk of their stakeholders and customers, SOC reports provide much needed assurance, empowering service organizations to gain trust, while helping to protect their stakeholders from outside risk.
Why was SAS 70 replaced?
Since 1992, SAS 70 has provided service organizations with a vehicle to disclose control objectives and activities related to financial reporting. As the market changed, service organizations had a growing need to report on many nonfinancial control objectives. SAS 70, with its limited intended focus, was too often being used for purposes outside of financial controls.
In order to solve this problem, the AICPA issued Statements on Standards for Attestation Engagements (SSAE) 16, which replaced audit standards with attestation standards for internal controls over financial reporting. SSAE 16 standards became the basis for SOC 1 reporting, replacing SAS 70.
Additionally, the AICPA issued guidance related to attestation on controls relevant to the Trust Service Principles and Criteria including security, availability, processing integrity, confidentiality and privacy. This guidance became the basis for SOC 2 reporting, bridging the gap between market need for broad assurance reporting and the previously narrow financial focus of SAS 70.
How can an organization know whether a SOC 1 or SOC 2 report is right for them?
Whether an organization should obtain a SOC 1 or SOC 2 report depends entirely on the controls in question. Controls relating to information that could affect financial statements are covered by SOC 1 reports. SOC 2 covers controls related to nonfinancial information.
Payroll processors, employee benefit plan managers and banks commonly use SOC 1 reports. Data centers, Software as a Service providers and companies subject to industry-specific regulatory standards frequently benefit from SOC 2 reports.
Why should companies consider SOC reporting?
Service organizations that want to remain competitive need internal control attestation in a variety of areas. Many companies will not even consider working with an organization without assurance that relevant controls are well designed and operating effectively. In a highly risk-averse business climate, organizations can demonstrate effective controls with the appropriate SOC report.
Jeff Stark is an audit partner at Sensiba San Filippo LLP. Reach him at (480) 286-7780 or firstname.lastname@example.org.
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One law small businesses frequently underestimate is the misclassification of employees as being exempt from Fair Labor Standards Act (FLSA) overtime rules, an oversight that could cost millions in employee misclassification lawsuits.
Minimum wage rates also pose problems because there may be different standards at federal, state and local levels.
“Companies need to know the basics of the FLSA in order to determine if they’re in compliance,” says Tracy Baskin, payroll compliance analyst in Wage and Hour Compliance at TriNet, Inc.
Smart Business spoke with Baskin about FLSA issues and how to stay compliant.
What are typical FLSA compliance issues?
Many businesses have problems keeping in step with minimum wage rates. An employee, having worked a year or so at a given rate of pay, may be due retroactive payments because of an increase in state or local minimum wage rates. Employees paid at the lower rate of the previous calendar year could file a complaint with the Department of Labor (DOL), which could lead to an audit.
It can be even more of a problem with exempt employees — many companies aren’t even aware there is a minimum salary basis. Exempt employees paid at a rate less than minimum wage would need to be increased to at least $16 an hour to be in compliance with California’s requirement for executive, administrative and professional (exempt) employees. For example, computer professionals are employees who typically write or modify programming have their own minimum, which is $39.90 per hour.
The most impactful item is overtime compensation. Companies are not accurately calculating overtime pay because they aren’t including additional earnings such as bonuses or commissions, which need to be included to comply with the FLSA.
How do you determine if an employee should be classified as exempt and nonexempt?
The FLSA provides general guidelines. You’ll need to concentrate first on the employee’s primary duties. Are they managers who customarily and regularly direct the work of two or more employees? Do they set company policies, or authorize, suggest or recommend the hiring and firing of others?
Employees who have advanced knowledge in a field of science, whether college or beyond, may qualify for certain professional exemptions. However, college graduates are not necessarily exempt. In California, the professional exemption is reserved for those licensed or certified by the state, generally in the fields of law, medicine, dentistry, architecture, engineering, teaching and accounting. Typically, exempt employees must also be paid at least $455 per week on a salary or fee basis.
Nonexempt employees have to be paid a certain amount per hour. If they’re tipped, they must earn enough in tips to bring them up to minimum wage. They’re the average employee and are paid time and a half if they work in excess of 40 hours in a workweek.
While most exempt employees are required to receive salaries, not all salaried workers are necessarily exempt. As a rule of thumb, you can say that an employee whose duties include supervising two or more employees; authority to hire, fire and promote; and giving job assignments to others are usually exempt. But it’s not the job title that matters, it’s the actual job duties that determine whether an employee is exempt or not.
What are the penalties for noncompliance?
Penalties vary depending on what the employee has presented to the DOL, whether it’s an overtime violation, he or she wasn’t paid the minimum wage or a simple miscalculation. If the DOL considers the violation to be willful because a business has had this offense before and not corrected it, fines can be doubled or tripled.
Our recommendation is to pay employees what they are due. If you don’t, you should expect someone will eventually reach out to the DOL, which will open the company up to a much larger audit. The DOL will examine the status of all employees and ask for the documentation to see the criteria the business used to determine their status as exempt or nonexempt. So it’s best for everyone to make sure employees are classified properly and paid what they are owed.
Tracy Baskin is a payroll compliance analyst, Wage and Hour Compliance, at TriNet, Inc. Reach her at email@example.com
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It’s not easy to keep a company going for 100 years — there are going to be a lot of challenges to address along the way.
“There has to be a willingness to change and take chances,” says Roger Weninger, Southern California regional managing partner at Moss Adams LLP. “When I think of longevity, I think of growth. Not purely as it relates to size but also ingenuity, the willingness to change and remain relevant. The company that can continue doing the same thing and remain successful is the exception.”
Smart Business spoke with Weninger about common characteristics of companies that stand the test of time.
What are the keys to longevity for companies?
It’s very important to develop leaders, plural. Companies, no matter how successful they are, get to a point where they need to provide opportunities to others. That can be hard for an individual in charge to understand — the concept that he or she can do less and it will result in more. By allowing others to make decisions and feel a part of the success of the organization, you create a strong culture of growth and change. People thrive in these settings, and so will the business.
You also need to have leaders and decision-makers at all levels. To think that leadership takes place only at the highest levels within any organization is a mistake. Instill a culture of risk taking and empowerment where people at all levels feel they can make a difference and aren’t afraid they’ll be punished for making a mistake. You’ll be amazed at the ideas and the level of ownership people will take when they’re asked, and even expected, to contribute to organizational change and success.
Every organization should have strategic plans and goals that have application to every employee. In addition, each employee should know what contribution he or she can make to reach those goals.
How can a company stay relevant in changing times?
It sounds trite, but it goes back to your mission and focus — self-awareness of your strengths and weaknesses, as well as how you fit into the needs of your clients and customers. Creating this awareness within your organization will provide a clear decision-making and prioritization path for your people. If there’s doubt as to what your value proposition is, or what it isn’t, you can waste a lot of time and send confusing messages to your people and to existing and prospective clients. Being the best at something is always a good goal.
What poses the biggest threat to longevity?
Complacency. When things are going well, there’s a tendency to become satisfied and convince yourself that things will never change. The willingness to listen and actually hear what’s being said, rather than simply assuming you already have all the answers, is crucial. Again, you must have multiple decision-makers and leaders, and this highlights the need for ongoing succession analysis. Succession isn’t something that should be dusted off and practiced when the owner is ready to retire.
People want to see the opportunity to grow into leadership positions from the time they walk in the door. That doesn’t mean they want to take over the top spot in the organization within their first year of employment, but it does mean they want to feel relevant, appreciated and impactful. If they have to wait for someone to die or move on, they may not stick around very long. New leaders bring different ideas and knowledge, and not having that will restrict your ability to grow and sustain the organization through good times and bad.
There’s no such thing as staying flat — you’re either on an incline or decline. You have to always be working to get better. If you’re willing to listen, your people and your clients will tell you how.
Roger Weninger is the Southern California regional managing partner at Moss Adams LLP. Reach him at (949) 221-4047 or firstname.lastname@example.org.
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Over the past few years, the term “managed services” has become more prevalent in the IT services community. It’s how many companies these days are consuming IT services, especially companies without the need or the budget for a full-time IT department. In its most basic sense, managed service delivery is the utilization of remote tools in which an IT service company can remotely manage and support a client’s IT environment.
These tools allow the remote monitoring, patching, upgrading and support of a client’s servers, workstations, and network devices. These services are usually priced on a “per device or user/per month” model, with the idea that a network can be maintained for a “fixed fee” per month.
“There are distinct advantages to this IT service delivery model, both to the IT company as well as to the client,” says Zack Schuler, founder and CEO of Cal Net Technology Group. “First, from the IT company’s perspective, they can automate most of the routine tasks that are associated with maintaining a computing environment. These remote management tools have many automated processes that can be turned on, thus saving the IT company time and money.”
Smart Business spoke to Schuler about how to get the most from managed IT services.
How do businesses benefit from managed services?
First, this service delivery model helps clients manage their IT budgets a bit more closely, as many of the services are delivered on a fixed fee. This adds predictability to the ongoing cost of IT. Next, if the IT company has perfected its own processes around these tools, the ‘human error’ factor of manual maintenance goes away.
With all of the benefits to managed services, if a company looks at it as its only answer to IT services, it is doing itself a huge disservice. While managed services might be the answer to basic maintenance of the system, it neglects helping companies to truly drive value out of their IT resources. Managed services, when pitched as the solution, put consumers in a highly commoditized mindset. IT services should not be viewed as commodity services since, if delivered correctly, they can add serious bottom line advantages to the business.
How can businesses ensure these services are effective?
A less known term in the industry is ‘blended services.’ Blended services are a strategic combination of managed services and professional services that are packaged together to deliver the ultimate amount of value to the customer. This consists of looking hard at those services that can take advantage of remote tool sets and automation, and subsequently injecting intellectual capital into every other facet of IT that cannot be automated.
Part of blended services consist of pre-scheduled on-site consulting time. The face-to-face interaction that occurs during this time is invaluable to the business. It is during this time that questions like, ‘What is the best way to do such and such on my computer?’ or ‘What application can solve this business process issue that we have?’ are more likely to get answered. It is this face-to-face interaction that leads to new efficiencies being discovered, and people at the company ultimately being more productive.
If services are delivered 100 percent remotely, the chances are slim that a person will pick up the phone and call a relative stranger to ask about the best way to do something.
How can executives be sure they derive value from managed services?
They need to see the value in IT and its effectiveness as a bottom line tool. Too many executives at companies have traditionally been ‘technophobes’ and view IT strictly as overhead, a necessary evil, as opposed to a bottom-line boosting critical part of the business. In short, when consuming IT services, make sure that you are as equally engaged as your service provider.
Make sure that you see past the commoditized services being sold to you, and that you ask your IT company to do more and to prove its real value. Assuming you are paired up with the right organization, they will help you take your company to the next level. This might cost more in the very short run, but in the not too distant future, the ROI will be there.
Zack Schuler is the founder and CEO of Cal Net Technology Group. Reach him at email@example.com.
Insights Technology is brought to you by Cal Net Technology Group
Cash flow management is important for business owners who need to know where they stand on a daily, weekly, and monthly basis in order to pay bills and employees on time. If, for example, a business owner unexpectedly discovers he or she cannot purchase inventory, it can shut down his or her operation, says John West, CPA, CGMA, director of finance at SS&G.
Cash flow management is a far different world for larger corporations, he says, as they tend to closely monitor cash flow and run their organizations as lean as possible — something smaller companies could learn from.
“To some degree, you’re just not exposed to it when you are a smaller company — you’re not thinking in that mindset.”
Smart Business spoke with West about how to handle cash flow management.
How does cash flow forecasting act as a warning system?
Many organizations consider cash flow on a weekly basis — looking at payables, accounts receivable, inventory, payroll, etc. By monitoring on a weekly or at least a monthly basis, businesses can foresee and fund potential shortfalls and not go out of business. For example, if they know they’re going to fall short in six months, they can obtain a line of credit or fund fixed assets.
Where do businesses get into trouble with cash flow and cash flow projections?
Fundamentally, it’s misunderstanding how cash flow and cash flow forecasting works in their operation. Problems also come from not realizing how business seasonality impacts cash flow. When receivables and inventory grow, cash is needed to cover them.
It’s important to do projections one to two years out. Many organizations don’t go out that far; they just do it on a quarterly basis. That’s more just looking at the current status as opposed to a projection.
How can companies guard against overly optimistic projections?
Payables and payroll can be fairly predictable, other than inventory fluctuations, so finance can do a great job at monitoring those. Overly optimistic projections usually come down to an overly optimistic sales forecast, so have finance take a hard look at changes, trends and new customers.
How should cash flow and shortfalls be managed?
Organizations should obtain a line of credit, even if they don’t need one. Once they run into trouble, lenders are far less likely to lend. There’s no interest charge to have available credit sitting there.
Another strategy is using a corporate credit card through the payables department. Wait 30 days to make a payment, and then put it on the card to get up to another 30 days.
Financing fixed assets is something a lot of organizations don’t do, but rates are great right now. Banks are very willing to give three- or five-year loans on fixed assets, which can help with a shortfall for the year.
It’s key for businesses to focus on collections by contacting their customer base and sending out reminder letters. Receivables shouldn’t go past their terms. If they are causing delays it could cause a cash shortfall.
Pushing out payables and extending terms is another more recent cash management trend. Some organizations send out vendor letters, stating they are pushing their payment time back X number of days. Otherwise, it’s something that could be considered when entering into a vendor agreement. Also, weigh vendor discounts against payment terms to see if the value is offset by potential shortfalls.
Finally, no one wants to say it, but it might be necessary to eliminate expenses, such as payroll, inventory and even whole product lines.
If business owners aren’t ‘numbers people,’ how should they tackle cash flow?
Businesses should calculate their projections to understand their current position, even if it takes outside accounting help. However, cash flow projections can actually be easier in small and midsize businesses because owners are more involved day to day.
If there’s a shortfall, accept it and move on. It’s hard to face the fact that there’s trouble, but it already exists. Now it’s just a matter of putting it on paper and dealing with it.
John West, CPA, CGMA is director of finance at SS&G. Reach him at (440) 248-8787 or JWest@SSandG.com.
Website: Meet SS&G’s new CEO, Bob Littman, at www.SSandG.com.
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