Arthur G. Sharp
After long days in the lab and countless sleepless nights, you have developed a product that can have a real impact.
Companies are expressing interest in your discovery, which creates new problems and questions about how to account for research and development expenses, whether R&D expenditures create tax credits to offset future taxable income (they can) or how the R&D expenses qualify for tax credits (they will if certain requirements are met).
As Mark Werling of Burr, Pilger & Mayer LLP notes, “As these initiatives progress, more eyes will be examining your company’s financial statements and looking to ensure your compliance with generally accepted accounting guidance to help judge their ultimate investment decision.”
Smart Business spoke to Werling to learn more about how R&D is defined, R&D credits, their treatment by the IRS regarding income, how to facilitate the compliance process and when to consult with qualified R&D accounting specialists.
How is R&D defined?
SFAS 2, Accounting for Research and Development Costs, defines the research component of R&D as a ‘planned search or critical investigation aimed at discovery of new knowledge’ that could result in a new discovery. The development component of R&D requires translating ‘research findings or other knowledge into a plan or design’ for a new discovery. This can include conceptual formulation, design, construction of prototypes and operation of pilot plant. Routine alterations to existing products, processes or operations are excluded from this definition. Materials, equipment and facilities used in R&D activities are expensed as incurred, including depreciation. R&D costs may include salaries and other personnel costs, contract services and a reasonable allocation of indirect corporate costs, unless they are not related clearly to R&D activities.
How does the treatment of R&D change through a product’s development?
FASB defines three unique stages of development in determining the accounting treatment of R&D costs. Stage one coincides with the beginning of a product’s development cycle and ends when technological feasibility is established, either upon the completion of a detailed program design or of a working prototype. Until that point, all costs related to R&D expenditures are expensed as incurred. Once technological feasibility has been achieved, the product moves into stage two and all R&D costs are capitalized and amortized according to its useful life or as a percentage of expected future revenue. Once the product is available for general release to customers, it enters stage three. All subsequent outlays are again expensed as they are incurred. Recognizing these three phases and the inflection points that separate them is key in accounting properly for R&D treatment.
What do these accounting treatments mean for a company?
Applying this methodology increases net income by capitalizing the costs during the development of the full product roll-out period and then spreading the expenses into future periods. It also prevents companies from artificially ‘propping up’ their net income as they pursue technological feasibility by moving too much expense off the income statement. Until a company has something that works in prototype form, everything gets expensed.
From a cash flow perspective, there is little change to the financial statements, as there is still a real capital outflow regardless of whether it is capitalized or expensed. In an acquisition scenario, a misrecording of R&D expenses could have a significant impact on the purchase price of a business. If a portion of a purchased company’s value is represented by R&D assets that have no alternative future use, GAAP requires that this part of the acquisition price be written off. This could greatly impact the price that the company is acquired for. Because the SEC has made it a priority to minimize opportunities to manipulate earnings, proper valuation of in-process R&D for acquired enterprises is critical.
When are outlays considered R&D for federal tax purposes?
Outlays can be classified as R&D for federal tax purposes if they are intended to discover information that would eliminate uncertainty regarding the development or improvement of a product. As specified in Treasury Regulations section 1.174-2(a), this can include costs to create a pilot model, process, formula, invention, technique, patent, or similar property that contributes toward the development of a product. Any R&D costs should be clearly intended to establish the capability or method for developing, improving or designing the property.
Do R&D credits offset future taxable income?
If properly utilized, they will provide a tax credit of 20 percent of certain increases in qualified research expenses with a few additional caveats. Alternatively, the taxpayer may elect to take the full R&D deduction but reduce the credit by 35 percent (the maximum corporate tax rate). There are other nuances that may require additional examination, but generally, this is how these transactions are approached. These nuances and the requirements that the research expenditures must meet to qualify for tax credits can be explained by qualified R&D accounting professionals.
MARK WERLING is a manager with Burr, Pilger & Mayer. Reach him at (415) 421-5757 or email@example.com.
You’ve heard the buzzwords during this presidential campaign year — universal health care, individual mandate, the uninsured, the underinsured, and so on. As candidates draw up their plans and big businesses lobby to lower their costs, small business owners are struggling to keep their employees insured and their doors open.
“Small businesses have seen a staggering 70 percent cost increase in health insurance in the last five years, making it unaffordable for more than half of small businesses with 10 or fewer employees,” says Steve Millard, president and executive director of the Council of Smaller Enterprises (COSE).
“The cost of health insurance is threatening the very existence of small business,” adds Millard. “In an economy that depends on small business to create all new jobs, the current state is simply not sustainable.”
But, there is hope — scenario planning, a new approach that could serve as the launch pad for a more informed national debate.
Smart Business learned more from Millard about COSE’s health care scenario planning effort and the changes that must happen regarding health care and small businesses.
In a nutshell, what led us to the current state of the health care system?
For the last 60 years, the system has developed expectations of unlimited care and boutique services primarily on the tab of employers or government. Putting people in charge of making decisions for which they reap benefits or accept consequences is key to reducing costs — and long overdue. After all, as consumers, we don’t let other people make decisions for us about buying a house or a car. Why should we let someone else make a decision regarding our health and our health care?
Today, the health care system is fundamentally broken, and we’ve concluded that no less than a complete overhaul will suffice.
What specific changes to the health care system should be pushed?
We’ve concluded that change must occur in two major areas no matter what political party wins the presidency or whose plan takes center stage. The first is the health care marketplace itself. We need vast improvements in the way the health care marketplace operates; for example, the development of an IT infrastructure that can make information about provider quality readily available to consumers. Availability and transparency of data can lead to improvement in care, reduction of waste and inefficiencies, improved prescription accuracy and service/cost transparency to consumers.
Secondly, the consumer mindset must change. We must take charge of our own health, starting with avoiding to the extent possible the three biggest cost drivers — obesity, smoking and depression. We must also take an active role in making the system work through responsible use of health care. By making better decisions, such as not using emergency rooms for primary care and avoiding lifestyle prescription drugs, we as consumers can make a significant impact.
What is ‘scenario planning’?
Scenario planning is the process of bringing together experts and stake-holders, identifying large uncertainties, and envisioning potential scenarios or futures that can play out down the road.
Rather than advocating for a specific solution, we engaged some of the best minds in the country and took this new approach to look at the issue in a comprehensive way. Our experts included representatives from national and regional organizations like The Leapfrog Group, The Cleveland Clinic, University Hospitals, Michigan and California small business groups, big insurers, academics, big businesses, former government policy makers and small business owners. Our goal is to envision potential futures in health care in 2015.
What conclusions or solutions have come from this process?
This process did not result in any one specific solution — rather, it provides a glimpse at the various issues that must be considered in any effort to reform the health care system, and one thing is clear: comprehensive reform of the U.S. health care system is no longer optional. The hemorrhaging has gone on far too long for an incremental, or band-aid, approach to be sufficient or acceptable.
STEVE MILLARD is the president and executive director of the Council of Smaller Enterprises (COSE), one of Ohio’s largest small business support organizations. Comprised of more than 17,000 members, COSE strives to help small businesses grow and maintain their independence. COSE has a long history of fighting for the rights of all small business owners, whether it’s through group purchasing programs for health care, workers’ compensation or energy, advocating for specific changes in legislation or regulation to benefit small business, or providing a forum and resource for small businesses to connect with and learn from each other.
In the past, a company with six quarters of profitability and $2 million in profits would be a good IPO candidate. Today, the high costs associated with Sarbanes-Oxley compliance sometimes estimated at as much as $2 million annually have contributed to a change in companies’ exit strategies from IPOs to acquisition. There is some evidence that venture capitalists are shying away from IPOs because SOX compliance costs make their short-term ROIs less attractive than they would have been 15 to 20 years ago.
There are ways companies can reduce their compliance costs. One of the best ways is to transfer their focus on manual accounting controls to automated controls. Doing so can enhance their SOX compliance, reduce the time and money they spend on achieving it, and increase their value to investors.
Smart Business spoke with Roy Maynard of Burr, Pilger & Mayer LLP to learn how those benefits can be achieved.
How can companies save time and money by changing their focus on controls?
One area is in the risk assessment phase. Remember, SOX is focused entirely on the financial statements. Companies are still relying on manual, rather than automated, controls. The automated controls within the accounting application can be controlled by the general computing controls, which ensure the continuous and proper operation of the program procedures and the integrity of the financial data. These controls cover direct access to the data and to the application. Companies that have this group of controls in place can be reasonably assured that their program procedures will operate continuously and that they will have data integrity. They can rely on computers, for example, to cross-match receivers to invoices, rather than doing it manually. Just a simple change like this can save a company time and money. More reliance on automated controls reduces the risk of financial misstatements and costs less to test and execute.
Are the costs of complying with SOX inhibiting companies from offering IPOs?
Yes. There is a change in companies’ exit strategies post-SOX. Whereas companies once offered IPOs as a liquidity event, now they are looking at being acquired. Fifteen or 20 years ago, venture capitalists investing in a company thought its liquidity event would come about as the result of an IPO. That has changed. Consider a company that does $80 million in business in a year and takes $2 million to $3 million to the bottom line. If that company had to pay out an additional $2 million annually of costs for SOX, it would be back to break-even. It would not be viable in the market. That is a realistic scenario in some venture capitalists’ minds. Based on the increased costs of SOX compliance, they see fewer opportunities for IPO liquidity events.
How can companies keep SOX compliance costs low?
One way is to be prudent and rigorous in monitoring the costs of SOX compliance. Don’t assume that compliance is going to cost $2 million or so a year. Treat SOX compliance like any other business process and strive to lower the cost each year. It can be lower. Just as in a manufacturing process, working with professional advisers can help companies find ways to reduce costs.
Another way is to take advantage of automation opportunities. For example, some companies don’t automate the collection of data that goes into compliance documentation. So, if auditors select a specific transaction, and the paperwork for it was misfiled or on some ones desk, the auditors may look at that as an error. They may then have to increase their sample size or do other procedures. That runs up compliance costs. If companies collect data more efficiently, hopefully electronically, and allow the auditors to select what they need from the population of documents, that reduces costs.
Where else are companies missing opportunities?
Another example is payroll processing, which is a material expense for most companies. Most companies outsource their payrolls to service providers that exercise a set of controls to assure the continuous operation of their programs and data integrity and execute manual controls to make sure all the transactions are processed and reported correctly. Often they provide a SAS 70 report, which is an audit report on the design and effectiveness of the service providers controls.
Perhaps a better way to look at controlling payroll would be to perform an actual-to-budget comparison monthly, do a roll forward of total payroll costs and rely on the service providers controls. These types of automated analytic controls can be very effective in this situation and reduce the need for detailed transactions controls once again reducing the cost of SOX compliance.
ROY MAYNARD is a consulting partner with Burr, Pilger & Mayer LLP. Reach him at (408) 961-6390 or firstname.lastname@example.org.
Often, the hardest work in opening a business is securing start-up financing. People who don’t plan properly learn there’s no “fun” in funding, and they increase the risks that are part of any business venture, ranging from slow starts to failure.
When a business does not succeed, the gap between cash available after liquidating assets and liabilities taken on by the business ultimately becomes the responsibility of the owners. To close the gap, owners have to be realistic about the risks and the underlying costs of starting a business and be prepared to put some “skin in the game.”
Smart Business spoke with John Bonfiglio, CPA, CVA, a principal with Skoda Minotti, to gain some insights into financing start-up businesses, how to complete the process and how doing so increases the chances of success with the new business endeavor.
What sources of financing are available for a start-up business?
Business owners often consider financing a business from their own personal finances, family members or friends; however, there are other sources, such as commercial banks, angel investors or venture capitalists.
There are different factors to consider for each source. Commercial banks often look to ensure that loans made to start-ups are collateralized by company assets or personal assets of the owners. At times, shortfalls in this area can be made up by government programs guaranteeing a repayment of a portion of the loan.
Angel investors and venture capitalists can be more flexible with immediate repayment terms, but often seek a higher overall rate of return than commercial banks. Such financing can often include a mixture of debt and equity or ownership stake in the endeavor. These investors often look for a clear exit strategy. Time horizons for exits differ, but often are in the five- to seven-year timeframe. If considering the purchase of an existing business, there is also the potential to finance the purchase through the seller.
What is the difference between financing a service company versus one that produces a product?
Service businesses typically do not have as many underlying assets, such as inventory and equipment. This makes them tougher to finance because they do not have the underlying collateral. Lending sources will then look to the owner’s personal assets and guarantees or government programs to make up this shortfall.
Do options differ between starting a conventional business versus buying a franchise?
There are the same financing considerations whether buying a franchise or starting a conventional business. However, there are banks and other financial institutions that are familiar with a franchise’s business model and have a comfort level with financing franchisee start-ups.
Should a prospective business owner concentrate more on short- or long-term financing when looking at start-up costs?
New business owners should consider both long- and short-term financing alternatives. Often, longer-term financing can be used for the purchase of capital assets such as equipment. Short-term financing can help finance operational costs such as employee wages and inventory purchases over the course of the business’s normal operating cycle.
What factors should business owners consider when estimating start-up costs?
A key to success is to develop a comprehensive business plan that includes realistic costs to fund initial start-up of the business as well as to pay for ongoing operations and overhead charges. Some start-up costs include the initial purchases of business assets, such as inventory and equipment, costs to set up the business itself, costs related to hiring employees, rent for the primary business location, including the initial security deposit, and costs related to implementing the information technology infrastructure.
Often it is helpful to put together a ‘sources and uses’ cash budget that focuses on starting the business and the first full operating cycle of the business. As a rule of thumb, we see that entrepreneurs should often plan on ‘twice as much’ and ‘twice as long’ versus their initial plans.
What financial criteria should start-up owners consider before financing a business?
The overriding criterion when considering whether to finance a business is gauging whether the sales and profit margins for the business endeavor outweigh the start-up and ongoing costs over time. This involves initially developing an understanding of the business and the market niche you are serving.
Thereafter, the key is ensuring the organization is delivering an excellent product or service and measuring its success by generating sound financial data for decision-making.
JOHN BONFIGLIO, CPA, CVA, is a principal with Skoda Minotti. Reach him at (440) 449-6800 or email@example.com.
Employers who do not take the time to understand the requirements of the Fair Labor Standards Act (FLSA) run the risk of Wage and Hour disputes that can generate costly single plaintiff, multiple plaintiff or class-action lawsuits filed against them.
A wide range of companies in any industry, particularly those in the hospitality and service areas, may become involved in such disputes and lawsuits. The outcomes of those lawsuits for defendants found liable by the Department of Labor or courts can involve severe financial penalties, significant back pay amounts, and hefty lawyers’ fees.
Smart Business spoke with C. Dean Herms of Porter & Hedges LLP to learn how employers can protect themselves from those possibilities and strengthen their financial positions.
Why have Wage and Hour claims become so prevalent recently?
Most of the employment law cases being filed lately are violations of the overtime regulations of FLSA. Due to the 2004 amendment to the FLSA regulations, people who weren’t otherwise aware of the fact that they can get overtime pay for hours worked in excess of 40 hours if they are non-exempt employees have now become aware of their rights under the law. That, combined with a fundamental misunderstanding by employers of the requirements of FLSA, has led to an increase in the number of cases. Finally, the damages and penalties can be high, which makes these types of lawsuits attractive to plaintiffs and attorneys.
What types of misunderstandings might lead to disputes and lawsuits?
Salary is a good example. Some employers will believe that their employees are exempt simply because they are paid a salary. That is not the case. They have to satisfy two different standards under FLSA to qualify an employee as exempt: the salary basis and duties tests. If employers do not satisfy both of these standards and it is their burden to prove compliance if called into question they run the risk of becoming involved in disputes with their employees. That is why it is imperative for employers to understand the requirements of FLSA.
How significant are the damages and penalties associated with Wage and Hour cases?
The damages and penalties can be extremely high. For an employer who is found to have violated FLSA regulations, back pay can be awarded going back two years. If it is found to be a willful failure to comply with the Act, the employer can be liable for back pay going back three years preceding the time of the plaintiff’s complaint. In addition, the employer can be assessed liquidated damages for non-compliance, which basically doubles the amount to which the employee otherwise would have been entitled. Add lawyers’ fees to these damages, and the costs can be astounding, especially for smaller companies. And the problem is compounded in some cases, because if one employee at a company has not been paid correctly, most of the rest of them probably haven’t been either.
Are there key indicators in how a business operates that can lead to Wage and Hour claims by employees?
One is the number of exempt employees. The larger the number, the more susceptible an employer might be to having exemptions questioned. Also, employers who know about and allow employees to work off the clock are making themselves susceptible to claims. Employing workers who travel extensively to and from the worksite might raise some Wage and Hour issues as well. Another example is ‘donning and docking’ cases, which involve employees wearing uniforms. If uniforms are required, and employees are not paid for the time it takes to don them, even if they are at work, that too can lead to claims.
Are there steps employers can take to prevent Wage and Hour lawsuits and avoid crippling damages and penalties?
The key is ‘prevention.’ In this regard, there are several steps that can be taken. One is to classify employees correctly. This requires an understanding of what salary really means and when deductions can be made from salaries. Understanding of these key concepts often comes too late after employers are sued. Another step is for employers to develop a thorough understanding of FLSA and other employment laws before disputes arise and stay on top of what is required of them. They can do this in a variety of ways, e.g., by attending seminars, subscribing to business publications, or consulting regularly with their attorneys. Another step is to develop, implement and make known to employees the company’s employment policies, such as a ‘safe harbor’ policy, which allows employers to address improper deductions from salaries of exempt employees that are isolated or inadvertent without having to pay damages. This can be done with attorneys’ counsel and can help prevent devastating financial penalties and damages.
C. DEAN HERMS JR. is a partner with Porter & Hedges LLP in Houston. Reach him at (713) 226-6680 or firstname.lastname@example.org.
Acompany without a well-developed business plan is likely headed for failure. Even if the business owner doesn’t fail, the lack of a plan can lead to issues such as less customer traffic and lower profits.
Therefore, anybody who is planning a business must be prepared to spend a fair amount of time writing, implementing and monitoring a business plan. There are no shortcuts to business planning or to business success. Writing a business plan requires a lot of research and a great amount of due diligence. A solid business plan is the foundation of a successful business — and may require more work at the onset than actually running a company does.
Smart Business spoke with James P. Sacher, CPA, a partner with Skoda Minotti, to learn more about the importance of business plans, what to include in them and how they contribute to a business’s bottom line, regardless of how it is structured.
Is there a correlation between the form of a business and the need for a business plan?
No. Every business is going to be a little bit different, whether it is a sole proprietorship, an S-Corp., or an LLC. But that does not mitigate the need for a business plan. The form of the business is just one small aspect of the business plan, but a big consideration. Regardless, the way the business is set up from the beginning will have implications going forward.
Should business owners develop their own business plans?
Yes, whenever possible. Primarily because, no one knows their businesses as well as owners do. If owners cannot articulate what they are going to do and how they are going to do it, nobody else can do it for them. Second, developing a business plan forces owners to really think about how they are going to run their companies. They have to consider what services they are going to offer, whether they will expand them at some point, how many employees they are going to need, how much space will be necessary, etc. If the owners do not write the plans themselves, they will miss a lot of those details. Once the plan is done, the owner can run it past other people who will be able to point out what might be missing.
Do the components of a business plan change from company to company?
The fundamentals don’t. Even though there is no formula for writing a business plan, the owners always need to be able to identify fundamentals like products and services, pricing methodologies, their competition, differences between their products and services and why they are better than their competitors’ offerings, marketing strategies, financial details, organization charts and mission statements. However, the details of the individual plans may change a bit. There may be things added or taken away, depending on the type of business. But, for the most part, there is a core list of considerations that are a part of every business plan.
Should business owners monitor their business plans occasionally?
Yes, especially with the financial sections of the plan. The writers of the plan probably know the details about the products, services and competition, etc. They know what they are going to sell and how they are going to make their money. The financial sections drive a lot of decisions regarding the timing of projected revenues, the variable and fixed expenses, hiring plans, the need for equipment and space, and so forth. The financial forecast part of the business plan often turns into the owners’ budgets.
The owners find themselves in the position where they are able to measure their businesses’ outcomes against their budgets. They have goals and objectives and targets they laid out in their business plans, and the results of those plans are going to be demonstrated in their financial results. The comparison allows business owners to compare financial results against what is budgeted. And they will know how well they are doing and if and where they have to make changes.
Can changes be made to a business plan?
Yes. The plan has to be firm when the business starts off, but owners have to be nimble enough to change when necessary. They don’t have a crystal ball, and they don’t know exactly how things are going to go with the business. For example, it might take longer to get a product to market than the owner originally predicted. That may stimulate changes in the financing or hiring parts of the business plan. Or, things might be going better than the owner could have predicted, so changes in the plan have to be made to accommodate that, as well. Business plans can be changed as the situation dictates, but they cannot be changed unless they are in place to begin with.
JAMES P. SACHER, CPA, is a partner with Skoda Minotti. Reach him at (440) 449-6800 or email@example.com.
Companies are sometimes surprised to learn that their contracts are on occasion anything but enforceable.
Even the seemingly plain terms of negotiated contracts and form contracts have loopholes. If your business depends on certainty, and you want to avoid “he said, she said” disputes, carefully drafting and reviewing contracts before signing can help avoid problems down the road.
Smart Business spoke with Clay Steely, a litigation partner with Porter & Hedges LLP, to learn more about arguments used to avoid the plain terms of contracts and to assess how companies can protect themselves from such arguments.
What are some common arguments used to defeat contracts?
In what I call ‘private’ contracts, parties normally negotiate to memorialize a specific deal to avoid factual disputes over the parties’ obligations in the future. Two common arguments used to defeat private contracts are 1) the deal is not as expressed in the contract, or 2) a party misrepresented some fact which improperly induced the other party to enter into the contract. To try to address/avoid these arguments, many contracts expressly state: ‘This contract contains all the agreements between the parties and no representations outside the contract are enforceable’ (a merger/integration clause). Seems straightforward, right? Not always. Claims that a party misrepresented the deal or improperly induced a party to enter into a contract (fraud) are commonly used to try to defeat contracts. Even when a contract contains an express merger clause like the one noted above, the inquiry does not end. Courts many times will analyze how the clause is worded and who was involved in the transaction when the clause was put in place. If a court finds that a contract is unclear, the terms were not expressly addressed in a contract or that a merger clause is insufficient, a business may be faced with having a jury decide the meaning of the contract. In short, the document you thought would help you avoid uncertainty and any future disputes does not help at all. However, carefully crafted written contracts can address and try to eliminate some of this uncertainty as well as potentially costly future problems.
What are some problems with form contracts?
Purchase orders and invoices contain terms. Everyone has seen them. Very few people read them. Many times each party’s documents have different or new terms. The problem then becomes which documents’ terms control? Such a dispute is sometimes referred to as a ‘Battle of the Forms.’ For example, if your purchase order does not limit the transaction to your terms, if you accept an invoice which states you agree to waive certain rights or bring your dispute in a different state, those terms may be enforceable.
How can I avoid some of these problems?
Careful drafting and review of all contracts can help. For private contracts, use well drafted language like merger/integration clauses to try to avoid future problems. Carefully consider the use of clauses requiring a party to pay for problems caused by the other party’s actions (indemnity). Be as specific as you can on the duties and obligations of the parties. For form contracts, talk to your employees. Tell them to read what they sign, even the small print on the back of a document. If there is any question that the contract is changing/waiving a company’ rights or contractual terms, then they need to discuss that issue before signing the contract. Draft your forms so another party’s documents can not change your terms. But be sure that your terms meet the requirements of the jurisdictions in which you are doing business. For example, some terms waive a trial by jury or stipulate what law applies or where any lawsuit must be filed if a dispute arises. Since individual state’s laws may differ on these subjects, verify that the state in which you are doing business allows such a waiver or venue choice. Waiver of a right to a jury, choice of law, choice of venue (place a dispute will be litigated), limitation of damages, liquidated damages (setting the amount of damages for certain problems) and many other clauses can be very helpful.
As a litigator, I routinely see out of state companies forced to litigate contractual matters in Texas because they did not have the correct language in a private contract or some representative signed a form contract in Texas that had terms and conditions forcing the company to litigate in Texas under the other sides’ terms. Small contractual matters no one thought were significant can end up being expensive, not because the dispute is large, but because the company is forced to litigate in a place it did not choose, under terms it did not want. Be wary of these issues and, at the same time, use knowledge of the issues to protect your business. A lawyer can help you do both, and help businesses be sure that the contract they bargained for remains the contract that is enforced.
CLAY STEELY is a partner with Porter & Hedges LLP. Reach him at firstname.lastname@example.org or (713) 226-6669.
The rapid proliferation of general and niche job boards has created a bit of consternation among staffing firm owners and managers. Their concerns, although justifiable to some extent, have proven to be somewhat premature. There is no doubt that job boards represent competition for staffing agencies, and they provide a valuable service to job seekers and hiring companies alike. Both offer valuable services to their clients, and each has unique competitive edges that facilitate the hiring process for business owners.
Smart Business spoke with Don Crawford, president and CEO of Delta Dallas, about the advantages that staffing firms offer companies in their quests to hire key employees and what steps owners can take to attract and retain the “best and brightest” by partnering with them.
What advantages do staffing agencies have over job boards?
Principally, staffing services provide screening processes that are not available through job boards. A position posted on a job board can generate hundreds, and sometimes thousands, of responses. Business owners, particularly of small companies, generally do not have the time to sift through resumes or the expertise to unearth the best-qualified candidates to meet their specific needs. Staffing firms do. In essence, staffing firm recruiters are matchmakers. They have personnel who are adept at weeding out unqualified applicants and matching candidates to cultures, and they can do both expeditiously.
How can staffing agencies reduce the numbers of interested applicants for positions?
One method is to ask candidates specified prequalification questions. This eliminates some of the people who are simply applying for jobs randomly and don't have the requisite skill sets required by the employer. This could include three to five qualifying questions about applicants’ skills that help the employer whittle down the candidate list and prioritize their call backs.
Are there times when business owners are justified in posting positions on job boards?
Of course. It makes sense at times to post a position with a job board for budgetary reasons. For instance, a single posting on a job board might cost anywhere from nothing to $350, depending on the board selected. That same search through a staffing firm might cost thousands of dollars, and may not be prudent when considering the position being filled. Decisions regarding which approach to use must be made by companies on a case-by-case basis and should be congruent with the responsibilities of the position.
Are job boards more suitable for filling specific categories of positions?
Not at all. They are well suited for jobs at a variety of levels, ranging from salespeople, engineers and accountants to A-level executives. But, there is a certain percentage of people that job boards do not attract at any level. That is roughly the top 5 to 10 percent of people in their profession. If business owners want to hire that segment of a profession, they are going to have to network or retain executive recruiters to attract them. That is another choice business owners have to make when hiring: Do they want to hire the top-notch people in a given profession or recruit the 60 to 80 percent of their counterparts who are hard workers but not in the elite 5 to10 percent? This preference will drive their decision when choosing a search method.
What criteria should business owners apply when choosing among a job board, a search firm or a self-hiring process to fill a position?
The three most significant criteria are time, the importance of the position, and the economics of the search. For instance, if a company is hiring an executive assistant for a CEO, a search is likely to be time consuming and somewhat more narrow than filling positions of a more general nature. In many cases, due to the time investment and expertise needed to fill a position, a search firm is the most economical choice. Each open position should be analyzed using all three criteria when choosing a search method. An initial time investment examining the parameters of the search, can improve the overall investment required to fill a position.
DON CRAWFORD is president and CEO of Delta Dallas. Reach him at (972) 788-2300 or email@example.com.
Currently, “baby boomers” make up one-third of the work force. Assuming most of them retire at age 65, the first set of boomers will reach this milestone in 2010. Moreover, if the U.S. economy continues to grow at a 3 percent rate per year, which has been the average since the late 1940s, the work force will need to increase by 58 million over the next 30 years to maintain the same level of productivity. If the present population trend continues, the number of workers will increase by only 23 million. That leaves a shortage of 35 million workers. Employers have to take steps now to be able to compete with other companies for the talent that will be available in the years ahead. It’s time to shift the perception and think of ways to attract and retain the coming generations.
Smart Business spoke with Mimi Braziel, vice president, accounting division, Delta Dallas to learn how to do this.
How do companies safeguard themselves from this shortage?
One way is to pay higher salaries, including bonus incentives. As with any aspect of business, employers get what they pay for.
A second way is to assess the organization’s demographics and plan accordingly. Assess how many employees will reach retirement age in the next 10 years.
Once this information is obtained, it is important to discuss the plan one to two years before they intend to leave. Pair the ‘boomer’ with a junior person to mentor so his or her legacy is passed down prior to his or her departure. Boomers have been around for a while, and their knowledge and wisdom must be captured. At times, it may be possible to retain the boomer on a consulting or a part-time/flexible basis.
Finally, look into outsourcing parts of the business to save costs and implementing systems that will streamline processes to run more efficiently and effectively with fewer employees. Constantly re-evaluate the organization and adapt as needed.
What are the primary differences between baby boomers, Generation X and Generation Y?
Baby boomers did not go through the Depression, as their parents did. So, saving for a rainy day isn’t the norm for them. They have grown accustomed to a certain standard of living, and many of them will admit they have learned to live beyond their means. So assuming a large portion of them will need to work past retirement because of this, the consensus is also that they will not want to work a full load. Flexibility will be the key with them. Generation X trusts themselves more than institutions of any kind, and they recognize results versus tenure. They have to be managed accordingly rather than changed. Regarding Generation Y, employers may have to learn to deal with pink and blue hair, tattoos and a few piercings, worry less about rules, and place their focus on the quality of the work performed, rather than employees’ characteristics.
How can recruiting firms help in this process?
As the market continues to tighten, it is in employers’ best interests to partner with recruiters when they need to hire talent.
Recruiters keep up with market trends, so they can be valuable sources of information, especially when it comes to questions regarding market salary ranges. Those recruiting firms that have some tenure in their recruiting staff have an incredible network of candidates from which to select. Effective recruiters have great relationships with companies. They are best suited to match talent to cultures and opportunities that are in line with employers’ core values and desires and to advise them on how to maintain a flexible environment for employees.
What advantage does a company gain by being flexible?
Start with the premise that if employees are dependable and honest, they will do what is in the best interest of themselves and the company. Establish a friendly working environment that promotes a work-life balance. For example, establish a vacation policy that allows people to take off as much time as they need for vacation and personal matters as long as deadlines are met and their work is quality. Expand the fringe benefits program to include non-monetary, morale-building activities. Offer health club memberships, themed ‘happy hours’ on selected workdays, or cater breakfast and/or lunch at least occasionally, whatever works well for employee morale. Perks like those mentioned above present a ‘win-win’ for employees and employers. They keep employees working in the office during the workday, but they also get their work done and get out on time. More importantly, from an employer’s perspective, expanded fringe benefits help attract and retain the best qualified people.
MIMI BRAZIEL is vice president, accounting division with Delta Dallas. Reach her at (972) 788-2300 or firstname.lastname@example.org.
Choosing the right retirement plan for employees is a daunting task for business owners. They have to determine a plan’s tangible and intangible ROI to their business, what type of plan would work best for their employees, or if implementing one even makes sense. The list goes on.
Other factors to consider include whether the plan selected should be participant- or trustee-directed, include stocks, bonds, mutual funds or a mix. Owners might want to consider a retirement plan that allows participants the option of buying company stock. The number of retirement plans available seems endless and the final choice is not always easy to make.
Smart Business spoke with Robert D. Coode of Skoda, Minotti & Co. Financial Services to learn how business owners can find their way through the retirement plan maze and provide a significant benefit to their employees in the process.
How does creating and maintaining a retirement plan benefit business owners?
When it comes to implementing a retirement plan, some of the key benefits to a business owner include attracting employees, retaining employees and, of course, having the ability to defer some of his or her taxable income. The biggest benefit is probably the tax advantages associated with retirement plans. Contributions made to the retirement plan are deductible when deposited and grow from there on a tax-deferred basis. Also, the owner may be eligible for a tax credit to set up and administer a retirement plan. One side note to setting up and maintaining a plan is that it needs to be expressed to your employees that the plan is a benefit not an entitlement. Often, that is best done through the help of your financial adviser.
What types of plans are available to employers?
Retirement plans for the most part are either IRA-based or ‘qualified’ in nature. An example of an IRA-based plan would be a Simplified Employee Pension (SEP) or a SIMPLE (Savings Incentive Match Plan for Employees). Profit-sharing plans, 401(k)s and defined benefit plans are common examples of qualified plans. Each plan has its own set of advantages and disadvantages depending on the business owner’s situation. With that being said, qualified plans are generally more complex to set up and maintain and more costly to run than their IRA-based counterparts, since qualified plans have to comply with specific Internal Revenue Code as well as ERISA (Employee Retirement Income Security Act of 1974) requirements to qualify for their tax favorable status. Furthermore, in a qualified plan, the employees may be required to work a certain number of years before they become fully vested in the company’s matching or profit-sharing contributions. Conversely, with IRA-based plans, the employees own the company’s contributions immediately.
How can employers determine which retirement plan is best for the company?
Employers always have the option of walking down this path by themselves. They can study the vast array of plans and all of their idiosyncrasies and try to decide on the right one. However, we feel as though the owner is best served by hiring financial professionals who will walk them through the maze of plans to come up with the right fit. In the end, this could end up saving the employer a lot of time and money and lets them focus on what they do best, which is run their business.
How often should employers review their plan?
Generally, it’s a good idea that employers review their plan annually. Conducting an annual plan review helps to assure that the plan trustee — usually the business owner — is handling their fiduciary responsibilities. The review process should include the employer, financial adviser and the third-party plan administrator. A few of the topics to be covered would include mutual fund lineup, fund performance, fees associated with those funds as well as costs to run the plan from an administrative level. The point of the exercise to make sure that the plan in place is the best one possible for both the employer and the employees.
What should employers be looking at when evaluating retirement plans?
With a wide variety of plans out there, each with its own positives and negatives, it’s very important that employers define their goals before making a decision. A few things to consider would be making sure the plan they choose allows them to maximize the amount that can be saved annually. Next, is the employer looking for a plan that allows just employee contributions, employer contributions or both? Is it important to allow employees to make both pre-tax as well as Roth contributions to the plan? Next, most business owners are looking for the flexibility to skip employer contributions in some years. And, with a wide variety of choices comes a wide array of prices, so shop carefully.
How important is the cost of the plan?
Naturally, employers must consider cost versus benefits when selecting a plan. You get what you pay for. In many instances, lower cost equates to reduced services. During the plan evaluation, make sure that fees and expenses are disclosed and everyone’s roles are defined, from implementation to ongoing servicing and employee education.
ROBERT D. COODE is a principal and registered representative at Skoda, Minotti & Co., a CPA, business and financial advisory firm, based in Mayfield Village. Reach him at (440) 449-6800 or email@example.com.