Paul R. Harvey
The trio of hurricanes that punished Florida in 2005 left physical, emotional and economic scars that will be felt for years to come.
In the wake of that season, which spurred 25 additional named storms, the Florida property insurance industry was left in dis-array, and the state’s hurricane catastrophe fund was stretched beyond expectations. Meanwhile, Florida property-owners, struggling to pay ever-increasing insurance premiums, demanded relief.
As the calendar inches closer to the 2007 hurricane season, what core property insurance issues remain, and what actions are under way to mitigate the crisis?
“The core issue at hand is the lack of property windstorm coverage available from the private insurance marketplace,” says Mike Colon, a producer at Hilb, Rogal & Hobbs of Tampa. “But sweeping changes are about to take place.”
Smart Business spoke with Colon about the rapidly changing landscape of Florida’s property insurance industry.
Where does the Florida insurance crisis stand today?
The 2005 hurricane season set a new record with 28 named storms. The estimated damages caused by hurricanes Katrina, Wilma and Rita was more than $60 billion. Because of this, reinsurance costs for private insurers have risen significantly. In January 2006, pricing from reinsurers increased by 40 percent, and by July 2006, pricing was up more than 100 percent. This resulted in a lack of property windstorm coverage available from the private insurance marketplace and the rising costs insureds are faced with today when trying to obtain this coverage.
As reinsurance rates for private insurers rise, higher pricing and higher deductibles for windstorm coverage get passed along to insureds. Sometimes, these same insurers will not offer windstorm coverage at renewal to existing policyholders as they attempt to cut back on their capacity in Florida. We are seeing more private insurers not having the capacity to write wind-storm coverage in Florida.
How will the Senate hurricane package impact the property insurance industry and bring about lower premiums for property owners?
Sweeping changes are about to take place. This legislation repeals the planned rate increases by Citizens Property Insurance Corp. and freezes any further rate increases during 2007. The legislation also increases available capacity of the state’s Hurricane Catastrophe Fund (CAT) to $33 billion from $16 billion. Insurers must in turn pass these savings on to their insureds. Additionally, the new law bans ‘cherry picking’ by primary insurers that previously wrote auto insurance but did not write homeowners policies in Florida.
How does the insurance industry interact with Florida government?
As a result of the recently passed legislation, private insurers will be allowed to buy state-backed reinsurance at below-market rates to cover their risks in the event of a hurricane. This is expected to produce average rate savings of 25 percent. It also provides insurers access to more state money to help them pay claims should another major hurricane or storm season strike. In addition, Citizens’ rates are no longer required to be noncompetitive with the private insurance marketplace.
How can property owners help control insurance costs?
One of the best ways for insureds to reduce their property insurance costs is through proper construction and retrofitting to make their properties more hurricane-resistant. By protecting their properties against the potential damage of future storms, insureds can thus expect to pay a lower premium on their property policy. This loss-control measure helps to reduce damage during a storm and in turn reduces the cost of a disaster and the cost to insure the potential damage.
Another way insureds can help themselves is to provide their insurer with as much COPE (construction/occupancy/protection/exposure) information as possible. This includes the type of construction, year built, number of stories, fire and security alarm system information and other facts. This information makes a huge difference in the rating process and does help reduce costs to the insured.
What is the prognosis for Florida property insurance in the future?
In the short term, the sweeping legislative and industry changes on the horizon will bring about much needed relief to policyholders in Florida. As these changes carry some risk, it is not a certainty how long it will last. For example, two years ago, insurance companies burned through the state’s CAT Fund. Most insurance companies are charged to make up that difference with insurers passing those costs on to policyholders. Now that Citizens’ rating methodology is more competitive with private insurers, there is a chance that this may prevent more private insurers from entering the market place.
MIKE COLON is a producer for Hilb, Rogal & Hobbs of Tampa. Reach him at (813) 261-7980 or email@example.com.
It’s no secret that IT projects fail at an alarming rate. Business requirements are changing so fast that project managers who complete a project on time and within budget may still deliver an irrelevant product. Approximately two-thirds of all IT projects come in significantly over budget or late on their timeline. And about half of these projects are deemed outright failures. So what lies behind so many failed IT projects?
“There is certainly not enough up-front quality thinking taking place,” says Bill Russell, executive vice president of Allegient in Indianapolis. “And it’s often due to a lack of alignment between the business side and the IT side within an organization.”
Smart Business spoke with Russell about the high failure rate of IT projects, and how business owners can mitigate and be better prepared for project challenges.
What should be considered when developing IT project plans?
First, you need to have a clear business objective, or scope, that defines a project’s business value and what you will need to accomplish. This leads to the second consideration. What are the requirements? This is the time to develop what some call a charter an agreement that defines the mutual understanding between the business and technical side. The charter defines the project by way of the business value it’s going to deliver, the scope that’s going to be covered and can even map out the first set of requirements that are needed.
Another critical consideration is to apply a strong project management discipline.
What can be done up front to keep IT project costs within budget?
This is a major challenge. Budgets need to be comprehensive in terms of providing estimates around business side costs, technical or integration layer costs, and organizational change and management costs, including categories like training, documentation and moving the solution into production.
But in order to keep it on budget, you really need to apply risk and issue management and constantly revisit your basic assumptions. Good project management relative to budget comes with identifying risks early. When risks become real, they turn into issues that need to be dealt with. To whatever degree that they are originating due to false assumptions at the beginning, that needs to be factored, and is all part of rigorous project management.
How can deliverables remain relevant during a long-term IT project?
The ‘Big Bang’ type of IT project is history. The old model of taking on a 10- to 18-month project and feeling good that we’re going to arrive at the end of that period with something that’s reasonable in terms of business value, is over. To reflect this change, projects need to be fundamentally restructured.
You must have a clear set of requirements that supports the business value, and you will need to break down the project into highly iterative releases, so that some of the business value is being delivered in as little as 60- to 90-day increments. This helps you to revalidate in an ongoing basis. Phasing the project into multiple iterations is extremely important.
How can clients help produce successful IT projects?
First, they should form a lead team, or steering committee, with both business side and IT representation. Second, a realistic set of boundaries should be developed that outlines what they hope to achieve relative to the business value and the project requirements given the budget and time-line. Finally, they should be aware of and avoid scope creep.
It takes a substantial communication plan to support this, but it doesn’t have to involve huge overhead. It can be done with the business and technical sides collaboratively working together. Any significant project must have joint ownership.
What are effective methods for handling ‘scope creep,’ or changing client requirements?
We call it refactoring, or planning for change in the business value and the delivery. You must have a systematic discipline for arriving at the iterative milestones within a company approval process. When an incremental value is completed, even within an iteration, the requirements should be reviewed with the business owners to make sure they’re still relevant. Early mockups of the user interface can be demonstrated to ensure that everything is tracking against their expectations. If feasible for approval purposes, an early prototype can also be implemented to provide a look and feel of how the software will work.
What golden rules will help reverse the project failure rate?
First, businesses should aim for improved business and IT collaboration, so they can arrive at, and deliver, the core issues. Second, break the project into smaller increments and get business value back into the business side sooner. Third, consider using different project approaches as a way to lower risk. Finally, you must have a process.
BILL RUSSELL is executive vice president of Allegient. Reach him at (317) 564-5701 or firstname.lastname@example.org.
Millennia ago, as the last of three ancient oceans drained from what is now North Texas, layer upon layer of carbonaceous sediment lingered. At some point equally unrecorded, that sediment began to seethe inside a massive geologic pressure-cooker.
Fast-forward to the 1950s when George Mitchell of Mitchell Energy began to uncover and unlock the energy potential in the layers beneath North Texas an unconventional natural gas hotbed known as the Barnett Shale. Barnett winds beneath 17 counties in the Fort Worth basin. By 2005, it was America’s second-largest land-based oil and gas field, producing more than 492 billion cubic feet of natural gas.
“I’ll be surprised if we don’t ultimately see 25,000 to 50,000 wells at the Barnett field,” says John Barnes, chairman and CEO of B&R Energy LLC. “An immense amount of acreage has yet to be drilled.”
Smart Business spoke with Barnes about the great under-tapped Barnett Shale and how the fuel from that field helps drive the North Texas economy.
Why so much natural gas at the Barnett Shale field?
Geology tells the tale. Three great oceans that covered Texas in the ancient Mississippian Age left an enormous amount of organic matter in their wake. Under geologic pressure, that matter became hydrocarbons and produced oil and gas. A considerable amount of that leaked upward from the Barnett field into some of the overlying formations, which was discovered in earlier drilling. Barnett Shale gas is a more recent discovery. The reserves are very thick; in the Lower Barnett region alone, known reserves are as much as 600 feet thick, while the Upper Barnett is more than 100 feet thick.
How much gas comes out of the Barnett field?
The field is a rich formation that spans a large area yielding about one-and-a-half billion cubic feet of gas per day. If expansion continues, expect output to outstrip New Mexico’s San Juan basin as this country’s largest land-based producer.
To put that in context, Barnett Shale drilling accounts for about 5 percent of the natural gas production in the lower 48 states. And tapping it is still in the early stages: The spacing may ultimately be reduced to 100 acres per horizontal well. Right now, a horizontal Barnett well averages about 300 acres.
What technologies were developed to extract gas from the Barnett Shale?
Horizontal drilling and fracturing both became solutions to the particular challenges of the Barnett Shale. With horizontal drilling, an operator can contact and intersect larger portions of the producing horizon than conventional vertical drilling techniques. Drilling sideways potentially raises both production rates and the ultimate recoveries of hydrocarbons.
Fracturing, or fracing, is the process of pumping fluids into a productive formation at high injection rates to hydraulically break up the rock. As water pressure fractures the rock, channels open for the oil and gas to flow to the well. Barnett Shale wells require really big frac jobs taking up to a million gallons of water.
Is Barnett Shale drilling economical?
The shale has decent porosity, but unfractured molecules of gas and oil can’t flow through the pore space. And while the early wells, all vertical, produced decent economics, horizontal drilling turned night into day. To put it in perspective, one horizontal well can match the output of four or five vertical wells for only double the cost.
What are the Barnett field’s long-term prospects?
The U.S. Geological Survey (USGS) estimates that the Barnett Shale has 26 trillion cubic feet of undiscovered recoverable natural gas. Long-term production there will depend on the price of natural gas, evolving technology, and how people apply that technology as they push the Barnett Shale frontier farther out. The good news is that when you get 167 rigs and a large number of big and small players, a lot of people try new things. That usually brings breakthroughs and new opportunities.
How does the Barnett Shale field affect the Texas economy?
Barnett has been called a perpetual motion machine. It provides a substantial economic impact. Currently, 167 rigs are at work there. That’s about 3,000 active wells. Each rig and the related well completion costs are $4 million or $5 million a month. The wells have an approximate worth of $7 million to $8 million apiece for about $10 billion to $15 billion of economic value to the tax base for cities and counties above Barnett. Local mineral owners garner anywhere from 15 percent to 25 percent of the natural gas sales revenue about $4 billion per year a total that also nets the state of Texas up to $300 million in annual tax revenue.
JOHN BARNES is chairman and CEO of B&R Energy LLC. Reach him at john_barnes@BandREnergy.com or (214) 445-6808.
There is much to consider when presented with the challenge to increase company profits. Many financial tools are available to help break down the numbers, and that’s a good place to start.
It’s natural to inspect the budget in search of costs that, when reduced or eliminated, drop directly to the bottom line. But a number of key strategies for profitability might be hiding in plain sight within a company’s available resources resources that are not tracked on the typical financial statement.
“A budget is a basic financial tool, but it doesn’t allow for nonfinancial assets or resources,” says Mark Topel, partner, Whitley Penn LLP in Fort Worth. “A budget discussion among managers and employees, however, may generate solid solutions to increase revenue or reduce expenses by better utilizing company resources.”
Smart Business spoke with Topel about how to improve the bottom line by discovering and tapping a company’s built-in assets.
When should a company perform a profitability review?
A review should be performed on an annual basis not necessarily at the end of the year or the beginning of the next fiscal year but at least once a year. It’s a good time for managers to assess if the company or the department they oversee is optimizing all of its available resources.
How can managers identify and tap underutilized resources within the operation?
It’s easy for CFOs, controllers and treasurers to get hung up on financial statements and things that measure net worth. But let’s look beyond those numbers, at the personnel. What different skills or experiences do the employees bring to the company on a daily basis? It’s becoming apparent that employees are really ‘leased’ at any point in time, so they are a valuable resource that needs to be maximized.
One way to maximize these assets is to plug personnel from a seasonal-type department into other areas of the business. There may be some training time for the employees to get up to speed in the new department, but these people may have a skill or a specialty they can bring to the new area that maximizes the overall profitability of the company. If you look at a nonfinancial balance sheet, these resources and assets become apparent.
What neglected categories can be addressed to increase profitability?
A lot of times, the best way to answer this is to ask employees from top to bottom, bottom to top this question. A retreat that brings all the employees together might yield 50 to 100 ideas. These suggestions can be ranked in order of priority, or by which are easiest to accomplish, or what’s going to make the biggest difference to the company’s bottom line.
During one corporate brainstorming session, the staff suggested that management hire an expert at buying and trading a certain commodity used in the production of their product. The company was using a cost-plus system of sales, with its sale price locked in at 110 percent of cost. The commodity buyer made recommendations on the best time to purchase the needed supply. So instead of cost-plus pricing, a sale price was established on the market at a certain amount, but the company was buying this commodity for much less, thus increasing its margin. As a result of the brainstorming, profitability increased from 10 percent to between 30 percent and 40 percent.
Can outsourcing increase profitability?
Generally speaking, companies will focus on reducing expenses without necessarily looking at ways to increase revenue. It may make sense to move a low-skill process out of the business to have it done at a lower price and avoid the additional cost of payroll taxes and benefits.
But on the other hand, there may be processes, skills and training that a department or company does very well; or space, personnel, and equipment that could be ‘outsourced’ to other departments or businesses. This is where the change in mind-set from making decisions based solely on financial statements, to making decisions based on nonfinancial assets and resources, can lead to profitability.
Can advisory boards impact profitability?
Yes. Usually the more ideas the better. But rather than beginning with an advisory board of outside people, why not utilize a board consisting of inside people who know your business very well? Get their input and ideas about how to improve profitability. Reward these strategies when they are implemented and succeed. An outside advisory board is helpful when you’ve taken your internal assets as far as they can go.
MARK TOPEL is a partner with Whitley Penn LLP in Fort Worth. Reach him at (817) 258-9130 or Mark@wpcpa.com.
By 2030, worldwide energy sectors will require $16 trillion to maintain the current trend of energy usage, according to a recent World Energy Outlook report. The oil and gas industry will make up about 20 percent of that total, creating huge investment opportunities. The oil and gas sector relies heavily on emerging technology. This technology has improved the prospects on wells drilled, helping to reduce costs and maximize production. When you add into the mix the available federal tax incentives on oil and gas investing, savvy investors can reduce risks and find good buying opportunities. “To maintain its growth, a nation must constantly find new energy supplies,” says John Barnes, chairman and CEO of B&R Energy LLC. “Energy growth is the essential engine for economic growth.”
Smart Business spoke with Barnes about oil and gas investing and how regional and global events influence these markets.
What are examples of proven energy investments?
Energy is a broad spectrum. It includes power companies, gas distribution outfits, refining companies, exploration technology firms and others. A number of investment opportunities also are available in alternative energies like ethanol plants and windmills, which may have certain tax subsidies.
The U.S. government and governments around the world appear committed to the research and growth of renewable and alternative energies, but they are estimated to only provide about 1 percent of our energy in 2030.
Let’s focus on upstream oil and gas investing, where companies find it, drill it and produce it. In this sector, investment opportunities are available and active, and range from master limited partnerships, producing properties, drilling and production companies, to many public companies.
What makes oil and gas investing attractive to today’s investor?
First, any economic growth requires an input of energy. This has been growing at a rate much faster than the availability of energy to feed that growth. As a result, we’ve had a significant increase in the prices of the energy needed, particularly hydro-carbon-based energies like coal, natural gas and oil. Those products have increased about 20 percent every few years for the last 10 years. This growth rate is certainly attractive for investors.
What are the tax advantages of oil and gas investing?
A tax-advantaged investment should first be a strong investment, and the tax advantage viewed as an added benefit.
There are certain tax benefits associated with oil and gas if the investments are properly structured. These may include the deductibility of intangible costs of drilling oil and gas wells including the rig, drilling labor, consumables and other costs. These line items may be expensed in the year paid by those incurring the costs.
Other tax breaks include the possibility of taking 15 percent of the gross income as a deduction, in the form of percentage depletion. Have previous eras, like the oil bust in the 1980s, impacted today’s investor?
Every industry is subject to cycles. The oil and gas industry is no exception. The 1980s oil bust was a result of a significant surplus of oil compared to demand. OPEC did not do a good job of maintaining balance, so Saudi Arabia imposed some discipline by flooding the market with oil and gas, causing the market price to careen downward. Stock prices fell and a lot of people lost a lot of money.
Before that, there was a period when the income tax was as high as 90 percent and the deductions on oil and gas investments were thus heavily subsidized by their deductibility. A number of investments were designed without a close eye on the economics of the deal, other than the tax deductions. This trapped a lot of investors.
How has the current insurance crisis impacted oil and gas investments?
Companies drilling on land in the U.S. have not been adversely impacted by insurance rates. But for those drilling in the Gulf of Mexico, insurance has severely increased costs. Insurance rates for the Gulf have increased four times from levels before hurricanes Rita and Katrina. Insurance companies have absorbed massive losses and the rules say they have to recover them. This extreme jump in insurance rates has forced some companies to cut back on Gulf drilling, while others are selling their Gulf properties. Additionally, some traditional insurance coverage, like profit protection insurance, are no longer offered.
The bottom line is that investing in energy is likely to be strong for years to come. As in any other investment, there will always be some risk. For investors who choose their investment programs and partners wisely and well, the steady stream of demand will continue to fuel exploration and production of energy for a long time.
JOHN BARNES is chairman and CEO of B&R Energy LLC. Reach him at (214) 445-6808 or john_barnes@BandREnergy.com.
The savings-and-loan industry is closely monitoring news about how a loan officer for a national bank in Cleveland allegedly stole $29 million during the past decade.
Despite comprehensive internal and external controls, companies continue to suffer substantial losses from a multitude of fraudulent schemes.
Edwin Sutherland coined the term “white-collar crime” in 1939. White-collar crime, he said, was a “crime committed by a person of respectability and high social status in the course of his occupation.” Since that time, technology, extreme financial pressures and opportunity have combined to entice once-respected employees into financial scandals.
Smart Business recently spoke with Felix Lozano III, a partner in Assurance and Advisory Services at Whitley Penn LLP, about how to identify and reduce the opportunities for business fraud.
Is fraud more prevalent than in the past, or is it simply receiving more coverage in today’s news-hungry media?
I would say ‘yes’ and ‘yes.’ When you have managements of large publicly traded companies like Enron and WorldCom engaging in fraud at a corporate level, the scale is simply staggering, and that commands greater media attention. But beyond those very public spectacles, fraud is more pervasive than people realize. It’s estimated that as much as 5 percent of the gross domestic product is lost to fraud.
What are the most common types of fraud?
According to the Association of Certified Fraud Examiners, it varies by industry. In small, cash-type businesses, ‘skimming’ the cash before it hits the till is the most common fraud. In the insurance business, fraudulent billings are the most common; and at the corporate level, concealing liabilities or expenses tops the list. But at the end of the day, the type of fraud is only limited by the perpetrator’s imagination.
What new fraud schemes are being uncovered?
The Internet opened a floodgate to new types of schemes involving identity theft. The Federal Trade Commission receives hundreds of thousands of complaints annually involving identity theft and fraudulent credit card and debit card abuse. Bank losses to credit card fraud are off the chart. What’s more, these cases are rarely prosecuted. Also, we have conducted forensic audits on companies that have suffered fraud by employees using company-issued credit cards. We see this as a growing concern in the marketplace.
What types of companies have significant exposure to fraud?
Any type of company and not-for-profit organizations can have significant exposure. The key issues are employees who find themselves inside what is called the ‘Fraud Triangle.’ These employees may have personal financial pressures; they may see an opportunity to steal and not get caught; and they are able to rationalize the actions they take. Then again, they may just be greedy.
What behavioral factors might indicate that an employee is committing fraud?
That’s the rub. A person can have the most gold-plated rsum you can imagine and be no different than the bartender who skims off cash at a restaurant bar. The only difference is the scale. The former CFO of Patterson-UTI Energy was recently sentenced to 25 years in prison for embezzling $77 million. His CEO testified that, before the fraud came to light, the CFO was ‘like a son to me.’
Lifestyle issues are sometimes tell-tale signs. Are they taking trips to Europe or wearing Gucci shoes on a clerk’s salary?
How has technology impacted fraud?
It’s a two-edged sword. Some sophisticated fraud diagnostic software can run on a client’s accounting system.
On the flip side, a popular accounting software package for small businesses makes it easy to commit check fraud. A perpetrator can make a check out, print it, and then go back and change the name of the payee in the ledger to that of a legitimate vendor.
Can improved hiring practices help reduce fraud?
Absolutely. Background and reference checks are essential before hiring. If there is questionable behavior, chances are it has surfaced before.
On the receiving end, think about the position in which you are placing a new hire. Is this a position of trust? If so, are the appropriate controls in place to counteract personal financial pressure of a nonshareable nature? Or can the position be redesigned so as to reduce your trust reliance on the new employee?
FELIX J. LOZANO III, CPA, CFE, is a partner in Assurance & Advisory Services at Whitley Penn LLP. Reach him at (972) 392-6640 or email@example.com.
When gasoline prices spiked this summer, the media was quick to point their cameras and microphones at every available source, looking for explanations. Myriad theories were rolled out and exhausted. When the price plummeted, the excessive coverage quickly faded.
Some tried to connect the dots to the fall elections. “While politics make for a wonderful conspiracy theory, the reality is that incumbent politicians are simply fortunate that the November elections follow moderate weather months,” says John Barnes, chairman and CEO of B&R Energy. “The recent downward correction is tied to much more than politics.”
Smart Business spoke with Barnes about the end-of-summer price decline and what dynamics were in play before the near-record plunge.
What key factors drove the recent gasoline price decline?
There are essentially two main factors guiding gasoline prices in the U.S.
First is the price of oil. It is the principal component of gasoline.
Second are the market forces of supply and demand, which can vary in different areas of the country that require special grades of automotive gasoline. For example, a few years back there was a ruptured pipeline that created a shortage of the gas required in the Chicago market, causing the price to go through the roof until the pipeline was repaired.
In addition, we’re at the time of year when we have mild weather, so customers are not using much heating oil, and the summer driving season has come to an end, reducing demand. Those factors, coupled with a dampening of the economy and certain speculative forces in the financial markets that were propping up the price likely precipitated the current price decline.
A glance at the futures market for January and February points toward a gradual rise back up to the $70 dollar-per-barrel oil mark again over the next year.
Do increased oil reserves lead to lower gasoline prices?
Not necessarily, because we have limits on refining capacity. We cannot produce all of the gasoline the U.S. market demands, so we have to import some gasoline from other sources. As we head into winter, some refiners can’t take any oil while they temporarily shut down to convert their operation to produce more fuel oil for heating. This prompts a temporary drop in oil prices. They adjust what they produce depending on the demand cycles forecasted for the coming winter, and they manufacture more gasoline leading into the driving season.
Regional ethanol requirements can also factor into a price decline, since certain areas require ethanol in the spring and summer but not in the winter. Adding and removing ethanol from the refining process can create additional oil supply or shortfalls.
Will foreign oil suppliers be satisfied with U.S. gasoline selling near $2 per gallon?
OPEC and other foreign suppliers, to a large extent, aren’t concerned with the price of gasoline. They care about the price of oil. To keep their economies churning,
they need to sell oil for at least $60 per barrel. They have proposed actions to keep oil propped up above that level.
What many don’t consider is that wealthy oil nations have a lot of their dollar reserves invested in our economy, so it’s to their benefit to keep the Western economies healthy. They don’t want to price oil so low that they can’t support themselves, but they also don’t want to price it so high that it hurts the customers or drives them to develop alternative energy sources.
How does this impact natural gas for home heating?
Gasoline prices and natural gas prices are only moderately correlated. In some areas, natural gas competes with fuel oil. Certain electric utilities were designed with flexible systems that can burn either natural gas or fuel oil, so when the BTU price for one is cheaper than the other, you’ll see some fuel source requirements switching back and forth. Last winter, when natural gas prices were extremely high, those with the capability to switch changed to fuel oil, and as gas prices dropped this summer, they reverted back to natural gas.
Will the lower prices spur other sectors like retail and manufacturing?
The record high gasoline prices certainly impacted, to some extent, disposable income. But for the average driver who drives 12,000 miles to 15,000 miles per year, the difference between $2 gas and $3 gas is only about $2 per day. In aggregate, this adds up, but it’s probably not going to make that much of a difference to the economy or to the retail marketplace.
On the manufacturing side, anything produced with petrochemicals has been positively impacted by lower prices. Conversely, most of the chemical manufacturing that uses natural gas has moved offshore because prices have been too high to sustain domestic manufacture.
JOHN BARNES is chairman and CEO of B&R Energy. Reach him at (214) 445-6808 or john_barnes@BandREnergy.com.
When fall takes hold and the days get shorter, it’s time to work with your CPA or tax adviser to develop a year-end tax-saving strategy. Given time, tax professionals can suggest adjustments that should produce more favorable year-end results. After Dec. 31, there are few moves available that impact the prior year.
Taxpayers often are unaware of the advantages available to them in the tax code.
“I’ve seen investors sell a piece of real estate for a substantial gain. Frequently, they will take the revenue and buy another piece of property, creating a large capital gain tax,” says Beth Engelhardt, CPA, Whitley Penn LLP. “Had the individual worked with a tax professional to develop a plan, the property could have been exchanged in a Section 1031 transaction for another like-kind property, thus deferring the long-term capital gain for the current year.”
Smart Business spoke with Engelhardt about the benefits of year-end tax planning and what key categories are included in a successful plan.
What is the major goal of year-end tax planning?
The desired result of tax planning is optimizing tax savings. A comprehensive year-end strategy can identify categories that need attention, allowing the taxpayer ample time to adjust the plan. A strong understanding of your current tax situation helps form the basis of a beneficial year-end plan.
What key areas of tax planning often are overlooked?
The Alternative Minimum Tax (AMT) frequently traps taxpayers. The AMT is a separate set of rules that disallows certain deductions and personal exemptions. For instance, when gifting to charitable organizations or itemizing expenses, people believe they are eligible for a full deduction, but these add-backs could force them into the AMT. Year-end planning will help project if you are subject to the AMT, leaving sufficient time for a new approach during the last few months of the year.
Some investors make the mistake of selling appreciated stock to raise cash for a charitable donation. The resulting capital gain increases adjusted gross income (AGI) and decreases the benefit of the itemized deductions that have limits based on AGI. Instead, by using a direct transfer of stock to the charitable organization, no additional capital gains or increased income is realized, and the taxpayer can claim a deduction for the fair market value of the donated stock.
Were there any substantial changes to the 2006 federal tax code?
Yes, the Pension Protection Act was added, and a change to IRA distributions is now in place. The IRA change permits a donation of $100,000 directly from an IRA to a charity as part of the required minimum distribution. Additionally, a change to the Heritage 401(k) plan allows for a rollover into a separate IRA not only for a spouse, but also for other beneficiaries, with withdrawals stretched out over the beneficiary’s life.
Parents of working children should note a change in the kiddie tax. The age limit for this tax was raised from 14 to 18, meaning that children’s income will be taxed at the parents’ higher rate for four additional years.
As we approach the end of the year, what tax planning items should receive top priority?
People should review the status of capital gains and losses. Each year, an individual is allowed a $3,000 overall loss, so gains early in the year could be offset by investment losses later in the year. Conversely, early-year losses might be offset by late-year gains.
Additional aspects to consider are itemized deductions, real estate tax payments and charitable donations. It may make sense to double-up on these items in one year, and not take them all in the following year, depending on your income, the phase-out of itemized deductions, and matters relating to the AMT.
Ideally, when should individuals start their year-end planning?
Of course, CPAs and tax advisers promote a year-round planning strategy. An excellent time to review your current position is when you pay estimated quarterly taxes. Some taxpayers may not need to act until the fourth quarter or even December, but they should give themselves time to implement their tax plan. After Dec. 31, contributions to certain retirement plans may be the only way to impact the prior year’s tax liabilities.
Frequent communication with your CPA or tax consultant will lead to pro-active year-end tax planning. Contacting a professional for advice before making a major decision is much easier than trying to dig your way out of trouble after the fact.
BETH ENGELHARDT is senior manager of the Tax Department at Whitley Penn LLP. Reach her at (817) 258-9118 or Beth@wpcpa.com.
Before you review last month’s financials, remember that those numbers, while important, are old news. What you need is a program to fix something right now, today, so that tomorrow’s profits are bigger, or tomorrow’s business is more valuable. A benchmarking program can be the platform for these gains.
Benchmarking is “comparing yourself to the best example of how another organization performs a process,” according to Larry Autrey, managing partner of Whitley Penn.
“I have always assumed that everyone is trying to make their business better. In doing so, they’re trying to find a standard by which to measure it. Benchmarking, in my mind, is the right answer.”
Smart Business spoke with Autrey about the process of benchmarking and how it can increase the value of your company.
What benefits can a benchmarking program produce?
The business environment has changed radically in recent years, and the consequences of failing to manage value can be severe. Benchmarking can determine what is achievable, identify constraints and limitations, improve processes and operations, make you more competitive, and exploit the investment of others.
What are the basics of benchmarking?
If you know what you’re trying to accomplish, it’s much easier to get there. Implementing a program involves a four-step process of planning, research, analyzing data, and putting the results into tactical plans specifically adapted for your company. A key part of the research phase is to identify the company’s value drivers, which are areas that drive up the value of the business. There are probably two or three categories in any business that are going to drive cash flow, profitability or value. We try to benchmark those categories that will have the most impact.
Once the key value drivers are identified, we look for leading indicators. For example, if gross profit is the category you’re going to benchmark against the competition, and you are currently two percent shy of what the leaders have, then the question is, What can I look at every day that improves or deteriorates gross profit? This should help you in determining if you can meet or exceed that benchmark.
What kinds of companies should utilize benchmarking?
Benchmarking is for any company that is concerned with improving cash flow, profitability or value. Sometimes it’s not easy, because perhaps the industry you are in is very unique. But there’s always an industry that you can find to learn something from or to mimic, and to benchmark against.
Even businesses that are considered the best in their industry have an area they would like to improve, and somewhere in their mission may have identified something they want to protect themselves against. They may have knowledge of another leading business that slipped up and lost profitability or value and, therefore, want to capitalize on what others may not have by implementing safeguards to protect what they have in place.
Can benchmarking be used internally?
Benchmarking can be used internally to compare processes with firms from any sector of the economy. Additionally, within a large company, you could put a strong-performing division up against another division and try to benchmark the less profitable division against the more profitable. Sales companies can benchmark aspects of bids before they go out. But I believe it’s more effective externally when used to compare your business with competitors and similar businesses, or against the best practices in your industry.
What key factors should be considered when outsourcing a benchmarking program?
Before outsourcing, make sure the company understands your mission. Usually it’s cash flow, profitability and valuation. Often, a business will obtain a valuation to determine what it is worth today, and then the goal is to increase its value by 25 percent. As part of the valuation, an outside firm should determine the top two or three key value drivers. If it’s understood what drives value in your business, then benchmark parameters can be developed.
LARRY G. AUTREY is managing partner of Whitley Penn LLP, CPAs & Professional Accountants. Reach him at (817) 258-9190 or firstname.lastname@example.org.
Aligning an organization to reflect real world diversity can be overwhelming. When considering the metrics of race and ethnicity alone, today there are more than 30 different groups with more than a million members. But this is the world we live in and our workplaces should reflect this immense diversity.
But sensitivity goes far beyond race and ethnicity; religion, age, gender and even different ways of thinking or doing business are all ingredients in the corporate melting pot.
Since there’s no panacea when it comes to measuring a company’s sensitivity and cultural awareness, how can companies best assess their commitment to honoring and celebrating diversity?
“It really becomes the responsibility of every manager in the organization to take ownership for that,” says Linda W. Devine, Ph.D., vice president for operations and planning, The University of Tampa. “And it takes a ‘top down meets grassroots’ initiative to strengthen your commitment to a diverse workplace.”
Smart Business spoke with Devine to find out more about recognizing the subtle differences that make us stronger and how your company can respond with flexibility to honor and celebrate diversity.
How can organizations celebrate diversity with respect to race, ethnicity, gender, and also differences in ideas and ways of doing things?
The celebration of differences begins with active listening and being aware of the cultural dimensions of the organizational environment. It is easy to sail past the subtle nuances that characterize subgroups within the larger organizational context, and by doing so, we miss out on potential new solutions and new ways of knowing. The embracing of differences requires recognizing the obvious but also the not so obvious, and it takes intentionality on the part of the leaders, managers, and ultimately the members of the organization. Effective leaders recognize the inherent value in understanding and capitalizing on individual differences.
What are methods to engage and retain diversity beyond recruiting efforts?
The way to retain diversity in the organization is by engaging all members, not just those of the majority. This can occur at all levels of the organization and in a variety of work settings. It requires the work group leader to ensure that all members have the opportunity to contribute to solution building, bring intellectual capital to the table, or otherwise offer skills and abilities to the tasks at hand. From an intergenerational perspective, this contributing may take the form of the ‘greatest generation’ offering perspective on organizational structure and hierarchy, the ‘boomers’ creating the face-to-face opportunities to communicate, and the Gen-Xers and millenials assisting them in the application of new technologies.
Organizational diversity is also maintained through understanding worker motivation. Is it through compensation? Time off? Recognition? A collegial and productive work environment? Corporate volunteerism or service? Recreational activities after work? Learning opportunities? The diversity of the workplace calls for diverse responses in meeting employee needs whenever possible. In these trying times, new paradigms will emerge, and new ways of working and succeeding will become apparent. The solutions will rise from the current situation in ways not yet known, and wise leaders will tap into all their human capital and find ways to differentiate encouragement and motivation.
What should be considered when honoring holiday celebrations that respect and celebrate diversity?
Respect coupled with employee education is central to celebrating diversity. While the celebration should not detract from the organization’s core business or purpose, such celebrations can and do present rich interaction opportunities. For the celebrants, it is an opportunity to share traditions, customs, histories and perspectives, and for colleagues, it is an opportunity to learn. Honoring another’s beliefs and traditions promotes an organizational culture of mutual respect, and this is a healthy platform for any organization.
Who should be charged with guiding diversity initiatives?
Large organizations frequently have the opportunity to have a person or persons responsible for diversity training and other related initiatives. In the best of all worlds, diversity initiatives should be in the scope of every manager’s duties. In this way, the importance of differences permeates the organization and is looked upon as a strength and a source of capital.
How can an organization benefit from increasing sensitivity and embracing diversity?
Organizations that embrace differences are merely reflecting the larger society. The United States, with a population of roughly 308 million, is one of the most diverse nations. Work force diversity, whether measured by age, race, ethnicity, gender, ability, or any other characteristic, is societal diversity, and increasing understanding within the organizational environment can only be positive for society at large. It is simply the right thing to do.
Linda W. Devine, Ph.D., is the vice president for operations and planning at The University of Tampa and a board director at Tampa Bay WorkForce Alliance. Reach her at (813) 253-6203 or email@example.com.