You think it can’t happen to you. Your employees are honest, you trust them and they would never steal from you.
But no company is exempt from the threat of fraud, says Frank A. Suponcic, CPA, CFE, CFF, principal in the Valuation & Litigation Advisory Services Group at Skoda Minotti.
“Fraud is out there, it is increasing and companies need to be more vigilant,” says Suponcic. “They need to not be so trusting and raise their level of awareness.”
Smart Business spoke with Suponcic about how to reduce the risk of your business becoming a victim of fraud.
How does fraud occur?
Ninety percent of fraud occurs in disbursements, money leaving the company in the form of unauthorized checks, electronic funds transfers and debit transactions. Employees are not as likely to steal cash receipts, but it’s easy to write a check to yourself, submit your personal credit card statement to the corporation or commit fraud on an expense report.
There are many ways that employees can unlawfully enrich themselves, so within those mechanisms, there have to be policies and procedures in place. For example, there should always be substantiating documents for disbursements. Too many companies simply pay bills without documentation and aren’t conscientious about the fact that they may not be paying for what they think or that there may be overcharges. They just don’t take the time to approve invoices and match them to other corroborating documentation.
Fraud is occurring more often in this economy as a spouse loses a job or an employee is threatened with home foreclosure or is struggling to pay their bills. And once they have a reason or rationalization, the next step is figuring out how to exploit the system to fulfill that need. Smart people with criminal intent can identify the internal control weaknesses. They know you aren’t looking at the bank statements and invoices to be paid or that the check plate or blank check stock is not secured. They know that you trust them and, as a result, will take advantage of that.
Why should businesses be concerned about fraud if they have good relationships with their employees?
Occurrences of misconduct happen in every occupation, from professional organizations to religious organizations to not-for-profit organizations to law enforcement, legal and accounting firms, and at every level, from the receptionist to the CEO.
You can’t let your guard down. Fraud is based on a violation of trust, and the more that you trust someone, the more you should have your guard up. Many cases have involved family members, people who have known each other since childhood, or even the best man at your wedding. There are no boundaries as far as who commits fraud, and if you think it can’t happen to you, invite a forensic professional into your business for an hour and he or she can likely show you several places in which you have inadequate internal controls.
How can having a forensic professional perform a fraud assessment help prevent fraud?
During a fraud assessment, the forensic accountant will interview everyone in the accounting cycle, identify the weaknesses and provide the company with suggestions for enhancement of internal controls. If there are weaknesses that can be exploited, it is well worth the cost of the assessment. It’s not uncommon for the forensic CPA to compile many valuable recommendations, some of which have a cost attached and some of which can be implemented for free.
How can surprise audits help deter fraud?
Surprise audits review specific transactions, and the fact that employees can’t prepare for them can be a deterrent. This is a valuable internal control mechanism, especially in smaller companies.
People may be aware that there is a corporate policy against fraud, but if they recognize that no one is looking over their shoulder, bringing in an outside forensic CPA can provide management with assurance that there is an invoice for every disbursement, that credit card bills don’t reflect personal purchases, that the person who issues payroll isn’t paying themselves too much, and that specific controls are operating and being adhered to.
What other steps can a business take to help prevent fraud?
Have people rotate jobs, so you don’t have just one person in a position in which fraud could occur. You can also offer financial incentives to employees to report suspicious activity. Also, have bank statements sent to your house. Don’t just hand them over to your bookkeeper. Actually look at the disbursements and examine what is being paid out of the account.
In addition, the tone at the top is critical. Employees need to see that executives are ethically handling business transactions and instilling that the company will do things right. Require employees to sign a fraud policy that discusses, in writing, the definition of stealing and what will happen should an employee decide to commit a financial crime. Make it clear that you will press criminal charges and pursue every civil course for restitution. Fraud has put companies out of businesses. Employees need to understand that everyone has a stake in making sure that the company continues and that one unethical person can jeopardize that.
Circulate the fraud policy annually, meet with the employees and have them acknowledge that they have read it, that they have not perpetrated a fraud and that they understand what stealing is. This is also a good time to ask if they have noticed anything unusual, such as someone cheating on an expense report or padding payroll. Give employees the opportunity to talk to you. You can also utilize a fraud hotline so employees can anonymously report suspicious financial activity.
Fraud can’t be eliminated, but by taking steps to implement effective internal controls, you can reduce your risk of becoming a victim.
Frank A. Suponcic, CPA, CFE, CFF, is a principal in the Valuation & Litigation Advisory Services Group at Skoda Minotti. Reach him at (440) 449-6800 or firstname.lastname@example.org.
When determining what entity type is best for your organization, you need to consider several factors, and working with an outside adviser can help avoid trouble down the road, says Steven H. Gross, CPA, a partner with Skoda Minotti.
“A limited liability company (LLC) often makes the most sense, as it provides the most flexibility, but there are other options to consider,” says Gross. “Even with an LLC, you need to determine the best way to be taxed.”
Smart Business spoke with Gross about how to make the best choice to lessen your tax burden and avoid common tax traps.
What types of entity structures can businesses choose from?
The most common options are a C corporation, an S corporation, partnerships and, as mentioned above, an LLC.
A corporation (S or C) is a separate legal entity. C corporations are tax paying entities, that is, they pay taxes on their taxable income just as individuals pay taxes on their taxable income. A C corporation can make a distribution to its shareholders, which may be taxed as a dividend. These dividends are not deductible to the corporation, but taxed, at least until 2013, at a favorable tax rate to the recipient. Depending on the tax situation of the individual and the corporation, paying some dividends may result in less taxes paid by the corporation and individual combined.
An S corporation is also a separate legal entity but generally is not a tax-paying entity for federal tax purposes. An advantage of an S corp. is that its profits are taxed to the shareholders, not the corporation itself; therefore the double taxation that exists in a C corp. is eliminated. Another advantage is that the amount of profits taxed to the shareholders is subject to self-employment tax. Since S corp. profits are not subject to self-employment tax, you can manage your self-employment taxes better than in a C corp. In an S corp., profits and losses have to be allocated to the shareholders in the same percentages, as ownership and distributions cannot be disproportionate.
Another entity structure option is an LLC. Generally, a multi-member LLC will be taxed as a partnership. An LLC filing a partnership return is not a tax-paying entity and the profits and losses flow through to the members in a similar manner to an S corp. Members of an LLC can elect to have the entity taxed as an S corp. or a C corp.
What are some benefits of an LLC?
An LLC that is treated as a partnership allows its members to avoid the double taxation and higher income tax of a corporation while, at the same time, retaining limited liability and other favorable attributes of a corporation.
An LLC, unlike an S corp., has the ability to specially allocate items of income, loss, deduction or credit, so long as the allocations have substantial economic effect.
Note that, even if an LLC is treated as a partnership for federal income tax purposes, an LLC may also be treated as a corporation and be subject to franchise taxes under state law.
What are some benefits of an S corporation?
As stated before, shareholders of an S corp. do not pay self-employment tax on the flow-through profits.
An S corp. with only one shareholder still files a separate return, unlike a single member LLC. A single member LLC is a disregarded entity for federal tax purposes and all of the business income and expenses are reported on Schedule C of the individual’s income tax return.
Disposition of an ownership interest in an S corp. at a loss may yield an ordinary loss under I.R.C. Sec. 1244, while disposition of an LLC ownership interest generally yields a capital loss.
What are some common tax traps businesses fall into?
When you have flow-through entities, you have basis issues when it comes to losses. If you meet certain criteria, those losses can be deducted on your tax return. However, individuals often think that if they are incurring losses in their pass-through entity, they can deduct those losses on their individual income tax returns when, in fact, they do not have basis to take the losses.
Another trap in the C corp. arena is charitable contributions. Contributions made in a C corp. are only deductible to the extent that they don’t exceed modified net income by 10 percent. Any excess contributions can be carried forward for up to five years. If a C corp. is running at a loss, the shareholder may want to consider making the donation personally.
How do you determine the right choice for your business?
Business owners need to seek advice on what would be the best choice in their particular situation. Sit down with an adviser, determine the pros and cons and weigh the options.
The issues can be very confusing and difficult to get your arms around. These are intricate tax issues and you would be best served by sorting through your options with an experienced professional.
Steven H. Gross, CPA, is a partner with Skoda Minotti. Reach him at (440) 449-6800 or email@example.com.
Estate planning generally has three purposes: to reduce estate taxes, to avoid probate and to protect beneficiaries.
Failing to plan can result in unnecessary expenses and leave your executor with the task of sorting through your estate. But creating a plan isn’t enough; you have to revisit it to ensure it remains relevant, says Steven C. Hartstein, CPA, JD, a partner in the Tax Planning & Preparation Department at Skoda Minotti.
“When it comes to estate planning to protect your business, your family and your assets, you need a good estate plan that is flexible, allowing you to take advantage of what the rules are now and what they will be in the future,” says Hartstein.
Smart Business spoke with Hartstein about how to plan your estate to minimize taxes and ensure a smooth transition to the next generation.
What are the current estate tax rules?
In 2010, if you passed away, there was no estate tax. Late in 2010, President Barack Obama signed the Tax Relief Act which said that, in 2011 and 2012, you can exclude up to $5 million from your estate while anything above $5 million is taxed at 35 percent. The rules in place now say that in 2013, the exclusion will be $1 million adjusted for inflation, and the highest tax rate could go to 55 percent.
Sitting here in 2011, no one thinks that’s actually going to happen, but in 2001, no one thought there would be an unlimited amount of untaxed estate in 2010. Although it is a guessing game, there are steps you can take to protect your estate.
How can you use the current rules to help limit your liability?
For 2011 and 2012, there is portability. That means that, since both the husband and wife get to pass along $5 million without tax, when the second spouse dies, that person can use the remaining amount of the first deceased spouse’s $5 million exclusion, providing that an election is made on the first deceased spouse’s tax return.
Technically, if the husband had zero assets in his name and died first, and the wife had $10 million, she could use all $10 million of the combined exclusion between them.
However, the executor has to have made an election on the husband’s estate tax return. You have nine months after the date of death to file that document, and if you don’t, you lose that portability.
How can you make gifts as part of your estate plan?
That $5 million exclusion applies during your lifetime or when you are deceased. So you can give away $5 million today, or $5 million when you die.
One of the best things you can do is give away appreciating assets now. If you have an asset worth $1 million today, but in 10 years, it will be worth $5 million, you are better off giving it away today at that $1 million value than if you die in 10 years and give it away at that $5 million value.
You may not want to give up stock in your business, because you lose that control, but you may have other assets you can give away.
How can a grantor trust benefit an estate?
With a grantor retained annuity trust, you put your assets into the trust, and you, as the donor, get back a stream of annuity revenue for a number of years. When you pass away, the assets then go to the beneficiary at little or no gift tax cost. This is because the present value of the annuity is close to the fair market value of the property, thus, the remainder gift is small.
How can having an estate plan help avoid probate?
No one wants to go through probate. Probate is public, so anyone can know what you have, and there are time and monetary costs involved. In addition, it usually takes a long time to go through probate. But it is very easy to avoid.
The purpose of probate is for the court to determine what should happen to your assets when you die. But if you have a trust document that dictates what happens to those assets, there is no need for probate.
How can having an estate plan benefit your family after you pass away?
Being the executor of an estate is very time consuming and messy. The children may not know where the parents had the insurance policy, or what their brokerage accounts are. The great thing about an estate plan is that it marshals assets and gathers them in one place. If everything is in a trust, it makes it much easier.
An estate plan also protects your beneficiaries. If you have minor children, you may not want them to have $1 million in their bank account. If you have older children, you may want to protect them from creditors. By placing those assets in a trust, if they are sued by creditors, or go through a divorce, those assets will be protected.
How often should the plan be reviewed?
In today’s uncertain tax world, it should be reviewed at least every couple of years. Things change, relationships change and tax laws change, and the plan should be addressed frequently. I’ve seen wills and trusts that have not been updated since the 1970s, from before someone had children and grandchildren. That does you no good whatsoever. Rules that were in place even 10 years ago don’t exist any more, so you need to have something drafted that takes advantage of rules that are in place now and be flexible enough to take advantage of the future.
Steven C. Hartstein, CPA, JD, is a partner in the Tax Planning & Preparation Department at Skoda Minotti. Reach him at (440) 449-6800 or firstname.lastname@example.org.
If you own real estate, a cost segregation study is one of the best tools to help you reduce taxes and improve cash flow. Although a cost segregation study will not provide additional tax deductions, it will enable the taxpayer to accelerate a portion of the depreciation on the building, says David R. Walter, CPA, MBA, tax manager at Skoda Minotti.
“Cost segregation is the process of breaking out a portion of a building’s cost that can be depreciated quicker than the standard life of 39 years,” Walter says.
Smart Business spoke with Walter about the benefits of performing a cost segregation study and how doing so can help keep money in your business.
Where should a property owner start when considering a cost segregation study?
The purchase or construction of a building is the starting point for any cost segregation study. Any building is eligible, but the owner must determine if it is cost beneficial to perform a study. Any cost segregation study should start with a cost-free estimate to quantify the potential tax savings from doing the study. These estimates usually do not take a large investment of time, as only a few items of basic information are needed.
How can an owner determine if a cost segregation study is worth the investment?
Most firms that provide cost segregation studies provide a cost-free analysis of the potential tax savings. This analysis gives you a conservative estimate of how much could be saved, the net present value of those savings, and the fee for conducting the study. This allows you to compare the net present value of what you could save, versus what you’re going to pay for the study, allowing you to make an educated decision.
At worst, you’ve invested half an hour to pull together information to get an estimate and see whether it makes sense.
What is the minimum building value at which a study is worth the investment?
There is no true value that answers this question. It depends on the size and type of building. If you’re talking about a traditional warehouse, which is essentially just four walls, $500,000 would be a general rule of thumb. But if you have a specialized facility, that rule of thumb could drop down to $200,000 or $300,000. I tell clients that while these may be general guidelines, because an estimate is free, any building owner should get an estimate to determine if a cost segregation study makes sense.
When should a study be performed?
Ideally in your first year of ownership. The sooner you break down the costs and depreciate them over those shorter depreciation periods, the sooner that you’re going to reap those benefits.
However, it is still worth doing a study even if the building was purchased/constructed in a prior year. With a cost segregation study, you can go back and determine the amount of depreciation that should have been deducted if a study was done at the beginning, and compare that to what actually was deducted. The current IRS rules allow you to deduct, in the year of the study, the difference in depreciation up through that year, thus getting the taxpayer caught up all in one year.
The value of a study is based on the time value of money saved. If you buy a building today, the sooner you get the study completed, the more beneficial it will be.
Are there benefits of performing a study beyond accelerating depreciation?
There may be some potential benefit on the insurance side. With a cost segregation study, you’re detailing the cost basis of the building. With this detailed cost basis, the replacement cost of the property may be better determined, which could lower the insurance premiums on the building.
Is this something building owners can do on their own?
No. The IRS has stated that an engineering-based approach must be used to substantiate the cost breakdown. If the segregation of costs is not supported by an engineer’s report, it will not stand up under audit of the IRS. Although that means investing in a professional, the cost is typically worthwhile when compared to the savings you will realize.
Why should owners pay for a study when they still get those deductions over time without one?
It’s all about timing and the ability to push those deductions into earlier years. From a time value of money standpoint, the sooner a deduction can be taken, the more valuable it is.
If you look at a $1 million building, either way, you’re going to deduct that cost over 39 years, but by moving 25 percent of that million-dollar depreciation into earlier years, for example, you are decreasing your taxes in earlier years and getting that money back in your business sooner.
Everyone needs cash, and one of the best ways to get it is to reduce taxes in earlier years. Most tax planning strategies are based on the deferral of taxes, and that’s what you’re getting here. You’re deferring the taxes for a number of years and using that cash to grow the business.
What role should your CPA play in the process?
As much as this is an engineering approach, there is also a tax side. Your cost segregation study may produce a deduction, but you want to make sure you are working with a knowledgeable CPA to figure out how those tax deductions are going to play into your tax situation.
You don’t want to be in a position where you have paid for the study and then later find out that because of your situation, the deduction didn’t quite work out.
David R. Walter, CPA, MBA, is a tax manager at Skoda Minotti. Reach him at (440) 449-6800 or email@example.com
Growing your business is a big job, and you can’t do it yourself.
In order to successfully grow, you need to have a dedicated team of advisors who are working together to identify the issues your business faces and develop a comprehensive plan to move it forward, says Robert E. Coode, CSA, partner-in-charge of the Financial Services Group at Skoda Minotti.
“Any business executive, regardless of the age or size of the company, should make sure that an appropriate team of professionals is in place to serve on an advisory board,” says Coode. “That includes an attorney, a CPA, a financial advisor or planner, and an insurance agent or consultant.”
Smart Business spoke with Coode about how an advisory board of professionals working together can take your business to new heights.
How can all these disciplines working together help a company succeed?
Each of those advisors is working in a different discipline. The problem that occurs in many businesses is that while they may retain someone in each of these disciplines, each is operating in a vacuum as it relates to his or her client’s business.
Too often, when business owners have a legal problem, they call an attorney. Or when they have an accounting problem, they call their CPA. The problems arise when each is working independently because there are discussions taking place and decisions being made on the legal side that may have implications on the accounting side that the attorney is unaware of, and vice versa.
All of these advisors need to be in a room with the business owner to develop a comprehensive overview of the company. And it is the financial planner or advisor’s role to coordinate, because unless you have a quarterback coordinating those meetings, they are not going to happen because people are just too busy. This should be happening at least once a year, if not twice.
What would you say to business owners who are reluctant to invest in such a meeting?
It can be a difficult sell. Business owners are so involved in the day-to-day operations that it can be difficult to coordinate. They are majoring in the crisis on their desk today and the things that have to get done right now.
That is where the quarterback comes in. If the owner comes into work and has 10 problems on his or her desk, that person is not going to be thinking about coordinating a meeting of an advisory board. But if they have chosen a quarterback and given them the authority to plan the meeting, a meeting will be on the calendar, making it much more likely to happen. There is rarely a situation where the business owner says he or she is too busy to attend such a meeting. More than likely, that person wants to do it but is just too busy to put it together.
How should the meeting be structured?
The financial planner will provide an agenda and lead the discussion. At the initial meeting, there is a lot of time spent getting to know each other.
In subsequent meetings, each participant is encouraged to bring his or her major concerns relating to the client and the client’s business as it relates to structure, accounting, financial planning and insurance needs. Each participant brings an agenda item, and the owner will present three or four topics that he or she would like covered, such as transitioning the business or how his or her estate plan may be affected by the business.
But the meeting shouldn’t be too structured, because you want people to offer their input and be able to discuss new ideas as they arise.
What are the benefits of such an advisory board?
First of all, it forces the owner to go back and re-examine a variety of issues. For example, how the business is structured. Is it the right entity, be that a C Corp., an LLC or an S Corp., and what are the ramifications of that choice? Should the business be structured that way from a legal standpoint?
From an accounting standpoint, it’s an opportunity to sit down together and look at the numbers, income and balance sheet. It’s also an opportunity to look at expenses and how the business is spending money. Should it be spending it in different ways? How does it do business related to other similar businesses, both in the region and internationally? What are other businesses doing? By having these conversations, the professionals know that the client is serious about growing his or her business and is more likely to help that business grow by introducing it to new opportunities.
Businesses of any size can benefit from having such a board. Even if a business is just getting started, I wouldn’t advise moving ahead without the advice and input of a team of professionals.
Creating a team of trusted professionals and getting them working together for the good of your business can lead to far better results than simply meeting with them individually on an as-needed basis.
Robert E. Coode, CSA, is partner-in-charge of the Financial Services Group at Skoda Minotti. Reach him at (440) 449-6800 or firstname.lastname@example.org.
Although Northeast Ohio’s construction industry is struggling, some construction companies are still succeeding.
Those that are doing so are taking a hard look at what they do and how they do it to stand out from the crowd and give themselves a competitive advantage, says Roger T. Gingerich, CPA/ABV, CVA, partner-in-charge of the Real Estate & Construction Group at Skoda Minotti.
“You need to examine your current scope of work and determine your strengths to help maximize your bottom line,” says Gingerich.
Smart Business spoke with Gingerich about several steps contractors can take to grow top-line revenue and improve their bottom line.
What can contractors do to grow their business in the current market?
The most important thing is to look at the scope of your work and determine what you are really good at. Take a hard look at whether you are better served by focusing on general contracting, or whether it makes sense to get into a different segment or trade of the construction process. Can you take on more of the project instead of subcontracting some parts out? Doing so can help you grow the top line.
Challenge the scope of the work you’re doing, and consider whether there are new skills you should add for work in different areas. Or perhaps it makes more sense to get out of areas in which you are spending resources and not making money, negatively impacting your bottom line.
What areas can a business focus on to increase its chances of success?
Two areas with the highest potential for construction opportunities in Northeast Ohio are institutional — universities and health care — and governmental, in the form of municipalities, states, government buildings and public schools.
Also consider finding an underserved niche. For example, not a lot of construction companies are building student housing. If you can find your niche and get really good at it, you will have more opportunities. Other niches include national chains, restaurants and pharmacies. If you get really good working with a certain brand or a type of chain, that can afford you the opportunity to secure a lot of work over a short period of time. In addition, national chains that are rebranding hire contractors that can do multiple stores over a short period.
Should construction companies steer away from the private sector for now?
No. No matter what, even when times are slow, you need to be developing relationships within the private sector. Stay in front of people you have done work with in the past. Even though they are not building today, there will come a day when they start to spend money on capital expenditures again. While staying front and center might not mean new business today, it may mean business five or 10 years from now.
Also, introduce yourself to people with whom you haven’t done business to build new relationships for when things turn around.
What are some other strategies to grow your business?
Bid volume. Look at your business’s history and see what percentage of bids you win. If you historically win 10 percent and you want to be a $10 million contractor, you need to bid $100 million worth of work.
Bid a higher volume of jobs with the goal that if you can secure what you have historically secured, you should be able to drive revenue.
Should local contractors keep their sights solely on Northeast Ohio?
No. To be successful, you have to be mobile. You have to go where the work is. If certain geographic markets have more work, you have to be open to bidding on jobs out of state.
The challenge is that when you go into new markets, you don’t know the players. You may have to hire unfamiliar subcontractors. As a result, you need to prequalify subcontractors and work with your bonding company.
It’s not as simple as saying, ‘I’m going to go into North Carolina and do work there.’
You have to register with the State, and there’s a lot of red tape. If you do it right, though, there are opportunities to succeed.
How can government programs help some businesses succeed?
Not everyone qualifies, but those who do can benefit from being designated a small business enterprise, woman business enterprise, minority business enterprise or disadvantaged enterprise. Doing so give gives you the opportunity to bid on projects with less competition than you otherwise would face.
How can a business position itself for growth as the economy begins to recover?
Part of growing is surviving tough times. Make sure you’re doing a good job managing overhead. Fewer jobs means you’re making less margin, which means less overhead you can cover. You have to run lean, cut back on overhead and work with your banks and bonding company so when times get better, you can get a bond or a bank loan when you need it.
You have to be able to demonstrate that you’re managing overhead and that you’re willing to put equity into the company if it needs an infusion of capital because banks are more likely to loan to you if they see you’re putting skin into the game. Show banks that you’re sophisticated, that you have a good financial reporting process in place and that you are budgeting well.
All of those things are important in a tough market to weather the storm and put yourself in a better position to grow as you come out of it.
Roger T. Gingerich, CPA/ABV, CVA, is the partner-in-charge of the Real Estate & Construction Group at Skoda Minotti. Reach him at email@example.com or (440) 449-6800.
As nonprofits plan for growth in a struggling economy, they must take a careful approach to change. Failing to do so could result in a loss of donors, a missed opportunity in structuring their boards, or the potential misuse of social media, says Herzl Ginsburg, CPA, manager, not-for-profit group at Skoda Minotti.
“As nonprofits look to grow, it is critical that they not lose sight of the key resources and assets that they already have in place,” says Ginsburg. “It would be a real shame to lose something of value in your efforts to grow the organization.”
Smart Business spoke with Ginsburg about the keys to successful growth for nonprofits.
Is there a process that is critical to allow for growth at a nonprofit?
It is vital to identify your key resources, the risks to those resources as you grow, and strategies that allow you to mitigate those risks. For example, if launching a new marketing campaign might alienate a key donor, have you identified this donor and this risk? Have you planned for this risk as a part of your campaign? As appropriate, consider engaging your staff, donors and board in this process. Ask, ‘What really matters to us? What could we not do without?’ Whether that is a key donor, staff person or piece of property will vary. But the process always involves asking those questions and having a meaningful discussion around them. Organizations are working hard to change in order to meet the current economy. In that mindset, it is easy to lose sight of the related question: ‘As we grow, what will we do to safeguard our key resources and people?’
What role should professional service providers play as nonprofits looks to grow?
Your service providers should serve as your advisers. They can best fill that role when you keep them informed of what your organization is doing and planning.
You do not want to surprise the banker with financial issues, or the attorney with legal issues. Give your advisers the opportunity to plan rather than react. But beyond that, if you are working with the right advisers, they should be offering suggestions and challenging the details of your plans. The more discussions your advisers have with you, the easier it is to see where the organization is trying to go and to identify the risks it will face along the way. At that point, with the path forward clear, you can work together to plan for successful growth while mitigating your risks.
What opportunities and challenges does the use of social media present to nonprofits?
Social media offers what may be described as a double-edged sword to nonprofits. On one hand, it provides a relatively inexpensive way to reach out to a large audience, which is enticing given the cash shortfalls that many nonprofits are facing. On the other hand, there is a potential pitfall in embracing social media, that the messages will not go through the same checks and balances that traditional marketing would. For example, if a nonprofit were putting out a flyer about a new fundraising campaign, its staff and executive director would likely spend time drafting the flyer, reviewing it, ensuring everything is spelled correctly and checking that it includes the correct information. That process will need to be modified to properly and effectively capture your message in your use of social media. Nonprofits should think about this issue — balancing the ease of the message with its quality — and have processes and policies in place as they grow and use social media.
What role should the board play in its nonprofit’s plans for growth?
The board should be viewed as a pool of resources and talent, to be cherished, nurtured and grown for the benefit of the organization. Board members have talents and experience, such as in financial and legal matters, which prove beneficial to the organization. These skill sets may allow the organization to forgo, or at least curtail, the expense of a third-party adviser in the organization’s growth process.
Given this role, this impacts the selection of new board members. As you identify critical areas for the organization where additional expertise would help, take stock of your board members and how they can participate. If the need is not met by existing members, consider targeting future members who have the needed skills. Much as you develop a job description when hiring an employee, draft a description of your ideal board member, including what background would benefit the organization, as you begin your search. You may choose to select a person with passion for the organization over someone with a particular skill set; planning out the process will better equip you to weigh the factors involved and make an informed decision.
What advice would you offer nonprofits regarding employees and volunteers?
Your staff may be your strongest and most important asset; treat them that way. Given tight budgets and uncertainty in existing funding sources, many nonprofits have staff performing multiple roles, freeing up funds that would otherwise have been spent on salary. Over time, this can prove taxing for your people. You should know if your staff is overburdened, and they should know you care. Make a point of checking in and talking with each staff person on a regular basis. When I meet with nonprofit executives, I enjoy asking them what their vacation plans are. The question is innocuous and friendly; more often than not, the response is innocent as well. However, when the response is, ‘I really cannot take a vacation; I am needed here,’ we have a heightened risk of this person burning out and we need to plan for it.
Some questions to consider: If this person is essential to the organization, what can we do to remove some of his or her burden? As we are attempting to grow, will we be asking too much of this person in the process? Do we have an alternative approach we can try? Particularly when nonprofits are looking to change and grow, care should be given to their staff — and all of their key resources — to not harm them in the process.
Herzl Ginsburg is a manager of the not-for-profit group at Skoda Minotti. Reach him at firstname.lastname@example.org or (440) 449-6800.
|Strong business skills alone are not enough for business owners who want to grow their businesses. They must implement strategic plans to help them meet that goal. Sometimes owners get so focused on day-to-day operations, though, that they let the future take a back seat to the present — and what lies in between.|
As hard as it may be to find the time to plan, they should develop measurable short-, mid- and long-term goals, link short-term goals with long-term outcomes, develop realistic budgets and financial forecasts, tie objectives to measurable actions and establish road maps for their strategic growth. That is strategic planning, the process of developing a methodology and making it the company’s way of life. How do they do that?
Smart Business spoke with Kenneth M. Haffey, CPA, CVA, a partner with Skoda Minotti, about strategic planning and how it can enhance a business’s chances of success, durability and growth.
Why is strategic planning important?
It gives business owners an idea of what they want the company to look like in the future and how they are going to get there in the most efficient, effective way. If they don’t engage in the process, they might find themselves losing ground to their competitors who do. They may not be nimble enough or quick enough to make changes within the organization or to match their competitors’ strategies as the market changes around them. They are left on the outside looking in as opportunities arise — and pass them by.
Is it an ongoing process?
Yes. One of the key things to remember about strategic planning is that it is a very fluid process. It provides a sanity check for owners to make sure that things are moving forward, rather than stagnating.
Business conditions change; owners have to change with them. If they don’t have a plan in place that can be executed quickly to help them adapt to changes, they will be ill prepared to function in a competitive market, let alone survive or grow. Owners have to establish regular touch points in their strategic plans to make sure that things happen in a timely fashion and that change can follow.
Does strategic planning involve both long- and short-term goals?
Definitely. Plans should go out for at least 24 to 36 months to address the fluidity in business cycles. They should also contain components that address the next six to 12 months. In any case, they should reduce the impact surprises can have on businesses when changes occur. After all, eliminating the adverse impact of surprises is one of the purposes of strategic planning.
Does it follow specific formats?
Not at all. It can be as simple as writing notes on a napkin or as formal as sitting with partners, managers and other key people to brainstorm, write down ideas and feed them to a software package designed specifically to create a strategic plan. The important thing is not how strategic planning is done; rather, it is that the process is performed on an ongoing basis with the company’s future in mind.
How do companies benefit from it?
In addition to growth, it results in improved operations, expanded market share and increased company value and it enhances the ability to take advantage of opportunities as they come along. A match between being strategic and opportunistic is the best place for business owners to be when running a company. The same holds true for managers of divisions, departments and other units within the company. And, it is important to note that strategic and opportunistic must complement each other.
Some people get caught up in the opportunistic part but don’t have strategies in place to take advantage of opportunities when they arise.
Opportunists without plans find themselves reacting rather than ‘proacting.’ That is not where they want to be. Strategic planning also enhances a company’s competitive position. The organizations with the best strategic plans tend to be those that react most quickly and most efficiently to market changes. They also tend to be the ones with leaders who focus on everyday operations and future opportunities simultaneously. Strategic planning allows them to do both.
Who should be involved in it?
The primary person is whoever is responsible for the operation of the business. Depending on the type of organization, others who should be involved include financial, operations, marketing and sales. Some companies might benefit from working with consultants to gain an external view of market forces and how they fit in to the overall competitive picture.
In short, the process should include the business leaders of the different departments and areas throughout the organization. The inclusion of these leaders enhances the chances that the result will be the organization’s plan, not the boss’s plan. In fact, that should be one of the goals of strategic planning.
Kenneth M. Haffey, CPA, CVA, is a partner with Skoda Minotti. Reach him at email@example.com or (440) 449-6800.
Growing your company through mergers or acquisitions can provide a tremendous boost to business, but isn’t something to take lightly.
“You have to consider how you want the organization to grow,” says Kenneth M. Haffey, CPA, CVA, a partner with Skoda Minotti. “When you start identifying targets, consider what sort of operational challenges you will face. We call that smart growth — what should an organization look like for the short-term and the long-term.”
Smart Business spoke with Haffey about what owners should know before making the deal.
Before considering growing the business through a merger or acquisition, what should a business owner think about?
At the end of the day, you have to know what your goals for the merger or acquisition are. Will the target company be an add-on or tuck-in to an existing segment of your business? The bottom line is to understand the who, what, when, where and why of the potential acquisition or merger before you start the process.
Although often overlooked, the ‘where’ is actually just as important as the other questions. Acquiring or merging with companies in different parts of the country poses specific operational challenges, not the least of which is banking. With whom should the company bank? There are many large national banks now, but that wasn’t the case 10 years ago. If one of the involved company’s banks does not have a presence in the other company’s geographic area, then simple operational issues can become a challenge.
What should business owners keep in mind during a merger or acquisition?
Pricing is one element. Another is structuring the transaction correctly, which comes with hiring competent advisers. I can’t tell you how many times someone has their niece or nephew who just graduated from law school and took one M&A class working on these major transactions. Needless to say, that poses several challenges. You need a deal expert to make sure little things aren’t made into big things.
Years ago, when we were working on a deal with a client, three times in the first hour of our conversations, the attorney on the other side of the table came up with a ‘deal breaker.’ The third time I said, ‘If we are one hour into this and you already have three deal breakers, maybe this isn’t such a good idea.’ But this person was just trying to show his client that he was ‘in charge’ and that they would get the better of us.
After that, the individual owning the other business grabbed his attorney and said, ‘Let’s go out in the hall and talk.’ When they came back in, they had a completely different attitude. It wasn’t us versus them; it was us and them. Acquisitions and mergers only work if it is fair on both sides.
A confident and competent deal attorney and accountant or financial adviser will help make that happen. It’s important to make sure you understand the other side’s points. If every negotiating point is only going one way, why waste the other side’s time?
How should business owners prepare for an acquisition?
Have a plan in place. Set a time horizon, because, most of the time, things take longer than you think. It takes a while for both sides to perform financial and legal due diligence, and to figure out the operations. It’s not unusual that it would take four to six months from the time the letter of intent goes out until the deal is consummated. It’s more than a couple of meetings, but it also shouldn’t drag on too long or the individuals operating each entity may have their eyes off the ball of their own entities. You still need to run your own business.
What sort of tax ramifications should business owners prepare for with mergers or acquisitions?
Proper tax planning is important to make sure your corporate structure fits on an overall basis. Proper planning must be done with regard to the type of entity. Are you buying it as a subsidiary, a separate division or setting up a new company to do all this? For example, if a C corp. is buying an LLC, you have to prepare for the specific challenges for that situation.
Make sure you do your tax-related due diligence to ensure that all sales, property and payroll taxes have been paid, because the acquirer becomes liable for those taxes if they haven’t been paid, irrespective of the fact that it should have been paid by the seller. You could be on the hook for a lot of unpaid tax.
We just helped a client buy a company, and we found the company owed $300,000 in unpaid state and local taxes. That discovery drove a substantial purchase price adjustment.
Generally, when there is a problem, it is not so much federal income taxes; more often than not it is state and local taxes. Sales taxes, property taxes, payroll taxes — things like that.
How else can business owners determine what to pay when purchasing another company?
It’s important to understand the sustainability of the target company’s earnings. How does its revenue come together; what kind of clients do they have? For each client, determine if it is a special project client or if it is a client that has been around for a long time. Also, determine which clients will be continuing on with the company. That, as much as anything, drives purchase price.
Also, you must be aware of what kind of liabilities you will be assuming. Are there leases or mortgages? That is where financial diligence will uncover the liability side, and find out what is still owed to make sure there are no surprises. You don’t want to find out after an acquisition that you don’t really own your new assets — that you are leasing equipment.
Kenneth M. Haffey, CPA, CVA, is a partner with Skoda Minotti. Reach him at (440) 449-6800 or firstname.lastname@example.org.
As we are coming out of this recession, companies are hiring again and staffing specialists can utilize their databases of qualified candidates to assist companies with filling critical openings with great candidates more quickly.
“The fact that companies are starting to hire again is a positive indicator for professionals, as well as companies,” says Andrew Devore, managing director of Skoda Minotti Professional Staffing. “For professionals, it gives them the opportunity to explore positions they wouldn’t have considered a couple of months or even a year ago. For companies, they can now look internally and externally for growth. Many companies have the financial resources to start growing their operations by adding new talent. They can add the professionals necessary to take them from where they are today to where they want to be down the road.”
Smart Business spoke with Devore about why a staffing firm might be the right solution for your company’s hiring needs.
Why should companies consider delegating their hiring to an outside staffing firm?
You can narrow this down to saving time, money and effort. Staffing professionals know who the ‘A’ candidates are in the market right now, and can best match them to the needs of a company. Through their day-to-day interactions with professionals, recruiters constantly have a pulse of who’s available and what opportunity will motivate them to make a change. Delegating your hiring can save the internal recruiter or internal HR department time and money because a staffing firm will already have a list of candidates. The firm can quickly identify a list through its own database and research, which helps the company get into the interview process quickly rather than going through countless resumes that came in through job boards.
What can a staffing agency add to the hiring process?
Recruiters have a pulse on what’s going on in the marketplace or within their niche. That is why they are truly subject matter experts in their industry. Many recruiters refer to it as The DIG model — discipline, industry and geography. Also, recruiters look beyond the resume. Often, companies will look at a resume and think a person isn’t a good fit. Staffing specialists understand that many professionals will use bullet points and provide general information in their resumes, so they look for their achievements and the potential benefits they will provide a company. A staffing specialist will ask the qualifying questions to gain a better understanding of what a professional’s daily tasks consist of and their real-life work experience so they can provide a company with a very thorough summary of that candidate’s background that complements their resume.
What should a company look for in a staffing firm?
Companies may consider a recruiter who is specialized in a particular niche, (i.e., manufacturing or IT), or by a certain position (engineer, sales, etc.). It is important for a company to understand how the recruiter conducts their search either through direct recruitment (phone or in-person) or via job board postings. Finally, the company could also consider other ancillary services provided by the recruiter such as background checks, education verification and reference checks.
What criteria should a company consider when selecting a professional staffing firm?
A company should look for a track record of success and ask a lot of questions. For example, ask questions such as: What experience does the recruiter or agency have in placing that particular type of opening? What have they done to successfully fill those positions? How fast have they filled them? What type of companies have they filled those positions for? How do they qualify their candidates?
Another criterion is how recruiters develop relationships with companies. For some companies, this may be their first experience working with a staffing specialist. It is important that they are comfortable with the process and their level of involvement. For example, some staffing specialists will meet with the hiring authority and the internal HR department, very similar to how a company would interview a candidate.
How can a company quantify a track record?
Some companies will send out a proposal or request for information, especially larger organizations. For smaller organizations, they may ask for references. Also, companies may ask for a list of hiring managers the staffing firm has placed candidates with.
How does a staffing firm differentiate great candidates from good candidates?
Staffing specialists look at the whole picture: credentials, real work experience, achievements and potential benefits. For example, if you are looking for a software developer, the recruiter can provide examples of some sample scripts or codes the candidate has written. When qualifying ‘A’ candidates from ‘B’ candidates, it often comes down to how engaged they are with the recruiter and how much information is provided. Have they provided the examples necessary to differentiate them from other candidates?
Staffing specialists look at certifications, degrees, and education. For some companies, a college GPA can make a big difference as they evaluate candidates. Companies often look for applicants with a particular certification, and where that certification was earned.
A staffing specialist can ensure that a candidate is reference-checkable by making sure a direct or previous supervisor can be contacted during the interview process. Timing is everything. The sooner a recruiter can get the candidates into the process and provide the hiring authority with as much information as needed, the sooner the recruiter can solve the problem or alleviate some pain for them.
Andrew Devore is managing director of Skoda Minotti Professional Staffing. Reach him at email@example.com or (440) 449-6800.