Business owners have many choices when it comes to how to pay their employees. Some handle the payroll process internally, and spend a great deal of time managing all the paperwork of federal and state taxes, Social Security, Medicare, union dues, 401(k) contributions and more.
Some use payroll software, which allows accurate recordkeeping, but often has a long learning curve. Some hire a local accountant, or a professional tax lawyer/CPA.
Others outsource these tasks to companies that provide automated payroll services.
Smart Business spoke with Jim Geuther, Director of Business Banking at FirstMerit Bank, about what services to expect from payroll providers and how to ensure you choose the right one for your company.
Why is it important for a business to choose the right payroll provider?
Payroll appears to be pretty simple on the surface — employers calculate employees’ gross earnings, they deduct the respective payroll taxes and other ancillary deductions such as insurance or 401(k), they send the government their share and produce a payment for the net amount to the employee.
Payroll is actually more complicated than this. There are bonuses, sick time, overtime and other factors that can change from pay period to pay period, affecting compensation. In addition, federal, state and local taxes are always changing and, depending on the complexity of a payroll, the time it takes to keep track of all of these changes can turn it into a daunting task.
If employers aren’t up to date on payroll tax requirements such as rates or frequency of payments and filings and they miss a deadline or pay an incorrect amount, they can be fined. In addition, these errors can lead to an inaccurate payroll and, ultimately, unhappy employees. That’s why it is so important to do it correctly.
How can an outsourced payroll provider benefit a business?
With payroll being a much more complicated task than it appears, businesses need someone they can count on for more than just paycheck calculations. Entering all that data and pushing out a check is the easy part. It is everything else after the fact that becomes difficult.
FirstMerit’s Business Online Payroll, for example, provides payroll tax payments and filings as well as 100 percent liability that payroll taxes will be paid and filed accurately and on time.
Offering direct deposit saves time and money for the employer and employee, because there are no checks or check stubs to print and the employees don’t make an extra trip to the bank on payday, so their time is spent focusing on business productivity.
With most in-house accounting products there are additional costs for keeping the technology up to date and tax tables current. With an outsourced payroll provider, there is no software to purchase, no need to have personnel maintain it and no ongoing fees to keep current.
Having an employee do in-house payroll presents a risk of knowledge walking out the door if that employee leaves the company. There is no need to have an ‘expert’ in house with an automated payroll service.
How can business owners determine which payroll provider would be the right fit for their company?
There are many factors that go into determining the best solution when it comes to payroll. The five most important factors are reputation, customer service, ease of use, ability to grow with the company and, of course, cost.
Businesses need to look at the complete picture when deciding on a payroll provider. Working with a small local payroll provider can present issues with out-of-state calculations and few, if any, offer any liability or guarantee with their service. However, working with a payroll provider that has a proven track record of success and growth offers peace of mind to the business owner.
Businesses should look for a payroll provider that has been recognized and awarded for the customer care it provides and can answer questions and provide solutions to problems. Also, look for a payroll service that provides live support available at one number, eliminating all the shuffling around and waiting for a call back.
With the many options available for payroll services, ease of use is one of the most important factors for business owners. FirstMerit provides an award-winning online product that allows business owners to run their payroll from any Internet-capable device. Employers simply log in to their online account, enter hours and other specific payroll information, preview the payroll to ensure data is correct and press ‘approve’ — everything else is taken care of. Processing payroll this way takes about five minutes.
Another important factor to look at is whether the provider can grow with the business’s future needs. Finally, businesses should consider the cost of working with a payroll provider. One of the major advantages of working with an all-inclusive provider is that there are no hidden costs for direct deposit, reports and payroll tax payments and filings. Our online technology significantly cuts operational costs, and those savings are passed on to our customers. Some customers pay half the cost charged by larger companies, accountants and CPAs and most local providers.
Jim Geuther is Director of Business Banking at FirstMerit Bank. Reach him at (216) 694-5683 or email@example.com.
PowerNet Global’s “Love Your Neighbor” Tablet Program was created to bring communities together and give every child an equal opportunity for a greater education. The “Love Your Neighbor” program asks businesses and churches within a local community to purchase PowerNet Global tablets and/or telecom services to help fund PowerNet Global’s school tablet program.
The program provides children that attend a participating school with a tablet for their education. The Android tablets allow kids to keep up with today’s emerging technology while having access to books, assignments, the Web and much more right at their fingertips. New tablets will be provided to the schools every two years to ensure children have the latest and greatest models. All of the old tablets are donated to children attending schools in Namibia, Nigeria and other developing countries.
In order for the kids to get the most benefit from their tablets and sustain the program, their families are asked to purchase Wi-Fi for their homes. PowerNet Global offers multiple payment plans to fit every family’s needs to make sure the “Love Your Neighbor” program truly fills the gaps for families in need of a little extra help.
To start the program with a bang, PowerNet Global is offering all local schools the opportunity to participate in the program and take advantage of getting Wi-Fi service in their school, and providing every student with an Android tablet.
When you buy from PowerNet Global, you’re not just buying a tablet or service; you’re investing in a cause. With PowerNet Global, businesses will be paying the same or less for the telecom services they already have today, but they’re giving back to their local community at the same time. The “Love Your Neighbor” Tablet Program gives children a powerful advantage, ensuring every child has the same opportunities, regardless of their family’s income.
About the Company
PowerNet Global provides high quality communications services to businesses and residents nationwide. Celebrating 20 years as a leader in the telecommunications industry and achievement as a multi-award winning company, PowerNet Global is a premier provider of voice, data, SIP and managed services.
Headquartered in Cincinnati, Ohio, PowerNet Global was built on a foundation of strong business ethics and integrity. Offering an expanding array of progressive products, its services are supported by a consistently expanding footprint, strong network, expert sales professionals and support teams that are dedicated to providing customers with the service they really need. Clients can focus on their business and leave the details to the experts.
When you do business with PowerNet Global, you can be sure that you’re working with a true partner that cares about your success.
You can reach PowerNet Global at 866.764.7329 or www.powernetglobal.com.
As American and world markets remain volatile, many companies are striving to further lean out their operations. Cutting waste out of an organization requires calculated decisions and requires managers to take a hard look at all areas of a company to assess how changes will affect operations.
Whether looking to cut costs by improving efficiencies, renegotiating contracts or reducing the work force, it is important for companies to consider the big picture. Managers must also involve those at the highest levels of their company, including board members.
“It is essential that directors become more involved in the day-to-day operations of the firm,” says Adam Wadecki, manager of operations, Cendrowski Corporate Advisors LLC.
Doing so is important, Wadecki says, because directors bring a different perspective than the management team and can help the firm’s members see issues from another angle.
Smart Business spoke with Wadecki about how to become a leaner company and streamline operations.
How do you define a lean organization?
A lean organization is one that can quickly convert its resources into cash. The time it takes to convert resources into cash is equivalent to the time it takes the firm to convert raw materials into finished goods, finished goods into receivables and, finally, receivables into cash.
An organization becomes lean by decreasing the time between each of these steps. Many organizations track the average time spent in each of these conversion processes; however, a more thorough analysis will look at not only the mean time spent in each process but also at the distribution of the time spent in each process. This analysis should be included in an organization’s risk management strategy, as decreasing time to realize cash will help the organization improve its working capital management.
What steps can an organization take to start becoming leaner?
With respect to production processes, lean manufacturing and Six Sigma are probably the most widely used tools. Each of these has gained in popularity in the last 20 years. Accountants also have developed tools to use when assessing operations, generally under the guise of internal control.
For a long time, the accounting profession largely concentrated on what it called internal accounting controls within a business. However, the profession has since moved to a broader definition of what it labels internal control, emphasizing that operations are indeed a part of an internal control assessment.
Lean manufacturing, Six Sigma, and internal control all serve to increase efficiency and reliability, though they do so in different ways. Lean manufacturing is generally less quantitative than Six Sigma and internal control methods, but can deliver formidable results.
What types of analyses can management perform to improve a company’s operations?
Historically, managers operating in volatile environments have placed great emphasis on cash management at all levels of the organization. We see this today in the large cash balances held by many companies in spite of what appears to be a rebounding (albeit slowly) economy. This emphasis is underscored by the need of management to understand the day-to-day finances of the firm’s operations and also the ability of the firm to service any outstanding debt obligations. However, it also is important to quantify the risks to these cash flows based on the likelihood and impact of potential events. This should be an essential part of the organization’s risk management process.
How can an organization quantify risks to cash flow?
This is a process that both management and the board of directors must be involved in. Cash flow risk assessments must be performed with accurate and timely information. It’s also important to consider the human element in the risk assessment process. For instance, when directors receive risk assessments from management, they should consider management’s track record in providing these assessments. Are risks generally understated? How tolerant is management of low-likelihood risks? How does management test its risk assumptions? How are likelihood and impact estimates quantified? Management can pose similar questions to the company’s support staff.
By understanding risks, organizations can identify with a laser focus those operations in need of improvement. This process is especially important for organizations that have lean operating strategies or those that are attempting to improve their leanness; such organizations often rely on steady, predictable operations to maintain high profitability.
What are some mistakes organizations make when proceeding toward lean operations?
Organizations need to ensure that they are, in fact, ready for change before they begin implementation. To borrow a phrase from the accounting profession, a proper tone at the top needs to be set, and employees must buy in to the process.
This tone is set not only by management but also by a firm’s directors. If these individuals are not able to garner worker support, any initiative is likely to fail. Where possible, it may be advantageous to tie employee performance with company profitability in order to make sure everyone is properly incentivized; workers must believe the benefits of their activities will exceed the costs.
However, organizations must be careful not to create incentives for workers to optimize myopically rather than over the long term. This was a central problem at the heart of the current crisis that began several years ago — improper incentives that led to socially suboptimal decisions. Remember the adage, ‘What gets measured gets done.’
Adam Wadecki is manager of operations at Cendrowski Corporate Advisors LLC. Reach him at (866) 717-1607 or firstname.lastname@example.org.
One of the most critical elements of creating a plan or vision is to make sure you have sound processes in place within your business. This starts with evaluating your products.
“You have to look at your product range and you need to ask yourself the question, ‘Is this the best product, or are there competitors that are better than I am?’” says Martin Richenhagen of AGCO. “American cars are not sold outside of America because they’re lousy cars — not because people in Europe prefer European cars. The technology isn’t leading technology and leading quality. Today, you need to be able to lead in technology and lead in quality and have a competitive cost position.”
It’s also important that as part of your processes you’re willing to take risks.
“A willingness to take risks and experiment is very important because the good ideas stop coming if people think there’s no chance it will ever get implemented because they’re viewed as too risky,” says Chip Perry of AutoTrader.com. “You have to be willing to experiment, make mistakes and iterate toward a better solution in order to promote an innovative environment where people feel safe to make suggestions that are outside the box, and then the company has to be willing to methodically test and evaluate them.”
And above all, you have to make sure you have measuring processes in place as well.
“Invest in data and metrics, not just metrics that your clients use but metrics internally, trying to make them simple but sort of poignant,” says Chris Krubert of ApolloMD. “You have got to understand what is the key component that determines success.”
Krubert says if you don’t have ways of measuring, it’s something you need to spend some time processing, as well.
“You have to come up with ways to measure it, whether its technology or simplifying your process, but then monitoring it and benchmarking it and having historical data, so you can do a trend analysis and when you’re pointing toward the worst direction, you can act,” he says.
Planning and vision
It’s hard for any business to know where it’s going if it hasn’t taken the time to do some strategic planning and analysis.
“You have to find a niche in the business,” says Mit Shah of Noble Investment Group. “I think that companies of the future that are going to be very successful will have a niche. They aren’t broad-based companies that do a lot of things. They’ll find a couple things they do really well, and they focus on those things, and they outperform the competition there. It’s way too difficult to be good at many different things.”
So how do you find a niche? You have to look at trends and what you’re good at.
“I encourage people to analyze the markets,” says Millard Choate of Choate Construction Co. “What’s the coming trends? What are the needs going to be not just today but six months to a year from now? Try to anticipate where to deploy your resources to produce the maximum return.”
Watch the wording that you use, as well.
“You can wordsmith sentences that become ambiguous,” says Jeff Bowman of Crawford & Co. “What you have to do is create a series of effectively executable plans that are then absolutely easily translated.”
For example, you might say something such as, “We’re going to increase sales around the world,” which is a very wide open statement.
“Increase is a good word,” Bowman says. “Sales is a good word. Around the world? What does that mean? It has to be more defined than that. What’s the marketplace? What is the product we want to grow? That’s where a lot of strategies have to be planned in the sessions that you do prior to laying those strategic plans out.”
No matter what you do, make sure you’re honest with yourself and aren’t being unrealistic.
“It’s important to be as objective as you can and gather objective facts and information,” says Chip Perry of AutoTrader.com. “One of the things we try to do is whenever it’s possible, to go out and do some research about the potential impact of an idea so we’ll go talk to consumers and dealers and manufacturers and ask them for their guidance on how valuable they think it is, so research is a very important part of it.”
On top of everything, make sure you don’t put your strategy on the shelf and forget about it.
“A strategy document is a living document,” Bowman says. “Events change, and you have to change an organization to implement the goals.”
One of the other key elements to successfully leading is measuring the goals and processes you’ve created.
“You make your own metrics for what success is,” says Ted Turner. “You set up criteria and write down what you think would make you feel successful. Each person would do it differently. What success is for one person wouldn’t be success to another. If one guy said, ‘If I made $1 million, I’d be a success,’ but to another, ‘I wouldn’t be a success unless I made $1 billion.’ They’d be off by a factor of 1,000 to one.”
So what should those metrics look like?
“You have to have quantitative, objective measurements of your business results,” says Bob Puccini of Mizuno USA Inc. “That’s certainly an indication. You have to have a clear indication of (key performance indicators) — what are you trying to measure? What’s important to you? Therefore, if those things are important to you relative to achieving your business goals, these are the KPIs you ought to be looking on a regular basis. If we’re succeeding or not based on certain benchmarks, that’s one indication.”
And make sure you’re not trying to measure and hold people accountable to things they can’t control.
“Make sure you focus on things that you can control,” says Darrell Grimes of MAG Mutual. “In other words, you can’t control, and I can’t control, interest rates. You and I can’t control health care reform. You and I can’t control tsunamis and earthquakes that are actually affecting us today. Focus on those things that you can control, but remain flexible and keep your options open but have a mission and reason for being.”
2 Tips: Customer relations
“Ask probing, delicate questions to make sure that their vision is consistent with what our plan is and then updating it periodically.”
Chris Krubert, ApolloMD, January
“You have to understand what your client’s hot buttons are, what his interests are. It’s not just always revenues. Each client has his own nuances so just customizing your approach to that client and making sure you’re taking care of them and promote that you’re looking out for their best interest.”
Millard Choate, Choate Construction Co., September
4 Tips: Culture
“Let’s be honest, this is a tough labor market. People aren’t jumping jobs right now, so we get that. You can’t use that as a crutch because as soon as the market comes back, they’ll leave for a better opportunity once available.”
Mit Shah, Noble Investment Group, February
“Recognize the value in what the honesty can deliver for you. Create an environment where truth and bad news is accepted and used as a learning opportunity, which means you also have to check egos at the door. You have to build trust with your constituency — your employees — where it becomes safe to have those open discussions.”
Bob Puccini, Mizuno USA Inc., December
“If you take care of your employees, they will take care of your customer. … It’s important that they understand that we’re all in the same boat and we’re all rowing in the same direction — that when times are good, they all get bonuses and when times are not so good, we may get a smaller bonus or no bonus at all. If we don’t all pull together and understand what the financial results are, we will not do as well as a company, and we won’t service the clients the way we want to be serviced. It’s an open-book policy.”
Darrell Grimes, MAG Mutual, August
“One of the hallmarks of successful companies is being open-minded and receptive to ideas for improvement from the employees, who are closer to the work than the executives are. It’s kind of built into your DNA. Either you are or you aren’t receptive. You have to be curious and receptive and then be willing to work with it. Then you need to set up a pattern and a tempo of consistency on this topic. If you do it once, and it goes away — a flash in the pan idea — it becomes not effective. If you do it every year, you’ve been doing it for 10 years, people come to expect it, and it becomes part of the culture.”
Chip Perry, AutoTrader.com, May
4 Tips: Communication
“Although you have to craft the format differently, I believe you have to be very consistent with the communications, whether it’s your employees or customers or suppliers or investors. You can’t have different messages. You have to have a consistent strategy and talk to them and adopt it to their viewpoint a little bit. You can’t create different ones for different people – it doesn’t work. … Making it a simple message is very hard. … You have to be able to communicate not only to your senior people but also be able to reach somebody who is working on a factory floor who may not speak English, and translate it and be ruthless and streamline the message down. When you do that, it means you have to be very clear about what you have to do. If you use a lot of words, you don’t have to be so clear. If you use very few words, you have to be much more clear.”
Jim Bolch, Exide Technologies, November
“I listen because no one person has all of the ideas,” he says. “It’s a collaborative environment.”
Darrell Grimes, MAG Mutual, August
“Make sure people understand what they’re accountable for. They do things that they understand much easier than things that they don’t understand. … The world we live in, you get swallowed up in the amount of data you’ve got. You have to cut through and say, ‘What is the important data that you’re going to measure people on?’”
Jeff Bowman, Crawford & Co., June
“If you ask someone their opinion, and you never follow it or you never use it, then why in the world would they ever want to give it again. But if you ask people their opinion and say, ‘To every extent possible, we’d like to take your ideas and make things better, and they see that we actually take ideas and implement it and use it to create a better work environment, it’s synergistic and it just grows.”
Michael Bass, Piedmont Newnan Hospital, April
4 Tips: Hiring
“It’s a disciplined approach to define the key characteristics of what you need in a person to do that specific job and completely severing the ‘I like, I don’t like,’ and then tapping into other people’s sort of ratings on the same scale. It’s pretty clear, hard work or not hard work. That’s almost a quantifiable type. There’s ways you can define that and then ask other people who are in a similar role.”
Christopher Krubert, ApolloMD, January
“The individual who is comfortable is relaxed. They pause, they think about their response. They’re inquisitive but yet they are knowledgeable. The cocky person is usually the person who you can’t get a word in edgewise. They just want to go on and on and on.”
Michael Bass, Piedmont Newnan Hospital, April
“What we always do is discuss it with the guy who has the job because I think it would be very bad if you have a job description, and the guy who’s doing the job would say, ‘That’s not me.’ That happens sometimes. If it’s getting too theoretical and you only have human resources involved or someone from the outside, this could happen. … You need to keep things simple in a way but also very pragmatic. This means don’t make it too long of details. The most important part of a job description is to describe the area of responsibility in the form of results you are expecting. Instead of describing what you expect somebody to do — he has to come into the office at 7 o’clock in the morning and open his door and start to make phone calls — describe activities and describe results you expect the leader to generate.”
Martin Richenhagen, AGCO, October
“If you have a business vision and a business goal and say, ‘Here’s where we’re going and here’s how you have to play,’ those kinds of things allow you to recognize the kinds of skills you need to do that. You have to have a clear vision — where you’re going, where you’re going to play, where you think you can win, and how you’re going to play in order to win. Then you step back and say, ‘Wow, what kind of skills do we need in order to do that?’ Then you do a gap analysis. Here’s where we are, here’s where we need to be from a competency perspective, and what’s the plan to either acquire or develop those competencies.”
Bob Puccini, Mizuno USA Inc., December
6 Tips: Leadership
“Sometimes you just have to be a smart guy growing up in New York to survive. That means knowing which alleys not to walk down. It doesn’t mean you walk down every alley and pick a fight and win them all. It means also being savvy enough to know I’m not going to walk down that alley — that doesn’t look right, that doesn’t feel right. It’s knowing where to play and where not to play, and again playing to your strengths. If you don’t have them, you better acquire or develop them. … That ability to be completely honest with himself was critical as a kid, and it’s just as needed as a leader looking at your abilities and your business. … Sometimes it hurts, but that’s part of being successful. You’ve got to be honest with your limitations.”
Bob Puccini, Mizuno USA, December
“So many people are trying to move up in an organization — step over someone else to get up the corporate ladder. Just focus on the company and just focus on the customer, and you’ll find that all those other problems go away. … Forget trying to beat the guy down the hall. I think there’s too much of that. If people will do that, they’ll see how much easier it is to move up the corporate ladder without doing it. Just do the right thing.”
Darrell Grimes, MAG Mutual, August
“Continue to do what the books say you’re supposed to do — stick to your core values during times of great opportunity and during times of crisis, take care of people, make sure that you continue to commit to things that are part of who you are and who you espouse to be.”
Mit Shah, Noble Investment Group, February
“How do you build trust? There are several ways. No. 1, you say what you’re going to do, and then you do it so that employees know that if I say that this is what we’re going to do or this is what’s going to happen, then I’ve got to make sure that that’s exactly what we do and we don’t deviate from that. Trust is being open and telling it like it is.”
Michael Bass, Piedmont Newnan Hospital, April
“The easiest thing is to do nothing, and then you’ll never get in trouble — and you’ll never get anywhere either, but doing nothing is an option, and that’s an option that most people avail themselves of in life. They do as little as they can, and they don’t realize what they could have done because they didn’t do anything. That’s most people. It’s just too hard, and it is hard. It’s extremely hard, and you’ve got to be — there’s an old expression I heard somewhere — smarter than a tree full of owls to do anything like create a Microsoft or a Google or a CNN.”
Ted Turner, Turner Enterprises, July
What’s the best advice you’ve ever received?
“‘Trust, but verify.’ I think it is critically important to empower your team, but periodically you need to drill down to ensure that you are getting the whole story and you are comfortable with the direction.”
-Jim Bolch, Exide Technologies, November
“Don’t worry about those things you can’t control. Just try to manage through them. I see a lot of people worrying about things, but it’s just more stress in your life. Manage what you can control. Prepare for the worst; accept the rest. Don’t worry too much about what you can’t control. I think that’s important advice.”
-Darrell O. Grimes, MAG Mutual Insurance Co., August
“The best advice I’ve ever received is you’ll only get one chance to make your case for a change order, and only a fool would be willing to attempt to argue about the end result after that. That was my grandfather, who was the road-building construction contractor.”
-Chip Bullock, HDR CUH2A, March
“One of the original founder’s term: personal is best. That’s important. That’s the advice I use. When I’m trying to understand why someone is acting out or stressed or giving me a hard time, trying to keep it personal and trying to understand who they are as a person, whether it’s in a clinical setting or a business setting and that often times will give you the answer. That’s the best advice I’ve gotten to date.”
-Christopher Krubert, ApolloMD, January
You don’t need a crystal ball to plan your risk management strategy for 2012. You do need an advisor with an understanding of the market and the right expertise.
“As far as rates go, we see a casualty market that is starting to firm,” says Kevin J. Pastoor, CPCU, a managing director of Aon Risk Solutions. “Some low and medium hazard firms are still receiving low single-digit rate decreases, but the size of the decreases, as well as the numbers of firms receiving them, are both continuing to abate. We see this trend continuing in 2012 and rate increases becoming more the norm. Increases are already being seen for higher hazard classes of business and where limited competition exists.”
For property, Pastoor sees more of the same: rates increasing in 2012. According to estimates from reinsurance company Swiss Re AG, 2011 will be the most costly catastrophe loss year on record, with $350 billion in total disaster losses. Approximately $108 billion of those losses will be covered by insurance, making 2011 the second most costly year on record for insurers, trailing only hurricane-plagued 2005, which had $123 billion in insured losses. Pastoor says these losses are increasing the pressure on rates.
“In Q4 of 2010, we were seeing average rate decreases of 6.3 percent,” he says. “By Q3 of 2011, rate decreases were less than 0.5 percent on average across all business segments, with our largest customers (with greater worldwide exposure) seeing a 2.3 percent average increase in rate.”
Smart Business spoke with Pastoor about what companies can expect in 2012.
What factors are affecting the 2012 outlook?
The high catastrophe losses in property and challenges facing the casualty market, such as tort issues and medical inflation, are having a negative impact on insurance company profitability. In addition, continuing low interest rates are negatively impacting insurance company investment income results. Also, many insurance companies have taken significant reserve releases (reserves are the surplus an insurance company holds to protect against incurred but not reported losses) over the last several years so the ability to prop up profitability with reserve releases has diminished.
However, these issues are not having the impact that many had predicted: significant rate increases and a tightening of coverage terms. This is mainly due to two factors. First, the industry still has considerable excess surplus. Second, we still don’t see consistent underwriting and pricing discipline. While commercial lines pricing has turned from negative to more flat over the last half of 2011, competition still remains fairly intense as companies are looking to maintain market share.
What are some of the emerging risks for 2012?
Two important emerging or evolving risks for businesses to consider are contingent business interruption and security and privacy risk. The Japan earthquake and tsunami, as well as flooding in Thailand, have increased awareness of the importance of understanding your supply chain risk and the effect it has on your contingent business interruption.
Contingent business interruption coverage is intended to respond when your supplier can’t operate and supply you with needed product and, therefore, you can’t operate. What was learned from the Japan disaster is that these policies respond differently. For example, some only respond when the disruption to your operations is caused by a direct supplier. If a supplier of your supplier is the business that suffered the direct loss, you may not be covered.
It’s critical that you understand your supply chain so that you can make sure you are purchasing appropriate coverage from both a language and limits standpoint. Working with a broker or agent with specific expertise in this area is critical.
Security and privacy risk is another evolving area. Security and privacy risk stems from the destruction, loss or unauthorized disclosure of information, including trade secrets, customer lists, or data such as personally identifiable information (credit card, Social Security or bank account numbers). This risk includes third-party liability, fines and penalties, as well as significant reputational harm.
Data breaches are becoming more frequent, more sophisticated and more financially damaging. In fact, 78 percent of Fortune 1,000 companies have suffered a breach. However, you do not need to be a large company to suffer a loss because virtually every organization has this type of data on customers and employees. Every company should conduct a data privacy and network security review.
You should also work with a broker or agent who understands this coverage, as base policy forms vary widely and usually need to be customized to ensure maximum coverage.
How will this outlook affect companies’ insurance purchasing and risk management programs?
With the market starting to firm, companies need to be more diligent when it comes to managing risk. Insurance companies are being more careful in how they deploy capacity. As such, the better your risk profile and the more complete you are in terms of how your information is presented, the more likely you are to be one of the companies that is still seeing favorable pricing.
Work with your broker or agent to get the data right in terms of your exposures. For property, this means you need to know your facilities’ secondary characteristics, such as the year built, type of roof, number of stories, etc. Provide details of your loss control and safety programs. Explain the details of any large losses and what you have done to make sure they don’t occur in the future.
It’s critical that you work with a broker or agent who understands your risk and the marketplace and who knows how to present your risk in the appropriate light. Remember, the reality of your situation is never worse than an underwriter’s assumption if information is missing.
Kevin J. Pastoor, CPCU, is a managing director of Aon Risk Solutions. Reach him at email@example.com or (248) 936-5346.
Venture capital (VC) backed portfolio companies are highly susceptible to macroeconomic, industry and unique risks. In addition, VC fund ownership interests in portfolio companies are subject to risks, including market factors. How these parties address risks can significantly impact the value of companies and fund interests therein. An enterprise risk management (ERM) process involves identifying risks relative to an organization’s objectives, assessing them for likelihood and impact, developing a response strategy and monitoring progress. A well-defined ERM framework can protect and create value for the portfolio company and its parent VC fund.
“How a portfolio company addresses risk can have a significant impact on the harvest value of a business as well as interim mark-to-market valuations,” says John T. Alfonsi, CPA, ABV, CFF, CVA, CFE, a managing director of Cendrowski Selecky PC.
Smart Business spoke with Alfonsi about portfolio company risks and how they impact valuation.
Where is risk addressed in a portfolio company valuation?
The most common method of valuing a business is the ‘income approach,’ which requires a valuation analyst to project a business’s future cash flows, then calculate the present value of the sum of these cash flows by employing an appropriate discount rate.
When using the income approach, a valuation analyst must address risk in two primary areas: projected future cash flows and the discount rate. Effective ERM processes can help portfolio companies increase value by affecting the estimates for these quantities.
How does risk impact projected future cash flow?
Projections contain risk: There exists a risk that the portfolio company will not achieve the projected figures. As such, the process by which portfolio company management and the VC fund project future cash flows can impact a valuation analyst’s assessment of the business. A key risk is information integrity, the quality of information generated through monitoring and data assimilation. Information integrity allows management to make well-informed decisions and should provide a valuation analyst with greater confidence in a business’s projections.
Valuation analysts can analyze information integrity by examining historical projections and assessing elements of the internal control environment. While VC-backed companies are often nascent firms, the development of a robust internal control environment is an essential component to maximizing value. Potential strategic and financial acquirers, as well as investment bankers who may take a portfolio company public, want to see control environments supported by strong culture focused on mitigating risks. This culture will be evaluated by valuation professionals when they examine projections.
In analyzing historical projections, a valuation analyst should examine the variance between historical projections and a business’s actual performance as well as the business’s ability to reach milestones in a timely manner. If a strong correlation exists between projected and actual performance, a valuation analyst can be confident in current projections, if the process employed by the organization in making projections remains constant. If a strong correlation does not exist, the analyst must examine the variance between past projections and actual performance to discern whether bias existed in past estimates and may exist in current projections.
What about risks in the discount rate?
The discount rate is the yield necessary to attract capital to a particular investment, given the risks associated with that investment. In determining the discount rate, there are two sources of risk to be quantified: systematic and unsystematic. Systematic risk is the risk one must bear for taking on a risky investment in the market, which encompasses all available risky investments, including public and private equities, real estate, foreign currencies, etc. However, systematic risk is estimated by calculating the return to public equities due to availability of data. The ERM process has little impact on systematic risk unless the business’s performance is heavily tied to market performance, as was the case with Lehman Brothers and Bear Stearns in their final days.
Unsystematic risk is sometimes broken down into two components, industry risk and company-specific risk. Industry risk reflects the risks identified with the industry in which a business operates. Company-specific risk encompasses all other risks, including (but not limited to) size, depth of management, geography of operations, customer and/or vendor concentration, competition and financial health. This last component of the discount rate is one that portfolio companies can impact, and commensurately increase or decrease their valuation. Identifying and minimizing company-specific risks through an ERM process can positively impact the value of a business, as a company subject to less risk is more valuable than one subject to greater risks.
How can ERM processes mitigate company-specific risks and increase value?
An ERM process should quickly gather and assimilate high-quality information for use in the organization’s decision-making process, allowing the organization to rapidly assess the impact and likelihood of risks associated with changes in its internal and external environments. Early assessment and mitigation can help preserve value and cash in the business as well as allow it to capitalize on risky events when competitors do not react as swiftly to environmental changes. By capitalizing on risky events, portfolio companies increase the chance of improving their market share or establishing an industry-leading position. The ability to successfully mitigate risky events should be recognized by a valuation analyst through lower estimates for company-specific risks, leading to higher valuation estimates.
John T. Alfonsi, CPA, ABV, CFF, CFE, CVA, is a managing director of Cendrowski Selecky PC. Reach him at (248) 540-5760 or firstname.lastname@example.org.
In light of the slow recovery of the economy, you may not be ready to commit your business to an expansion. But many analysts remain optimistic that the economy will continue to improve.
However, a plan to expand and move into new space may be in your organization’s not-too-distant future. That makes now a prime time for evaluating how to proceed when you’re ready to pull the pin, says Gregory T. Warsek, senior vice president/regional manager, Commercial Real Estate Division, Associated Bank.
“A primary decision is going to be whether to buy or lease office, retail and/or manufacturing space,” says Warsek. “Financial considerations may be of prime importance, but don’t overlook other consequences of your decision. There are pros and cons to buying and leasing, so be sure that you review your options carefully and discuss them with your financial team.”
Smart Business spoke with Warsek about how to determine whether leasing or buying is the better choice for your business.
What are the benefits of buying?
First are the tax benefits. The interest on a mortgage and property taxes may be tax-deductible, the property may be depreciable and costs associated with owning a commercial space may be deductible. Talk with your tax attorney or adviser to see what tax breaks you may be eligible for.
Buying also gives you greater freedom to convert the space to your needs, allowing you to build on, tear down or reconfigure to meet your needs. In addition, there will be no rent increases. Locking in a commercial mortgage can give your business a clear idea of future costs. And should you decide to sell, you may make a profit if the value of the property has increased. Ownership also creates the potential for additional income. If you buy or build a multi-tenant building, you can enjoy an income stream from rent paid by other tenants.
What are the drawbacks of buying?
Buying creates more upfront costs. Initial capital outlay includes down payment, possible property improvement costs, and appraisal and maintenance costs. Evaluate the opportunity cost of those dollars being spent in other ways. It also puts the property on your balance sheet, which may create future borrowing restrictions resulting from real estate debt. And it creates a lack of flexibility, making it difficult to adapt quickly to changes in your market. It takes time to plan and construct or purchase a property or to sell a property. For businesses whose success depends on location, owning may make it more difficult to adapt to market shifts.
Owning also creates operational costs, and the time and energy devoted to maintaining a property can be a distraction. If you buy a multi-tenant building and lease space, consider how being a landlord fits with your primary business. If you don’t want that responsibility, leasing may be the better option.
What are the benefits of leasing?
Leasing is easier on a business’s cash flow. When you buy, you tie up a significant amount of equity. Leasing doesn’t require as large an outlay of capital at the outset. Not having money tied up in real estate frees up working capital, allowing your business to respond to other opportunities in the market. Leasing also makes it easier to move into prime locations and eliminates the headaches of selling if the area cools. Also, the rent a business pays on a lease may be tax deductible.
What are the drawbacks of leasing?
Leasing subjects you to uncertain costs, as you may be subject to rent increases when your lease expires. Some leases also allow for annual increases tied to changes in the Consumer Price Index. There may also be restrictions on adapting the space to your needs. If you find that the space no longer meets your needs, your only option may be to move. Leasing also makes you dependent on a landlord, who may decide to terminate your lease if it has other plans for the property.
The answer to lease or purchase commercial space is not clear-cut; it melds market, tax and financial analyses with other business considerations. Discuss your situation with your company’s finance team, commercial banker and tax adviser to make the most informed decisions about buying versus leasing.
How can environmental cleanup responsibilities impact your decision on whether to buy or lease?
Almost every real estate deal carries some risk of environmental liability. For much of the 20th century, the standard method of waste disposal was to bury waste or dump it in a nearby waterway. This resulted in thousands of contaminated properties nationwide. A purchaser or lessee could be held responsible for remediation costs, even if it did not cause the contamination.
Remediation has the potential to be very expensive and time consuming. Before acquiring or leasing a site, be sure to conduct an effective audit by referring to a records review or invasive testing. Also consider environmental liability insurance, which can be designed to protect the buyer, seller or both against unknown risk. Another option is a cost cap or stop loss policy, which puts a ceiling on the actual cleanup cost of the site.
It’s a good idea to consult an attorney to negotiate provisions in the contract or lease that minimize your exposure and risk of environmental liability. Some possible protections include lengthy due diligence periods, representations and warranties regarding hazardous materials, indemnification provisions, carefully drafted provisions regarding responsibility for cleanup, remediation and monitoring, and holdbacks or other security for future performance.
Loans subject to credit approval. Equal Opportunity Lender. Associated Bank N.A. is a Member FDIC and Associated Banc-Corp.
Gregory T. Warsek is senior vice president/regional manager, Commercial Real Estate Division, Associated Bank. Reach him at Gregory.Warsek@associatedbank.com.
This year 1.5 million Americans will be diagnosed with cancer. And the lifetime probability of an invasive cancer is 44 percent for men and 38 percent for women. Thanks to significant advances and as well as a greater emphasis on preventive measures and healthier lifestyles, cancer diagnoses and deaths are declining.
To learn more, Smart Business spoke to Philip DiSaia, M.D., medical director, Todd Cancer Institute at Long Beach Memorial Medical Center and world renowned leader and researcher in gynecologic oncology; and Amanda Termuhlen, M.D., medical director of Jonathan Jaques Children’s Cancer Center at Miller Children’s Hospital Long Beach, the region’s renowned pediatric cancer facility.
What causes cancer?
While causes are unknown, research helps us identify risks and cures. Since different cancers have different risk factors, understanding them helps with prevention. Controlling some risk factors — like not smoking, maintaining a healthy weight and diet, and getting plenty of exercise — helps reduce your risk of cancer. Other risk factors, such as age, ethnicity, family history and inherited genes, cannot be changed. Genetic counseling offered through Long Beach Memorial helps patients determine their risk for diseases that may be inherited, including colon, uterine, breast and ovarian cancer. Families with a higher than expected number of cancer cases can benefit from our Hereditary Cancer Risk Assessment consultation.
Why are the rates declining?
We are witnessing more effective diagnosis and treatment of major cancers. Screenings such as pap smears to detect cervical cancer, colonoscopies to identify colon cancer and PSA tests to determine the likelihood and treatment of prostate cancer are examples. Laws restricting smoking and education on its associated risks are stemming lung cancer. Maintaining a healthy lifestyle can reduce onset of cancer. Vaccines like those to prevent cervical cancer in women may be effective in other cancers as well. Emerging treatment technologies, techniques and drug discoveries continue to help us to more accurately treat cancer with fewer side effects.
Can we access these advances locally?
Todd Cancer Institute and Jonathan Jaques Children’s Cancer Center are dedicated to early diagnosis, research and treatment as well as education of patients with cancer or serious blood disorders. Through interdisciplinary treatment planning conferences, specialists review new or difficult cases and develop treatment plans suited to each patient’s specific needs. Our world renowned Thomas and Dorothy Leavey Radiation Oncology Center consistently achieves breakthrough results, using the most advanced technologies and therapies. In addition, cancer patients can access more than 100 ongoing cancer research protocols.
Working at the forefront of adult cancer management are our divisions of gynecologic, thoracic, breast, gastrointestinal, genitourinary, radiation oncology, genetic counseling services and robotic surgery. We were one of the first cancer programs to make individualized cancer therapy and targeted treatment a clinical reality.
What is the progress on childhood cancers?
Children that are between infancy and age 15 represent more than 10,000 new cases of cancers diagnosed each year. Prior to the 1970s, only half of children with cancer survived beyond five years following diagnosis. Today, that number improved to 80 percent, thanks to better cancer drugs, treatment, research and access to clinical trials. At Jonathan Jaques Children’s Cancer Center, we support advanced diagnostic tools and treatments with comprehensive psychosocial services and a multi-disciplinary care team that follows every cancer patient or blood disorder patient from the time of admission, through their hospital stay, and throughout their follow-up care in outpatient settings. And the integration of new research efforts into treatment plans allows our patients access to leading therapies.
What can we expect in the future?
Scores of cancer therapies and treatments are in varying stages of development as researchers continue to learn more about cancer cell biology and new treatments. Therapeutic vaccines hope to harness a patient’s immune system. Pharmaceuticals are being created to better kill tumors by cutting off their blood supply. Gene sequencing looks for specific DNA mutations that occur with different types of cancers. The ability to identify those mutations may lead to new treatments. Physicians are now using the knowledge gained by research to look at an individual’s family history and DNA to predict cancer risk. Personalized screening for those at higher risk will help detect cancer at its earliest signs. Doctors will be better able to customize treatment, choosing the most effective treatment and avoiding those that will not work.
How can employers help?
Employers can encourage their work force to take advantage of cancer screenings. Wellness programs can be as simple as ensuring worksite eating places and vending machines offer healthy food, sharing exercise tips and providing pedometers and wellness incentives. Businesses can partner with our cancer centers, which offer onsite education. Our memorialcare.org website provides a wealth of information on cancer prevention, screenings, diagnosis and treatments.
Philip DiSaia, M.D., is the medical director of the Todd Cancer Institute at Long Beach Memorial Medical Center. Amanda Termuhlen, M.D. is the medical director of Jonathan Jaques Children’s Cancer Center at Miller Children’s Hospital Long Beach. The not-for-profit MemorialCare Health System includes Long Beach Memorial Medical Center, Miller Children’s Hospital Long Beach, Community Hospital Long Beach, Orange Coast Memorial Medical Center in Fountain Valley and Saddleback Memorial Medical Center in Laguna Hills and San Clemente. For additional information on excellence in health care, please visit memorialcare.org.
In pressing times like today, where a large percentage of the American population relies on food stamps and the demand for food assistance is on the rise, AdvancePierre Foods and CEO Bill Toler responded to the need of families across the country with an inaugural companywide Volunteer Day last summer.
AdvancePierre Foods is a manufacturer of value-added proteins, philly steaks and handheld sandwiches. The company’s employees gathered on August 17 last year to partner with the Freestore Foodbank and Hamilton Living Waters Ministry Inc. to help with worthwhile projects and celebrate commitment to supporting communities where employees work, live and raise their families.
At the corporate headquarters in Cincinnati, volunteers packaged take-home food items for nearly 500 needy children as part of the PowerPack program. PowerPack provides kid-friendly, shelf-stable foods for children on Friday afternoons to ensure they have something to eat over the weekend.
The company’s volunteers also went to the Hamilton Living Waters Ministry Inc. to help get the facility ready for fall activities through yard work, panting and organizing. Living Waters works to make a positive impact on the lives of at risk children, youth and families in Hamilton’s inner city by offering academic, community and spiritual enrichment programs.
AdvancePierre didn’t just help those in need within Cincinnati. The company had hundreds of volunteers from facilities across the country donate their time to local food banks, food pantries and various food distribution sites to ensure that families receive the proper nourishment that they need.
Volunteer activities included packaging items for child feeding programs, assisting in mobile food pantry distribution, organizing and sorting items at food pantry warehouses, and fixing up local facilities with painting and maintenance projects. If all of that wasn’t enough, the company also donates thousands of pounds of product. In association with Volunteer Day, the company donated 21,000 pounds of burgers and ribs.
HOW TO REACH: AdvancePierre Foods, (800) 969-2747 or www.advancepierre.com
During a panel discussion at a recent governance conference, IRS officials named fringe benefits as the most common area for intermediate sanctions on exempt organizations. Intermediate sanctions include excise taxes assessed on disqualified persons and exempt organization managers to limit private inurement to disqualified persons. Excise taxes on excess benefits under the intermediate sanctions rules can be extreme, as they are designed to effectively punish private inurement without revoking an organization’s tax exemption. However, the IRS may still seek exemption revocation when excess benefit transactions arise after enforcing the intermediate sanctions rules.
Organizations must include fringe benefits in compensation to all employees, especially disqualified persons, i.e., those in a position to exercise substantial influence over the affairs of the organization at any time during the preceding five-year period. Fringe benefits not treated as income for chief executives may be deemed automatic excess benefit transactions. Automatic excess benefits arise when an economic benefit for an executive or disqualified person should be treated as compensation but is not, even in situations where total compensation would have been reasonable had the benefit been originally included in income.
There must be clear intent the benefit is compensation, with written contemporaneous substantiation that the value was intended as compensation. It is an excess benefit and subject to intermediate sanctions if not approved as compensation through the organization’s policies and treated as such in the books and records. Intent to treat the benefit as compensation is accomplished when the organization includes the benefit in the disqualified person’s income and the person reports such income on personal income tax returns. An organization also may establish intent after the fact by amending its Form 990 at any time before the IRS begins an examination of the organization or disqualified person. Failing to do so before the IRS challenges the transaction will likely result in an excess benefit treatment by the IRS.
The IRS may also identify excess benefit transactions associated with fringe benefits through efforts to identify uncollected employment taxes. The IRS National Research Program is conducting a three-year study focusing on uncollected employment taxes including taxes due to the omission of taxable fringe benefits, as well as other forms of compensation.
Another focus area in the employee compensation arena is reimbursable expenses reportable as taxable compensation. Failure by the employer to properly draft and maintain accountable plans and/or failure by the employee to properly substantiate reimbursed expenses could result in unintended taxable compensation to the employee. Employers should maintain accountable plans requiring substantiation of reimbursable expenses. Accountable plans are reimbursement or expense-allowance arrangements covering deductible expenses for federal purposes in which the employee must account for the expenses and return any excess allowance or reimbursement within a reasonable time period. The panel stressed expense reimbursements must be periodically reviewed by governing boards for compliance. Also, the panel pointed out, corporate credit card billing statements are not sufficient to meet the substantiation requirements of an accountable expense reimbursement plan; original receipts are necessary.
Common instances of fringe benefits that should be included as taxable wages for disqualified persons include personal use of equipment and facilities. Organizations should consider the following steps to make sure fringe benefit treatment is appropriate and to avoid excess benefit transaction treatment:
- A compensation committee, comprising governing board members not related to or controlled by the chief executives, should review reasonableness of compensation packages for the organization’s highest-ranking officers.
- Properly document all transactions.
- Determine applicable state laws for compliance.
Organizations should proceed cautiously when providing fringe benefits for disqualified persons and should properly document all transactions. It is important all reimbursable expenses include proper substantiation for reimbursement. Because the excise tax resulting from intermediate sanctions is imposed on both the disqualified person and any organization managers who approved the payment, proper reporting of employee fringe benefits to key executives is even more critical.
Contact your BKD advisor with any questions you have regarding taxability of fringe benefits or the intermediate sanctions rules.
Article reprinted with permission from BKD, LLP, www.bkd.com. All rights reserved.