It’s not the typical tax liabilities that can hurt you after an acquisition — it’s the hidden ones. Executives often inherit tax liabilities because unpaid federal, state, local and foreign taxes follow the acquired company, and those liabilities do not go away just because the company has new shareholders or owners. Also, many buyers have a false sense of security because they obtain representations, warranties and indemnifications for tax-related liabilities during the acquisition. But potential liabilities covered by a warranty should still be identified, as the best security involves setting aside funds in an escrow account to cover potential tax debts.
The only way to expose hidden tax liabilities is by conducting a thorough due diligence.
“In these tough economic times, staff reductions can hit tax departments hard, so acquirers don’t always have the resources to conduct due diligence,” says Gary Curtis, corporate tax partner with Haskell & White LLP. “In some cases, companies haven’t been examined for years, yet they remain subject to audit at any time. Given today’s budget deficits, taxing authorities are stepping up examinations in search of additional revenues.”
Smart Business asked Curtis about the problems of hidden tax liabilities and how due diligence can help.
What situations contribute to hidden tax liabilities?
Many middle-market companies do not have large internal tax staffs, yet those companies are dealing with multistate and multinational operations, which frequently results in overlooked tax issues. Public companies have been subject to financial reporting standards requiring them to inventory their uncertain tax positions and disclose potential liabilities. But private companies have been granted an extension to that requirement through 2009; so the chances of encountering an unrecognized tax liability increase when acquiring a private company. Also, if you acquire a company that was part of an affiliated group, which has been filing a consolidated income tax return, the acquired company remains liable for the group’s prior taxes after its acquisition.
Which state and local taxes are often overlooked?
Employing out-of-state personnel may result in hidden income tax liabilities. For example, if a sales representative is soliciting business in another state and the product used to fill the orders is warehoused outside the state, under federal law the company isn’t required to file a state income tax return. If that salesperson performs other duties, such as warranty and repair work or issuing sales credits to customers, then the federal law does not apply and the company must file a state tax return. If separate state returns have not been filed, the liability for unpaid taxes, penalties and interest can mount up quickly. Frequently, companies are able to negotiate a reduction in this liability, but they must initiate the discussion prior to an examination and there are still the professional fees of negotiating, correcting and filing the returns to consider. It’s also possible that sales and use tax as well as franchise returns may be required, even when state income tax returns are not.
Which foreign tax liabilities are frequently overlooked?
When companies price and sell goods in another country, how the transfer pricing is established can result in significant U.S. or foreign tax liabilities. It should be a red flag to buyers if a company has not conducted a recent transfer pricing study by a credentialed professional. Another problem is failing to withhold tax on interest or dividends paid to foreign companies that are not exempted by tax treaties. Sometimes the company may not have filed the required federal informational returns with respect to its foreign affiliates and the penalties for failing to file these returns can be up to $10,000 per failure. The IRS has announced that it intends to crack down on this problem during 2009, so buyers should be aware of the potential liability.
What steps should executives take to avoid financial surprises from hidden tax liabilities?
- Conduct tax, financial and business
due diligence concurrently and budget for
those costs when considering the total
- If significant tax exposures are uncovered, consider converting to an all asset
deal or reducing the purchase price.
- Require the seller to deposit funds into
an escrow account covering any potential
liability revealed during due diligence.
Funds should only be released when the
statute of limitations expires or when the
tax issues are resolved.
- If you are unable to implement any of these solutions, consider passing on the deal.
Remember that due diligence doesn’t just uncover hidden tax liabilities. It can identify and quantify tax assets, such as net operating loss carryforwards, that can be used to offset post-acquisition taxable income, and it can also identify unclaimed refunds. Conducting tax due diligence often pays for itself.
GARY CURTIS is a corporate tax partner with Haskell & White LLP. Reach him at (949) 450-6311 or email@example.com.
Having enough staff to handle unpredictable workloads has always been a management challenge, especially in customer-facing departments like call centers or hospitals, where managers must deal with a high volume of incoming calls or constantly shifting patient censuses. In addition, employee absences allowed under the Family and Medical Leave Act (FMLA) make difficult scheduling tasks almost impossible. The result is often increased overtime pay or expenditures for nursing registry temps as managers scramble to close unanticipated staffing gaps. Changes in FMLA regulations effective Jan. 16 may allow employers a greater ability to manage FML absences.
“One of the challenges has been that employees can take FML absences without calling in advance of the absence and are able to use the time in small increments,” says Janice Dragotta, senior consultant for Health and Productivity at Watson Wyatt Worldwide. “Employers have little control because their ability to contact a treating health care provider is quite limited and, in the past, such contact could only be made by a health care professional that was either on staff or contracted by the employer.”
Smart Business spoke with Dragotta about the new FMLA changes and how employers can mitigate the business impact from intermittent employee absences.
How has intermittent FMLA impacted business and created administrative challenges?
FMLA allows employees who have completed one year of service and 1,250 hours of employment to take up to 480 hours (for full-time employees) for qualifying conditions. Under FMLA’s intermittent time off provision, employees have not been required to call in before the start of their shift, impacting customer service, workflow and productivity. Employees can also take partial days off or use small increments of time for their absences, which makes keeping track of time off difficult, especially for salaried workers.
What are some of the new FMLA provisions?
Now, in addition to a health care professional, a company HR representative, a nonimmediate manager or the company’s leave administrator can contact the employee’s treating health care provider to clarify the FMLA request. For example, a treating provider may have suggested four days off per month but if a supervisor notices a pattern of absences (e.g., every Monday), a company HR professional can now clarify with the provider if such a pattern is to be expected based on the employee’s health condition. If an employee is taking a full day of absence for a medical appointment, the leave administrator or HR professional can contact the treating provider to determine if the appointment requires a full day of absence. Also, employers are now able to ask the treating provider for the frequency and duration of expected absences, which provides a greater ability to manage attendance. Also, unless there are unusual circumstances, employees must adhere to their work group’s call out policy when they miss time from work, so managers should expect earlier notification when employees need to take an intermittent absence.
How can employers better manage intermittent FML?
By following a few best practices, employers can reduce the business and administrative burden imposed by employee absences.
- Educate supervisors about FMLA,
including how to track employee
absences and set appropriate expectations. FML is an entitlement but it can be
managed more effectively.
- Coach outsourced FML providers or
in-house leave administrators to offer
resources to workers requesting time off.
For example, offering respite care or EAP
services to an employee who is caring for
a terminally ill family member might help
provide support and assistance but also
lessen the number of days an employee
may need to take off.
- Manage FML consistently across the enterprise, including a standard method for reporting time off, so you can track FMLA time off as well as determine the business impact.
What else should employers do?
While every company’s policy is unique, many employers craft their time-off policies so employees must use their allotted sick time or PTO in conjunction with FML, which avoids ‘stacking’ of unpaid time off and PTO, for instance. FML can help employees manage through a difficult period, but with some changes in the regulations, employers have a greater ability to manage FML, particularly intermittent absences.
JANICE DRAGOTTA, L.C.S.W., is a senior consultant for Health and Productivity at Watson Wyatt Worldwide. Reach her at (415) 733-4404 or firstname.lastname@example.org.
Downsized operations or a scarcity of tenants has temporarily left many business partnerships with too much real estate and too much debt. Refinancing is often the solution of choice, but doing so isn’t always viable. Owners may owe more than the property’s current value, or they face a maze of lenders and servicing agents behind highly securitized notes, making it nearly impossible to identify the lender, let alone build a relationship that would favor loan renegotiation. Even if selling the property were an option, partners want to be positioned to resume expansion plans and occupy the space when the economy rebounds.
“Down the road, these businesses will benefit from owning the facilities, but they have to survive in the short term,” says Tom O’Rourke, tax partner with Haskell & White LLP. “Raising capital is tough, so restructuring the debt may be the best option. But there are pluses and minuses to each alternative, so partners should consider each one carefully before proceeding.”
Smart Business asked O’Rourke what partners should know when evaluating options for restructuring real estate debt.
Why is renegotiating the debt terms the best option?
If possible, lengthening the debt terms would be the most expedient solution, because it will reduce the payments now, while giving owners the opportunity to recoup value and utilize the property down the road. But partners must use caution, because what appears to be a simple modification could end up generating forgiveness of debt income, which creates tax implications. The workout needs to be accomplished so that the modified debt issue price is not less than the old debt, which can be a complex calculation. Partners can research the tax impact under the original issue discount calculation provision provided for in IRC §1273 and §1274.
Is raising capital to pay down the debt still possible?
Bringing in a partner who will provide the cash to pay down the instrument or help fund the difference between the original note and the property’s current value for refinancing purposes is an option. Many traditional sources of cash have dried up, so partners will have to be creative and look to institutional investors, pension funds, life insurance companies, and even friends and family who might want to invest. Be aware that infusing capital into an existing partnership may create a step-down in basis under new mandatory basis adjustment rules that are just now having an impact, given the recent losses in real estate values. So model your new structure and plan to protect tax attributes.
Have some owners successfully converted lenders to partners?
If you have a relationship with the lender, selling him or her the debt in exchange for an equity stake in the business is another possibility. Be aware, however, that forgiving debt or cancelling debt is usually treated as income to the partners, unless there’s an exception. The American Jobs Creation Act eliminated the exception of using partnership equity to cancel indebtedness income. Under the revision, the partnership is treated as paying off the debt in exchange for the fair market value of the interest transferred, and the excess principal is forgiven, which creates tax consequences at the partner level. Under some circumstances, where the partnership agreement requires a deficit obligation restoration or guarantee, these gains can be mitigated, but both come with onerous economic considerations. It’s not that bringing in a lender as a partner isn’t plausible; it’s just not a slam-dunk solution because of the tax implications, especially for tax-paying partners.
Should owners consider the option of fore-closure or filing for bankruptcy protection?
Both foreclosure and bankruptcy are options. However, the decision often hinges upon whether the indebtedness was secured through partners’ personal guarantees. When liabilities are reduced or are deemed to be distributions, partners can be charged with the gains, and they’ll have to come up with the cash to pay the additional tax, unless they can find an appropriate exclusion.
What’s most important is that partners consider all options and the consequences of each choice, while considering the long-term business impacts. Though short-term business survival and debt reduction may be the current focus, eventually the economy will turn and partners want to be ready to capitalize on the rebounding market.
TOM O’ROURKE is a tax partner with Haskell & White LLP. Reach him at (949) 450-6358 or TORourke@hwcpa.com.
Sales are declining and so are profits. Many CEOs react to economic downturns by cutting costs and eliminating staff, because human capital costs are often a company’s largest operating expenditure. While reductions in the company’s top line are temporary, the long-term forecasted changes in work force demographics are not. Baby boomers may delay their retirement by a few years, due to shrinking portfolio values, but soon they will be exiting the work force, followed shortly thereafter by all the other boomers who are right behind them. Unless staff reductions are made wisely, the resulting business impact may be felt long after the economy rebounds.
“Despite the economic conditions, there are still talent shortages in critical skill areas,” says Paul DeYoung, talent management practice leader for Watson Wyatt Worldwide. “If executives simply issue an edict to management to reduce personnel expenditures by a certain percentage, the long-term results can be devastating. Strategic work force planning is a vital component of any downsizing action.”
Smart Business asked DeYoung what executives should consider when designing and executing a human capital cost reduction strategy.
What should CEOs evaluate before making staff reductions?
Executives need to understand which employees are pivotal players by asking who will bring the greatest value to the company in both the short term and long term. What executives want to avoid is making staff reductions purely a financial exercise, left strictly to the discretion of line managers, who may not understand the long-term impact of releasing critical staff. Conduct a work force supply-and-demand analysis looking forward five years; inventory those who have critical skills and who are your top performers and make sure that they are taken care of, because downsizings create uncertainty, and CEOs should not assume that retained employees will be grateful to have their jobs and will stay once the economy rebounds.
How can CEOs reduce costs while avoiding long-term business impacts?
Don’t focus on cutting heads; focus on reducing total expenses. For example, eliminating contractors or temps might be a good way to reduce short-term costs, but their charges usually aren’t included in the same line item as full-time staff expenses. A strategy focused on reducing head count may miss this opportunity to save these costs while preserving key personnel. Perhaps some employees would be willing to work part time or take unpaid leave as a way to reduce expenses; both moves preserve institutional knowledge and long-term productivity. Reductions in overtime or hiring freezes can produce savings without eliminating vital employees.
Are there other ways to save on human capital expenses?
Downturns can be an opportune time to look at organizational structures or job design to achieve greater efficiencies and savings. Do you have managers reporting to managers? Are engineers spending 60 percent of their time on administrative tasks? While the analysis and realignment process doesn’t produce instant cost savings, the company will benefit in the long term from making changes that improve efficiencies and the return for every dollar spent on human capital.
What are the best practices for implementing human capital reductions?
When it comes to sensitive areas like eliminating staff, how the process is conducted and communicating with employees is vital, because employee morale and productivity hang in the balance.
- Put safeguards in place to make certain
that any head count reductions are sustained. You don’t want managers bringing
back former employees as contractors, for
instance, unless it’s part of the strategic
- Take steps to retain critical knowledge.
Offer employees outplacement services
and severance pay in exchange for training, if the company doesn’t have formal
training and mentoring programs that facilitate knowledge transfer.
- Restructure performance plans. It’s
important to re-establish priorities and
align employee performance objectives to
fit with the company’s revised structure
and head count.
- Communicate effectively and transparently. Reach out and communicate with
employees whenever possible, so they are
reassured. If the company’s priorities have
changed, communicate the new vision. To
drive engagement and productivity you
have to create line-of-sight between the
company’s mission and the role of employees at every level of the organization. When
layoffs occur, employees will have questions, and it’s critical for CEOs to address
- Manage the process well. There are
many hidden costs to conducting this
- Do not forget about taking care of the survivors.
PAUL DEYOUNG is a talent management practice leader for Watson Wyatt Worldwide. Reach him at email@example.com or (818) 623-4779.
Just when the value of pension assets has plummeted, the funding requirements for companies with defined benefit plans are scheduled to rise in 2009. Staying on top of the plan’s funded status, required contributions and financial statement impacts round out the daily to-do lists of plan sponsors.
“It’s not a time to panic, but it’s definitely a time to be vigilant. Plan sponsors are feeling bombarded now with the market swings, so you’ve got to stay on top of your risk position,” says Michael Ford, senior investment consultant with Watson Wyatt Worldwide.
“Make sure you understand your current situation and have the right planning processes in place to do accurate modeling and forecasting, because you really want to avoid surprises,” says Christine Tozzi, retirement practice leader at Watson Wyatt Worldwide.
Smart Business spoke with Ford and Tozzi about how companies should manage their plans in the current environment.
What risks does the current economic volatility pose for pension plans?
Tozzi: The falling asset values will cause the plan’s funded status to decline. This requires employers to infuse cash in order to comply with IRS pension plan requirements. The cash needs will be magnified in 2009 because of the investment losses. In addition, under the new Pension Protection Act if a plan is not funded to minimum thresholds under the law it may need to restrict lump sum payments or temporarily freeze plan accruals entirely until the plan’s funded status improves. Meeting those funding thresholds will be difficult in this current environment. In addition to cash, pension expense in the company’s P&L statement may increase significantly due to asset losses.
Ford: The current environment is different than the last major downturn in the equity market in 2000. This time corporate bond yields have risen as a result of weakness in credit markets and the liquidity crisis. Since pension liabilities are valued using the AA corporate bond yield curve, liabilities have decreased somewhat offering some relief. But, the drop in assets more than offsets the decrease in liabilities, which has led to large decreases in a typical plan’s funding ratio.
Are there other solutions for underfunded plans?
Tozzi: Companies may be able to find some small relief from the significant cash funding that will be required. Sponsors could use an asset averaging method, which would factor in years when asset balances were higher. Alternatively, if employers have made larger-than-required contributions in prior years, they may be able to apply those credit balances to help meet 2009 funding requirements. They also may be able to change to a spot interest rate basis for measuring liabilities to capture the fact that today’s bond yields are higher, which lowers costs. We may see some legislation that will provide temporary relief to plan sponsors to minimize the additional cash that could be required due to the events of 2008.
What are the best funding strategies?
Ford: It’s important to remember that the risk in your plan’s asset allocation model and risk profiles within various asset classes have changed. Review your investment strategy in light of both the increased economic risk and liquidity risk to see if the model will still deliver its intended results. Revisit your plan’s fundamentals and your company’s risk tolerance to see if your plans and strategies are still in line with those philosophies.
Tozzi: Run models to see how the plan’s assets and liabilities will fare under a variety of investment returns and bond yield swings and develop contingency plans to deal with each situation. Preview the numbers more frequently and ride out some of the market’s ups and downs until things stabilize. Continue to monitor your plan governance processes and hold additional meetings to review your programs and investment options.
How should sponsors manage the increased cost for retirement plans?
Tozzi: In addition to updating budgets, it’s important to remember the long-term objectives for offering retirement programs to employees and balance that with the short-term impacts. As long as the retirement program is aligned with the company’s objectives, it is best to be patient. A Watson Wyatt survey shows that very few employers have plans to actually freeze benefits.
Ford: Plan sponsors can also consider and outline alternative asset allocation strategies, which may reduce volatility and the need for cash infusions down the road.
What should plan sponsors communicate to participants?
Tozzi: If the company offers a pension plan, sponsors should reinforce that prior benefits that have been accrued are protected. Update participants about the plan’s funded status and tell them that the company intends to make its scheduled minimum contribution. Plan sponsors want to communicate the truth, but also allay the fears of participants as much as possible.
Ford: Sponsors of defined contribution plans, such as 401(k)s, should communicate the implications of what’s going on in the market in a transparent and empathetic way, but making sure not to offer explicit advice. Remind participants that retirement investing is a long-term proposition and cite prior bear markets as proof that the current situation is not unprecedented. <<
MICHAEL FORD is a senior investment consultant with Watson Wyatt Worldwide. Reach him at firstname.lastname@example.org or (818) 623-4754.
CHRISTINE TOZZI is a retirement practice leader at Watson Wyatt Worldwide, San Francisco office. Reach her at email@example.com or (415) 733-4346.
Frank Lloyd Wright would be a fish out of water in the culture of global architecture and design firm NBBJ. The traditional hierarchical structure is gone, there’s no head office, and professionals are hired for their teamwork skills, not their egos. The firm that designed the headquarter buildings for Reebok, Starbucks and Telenor and collaborated on seven of the top 10 hospitals listed on the U.S. News and World Report Honor Roll, including the Cleveland Clinic, has gone global and left its vertical structure and traditional leadership model behind.
“Beginning about 10 years ago, all of the growth opportunities were centered on a much more diverse mix of clients,” says Doug Parris, partner at NBBJ. “The new projects required a much more collaborative internal process and the ability to pool the best talent from across the firm. At the time, NBBJ was structured in silos, and that soon became an impediment to growth.”
NBBJ hasn’t just survived the transition to a global economy — it’s thrived. In the last five years, NBBJ has experienced double-digit top-line growth, the greatest profits in the firm’s history and total firmwide head count has grown by 200 associates to a total of 780 employees. In 2007, billings were $193 million firmwide.
While the last five years have been successful, the first five years of the global transformation were a struggle and Parris says the journey required a complete restructuring of the firm and a transformation into a learning organization. Parris, a 30-year NBBJ veteran, has also undergone a personal leadership transformation. He no longer manages, he mentors, and he doesn’t command and control. Instead, he facilitates group decisions.
Restructure for the global marketplace
Opening offices in London, Beijing and Dubai gave NBBJ additional dots on the map and the right to claim a global footprint, but as the NBBJ partners soon learned, you can’t just add locations — you have to change the way you do business to succeed in the global marketplace. The international demand for American-style hospitals was voracious, but the new projects were too large for one NBBJ office to handle; they required teams of architects and planners. But expecting professionals to suddenly morph into team players was a pipe dream, and when the firm hit a large growth spurt and struggled, it soon became clear to Parris that things had to change.
“A team of five partners, including myself, traveled to every office and asked our associates for their opinions about how the firm needed to change,” Parris says. “Everything was up for review. The feedback from the associates was pretty consistent. We needed a common structure, and we had opportunities for greater efficiencies in support functions.”
As a result of the feedback, the head office was eliminated, and now all NBBJ offices are equal in stature, which was the first step toward breaking down the silos. Next, Parris and the firm’s partners installed a structure based around practice studios. Practice studios are profit centers that specialize in a building type or client group, and each of the company’s 10 offices has at least one studio. The structure de-emphasizes the role of the individual architect, because all work is completed in teams, and it also focuses the firm’s designs around specific niches like hospitals and buildings for higher education. As projects arise, multidisciplinary teams are assembled from many of the firm’s studios. For example, design of a new Veterans Administration hospital in New Orleans requires 50 firm associates, yet only 30 are based in the Columbus office.
“As a result of the process, we also went through a substantial downsizing and consolidated the administrative functions and marketing into two locations, because we had redundancy in every office,” Parris says. “Now those two offices support the entire firm, so the structure helps us work as one big team.”
Evolve your leadership
Changing the structure was a critical first step in creating a flat organization that functions through teamwork, but Parris says that leaders can’t just flip a switch and expect cultural change. So over the last 10 years, NBBJ has been undergoing a cultural evolution led by a change in the structure and new roles for the firm’s leaders. Now, critical decisions, including project selection, are made by groups of associates, and partnership candidates are nominated by their peers.
“In a true horizontal structure, leadership is built around roles, not titles,” Parris says. “So at NBBJ, the clients and the projects are at the top of the pyramid, followed by the studios and their teams, then the advocacy groups and the firmwide administrative teams, and the partnership is at the bottom of the pyramid. Partners are also practitioners, and the rest of their responsibilities are focused on supporting everyone else and providing the right environment for success.”
NBBJ has 15 partners, including five market leaders, who head up the various niche markets, and many of them are new to their roles. The cultural shift is part of the reason for new leadership, but in addition, three of the firm’s partners in the Columbus office were approaching retirement, so Parris has been instrumental in creating a succession plan and developing the next generation of firm leaders.
To develop bench strength and nurture a cultural metamorphosis, NBBJ partners instituted an intensive training program for new and prospective leaders that focuses on leading change. The associates initially attend a two-week development class and then continue their studies by working with coaches each month. The program is designed after the teachings of author John Kotter in his book, “Leading Change,” and 50 NBBJ associates now participate in the program each year.
Without an autocratic decision-making system, the most vital decisions facing the firm’s leadership team surround project selection. The market for architectural services, especially in higher education has been plentiful, so the team must often choose projects from among a number of opportunities. Profitability is one criterion to consider, but there’s also the cachet the project brings to the firm.
“Frequently, the team disagrees about which projects to take on,” Parris says. “I play the role of facilitator, ask questions and play devil’s advocate just to make sure they’ve thought of everything. For example, I might ask the team if they all believe that the project has high potential. Then, I leave the room and let them decide.”
Parris says that one downside to group decision-making is maintaining business momentum, because reaching decisions with a large number of people takes time and energy. To maintain vigor, he now holds weekly team meetings and each member provides a progress report for their area of responsibility. The team then holds each member accountable for achieving results. Despite the obstacles, Parris says the cultural shift and change to group decision-making is working, because in the last two years, the firm has taken on much higher impact projects, and it is now engaged in the top 15 percent of architectural projects in the world.
As part of his personal transition from manager to mentor, Parris says that he now gives people as much responsibility as they can possibly take and empowers them to make decisions. He’s also learned not to step in and offer help when the group is deliberating over a difficult issue, unless the group requests it.
Parris says that leaders must learn to trust others to make the transition from manager to facilitator and they must also respect their colleagues and not tell them what to do. But it’s not enough to talk a good game. He says the cultural evolution has progressed at NBBJ because he demonstrates those qualities by being calm in every situation and not dominating the discussions.
“I’ve developed an on-board clock, so now I keep track of how long I’m talking and cut myself off before I go on too long,” Parris says.
Become a learning organization
When officials in Istanbul, Turkey, wanted to build a medical facility similar to the Cleveland Clinic, the NBBJ partners soon discovered that patient rooms would require a few modifications to fit with the local culture.
“In Turkey, the entire family stays in the room with the patient 24 hours a day, and they prepare meals on-site,” Parris says. “So we needed to design rooms that could accommodate as many as 10 family members.”
Succeeding in the global marketplace requires any business to adapt to the local culture, but in the design business, it’s crucial because nothing reflects a community and its heritage more than the architectural style of the buildings. Parris says it soon became clear that global expansion would be accompanied by a huge learning curve.
“In many cases, the building environments are much less regulated, and we were dealing with entrepreneurs who had never built buildings before,” Parris says. “They bring a trader mentality to the building process, where they want to debate and negotiate every step of the process on a daily basis. We had to become a learning organization to succeed in global markets.”
The firm instituted videoconferences and Internet meetings where design groups working on international projects could share what they were learning about each country’s culture in real time with their associates, and the firm created a presentation to share with clients in an effort to educate them about the building design and construction process.
In addition, the firm created a learning program called Oregano, which got its name because Parris says the firm wanted to spice things up. Each year, 20 NBBJ associates travel to other countries, build local relationships, and then share their learning moments and experiences with their peers. In keeping with the firm’s leadership philosophies, Oregano participants are nominated by their peers and more than 225 employees have traveled to 25 countries since the inception of the program.
Given all the changes, Parris says that the main consideration for prospective NBBJ new hires is their desire and ability to work in a team environment. But nothing speaks more to the success of the organizational and cultural changes than the number of “boomerangs” working at the firm. Twenty-five percent of NBBJ’s current staff is composed of former employees who left the firm, mainly because they didn’t see a clear path for career progression, and have now rejoined the firm.
“I think the biggest lesson I’ve learned is that sometimes you wait too long to initiate some of these things,” Parris says. “I wish we had made these changes five years earlier. Now we keep our fingers on the pulse and collect 360-degree feedback from associates every year and make the necessary changes.”
HOW TO REACH: NBBJ, www.nbbj.com
Check fraud is on the rise. Annual losses from check fraud among U.S. businesses are estimated at $10 to $20 billion according to sources cited on the eBankLink Web site, and those experts further estimate that fraud will grow by 2 to 3 percent a year. On one hand, technology has created greater convenience for businesses by providing access to many traditional banking functions online, but technology also makes it easy for trusted employees or criminals to commit fraud by gaining access to bank account information and creating knockoffs of company checks. Executives must take precautions to stave off check fraud losses given today’s high-tech environment.
“Check fraud happens more often than you might think,” says Sherri Cope, vice president of Risk and Operations for Fifth Third Bank, Tampa Bay. “It is often committed by a highly trusted employee, who yields to temptation and takes funds, intending to slowly repay the money. Employers must be aware of the risks and take preventive measures so they don’t become fraud victims.”
Smart Business learned more from Cope about how companies can become victims of check fraud and the best ways to prevent it.
How might a company fall victim to check fraud?
Checkbooks or blank checks left out on an employee’s desk or on a printer stand invite fraud, because, in a matter of minutes, a vendor or visitor can take a few checks out of the middle of the book, without anyone noticing. Sometimes contractors or vendors can wash away the ink on a check and type in any payment amount before cashing it. But in today’s environment, technology is a fraud enabler. Criminals can create realistic copies of your company’s checks if they have your banking information or a sample check to copy; banking passwords can be lifted by employees or visitors if they aren’t protected; and criminals can get access to your online account information by two fraudulent activities called phishing and pharming. The term phishing refers to social engineering attacks to obtain access credentials, such as user names and passwords. Pharming redirects a legitimate Web site’s traffic to a similar-appearing but bogus Web site, so users unknowingly enter their names and passwords.
What are the best practices for preventing fraud?
Create separate accounting functions for payables and receivables and use multiple employees to process transactions. Accounting checks and balances are a safeguard against errors and fraud, and you don’t want employees to become too comfortable, thinking that no one is reviewing their work.
Executives should review the bank statements each month to look for irregularities and compare checks against accounting ledgers. Most banks stipulate that fraud be reported within 60 days, so it’s incumbent upon executives to stay current in their oversight of financial records. Create written procedures directing employees how to secure blank checks and banking passwords and require them to shred cancelled or scrap checks.
Also train employees how to recognize e-mails that are really pharming and phishing attacks in disguise and install network security that screens out suspicious e-mails designed to lure employees into divulging your company’s banking information.
What should executives do if they discover check fraud?
As soon as you realize something is wrong, call your bank and make a police report, because time is of the essence. It’s best to close out the account and reopen a new one, but the decision often depends upon what has been compromised. Companies should immediately notify their vendors, because replacement checks will need to be issued on the new account.
How can a bank help?
First, issue as few checks as possible. Pay vendors and employees electronically and use Internet banking because it gives you a real-time view of what’s happening with your accounts. If you have a high number of transactions, consider positive pay. Positive pay is an automated fraud detection tool offered by the cash management department of most banks. It matches the account number, check number and dollar amount of each check presented for payment against a list of authorized checks issued by the company. All three components of the check must match exactly or the bank will not pay on the check.
Your banking representative should be partnering with you and suggesting proactive systems and procedures to keep your business from becoming a fraud victim.
SHERRI COPE is vice president of Risk and Operations for Fifth Third Bank, Tampa Bay. Reach her at (813) 306 2499 or Sherri.Cope@53.com.
Proactive funds management is to working capital what blocking and tackling is to football, so CEOs who consistently execute the fundamentals and a well-designed game plan won’t be forced to rely on a Hail Mary pass to improve cash flow. Ideally, CEOs need only tweak their strategy to fund working capital, speed up cash collections or discover new accounting efficiencies in response to changing economic conditions. But oftentimes, CEOs focus strictly on the cost of working capital solutions without considering their long-term impact or they fail to proactively manage funds; so when the economy swings, they’re behind the curve.
“Every business and every industry is different in terms of acceptable debt ratios, investment ratios and days sales outstanding (DSO), but regardless of the industry specifics or the economic conditions, if you’re managing your working capital position appropriately, everything else just falls into place,” says Sandy Ritchie, CTP, Vice President and Treasury Management Sales Manager for Fifth Third Bank, Tampa Bay.
Smart Business spoke with Ritchie about how CEOs can manage their company’s working capital position effectively.
What are the best tactics for improving cash flow through receivables and payables management?
Every business should have a stated process for collecting money in a fast and efficient manner. Track and monitor the average number of days it takes your customers to pay and proactively work with late customers so you’re not caught by surprise by a growing increase in your accounts receivables balance or a cash shortage. Accepting credit cards, debit cards and collecting payments through a lockbox are all ways to decrease DSO and improve cash flow. While these solutions require a small fee, the upside includes reduced staff time devoted to collections activities, drafting reports or creating bank deposits.
Once your company is receiving payments more quickly, the next step is to lengthen the time you have the funds. Pay your vendors with a purchasing card to improve float and review all partner agreements so they are paid at the maximum allowable limit. Renegotiate to more favorable payment terms with vendors.
How can reporting help?
No matter how you choose to collect the money, regularly review reports that detail each type of transaction as well as a consolidated report detailing your company’s total cash position; also make certain your reports tie together seamlessly and that the data flows into the general ledger. A regular review of real-time cash transactions will reveal opportunities to speed up collections, and report efficacy will enhance your company’s fraud protection program because it’s the gaps in reporting and the lack of real-time data that can leave the door open for fraud. A plus to putting all your transactions through one bank is that CEOs can benefit from comprehensive online reporting tools that update every day, without adding systems or staff.
What are the best practices for proactive funds reviews?
CEOs should schedule reviews with their bankers at least annually but as often as monthly if cash is tight. Take the opportunity to shop the banking competition at least once a year so you know what tools are available; hiring a new CFO or controller can be an opportune time to conduct a market survey. Banks are continually bringing new automated enhancements forward, such as online treasury management and online securities purchase and, best of all, it’s not necessary to be a big business to qualify for the services. Many of the packages are bundled, making them affordable for any size company. Then, when the working capital fundamentals are in place, CEOs can make small adjustments in reaction to market changes. For example, if your company experiences a 10 percent drop in deposits, a simple phone call can turn off the overnight investment sweep or turn on your company’s line of credit sweep. Because you know your company’s cash position through real-time data capture and know your options, you can make adjustments before a cash crunch becomes critical.
What working capital expertise should CEOs expect from their banker?
Your banker should not only offer fund management solutions, he or she should demonstrate the impact of his or her recommendations on the company’s financial statements. CEOs should furnish their financial statements and a chronology of their current accounting systems, including the requisite soft costs, such as staff time and labor needed for each type of transaction. The banker should be able to demonstrate the cash flow improvement and any reductions in overhead and other costs resulting from the solution. If the banker can’t quantify the savings from increased efficiency, try another banker. CEOs need to be open to new ways of doing things and they also need to consider the opportunities that result from implementing a comprehensive solution.
SANDY RITCHIE, CTP, is Vice President and Treasury Management Sales Manager for Fifth Third Bank, Tampa Bay. Reach her at (813) 306-2463 or firstname.lastname@example.org.
Consumers like the convenience of buying online, buying over the phone or purchasing gift cards, so offering these options exposes your company’s products and services to new customer segments and often expands your selling hours without adding brick and mortar or additional staff. Expanding your business through the use of merchant services can increase revenue without increasing fixed costs.
“Some customers prefer the convenience of consolidated credit card statements or receiving frequent flier miles or cash rebates for their purchases; still others can’t qualify for credit cards, so they use debit cards to complete their transactions,” says Mark Hayes, vice president and commercial merchant sales manager for Fifth Third Bank. “Strategic use of merchant services can expand your markets and customer base and, perhaps best of all, they level the playing field between small and midsize businesses and the big guys.”
Smart Business spoke with Hayes about how CEOs can win new customers by expanding their use of merchant services.
What are some merchant services available to businesses?
Merchant services provide businesses with a set of comprehensive solutions for accepting credit cards, debit cards and online payments from customers. The solutions are often provided on a turnkey basis, including point-of-sale (POS) equipment, shopping carts and merchant accounts or through referrals to qualified vendors, making it convenient for small business owners. Merchants can track their transactions online in real time and download sales data into software programs like Quicken. Greater data capabilities allow owners to view their average sale transaction amount, and then experiment with ways to increase it and discover growth opportunities by analyzing customer buying trends and habits, and then add new customer segments.
Also, POS equipment is now available that uses wireless technology to transmit transactions, so merchants can accept credit cards from customers at flea markets, trade shows or in their homes.
How can merchant services improve the customer experience?
Giving customers every possible way to do business with your company improves their experience and makes it more likely they’ll buy from you again. Statistics indicate that it costs more to get new customers than to retain old ones and that customers will spend more when they use a credit card to pay for transactions. Gift cards are becoming increasingly popular with consumers. Buyers don’t have to worry about selecting the right size or color, and the recipient gets exactly what they want, so offering gift cards provides customers with a fast and less-stressful shopping experience. Also, it’s unlikely a consumer would pay for high-ticket items with anything but a credit card, and busy people and younger consumers want to purchase online, so unless you give them what they want, they’ll go somewhere else.
What are the cost implications?
The fees for credit card processing average 2 to 3 percent of the total transaction amount and a POS terminal and software can average $300 to $500, while wireless terminals average $800 to $1,000; set-up fees are fairly nominal. The cost of taking payments over the Internet is sometimes less expensive for the upfront costs but can be more expensive for each transaction because of the higher V/MC interchange fees. Also, while some consumers still pay with checks, it can take a few days to receive notice of returned items, while credit card and debit transactions are verified on the spot.
What security is best for these types of transactions?
Make sure your equipment and third-party processor is PCI compliant, which stands for Payment Card Industry Data Security Standard. Any organization that accepts payment card transactions must be in compliance with the standards. Your merchant banker can refer you to vendors that meet the security standards.
How can a merchant banker help?
Merchant services bankers can provide you with turnkey solutions and equipment financing to help you expand your business through enhanced payment options. They should be able to either lease or sell you a POS terminal. Some business owners opt to lease first, then purchase later, so they can try the equipment before committing. A merchant services banker can also help your company expand into e-commerce by recommending a shopping cart vendor for Internet purchases. If you select the same bank for your merchant account and merchant services, the money from transactions normally transfers into your account in 24 hours instead of 48, which improves cash flow. Your banker should also be able to give you advice and ideas about the best ways to expand your business through the strategic use of merchant services, so owners should see them as a complete resource to build revenue.
MARK HAYES is vice president and commercial merchant sales manager for Fifth Third Bank. Reach him at (813) 306-2407 or email@example.com.
The incentives provided under the Economic Stimulus Act of 2008 will expire on Dec. 31. The legislation was designed to provide economic stimulus through incentives for business investment. It was originally estimated that businesses would save $50 billion in near-term taxes through a temporary change to the tax code that allows companies purchasing new equipment in 2008 to deduct up to $250,000 in qualifying capital expenditures as well as reinstating bonus depreciation to allow businesses to deduct 50 percent of their capital asset expenditures for 2008. With only a few months left in 2008, CEOs must act now or risk losing out on the opportunity.
“Essentially, for every dollar businesses invest on assets this year, they’ll save up to 45 cents in tax benefits, lowering their effective cost for purchasing the asset,” says Kevin Krogstad, senior tax manager with Haskell & White LLP. “Companies that need new manufacturing equipment, vehicles, computers or office furniture should buy now to get the tax savings. The equipment must be purchased and placed into service during 2008 to qualify, so CEOs should review their needs to avoid missing out on the benefit.”
Smart Business spoke with Krogstad about the Economic Stimulus Act’s parameters and the associated tax savings.
What are the increased expensing limits under the Economic Stimulus Act?
The Economic Stimulus Act increases the annual expensing limit under IRC §179 from $128,000 to $250,000 beginning in 2008. The investment ceiling limitation was also increased from $510,000 to $800,000. Thereafter, the amount eligible to be expensed is reduced dollar for dollar for purchases exceeding the $800,000 ceiling. For 2008, a taxpayer’s expensing limitation is phased out completely for the year, once its investment in qualified property reaches $1,050,000.
It’s important to note that the maximum amount that may be expensed under §179 is limited to the amount of taxable income resulting from the taxpayer’s active trades or businesses, so effectively, your business must be in the black to qualify. However, in most instances, a taxpayer should still elect for the deduction, as making the election will preserve the right to carry depreciation forward to other years. Absent making the election, the taxpayer can recover the cost of the investment only through depreciation deductions spread over the applicable recovery period.
Which businesses stand to benefit?
As a result of this incentive, most small companies and even some midsized businesses with moderate capital equipment needs will be able to obtain a full deduction for the cost of business equipment and machinery purchased in 2008, reducing their effective cost for those assets. And one more bit of good news, for federal tax purposes, there’s no alternative minimum tax (AMT) adjustment with respect to the property expensed under §179.
Does the act reactivate the bonus depreciation benefit enacted under prior stimulus packages?
Yes. The act provides 50 percent bonus depreciation for both regular and alternative minimum tax purposes for ‘qualified property’ acquired during 2008. The remaining 50 percent of the asset’s basis is eligible for regular depreciation deductions over the asset’s applicable recovery period. Qualified property is defined as having a recovery period of less than 20 years, which includes most office furniture, office equipment, computers, off-the-shelf computer software, water utility property and qualified leasehold improvement property. The property must be new, and there can’t be any previous contracts showing the intent to purchase the assets before 2008.
Does the act expand the deduction for luxury autos?
The maximum first-year depreciation for luxury autos has increased by $8,000, from $2,960 to $10,960 for qualified autos, trucks and vans placed into service in 2008. The vehicle must meet a 50 percent business use test to qualify. CEOs should note that the maximum §179 deduction for sport utility vehicles weighing more than 6,000 pounds remains at $25,000.
Do these same benefits apply to California tax calculations?
At this time, California has not adopted the federal provisions. The maximum §179 deduction for California tax purposes is $25,000, and because the property ceiling for California is $200,000, the §179 deduction is completely phased out once qualified property additions for the year reach $225,000. So as far as California is concerned, assets will continue to be depreciated over their applicable recovery periods. CEOs should note that this may create significant federal versus California basis differences upon the ultimate disposition of assets in the future.
In addition, taxpayers should be aware of these differences when calculating taxable income projections for purposes of making estimated tax payments for 2008. Overall, if these purchases will include assets your business needs to expand or even maintain its competitive advantage in the marketplace, the tax benefits might be too good to pass up, but you’ll have to hurry.
KEVIN KROGSTAD is a senior tax manager with Haskell & White LLP. Reach him at firstname.lastname@example.org or (949) 450-6200.