Volatile exchange rates have become a permanent fixture of the post-2008 financial markets, turning a foray into the global marketplace into a fiscal roller coaster ride. Instead of reducing risk by locking in exchange rates from the outset, companies face uncertain profitability, cash flow and market value when they attempt to time transactions to capitalize on favorable exchange rates.
“You don’t have to put your hard-earned profits at risk to compete in the global marketplace,” says Doug Reichman, corporate foreign exchange advisor for California Bank & Trust. “You can enhance your competitive position and overcome vacillating currency values by utilizing foreign exchange services.”
Smart Business spoke with Reichman about managing currency exchange exposure by utilizing foreign exchange services.
What is foreign exchange exposure and how does it impact profitability?
Companies want to grow their top line by selling products and services overseas, but unless they solidify the currency exchange rate, the price and margin may go up or down each time an invoice is processed. If you buy parts overseas, manufacture in the U.S. and sell finished goods to a company in a foreign country, it’s difficult to forecast sales and profitability given the number of currency exchanges that occur over the course of a transaction. Executives often try to avoid volatility by demanding payment in U.S. dollars, but savvy competitors who deal in foreign currency have a distinct advantage in overseas markets.
How can business leaders identify foreign exchange exposures and opportunities?
You need to forecast sales and profits using a variety of exchange rates and scenarios to recognize and exploit the arbitrage. For example, if you plan to ship $1 million worth of goods to France in three months, you need to look at the current exchange rate and the recent swings to see what you may ultimately collect. In the process of reviewing the best and worst case scenarios, you may recognize an opportunity to manage risk or find that selling products in Asia is more profitable than Europe.
What constitutes an effective hedging strategy?
Effective strategies are customized, mitigate currency exchange risk and help the company achieve its financial goals. The challenge is that most companies don’t have the time or expertise to develop and execute an in-house strategy that relies on precise calculations, great timing and luck to balance gains and losses. For example, some executives try to protect their margins by paying early or late for products, depending on whether they expect the exchange rate to rise or fall in the future. Still others hope that gains and losses balance out over time, but that approach is a gamble in a volatile currency market.
How can a currency advisor help?
Whether your goal is to increase sales, enter new markets, protect profits or improve supplier relationships, a currency advisor has the expertise to help you meet your objectives. First, he’ll review your budget and understand your objectives; then he’ll trace every dollar to expose the risks and opportunities that occur during currency exchanges over the course of the business cycle. Finally, he’ll recommend a hedging strategy and customized suite of services so you can focus on your core business instead of monitoring the hourly swings in the foreign currency market.
Which banking services are most effective for controlling risk and why?
While banks offer many types of foreign exchange services, businesses often use the following products to facilitate profitable global commerce.
? Spot contracts: A simple way to handle payables and receivables in a foreign currency. Currency is converted based on the current rate, funds are wired and your account is credited or debited within two days.
? Forward contracts: Allow you to secure an exchange rate now for a specific settlement date within the next 12 months. Whether you’re buying or selling a piece of equipment, both parties are protected from swings in the exchange rate when the deal is settled.
? Window forward contracts: Essentially the same as a forward contract, except the settlement date is flexible in cases where the manufacturing process or product delivery date hinges on uncertain factors.
? Vanilla currency options: Like insurance, a currency option allows you to exchange currency at a pre-agreed rate on a specific date for a fee, providing protection in case the market moves against you.
? Demand-deposit accounts: Allow you to hold foreign currency and use it to pay employees or bills without exchanging the money to U.S. dollars.
Do you have any other tips for executives venturing into the international marketplace?
First, understand your financial objectives before you engage in international commerce. Develop a forecast and budget and consult with a qualified professional to ensure that your goals are realistic and achievable. Second, understand the exposures and don’t take unnecessary risks, because speculators can get burned in today’s foreign currency market.
Finally, talk to your banker before you make any decisions. Your banker can explain foreign exchange products in simple terms and recommend a strategy and portfolio of services to help you meet your business objectives. There’s no need to put your profits at risk, when your banker has the knowledge and tools to help you succeed in the international marketplace.
Doug Reichman is corporate foreign exchange advisor for California Bank & Trust. Reach him at email@example.com or (213) 593-2113
Not only is Texas a leading provider of crude oil and natural gas, but the state’s abundant sunlight and persistent winds offer businesses yet another opportunity to lead the nation, by tapping renewable energy sources to power manufacturing plants, distribution centers and office buildings.
But despite the fact that Texas companies can leverage more than 80 federal, state and local incentive programs to defray the cost of purchasing and installing renewable energy systems and energy conservation equipment, executives in the Lone Star state are still leaving money on the table.
“Renewable energy and conservation incentives and credits allow companies to demonstrate environmental stewardship, increase operating efficiencies and lower income taxes by defraying the cost of purchasing renewable energy and energy conservation equipment and systems,” says Laura Roman, CPA, CMAP, partner in tax and strategic business services at Weaver. “Unfortunately, the funds often go unused, and the programs won’t last forever.”
Smart Business spoke with Roman about the opportunities to lower taxes and operating expenses and positively impact the environment by taking advantage of underutilized conservation and renewable energy credits and incentives.
Why should companies consider switching to renewable energy or energy efficient building materials?
The benefits include the opportunity to lower energy consumption and utility bills by installing modern, energy-efficient manufacturing equipment, windows or HVAC systems, and the chance to promote a positive public image by launching green initiatives and supporting environmental stewardship. Plus, both tenants and building owners can utilize the incentive programs and reap the financial rewards. For example, the improvements help owners by boosting property values, while tenants benefit from increased energy efficiency, which ultimately reduces operating costs.
What types of incentives are available?
There are more than 54 federal and 28 state and local programs that can be used for equipment purchases or upgrades that reduce energy consumption or utilize solar, wind, ethanol and biodiesel energy. The programs include: tax deductions, credits and exemptions, loans and grants, rebates and performance-based incentives. For example, Texas businesses can qualify for commercial energy efficiency rebates, energy efficient incentive programs, green building corporate tax credits and sales tax exemptions for purchasing energy and water efficient products. While the U.S. Treasury Department offers renewable energy grants for projects involving: solar photovoltaics, landfill gas, wind, biomass, hydroelectric, geothermal, municipal solid waste, CHP/cogeneration, solar hybrid lighting, hydrokinetic, tidal/wave energy, and ocean and fuel cells using renewable fuels or micro turbines.
Best of all, executives don’t have to commandeer large amounts of cash to complete the projects because companies can tap different programs to train employees, purchase equipment or pay for installation contractors. So, companies can still invest in that much-needed marketing program or software upgrade if they utilize renewable energy incentives and credits to hire renewable energy specialists, replace inefficient manufacturing equipment or install a new HVAC system.
How do the incentives provide financial benefits?
Essentially there are five areas where companies benefit from renewable energy incentives and tax credits.
- Gross income exclusions. Companies can deduct the full amount of incentive payments or grant funds they receive for qualified renewable energy or energy conservation projects from gross income.
- Dollar-for-dollar deductions. There are no sliding scales or phased-out deductions. Companies can use every dollar they invest in qualified renewable energy and energy conservation projects to reduce their tax liability.
- Accelerated depreciation. Under IRS 179D, companies can depreciate the cost of purchasing new plant and energy equipment at a faster rate than typically allowed. So, instead of taking 39 years to recover the cost of a new lighting, HVAC system or building envelope, the owner of a 100,000-square-foot building can deduct up to $1.80 per square foot, or up to $180,000 in the first year.
- Ancillary funding and allowances. Funding is available to hire specialized workers or train current employees on the use of renewable energy equipment and processes.
- Multiple opportunities. Companies can tap multiple incentives for each project including loans, performance-based incentives, deductions, tax exemptions and grants, as well as property and sales tax rebates.
Should executives be aware of any special qualifications or rules?
The incentive plans and tax codes are fairly straightforward, but there’s no need to spend hours interpreting the criteria or deciphering nebulous clauses when a tax professional is intimately familiar with the nuances of each program. At the same time, he or she may help identify additional opportunities to complete the project without tapping cash reserves, and can often share tips and ideas from experience helping other companies navigate the process.
How can executives evaluate the ROI and choose the most advantageous projects?
Companies should discuss ideas and energy needs with architects, contractors and energy professionals so they can create a list of feasible projects and determine the material and labor cost for the various improvements. Review the list with an accountant, since he or she is familiar with the tax code and incentives and can provide an estimate of the cash outlay and ROI. Finally, act now. Remember, it costs virtually nothing to investigate these opportunities, and there’s no sense in waiting when the money to complete renewable energy or energy conservation projects is there for the taking.
Laura Roman, CPA, CMAP, is a partner in tax and strategic business services at Weaver. Reach her at Laura.Roman@weaverllp.com or (432) 570-3030.
Beginning in May, approximately 60 million people will discover some new information in their 401(k) statements. Not only will they find out whether they made or lost money, for the first time, many will see how much they paid in plan fees and expenses.
Of course, plan sponsors not only have to comply with the new regulations and meet their fiduciary responsibilities, but they also have to justify the plan’s administrative costs to participants, who have been resorting to class action lawsuits after enduring more than a decade of lackluster returns.
“Plan sponsors may face a tsunami of anger and questions from participants unless they get out in front of this change,” says Kyle Pifher, principal, retirement plan services for Findley Davies. “Otherwise, some participants may be shocked to discover how much they’re paying in plan fees.”
Smart Business spoke with Pifher about the impact of the new disclosure regulations and why plan sponsors need to take proactive steps to address employee concerns.
What are the new mandates?
There are two critical components in the new regulations. First, beginning in April 2012, third party providers and recordkeepers must disclose a detailed summary of all fees and charges that exceed $1,000 to plan sponsors as mandated by 408(b)(2). Then starting May 31, individual participants will see their portion of those fees on their plan statements as mandated by ERISA Section 404(a)(5).
Why did the DOL propose new regulations?
The need for greater transparency became apparent following the market correction in 2008, when participants openly questioned fees as their account balances plummeted. Essentially, there was no consistency in the way fees were assessed or disclosed, making it difficult for plan sponsors to uphold their fiduciary responsibilities, which include prudent selection of service providers, monitoring fees and ensuring that reasonable compensation is paid for services to maintain the plan. In other words, the DOL is simply responding to the long-standing need to disclose a detailed break-out of fees and expenses that were often consolidated into a single charge or hidden in the fine print.
How do the changes shift or alter the duties and responsibilities of plan sponsors?
The fiduciary responsibilities of plan sponsors are essentially the same, but the new laws and detailed fee disclosures will certainly illuminate their rigor and performance. For example, participants may wonder whether the fees are reasonable given the plan’s risk and returns, since fiduciaries have an obligation to act prudently and solely in the interest of participants by monitoring plan fees and ensuring that the charges aren’t excessive. So, sponsors will need to show how they benchmark third party fees and be prepared to explain their selection and oversight methodology. Participants may also question their investment choices.
What are the benefits for plan sponsors and the possible drawbacks or unintended consequences?
Certainly the increased transparency will help sponsors benchmark and compare fees across companies and industries and negotiate every charge, which could ultimately lower the total cost of the plan. The good news is that the fee disclosures may encourage participants to read their statements and manage their investments, because optimizing retirement plan returns benefits everyone in the organization. On the negative side, this could create animosity toward the employer if fees have not been disclosed and employees feel as if they have been left in the dark. And we’re seeing more class action lawsuits from disenchanted participants, who are protected by the prudent man rule, which states that trustees must manage another’s money using skill and care.
How are companies using this new information to assess service provider fees?
We’re seeing more companies engage an outside consultant to conduct plan reviews and side-by-side fee comparisons along with a greater desire to benchmark current fees against industry standards. As a result, more companies are soliciting bids and changing providers, especially if they feel that plan providers aren’t charging reasonable fees or delivering value.
How can plan sponsors head off problems before they occur?
Follow these steps to head off problems before they occur.
- Review third party fees and expenses: Know where you stand before participants receive their May or June statements, so you can anticipate their concerns and negotiate fee reductions or even change providers. It’s also prudent to review your plan’s investment choices to see if they are aligned with your employees’ risk tolerance and desired rate of return based upon the current needs and demographics of your employee population.
- Communicate transparently and proactively: Fully disclose all service fees using language and terms that resonate with your employee base. Describe the services they provide and how your current fees compare to those charged by other providers.
- Provide education: Offer educational meetings, brochures and call center support, so employees understand the role of plan providers and how they develop their fees. In fact, this is the perfect time to review retirement plan fundamentals and the current investment options; because your 401(k) isn’t a benefit unless it actually helps your employees meet their retirement goals.
Kyle Pifher is principal, retirement plan services at Findley Davies. Reach him at KPifher@findleydavies.com or (614) 458-4651.
Why let a lack of staff or resources curtail your expansion plans, when the expertise you need to develop new markets is just around the corner. Business school students have the ability to conduct research, assess opportunities and develop comprehensive marketing plans, and since they’re supervised by faculty, you don’t have to spend a fortune to tap some great business minds.
“You don’t have to hire additional staff or expensive consultants to solve business problems, when students and faculty are capable of doing the work for a fraction of the cost,” says Dr. Terri Swartz, dean and professor of Marketing for the College of Business and Economics at California State University, East Bay.
“Instead of shifting projects to the back burner, tackle them by leveraging the resources at your local B-school,” says Luanne Meyer, director of the Business Opportunity Program at California State University, East Bay.
Smart Business spoke with Swartz and Meyer about the advantages of developing a partnership with a local business school.
Why should executives consider partnering with a local business school?
Swartz: Student projects provide companies with the opportunity to develop the work force of the future and evaluate prospective employees, without incurring the managerial responsibilities and costs of a formal internship program. We help company representatives scope out the project, while course professors guide and supervise the undergraduate and graduate students during the assignment. The concept is similar to the tried and true programs used in teaching hospitals and dental schools, where students gain hands-on experience under the close supervision of faculty experts.
Meyer: Busy executives like the fact that they have access to our faculty brain trust, so they can hear about the latest marketing trends or consider another solution to a challenging problem.
How do student projects benefit all parties?
Swartz: Class projects give business students the chance to augment their classroom studies through experiential education, so they hit the ground running when it’s time to enter the job market. At the same time, the Business Opportunity Program gives the university the chance to partner with local businesses, share faculty expertise and give back to the community.
Meyer: Companies have limited time and resources, so it can be difficult to source the right interns or freelancers and shepherd them through a complex project. But the program office does the legwork by evaluating your needs and connecting you with a faculty adviser who has the right experience and knowledge to manage your project.
Are some projects more appropriate for students than others?
Swartz: The students work on pricing and positioning projects, product launches, opportunity analyses and marketing communications plans and they even find solutions to human resources or supply chain issues. Projects typically last from two to nine weeks and are often divided into phases, so client partners can monitor the team’s progress. For example, our students have developed recruiting strategies for the FBI and helped Lawrence Livermore Labs develop a plan to commercialize one of its licensed technologies.
Meyer: Many projects involve the development of new revenue streams for companies in both the non-profit and for-profit sectors, and through our entrepreneurial studies program, we often help small businesses find innovative ways to expand. For example, we are currently helping a small detergent manufacturer reposition its product for the Latino market by designing new packaging, creating a new message and developing a comprehensive marketing campaign. We can help companies use social media to reach new customers, develop a marketing database or lower costs by utilizing cutting edge technology. In fact, our students can even lower the cost of using a major consulting firm for marketing projects by conducting some of the background research or designing a portion of the program.
How can companies work with B-schools to develop talent pipelines?
Meyer: Client partners have numerous opportunities to interact with the students during a project, which gives them a chance to assess their capabilities and gauge their interest in future employment. For example, a company representative usually addresses the class before each project in order to provide background on the company and articulate its objectives. In turn, students prepare a proposal, map out the specific milestones and timeline and state the need for client support and involvement during the project.
Swartz: The professors align students with projects that match their interests and talents, which increases the chance that the parties will end up working together in the future.
What’s the best way to initiate a mutually beneficial relationship?
Meyer: At CSU, businesses can simply contact the Business Opportunity Program office to initiate a dialogue and assess whether we can meet each other’s needs. We typically need a few weeks’ lead time to scope out a project and get it on the schedule before the start of the quarter.
Swartz: We ask our client partners to cover nominal expenses like office supplies or occasional meals and transportation costs for the students, and we certainly appreciate reasonable donations. But all in all, student projects are a great value when you consider that you’re gaining access to our faculty brain trust and discovering a future star performer during the process.
Dr. Terri Swartz is the dean and professor of Marketing for the College of Business and Economics at California State University, East Bay. Reach her at (510) 885-3291 or firstname.lastname@example.org. Luanne Meyer is director of the Business Opportunity Program at California State University, East Bay, www.csueastbay.edu/businessopportunityprogram. Reach her at (510) 885-7135 or email@example.com.
The latest data from the Federal Deposit Insurance Corp. shows that a permanent shift has occurred in the lending environment. Although overall commercial and industrial lending by banks has increased for five straight quarters, loans to small businesses with $1 million or less in annual revenue have been shrinking since June 2008.
Unless business owners make a concerted effort to understand underwriting requirements and adapt their approach, they will have a hard time securing capital at fair prices.
“Owners can no longer submit a loan package and wait for approval,” says Betty Rengifo Uribe, executive vice president of the Business and Personal Banking Division at California Bank & Trust. “They have to be engaged in the process and breathe life into their numbers, so bankers have enough information to approve their loan.”
Smart Business spoke with Uribe about the changing lending climate and why executives must adapt their strategy to secure a business loan.
How has the lending climate changed?
Bankers have to comply with a host of new regulations and stringent underwriting standards that have permanently shifted the way we consider and grant business loans. We do not rubber stamp applications — we want to hear the story behind the numbers, get to know applicants personally and even tour their facilities. For example, it’s not enough to understand the business and its customers’ needs; bankers need to understand the customers’ customers to validate the revenue projections and ensure the ability to service debt. We want to know how the economy has impacted the industry, how the business has adapted its strategy and why the company will be successful in the future. Of course, having an inside look at the business not only provides loan officers with the confidence to recommend the loan package, but they’re more likely to lobby on the borrower’s behalf when the loan comes up for approval.
What’s the best way to research the market and identify a prospective lender?
Start by researching prospective lenders on the Internet before requesting an appointment with a loan officer. Ask about the banker’s background and experience to ensure that the lender or branch manager has the knowledge, interest and enthusiasm to earnestly evaluate your business request. Move on if a banker seems lackadaisical. Make sure they have the expertise in your industry and can add value to your business. If they have the business expertise, they will be poised to help your business grow.
What should executives bring to the initial meeting?
Provide a framework to support your loan request by bringing an introductory memo or business plan that describes the history of your company, the profiles of your management team, a summary of your capital needs and the purpose for the funds. Also, bring copies of your tax returns covering the last two to three years and perhaps provide the contact information for your CPA or CFO so he or she can answer the loan officer’s questions and validate the efficacy of your financial assumptions.
How do lenders evaluate a borrower’s credit worthiness utilizing the 5 Cs?
Bankers consider these five characteristics to evaluate the creditworthiness of potential borrowers.
? Character: Reviews the owner’s and the company’s reputation as well as the thoroughness of the loan package.
? Capacity: Measures the borrower’s ability to service debt from current cash flow by reviewing a summary of monthly non-discretionary payments. Normally, lenders look for combined personal and business cash outflow to be no more than 40 percent of the cash inflow.
? Capital: Considers the borrower’s equity along with his or her initial investment. Remember, a banker will be more willing to invest alongside borrowers who invest in their own company.
? Collateral: Contemplates secondary sources of repayment should the business struggle financially, such as the ability to liquidate receivables or inventory, stocks and bonds or other assets like real estate.
? Conditions: Examines the industry’s stability, trends, competitive environment as well as other external factors that influence business success, including the overall economy.
What should owners include in their business plan?
It’s fine to use a template as long as your business plan covers the history of your company and provides an in-depth trend analysis covering the last three years. A brief bio of all key management members is always a good idea to include. This shows the lender that you have a solid management team with the expertise to grow your business. Loan officers want to hear about the obstacles you’ve faced and how you’ve overcome them, since resilient and resourceful executives will probably succeed in the future. Finally, provide a financial forecast and describe your plans for the next two years.
Are there other tips that can help owners navigate the lending process and secure a business loan?
Get to know the loan officer, underwriter and branch manager because each one plays an important role in approving your loan. Request a list of required forms and documents and submit everything at once. Don’t raise red flags by omitting answers in the loan application; just insert N/A if the question doesn’t apply. Finally, follow up at every stage of the process to make sure your request is being considered.
Betty Rengifo Uribe is executive vice president for the Business and Personal Banking Division at California Bank & Trust. Call (800) 400-6080 to reach the branch nearest you or visit www.calbanktrust.com to learn more about California Bank & Trust.
For the young, small, or medium-sized company, it can be inherently difficult to measure the value of the internal audit. As an example, upstream and midstream energy companies often employ fewer people and use less sophisticated administrative processes than similarly sized companies in other industries.
But the unique circumstances faced by these companies highlight the need for risk mitigation, and savvy energy executives have found a way to leverage the internal audit to help define the company’s strategy and manage risk.
“It’s critical to identify and mitigate risk in energy companies,” says Jody Allred, advisory services partner at Weaver. “But auditors also have the ability to offer objective advice, create operating efficiencies and resolve myriad issues, if they’re empowered to execute that charter.”
Smart Business spoke with Allred about the opportunities to create strategic business value by expanding the reach of the internal audit function beyond traditional audits.
Why is risk mitigation a priority in E&P and pipeline companies?
Preventing loss is always important, but it may mean the difference between success and failure in E&P and pipeline companies that require a substantial capital investment and simply can’t afford errors or inefficiencies. A relatively small E&P company requires 10 to 12 times the capital investment of similarly sized manufacturers, and also lacks the resources and streamlined operations when compared to these companies. Plus, survival hinges on its ability to exploit its assets and ensure the success of early projects.
All of this means that risk is higher and there’s a greater need for an internal auditor’s objective assessment.
How can an internal auditor create value by identifying, assessing and responding to risk?
Auditors create value by combining their industry experience, intuition and professional training to conduct assessments, identify risks and quantify the exposures. Savvy auditors know how to boil down massive amounts of data, so the risks can be prioritized and dealt with through a recommended course of action. And since they’ve seen the movie before, experienced auditors know what to look for in E&P companies, so investors are protected in cases where operational processes and procedures are often less sophisticated or mature.
Can an auditor really improve business processes and create new efficiencies?
It isn’t unusual for auditors to spot ways to streamline processes while reviewing the current systems and workflow during the risk assessment phase. But auditors are capable of going beyond risk assessment by finding solutions to recognize and solve business problems across the enterprise.
For example, a client was about to hire a consultant after a department struggled to comply with a set of operating procedures. After listening to the issues, we found that cultural differences were the root cause of the problem. So, we explained the need for the process to the department manager, made some minor adjustments and resolved the issue for a third of the cost of a consultant. Since auditors are detail-oriented, they often spot opportunities to streamline or eliminate bureaucratic processes during an engagement. They may even identify opportunities to negotiate better deals with vendors, garner higher margins or lower costs by utilizing business process outsourcing.
But to be effective in a broader, more strategic role, internal auditors must be empowered to go beyond risk mitigation by the company’s executives and audit committee.
Why is it important for an auditor to provide executives with insight and objective advice?
Executives often take a broad view of the operation, since they rarely have hands-on experience in every functional area. For example, they may need help assessing and understanding the risks in departments that require high levels of control like accounting and finance or IT.
An auditor can help executives determine whether the company’s security systems are adequate, calibrated and functioning effectively. Plus, they can help executives find the right balance between risk and cost, so the organization can achieve its business plan. Auditors can also assess the company’s operational effectiveness by providing benchmarking against peer organizations. Since auditors have the opportunity to work across multiple departments within a company, they have the knowledge that no one else has about the cross-functional interaction of the company.
The bottom line is that an auditor’s vast skills are often underutilized, since they can provide a valuable perspective and potentially play a greater role in adding value across the enterprise.
How can executives support the transformation process so internal auditors create value instead of police reports?
First, the executive-auditor relationship has to be built on trust, which seldom happens when auditors are relegated to creating police reports. Launch a cultural shift by changing the auditor’s marching orders and measuring them on value creation and financial contributions, not just the problems they find.
Second, executives need to understand the audit process, so they can identify opportunities for auditors to make recommendations. Give auditors an opportunity to prove their value-creating capabilities and ability to liaise with executives by giving them a crack at an under-performing business process or an area where costs are accelerating.
Third, view auditors as trusted advisers that are capable of making viable recommendations and be open to hearing them. Finally, maximize your investment in the internal audit function by expanding the reach, because companies can’t afford errors or inefficiencies in today’s competitive business environment.
Jody Allred is an advisory services partner at Weaver. Reach him at firstname.lastname@example.org or (817) 882-7750.
Successful business owners rarely miss an opportunity to consummate a strategic acquisition or sign a marquee customer. But tighter banking regulations, economic uncertainty and a tough credit market have dampened the enthusiasm of high-spirited executives by making it difficult to secure a traditional commercial line of credit.
Even if your balance sheet has taken a hit due to the recession, you may still be able to acquire a working capital line to grow your business by borrowing against the value of your company’s accounts receivable or inventory.
“In today’s environment, an asset-based loan is often the best option, because bankers can underwrite around problematic profit and loss statements or balance sheets by focusing on the value of the collateral,” says Tony Spinogatti, first vice president and portfolio manager for Asset Based Lending at California Bank & Trust.
Smart Business spoke with Spinogatti about using an asset-based loan to meet your company’s needs for working capital.
When should executives consider an asset-based loan?
If your company’s P&L and balance sheet have been negatively impacted by the recession, a traditional commercial line of credit may not be a viable financing option. However, the company may qualify for an asset-based loan, which is secured and underwritten based on the value of the company’s accounts receivable and inventory. It’s not unusual for a small to mid-size company to maintain accounts receivable and inventory levels of $2 million to $10 million that can be used to secure a working capital line to finance working capital and/or expansion.
What are the advantages and disadvantages of an asset-based loan?
Asset-based loan structures can provide greater flexibility as the loan amount is based on prescribed collateral values or advance rates. For example, advance rates on accounts receivable, being closest to cash, typically average 80 to 85 percent. And, depending upon the various components of inventory the advance rate may be 30 to 50 percent of prescribed inventory’s value.
Interest rates for asset-based loans are slightly higher than the rates for traditional lines of credit. However, because the prime rate is currently 3.25 percent borrowing rates are at historical lows. While the reporting requirements for asset-based loans are fairly rigorous borrowers say the process offers some unexpected benefits. For example, borrowers who may be required to process invoice payments through a bank-controlled lock box benefit by collected funds being applied directly to the outstanding loan balance. Instead of reviewing changes in accounts receivable, inventory and loan amounts on a monthly or quarterly basis, management is reviewing those changes in real time. Executives also report a benefit from more accurate cash flow forecasting and some have even discovered a unique way to make a profit. Management can use the line of credit to negotiate payment discounts from vendors. Those payment discounts can add up over the course of a year, offsetting interest expense and to the bottom line.
Is it difficult to qualify for an asset-based loan?
The qualification process is similar to any commercial line of credit, but bankers primarily focus on the quality of the assets in addition to internal controls, financial reporting and the experience of the management team. If the line is secured by accounts receivable, the banker will consider advances based on the value of outstanding invoices less than 90 days past due from invoice date, the credit worthiness and payment ability of the underlying customers and whether employees follow a disciplined collection process. Finished goods and raw material typically have different advance rates and lenders will not normally advance against work in process, so keep that in mind if you’re thinking about securing a loan with inventory. The company’s balance sheet and the owner’s personal financial statements aren’t decisive, but be prepared to substantiate the value of the company and personal assets.
What should executives know about the application and underwriting process?
Plan on submitting financial statements for the last three fiscal years, an interim statement, most current accounts receivable aging and, if applicable, inventory report. If your company has lost money, you’ll need to submit a 12-month forecast as well as back-up documentation so the banker can understand and validate the forecast assumptions. For example, he or she will want to know where you plan to cut expenses if your forecast shows a significant reduction in SG&A, or he may ask to see copies of customer agreements if you’re projecting a hefty increase in revenue. Be ready to explain your logic and methodology but keep in mind that the communication process provides an opportunity to build a long-term relationship with your banker.
How can a business owner identify the right bank for its needs?
The national or ‘big’ banks tend to focus on large and very small companies and often overlook the needs of middle market companies. Community and regional banks specialize in loans of $1 million to $10 million and provide customers access to key decision makers within the bank. Of course, you’ll want to select a banker who understands the nuances of your industry as well as the local marketplace. You not only benefit from an asset-based loan structure, but from your banker’s experience, industry insight and solutions to your company’s financing needs.
Tony Spinogatti is the first vice president and portfolio manager for Asset Based Lending at California Bank & Trust. Reach him at Anthony.Spinogatti@calbt.com or (213) 593-2080.
It’s no wonder executives seemed less than enthusiastic about the new auditing standards and controls for service organizations instituted by the American Institute of CPAs (AICPA). After all, most companies had already suffered through a decade of new internal controls and financial reporting requirements that managed to increase costs while offering nominal benefits.
But, this time, the reports that are part of the AICPA’s new Service Organization Controls (SOC) reporting suite actually benefit outsourced service providers and their customers by providing additional transparency at a time when companies are looking to outsource rudimentary tasks or move data and applications to the cloud.
“Companies previously felt like they had no option but to report under Statement on Auditing Standards 70 (SAS 70) even though it was often misused and did little to assure the performance of service providers,” says Brian Thomas, advisory services partner for Weaver. “But, the new SOC reporting options are better focused on the current needs of outsourced service providers and their customers.”
Smart Business spoke with Thomas about the benefits of the new SOC reporting options for service organizations and their clients.
Why did the AICPA change the reporting options for service organizations?
Some of it was housekeeping. The AICPA is updating certain U.S. audit standards to harmonize them with international standards, resulting in the replacement of SAS 70 with SSAE 16 (also called SOC 1). Secondly, the SAS 70 and SysTrust reports weren’t meeting the broader needs of outsourced service providers or their customers.
SAS 70 (now SSAE 16 or SOC 1) addresses only internal controls over financial reporting and SysTrust (now SOC 3) did not provide enough detail to customers — especially at a time when companies are increasingly contracting with Software as a Service (SaaS) and cloud providers, which is raising a host of different concerns. So, while doing its housekeeping, the AICPA addressed this gap with a new option called SOC 2.
What are the new SOC reporting options?
The new SOC reporting suite features three reports called SOC 1, 2 and 3. Best of all, the reporting formats are customizable, so customers can get information tailored toward their specific needs.
- SOC 1 — This report is intended to fulfill the requirements of SAS 70 (now SSAE 16). It has been updated to match international standards and is focused on internal controls over financial reporting relevant to the service provider’s customers.
- SOC 2 — This report is valuable because it addresses a service provider’s controls as they relate to security, availability, processing integrity, confidentiality and privacy of a system. All of these are important aspects of the non-financial performance of service providers. SOC 2 is more relevant for IT-based services and contains detailed results similar to a SOC 1
- SOC 3 (also SysTrust) — Its scope is the same as SOC 2; however, less information is provided about the results. A seal is issued that the service provider can post on its website. The accompanying report confirms only that a SOC 3 engagement was performed and the overall result without any details.
How do these new reports benefit service providers and their customers?
Alleviating the concerns of prospects and customers is one of the primary benefits for service providers. The reports may also reduce the need to accommodate auditors from client organizations because providers have to meet a fairly high audit threshold instead of self-accrediting and validating their performance using a universal set of standards.
Customers can simply review the reports and may be able to avoid the cost of auditing the service provider themselves. Also, the new reports engender trust by providing greater transparency into a service provider’s day-to-day operations, along with the assurance that a qualified auditor has examined its internal controls, compliance and performance.
How can service providers determine the best reporting format for each customer?
Certainly, the service providers should understand the needs and concerns of each customer and tailor the reports appropriately. They can also confer with the client’s auditor to determine the exact scope of their reporting concerns. The format to choose really comes down to the information and transactions handled by the outsourcer and the concerns of its customers.
For example, a client may be concerned about data confidentiality and privacy if they use any SaaS applications to manage customers and prospects, but they’ll have different concerns if they are hosting their core financial application with a service provider. It makes sense for auditors from both organizations to confer when the parties are ready to negotiate the contract and reporting requirements.
How can customers and prospects use the reports to mitigate risk and select a best-in-class service provider?
Customers must read the reports and should not assume that everything’s OK just because an auditor has ventured onto the service provider’s premises. Customers need to understand the scope of the SOC report and its relevance to the services they purchase from the service provider. Look for trends over time with the issues that are identified in their reports and request additional information from the service provider, as necessary.
Although service providers may not share the SOC reports with prospective customers, procurement specialists can develop screening criteria and RFP questions for service providers regarding the scope and issues identified in the report. Finally, don’t let the pain of implementing the new standards keep you from enjoying the gains. Thanks to the new SOC reports, customers can finally have the assurances they need to outsource with confidence.
Brian Thomas, CISA, CISSP, is an advisory services partner at Weaver. Reach him at (713) 850-8787 or email@example.com.
Between blogs, e-mails, tweets and text messages, experts estimate the average person is bombarded by a staggering 100 kilobytes of textual information each day. The resulting overload can cause employees to ignore vital messages that have a direct impact on their well-being as well as the bottom line. Instead of using read receipts or daily reminders to chide employees into reading critical communications, innovative leaders are finding that a picture is worth a thousand words.
“Cartoons are effective because they evoke emotions and people remember them,” says Denise Reynolds, senior communications consultant. “It’s a simple, cost-effective way to grab someone’s attention in a crowded digital world.”
Smart Business spoke with Reynolds about the benefits of using cartoons to convey critical messages.
Why are cartoons an effective way to communicate key messages?
Cartoons not only stand out from traditional communications — they’re concise. It can take hundreds of words to convey the ideas contained in a single image. For example, getting employees to read wellness and benefits literature was a constant struggle at Jergens. So we suggested that the small manufacturing company create mascots and use cartoons to encourage health screenings and educate employees about preventative care. Within days of e-mailing the cartoons and projecting them on the Jumbotron in the manufacturing plant, everyone in the company was talking about Chip and Scrap. Employees said they were previously unaware of many stress-reducing benefit programs like EAPs (employee assistance programs). The company is even considering using them in an upcoming sales and marketing campaign.
Are some topics better suited to cartoons than others?
Consider using cartoons to simplify complex messages or to lighten up drab, but important topics. Retirement planning, pension vesting and safety are good examples, because it’s easier to understand a complex vesting process if it’s broken down into steps in a cartoon panel. The key to garnering interest is creating characters that will resonate with employees. For instance, Jergens’ employees can relate to Chip and Scrap, because they’re based on real products that are part of the company’s manufacturing process.
What are the best practices for incorporating cartoons into a communications campaign?
- Let the characters do the talking. Let the characters convey your messages and display their unique personalities. For example, Chip is usually on his game while Scrap frequently makes mistakes and could use coaching.
- Inject the characters into various media. Inject your mascots into brochures, training videos and blogs so employees become familiar with them and learn to pay attention to their messages. You can even use them on your Facebook page or ask your employees to follow them on Twitter.
- Be patient and persistent. Tailor your messages toward your employee population and repeat them for several months, because any type of marketing campaign is more effective over time.
- Measure ROI. Compare the cost and effectiveness of brochures, letters and memos to cartoons and, most importantly, measure the impact of various media on employee behaviors and the bottom line.
- Make them interactive. Include pop-up messages and links to external videos, Web sites or brochures in each cartoon so employees can source additional information.
- Have fun. It’s OK to have fun and laugh at ourselves, especially in today’s difficult climate. You may find cartoons lift the mood of the company and even inspire creativity.
How can executives and HR leaders measure the effectiveness of creative campaigns?
Initially, you can judge campaign effectiveness by measuring the growth in hits, click-throughs and the amount of time employees spend viewing each cartoon, but, over time, you should see improvements in tangible measures like adoption rates, lower health care costs and changes in employee behaviors. Campaigns can be built to match each company’s budget and you can test pilot a few cartoons without making a big financial commitment. One company saw an immediate jump in health screenings after sending out just one cartoon. Another saw half of its employee population participated in open enrollment during the first five days of the period. It’s also important to gather feedback through employee surveys and focus groups to make sure they’re getting the message and fine tune your campaign.
For more information, contact Susan Riffle, the marketing manager with Findley Davies. Reach her at firstname.lastname@example.org or at (216) 875-1908.
Bolstered by new legislation that will provide it with valuable information about foreign asset ownership, the IRS has launched a crackdown on international tax evasion that will impact most U.S. taxpayers with foreign financial assets. U.S. tax evaders hiding foreign assets have a much greater risk of detection, but the draconian penalites can also be imposed upon law-abiding U.S. individuals and business that have reported all of their income to the IRS, but failed to file one of the reports disclosing ownership of foreign assets.
“The back tax and interest on unreported income from offshore accounts is often small potatoes compared to the penalties for failing to disclose the foreign account to the government,” says Dr. Gary McBride, professor of Accounting and Finance at California State University, East Bay. “Businesses and individuals can be fined up to $100,000 for willfully failing to meet the filing requirements, if the value of foreign financial accounts exceed $10,000 at any time during the year.”
Smart Business spoke with McBride about the IRS crackdown on offshore tax evasion.
How will the legislation impact U.S. taxpayers?
The foreign asset reporting requirements impact every law-abiding business — partnerships, corporations and individuals — with an overseas bank, securities or other financial account, as well as those with substantial ownership interest in a foreign entity. The crackdown was buoyed by new legislation in 2010 called the Foreign Accounts Tax Compliance Act (FATCA), which forces foreign financial institutions to disclose the names of U.S. account holders to the IRS beginning Jan. 1, 2014. If a foreign bank doesn’t comply, then corporations and other U.S. payors that make payments such as dividends, interest, rents or royalties to a foreign financial institution are required to withhold a 30 percent tax. If the tax is not withheld, the IRS will pursue the U.S. payor for the deficiency. The legislation also represents a unique exercise of extra-territorial jurisdiction by the U.S. government.
What are the most notable changes to the tax forms and filing requirements?
U.S. Corporations, partnerships, individuals, estates and trusts must file a Foreign Bank and Financial Accounts Form (FBAR) if they have a financial interest or even signature authority over accounts totaling over $10,000 in a foreign country. That requirement has been in the law for decades, but compliance and IRS enforcement have been lax until recently. Taxpayers must be far more attentive to the question on the income tax return about foreign financial accounts over $10,000. Beginning in 2011, U.S. individuals must also attach to their Form 1040 individual income tax return new IRS Form 8938, if they have foreign financial assets that exceed a specific threshold. The threshold varies depending upon filing status, but the IRS has the authority to set the threshold as low as $50,000. For a U.S. individual who is required, but fails, to file both an FBAR and a new Form 8938, the harsh penalties can be imposed for both omissions, and that is in addition to the income tax and penalties on any unreported income generated by the foreign financial asset.
Why is the risk of getting caught much higher?
The clear IRS commitment to enforce the foreign assets reporting laws and impose the penalties for noncompliance causes the greatest risk. Not all foreign financial institutions will cooperate with the upcoming requirement to disclose the names of U.S. account holders. In many instances, disclosure by a foreign financial institution may be prohibited by the domestic privacy laws. Regardless, the IRS Commissioner made the following statement in testimony before the U.S. Senate Appropriations Committee: ‘We are well on our way to deterring the next generation of taxpayers from using hidden bank accounts to avoid paying taxes.’
The IRS will eventually be able to cross-reference disclosed foreign accounts held by U.S. account holders against the database of returns to identify taxpayers who haven’t filed the proper forms or paid the requisite taxes.
What are the penalties for failing to comply?
Business entities (and even trusts and estates) face a penalty of the greater of 50 percent of the value of the foreign account or $100,000 for willfully failing to file an FBAR. Do the math: willful failure to file an FBAR for an $11,000 account is $100,000. If the account balance were $1 million the penalty would be $500,000, and, if the FBAR is not filed for three years, the penalty is $1.5 million. The nonwillful penalty for failure to file an FBAR is $10,000. For the new Form 8938, the minimum failure to file penalty is $10,000 plus a penalty of up to $50,000 for continued failures after IRS notification. Furthermore, underpayments of income tax attributable to non-disclosed foreign financial assets will be subject to an additional accuracy–related income tax penalty of 40 percent (up from 20 percent for most understatements).
How can taxpayers prepare and take steps to avoid hefty penalties?
First, make sure that all foreign financial accounts are reported on the FBAR as well as the new Form 8938 for individuals. Then, make the proper disclosure on the income tax return acknowledging the existence of any and all foreign financial accounts over $10,000. U.S. taxpayers may be required to report foreign trusts on Forms 3520 and 3520-A, foreign corporations on Form 5471, foreign partnerships on form 8865 and foreign disregarded entities on Form 8858. Failure to file any of these forms results in a $10,000 penalty.
If you don’t have substantial foreign holdings, consider moving them to a domestic bank or a U.S. bank that has a branch in that foreign country, but, even if you choose the second option, you’ll still have to file an FBAR. Remember, the U.S. Treasury has promised proposed regulations on FATCA by the end of December and final regulations by the summer of 2012, so keep your eyes and ears open, because the revisions may usher in new requirements for U.S. taxpayers.
Dr. Gary McBride is a professor of Accounting and Finance at California State University, East Bay. Reach him at (510) 885-2922 or email@example.com.