Lisa Murton Beets

Monday, 25 June 2007 20:00

Hedge fund taxes

Hedge funds are designed to have positive returns in all markets, bull or bear. However, they come at a price in terms of tax liability, fees, and the time and attention required to conduct proper due diligence.

In regard to taxes, the point is not necessarily to minimize them, but to maximize the after-tax return from the investment, says John T. Alfonsi, CPA/ABV, CVA, CFE, partner, Cendrowski Selecky PC, Bloomfield Hills. “Taxes are just like any other transaction cost that the investor needs to quantify and consider. Certain hedge fund investments might generate a higher return, such that even after considering taxes, the investment still makes sense.”

Smart Business asked Alfonsi for guidance on maximizing hedge fund investments returns.

How do the taxes and fees on a hedge fund differ from those of a mutual fund?

Most hedge funds are treated as partnerships for income tax purposes. As part of the partnership, you will be allocated a share of the income, whether or not that income is actually distributed. Therefore, you need a liquidity plan for covering taxes attributable to the income. Partnership allocation rules are complex such that an after-tax return could be significantly different than a pretax return. When considering an investment in a hedge fund, ask if the fund is reporting after-tax returns. If not, ask to see the components of the return. The character of each item of income and deduction could have a significant impact on the after-tax return. Unlike mutual funds, hedge funds are subject to little or no regulation, so close scrutiny is extremely important.

The fees involved with hedge funds are clearly greater than those for mutual funds. Hedge funds typically charge a 2 percent management fee, plus a 20 percent incentive fee or allocation.

How should the investor perform due diligence?

Every investor or his or her representative should meet with the fund team in person on a regular basis. Both quantitative and qualitative due diligence is required.

Quantitative due diligence involves an analysis of numbers, strategy and perspective. The goal is to get a comfort level with the fund’s reported performance and how it was derived. Investors should focus on the fund’s volatility. The goal of a hedge fund is absolute return with little correlation to the market, so there should be little, if any, down periods. Look at the breadth of gains. Look for across-the-board wins, not just a home run here and there. The investor needs to understand the fund’s risk management. How do they handle interest rate risk? Do they employ leverage? The quantitative due diligence should also focus on taxability. Investors need to understand the relationship of taxable income to economic income. The fund’s investment strategy also plays a part in analyzing after-tax returns. By analyzing their strategy, investors may be able to devise a predictable estimate of their tax liability.

Qualitative due diligence requires an analysis of the organization and its approach. Conduct background checks on the fund manager and team. If managed by one person, consider the risk should that person no longer be in that position. The investor also needs to be familiar with the fund’s service providers. Does generating audits result in any delays? Have they switched audit firms or attorneys? If so, why?

What are the advantages and disadvantages of a fund of funds?

A fund of funds is a good way to get your feet wet with hedge fund investing, giving you exposure to many managers that you may not otherwise have access to. They may also diversify risk. However, there is often a second layer of fees. The underlying funds each charge their 2/20 fees, while the fund of funds may also charge a 2/20 fee. From a reporting perspective, another disadvantage could be the complexity and timeliness of obtaining information.

Provide some advice for ongoing monitoring of the fund.

Typically, hedge funds hold quarterly phone conferences. Participate even if you don’t have any questions. Read any and all information sent to you, including the audit report. Have your CPA analyze the information as well.

Always watch for warning flags. Have they changed their risk philosophy? Examine their portfolio/holdings on a regular basis. A consistent change in the fund’s relationship of taxable income to economic income may be a signal of other changes at the fund.

Nothing is better than quarterly in-person meetings. The hedge fund manager should be someone you are in frequent contact with on a regular basis. Remember, all the reasons that induced you into investing in the fund in the first place should still be there.

JOHN T. ALFONSI, CPA/ABV, CVA, CFE, is a partner with Cendrowski Selecky PC, Bloomfield Hills. Reach him at (248) 540-5760 or jta@cendsel.com.

Saturday, 26 May 2007 20:00

Benefits of outsourcing

When you think about outsourcing, some of the typical functions that probably come to mind include payroll, benefits administration and information technology. But have you considered outsourcing your accounting, tax or CFO functions?

“Outsourcing these areas is not as publicized, but doing so can save you time and money, give you access to highly trained experts and transfer risk,” says Maureen A. Nulty, CPA/ABV, CVA, Cendrowski Selecky PC, Bloomfield Hills. “All companies can outsource. Small companies outsource because they don’t have the internal resources. Large companies outsource to better allocate their internal resources and they typically find it more cost effective than hiring additional staff.”

Nulty defines outsourcing as the transferring of complete responsibility for a function, division or task within a company to an independent third party that has expertise in that particular function, division or task.

Smart Business spoke with Nulty about the numerous ways companies can benefit by outsourcing.

How can outsourcing save money?

The cost to recruit, hire, train and retain people is enormous, not to mention the additional high costs of turnover. If you outsource, you’ll probably pay more when compared to an annual salary, but add in all the other costs and most companies typically save a great deal by outsourcing. With an outsourcing arrangement, you’re generally on a fixed fee, so you know what the costs are going to be. You turn a variable (personnel) cost to a fixed cost, so it’s easier to plan. You also eliminate the time and costs involved with dealing with absences and illnesses.

How does outsourcing enable a company to better allocate its resources?

Consider the tax function — a typically seasonal or noncontinuous type of activity. When you outsource this function, you don’t have to divert internal resources and disrupt other operations.

How does outsourcing provide a higher quality product/service?

Outsourcing gives you access to highly skilled experts at less cost than you would typically incur to employ these types of professionals, or to develop the resources internally. By outsourcing, you can even eliminate the need to develop and maintain entire departments of people, provide for their ongoing training, maintain reference libraries, research capabilities or support resources. The outsourcing firm provides for the continuing education of its employees, provides access to the latest technologies, ensures that licenses are kept up to date, provides benefits and support personnel, etc. Outsourced personnel have strong support behind them and can draw upon the expertise of other colleagues at their firm whenever the need arises.

How does outsourcing reduce the risk to an organization?

When you outsource, you transfer the risk to the independent third party. Again, let’s use the example of tax. The outsourcing firm ensures that all taxes will be filed correctly on a timely basis. You eliminate the risk of taxes not filed, filed late or filed incorrectly, which can be extremely costly.

Is CFO outsourcing a new trend and why would a company want to outsource this function?

This is a newer type of outsourcing activity. It’s not as common yet, but is growing in popularity. Some common scenarios might include:

  • A small company that is experiencing growing pains and doesn’t know how to structure the accounting and financial reporting areas. An outsourcing firm can assess the situation and the direction the company is headed in and design a CFO position.

  • A larger company that has to replace a resigning CFO with a new CFO. A resigning CFO might give one month’s notice. Typically, it would take two to six months to identify the right candidate and train them to fill the position. An outsourcing firm can manage the responsibilities during the interim period and help the company identify and hire the right person to fill the position.

  • A company in transition and experiencing a tremendous period of growth might consider hiring a CFO, but after analyzing the costs and requirements in terms of resource allocation, decide to outsource the function permanently.

What are some of the perceived downsides of outsourcing?

Some companies perceive that by outsourcing they will lose control, or that control is diminished. In reality, control and certainty is increased because you have moved a variable cost to a fixed cost. From a dayto-day standpoint, the obligations are clearly spelled out in the engagement letter. Performance is evaluated frequently and communication is often highly effective.

MAUREEN A. NULTY, CPA/ABV, CVA, is an officer of Cendrowski Selecky PC, Bloomfield Hills, Mich. Reach her at (248) 540-5760 or man@cendsel.com.

Wednesday, 25 April 2007 20:00

Global strategy

What do CEOs need to do strategically as their customers become more global?

“Adapt or find new customers,” says Mike W. Peng, Ph.D., Provost’s Distinguished Professor of Global Strategy and executive director of the Center for Global Business, School of Management, University of Texas at Dallas.

“It depends on the bargaining power of your customer and your firm,” adds Peng, author of the market-leading textbook, “Global Strategy.” “If the customer says follow us to China or lose our business, you may feel compelled to chase them. It’s somewhat like playing chess. For instance, Wal-Mart is a major customer of P&G. As Wal-Mart becomes bigger and more global, P&G has to become larger to counter-balance Wal-Mart. As a result, P&G recently acquired Gillette.”

Smart Business talked to Peng about the current definition of the term “global strategy” and how corporate officers and managers can take advantage of it.

How can we define global strategy?

I’ll simply define it as ‘strategy of firms around the globe.’ This is substantially broader than the traditional definition of ‘global strategy,’ which meant treating different countries as one worldwide or ‘global market.’ But that strategy has backfired repeatedly. There is no world car, no world drink. Toyota Camry is the best selling car in the U.S., but not even among the top five best selling cars in Japan. One size doesn’t fit all. That is why in my book “Global Strategy,” I advocate a more balanced view, covering both global and local (nonglobal) aspects of strategy, involving both foreign (multinational) and local firms.

Why should managers be interested in global strategy?

In this age of globalization, every manager needs to be strategic. Expertise in global strategy is often highly sought-after, especially when your career progresses to higher levels. More managers will find that traveling to, competing in and even living in countries such as Brazil, China, India and Mexico will be a part of their routine.

What top three factors must an effective global strategy take into account?

In three words, industry, resources and institutions.

Industry-based view: What industry is the company in? Some industries are high-tech, others low-tech; some are location-bound, others nonlocation-bound. For example, in the semiconductor industry, it doesn’t matter where your semiconductor chips are made, they are all the same, and customers expect that. On the other hand, if you produce potato chips, where you make these chips will matter a great deal.

Resource-based view: Among numerous companies in the same industry, why do a few outstanding ones stand out? What are they doing that their competitors fail to duplicate? For example, the success of Southwest Airlines has nothing to do with planes or fuel. All airlines essentially fly the same planes. Why can Southwest fly high year-in and year-out, and many other airlines fly in and out of bankruptcy all the time? The simple answer is that Southwest has resources and capabilities that are very unique.

Institution-based view: Institutions are the rules of the game. Rules in other countries can make life difficult for newcomers. For example, if a U.S. company wanted to acquire a company in Japan, there would be many roadblocks because rules governing mergers and acquisitions are different. To conduct business in other countries, you have to understand, respect and — if possible — leverage the rules of the game.

Typically, what are these rules?

There are both formal and informal rules. Based on a country’s culture, norms and institutions, informal rules are not written. Nothing can be taken for granted. For example, there is no American law banning a Chinese company from taking over a U.S. oil company, but norms exist, so that is not likely to happen. Two years ago, CNOOC of China tried but failed. Likewise, American companies would prefer to be able to acquire Chinese companies as they would domestically — but again, that is not likely to happen any time soon.

What determines the international success or failure of firms?

Acquiring and leveraging a competitive advantage. The key is to sustain such an advantage over time and across countries (regions) through replication and innovation.

MIKE W. PENG, Ph.D., is Provost’s Distinguished Professor of Global Strategy and executive director of the Center for Global Business, School of Management, University of Texas at Dallas. To learn more about the Center for Global Business, contact John Fowler, director, at (972) 883-4697 or jfowler@utdallas.edu. Reach Peng at (972) 883-2714 or mikepeng@utdallas.edu.

Monday, 26 March 2007 20:00

Equipment leasing versus buying

Two questions can help you determine whether to lease or buy equipment. (1) How will the costs of acquiring the equipment affect our cash flow and leverage, and (2) how long will you want to keep the equipment?

“Knowing the answers will help lead you down the right path,” says LaShaun A. Coard, vice president/senior relationship manager, Wells Fargo Bank N.A., in Houston.

“When determining whether leasing is the best option, it’s important to consider which type of lease product best meets one’s needs — an operating lease or a capital lease,” adds Coard. “An operating lease is an off-balance-sheet item. If cash flow or leverage is an issue, you may be able to deduct the leasing expense against current income without showing equipment on your balance sheet as an asset or liability.

“A good CPA will help you determine which financial scenario makes the best sense for your company.”

Smart Business spoke with Coard about leasing versus purchasing.

What are the advantages of leasing?

A clear benefit to leasing is that you may be able to acquire equipment without cash with a lower monthly payment as compared to the payments that would be due under a loan. All related costs, such as delivery and set-up, may be rolled in, so it may be a 100 percent financing option.

A lease is also an attractive option if the equipment will not have a high residual value, becomes technologically obsolete and/or has a relatively short useful life, such as with computers and other IT technologies.

Another advantage has to do with a company’s borrowing capacity. If your balance sheet isn’t really strong, depending on the type and residual value of the equipment involved, a lease may be easier to obtain because the requirements of some lessors can sometimes be more lenient than those of a conventional bank.

What are some disadvantages of leasing?

Overall, the expenses may be greater with a lease, depending on the type of lease product you select, particularly if the lessee decides to purchase the equipment at the end of the lease term. There might be an option to purchase the equipment at the end of the lease; if so, the amount can be based on an assumed residual value or may be whatever the fair market value is at the end of the lease term, depending on how the transaction was negotiated up front. As with some loans, many leases have prepayment penalties or may not pre-paid at all.

What are the advantages of purchasing?

You’ll own the equipment. With regard to high-tech equipment, such as computers that become obsolete very quickly, leasing may be the better option. On the other hand, if you’re looking at heavy machinery with a long, useful life that will have residual value, buying may be a better route.

Your overall costs may be lower by obtaining a loan to finance the purchase price of equipment than they would be by leasing the equipment if you end up exercising a purchase option at the end of a lease.

By owning the equipment, you avoid the risk of having to pay an increased price to acquire the equipment if the equipment retains a high value, which risk you would have in a lease transaction with a fair market value end of term option.

What are the disadvantages of purchasing?

You may have to spend money up front, which can tie up cash. Depending on the type of equipment, you might have to provide a 20 percent to 30 percent down payment. You also take the risk, again using the example of computers, that there will be no residual value when you are finished paying off the equipment — so it will be yours to sell, and you might not get much for it.

Do you have any money-saving tips?

First, as mentioned above, a good CPA will determine how to structure the tax deductions to your best advantage.

Second, if you need to make a major purchase and don’t want to spend cash up-front, another option is interim funding. For example, an equipment manufacturer requires a 30 percent down payment, another third after 30 days, and final payment upon delivery. With Wells Fargo Equipment Finance, Inc.’s (“WFEFI”) interim funding product, WFEFI can make those payments for you, and you only make interest payments during that period. When you take delivery of the equipment, the lease then begins.

What criteria should someone look for in a lender or lessor?

Many vendors have their own leasing deals and will promote discounts if you lease through them. You should compare what they’re offering as a discount to what you can get elsewhere, taking into consideration the amount you have to pay up front, the monthly payment, the term and the endof-term options. Ask what your commercial banker can offer. It’s prudent to have this type of relationship in place. If you look to one banker to handle all your business needs, your banker may be able to make concessions for you. The relationship with your banker can be as important as your relationship with your attorney or CPA.

LASHAUN A. COARD is vice president/senior relationship manager, Wells Fargo Bank, Houston. Reach her at (832) 723-5323 or lashaun.a.coard@wellsfargo.com.

Monday, 26 March 2007 20:00

Corporate ethics

If written properly, corporate ethics codes demand business-related decisions that are socially acceptable, reasonable, morally responsible and beneficial to the corporation in the long run.

Unfortunately, history shows that not every company possesses strong ethical standards.

“Ethical problems have always been around,” says Amy Troutman, assistant director of the Accounting and Information Management programs at the University of Texas at Dallas (UTD). “Before the recent high-profile scandals, it wasn’t something that was focused on. But everybody today has a heightened sense of awareness regarding corporate ethics.”

Charles Solcher, graduate tax director of UTD’s Accounting and Information Management programs, agrees.

“In recent years,” he says, “the scandals have been much more serious. Maybe it has to do with the magnitude of the funds that are involved. Some of it may be that the media is just much more aware; as a result, ethical lapses are much more serious because the probability of exposure is much greater.”

Smart Business recently spoke to Troutman and Solcher about the benefits of taking educational classes in ethics.

Why is it in a CEO’s best interest to ensure that his or her employees are acting ethically?

Solcher: Ethical standards are not the same as honesty and integrity. If someone has integrity and is basically honest, that means there are times he or she can be dishonest. With ethics, you are either ethical or you are not ethical.

For instance, CEOs need to understand that if their accounting staff has ethical lapses, large or small, the integrity of the financial statements will come into question by coworkers, shareholders, the financial community, legal officials, suppliers and other concerned parties — even if the statements are correct. This will have a negative impact on the organization’s reputation, and the CEO’s compensation and tenure is tied to that. Therefore, it is critical that CEOs have an absolute standard.

Troutman: The same holds true for relationships with external accountants. Much of the accounting profession is based on trust. If you are an external accountant assigned to provide reassurance on a company’s workings, that company must be able to completely trust you. For a corporation, the costs in terms of negative press and trying to gain back trust once financial statements are in question are enormous.

Why are exercises in fundamental ethics and general business ethics important?

Solcher: Fundamental and business ethics are intermeshed. Ethics courses try to accomplish two things: (1) to sensitize the individual to the ethical dilemma; (2) to give the individual some framework in which to make a choice — and we hope that choice is an ethical choice.

Troutman: Most of the things we discuss in the coursework are about general business ethics. One module talks about fundamental ethics, including philosophies from Aristotle and Nietzsche and Kant — all of whom laid the groundwork for modern ethical thinking — while another part of the course specifically addresses accounting ethics.

Why an emphasis on accounting ethics?

Solcher: In other professions, there are counterbalances. For instance, for every doctor there is a patient. In accounting, there is somewhat of a third-party ‘disconnect,’ so there must be trust based on whether the CPA is absolutely ethical.

In order to take the Uniform CPA Exam in Texas, you must first complete a three-hour accounting ethics class. UT Dallas recently began offering its accounting ethics course online. The online option provides student flexibility and is also an attractive option for accounting professionals who are moving to Texas and need to take the course.

Troutman: These kinds of courses help students recognize ‘situational’ ethics and analyze different ways to apply accounting ‘rules.’ During the semester, a great deal of discussion takes place. Students keep an ethics journal with weekly entries focusing on situations that arise in their personal lives. The goal is to sensitize them to ethics and enable them to at least confront the issues. Importantly, we emphasize that there are choices.

How are ethics enforced? What types of sanctions are there?

Troutman: It depends on the situation. For external accountants, sanctions are imposed based on the severity of a complaint filed. Following an investigation, additional education might be mandated, a certain privilege might be taken away, or a license might even be suspended or revoked. Most corporations today have confidential whistleblower hotlines that should be a minimum standard.

CHARLES SOLCHER, JD, CPA, is graduate tax director of the Accounting and Information Management programs at the University of Texas at Dallas. Reach him at (972) 883-6347 or solcher@utdallas.edu.

AMY TROUTMAN is assistant director of the Accounting and Information Management programs at the University of Texas at Dallas. Reach her at amy.troutman@utdallas.edu or (972) 883-6719.

Wednesday, 28 February 2007 19:00

Broker, investment considerations

Carefully selecting an experienced, licensed and ethical real estate broker will go a long way in helping you achieve your investment goals. When educating investors, Ron Sparks, MAI, MBA, and Jeff Tolrud, CCIM, managing directors/partners in investment sales for Colliers Arnold, cannot overemphasize these points.

“There really is no substitute for experience,” says Sparks. “Issues will arise during a transaction and a professional broker will have the background and skills necessary to handle them.”

The ability to communicate effectively and uncover your investment objectives and goals are also important factors, adds Tolrud. “The broker’s goal should be to become the client’s trusted adviser.”

Smart Business recently asked Sparks and Tolrud for more details about the intricacies of the investor/broker relationship.

What are some of the most important qualities to look for in a commercial real estate broker?

Sparks: Experience, integrity and professionalism should top the list. A good broker should understand the real estate asset and the marketplace and possess the technical skills to successfully create and execute a marketing plan. Today, the best professionals work in teams. Brokerage teams allow for an improved service offering. Having a quality service delivery platform is also a must.

Tolrud: The broker should understand the needs and risk thresholds of the client, as well as the client’s short- and long-term business objectives. Relationships with other groups such as county/city building departments, architects and attorneys are also important due to the complexities of the many processes involved with commercial real estate transactions.

Why are these qualities so important?

Sparks: Experience is needed to insure that a broker has been through the sales process before. Integrity is an absolute must. A good broker must be able to represent the best interests of his client. The firm should be able to offer a customized marketing approach to meet the needs of each client.

Tolrud: Working with a firm that offers the proper support, research, databases, professional affiliations such as the CCIM network, and — if required — property management services, offers obvious benefits in terms of expertise and efficiencies. In all dealings, the importance of honesty and ethics cannot be overemphasized. In short, someone you can trust.

What are the most important factors to review when considering a real estate investment?

Sparks: One of the more important, and often overlooked, factors is the level of management or time the property may require of the owner. Some investors just want cash flow and do not want to deal with a variety of tenants, lease turnover or varying occupancy levels. Passive investments, such as single-tenant net leased properties, may be a better fit for this type of owner. Other investors may be willing to accept more risk and may want to consider properties that are well positioned for redevelopment, renovations or conversion to another use.

Tolrud: Investors should consider their objectives. Are they looking for a relatively quick investment or a longer-term investment? What level of management intensity are they willing to take? An exit strategy should be in place as well — both for tax purposes and for determining what the investor will do with the profits. A good broker will help the client determine these factors based on the type of property. Does it need to be renovated to add value? Does it need better management to enhance retention? Are there vacancy, maintenance or marketing problems? Is the property being purchased for another use, like redevelopment? You have to evaluate expenses as well as income in order to maximize investment return.

What types of investments are hot right now?

Sparks: Large and small investment properties of all types continue to be in strong demand. We continue to see significant demand for office, retail and industrial properties.

Tolrud: Ron and I primarily focus on non-institutional, private-equity investments that continue to see significant activity.

How can investors get the most out of their relationship with the broker?

Sparks: Clients will benefit most by being honest with their broker (trusted adviser) about their situation, goals and expectations. Once these factors are understood, it is the broker’s job to educate clients on how to best meet their goals.

Tolrud: We strongly believe in setting reasonable and attainable goals in advance of beginning an assignment. We will not over-represent a property to an owner simply to get a listing assignment. We work for clients who we feel we can help the most. In our case, we can provide a tremendous value-add proposition with our firm’s capabilities, history and reputation to an individual’s real estate investment.

RON SPARKS, MAI, MBA, and JEFF TOLRUD, CCIM, are managing directors/partners in investment sales for Colliers Arnold. Reach them at (813) 221-2290.

Wednesday, 28 February 2007 19:00

A foundation for success

A liberal arts education provides students with skills that will be transferable to a variety of occupations and situations.

“With technology and the rapid pace of our society, we are inundated with information constantly. A liberal arts education helps people discern information and apply critical thinking. It trains you to follow an idea through, explore where it leads and make a decision,” says Michael McAnear, Ph.D., dean of the National University College of Letters and Sciences, San Diego.

“A liberal arts education offers a broader general education that develops a person in many different ways. The result is a well-rounded person who is able to clearly communicate his or her ideas.”

McAnear emphasizes the importance of that ability to communicate, especially in the business world. “There is so much rapid change in our society. People who can communicate ideas creatively and effectively have a competitive advantage. Take Steve Jobs’ recent unveiling of the iPhone, for example. His presentation was so creative and so strong that he was able to generate enthusiasm far beyond what may have been expected otherwise.”

Smart Business spoke with McAnear about how a liberal arts education can lead to a successful career in business.

What is the end product of a liberal arts education?

In a nutshell, it is an understanding and appreciation of the human condition and the natural world viewed from multiple perspectives — and the ability to communicate this understanding.

Can you elaborate?

Liberal arts include disciplines in the hard sciences such as biology and mathematics, as well as in the soft sciences such as sociology and history. Included are areas such as literature, philosophy and language studies. Though the student gets broad exposure to these and others in general education classes before majoring in a distinct discipline, all of these areas promote a spirit of inquiry and therefore habits of life-long learning.

What are the habits of a lifelong learner?

A lifelong learner approaches the world with a sense of wonder and delights at the richness of the human experience and our place in the world. The individual has learned to ask questions and weigh opinions — to test assumptions and apply reasoning to assertions made in favor of one viewpoint or another. And revelation and discovery leads to the next and so on.

There is no end to the quest for knowledge; the lifelong learner understands this and has developed confidence to take presented information and comprehend, analyze, evaluate and use (or not use) the information. That ability and confidence is certainly an asset in the business world where decisions make or break an enterprise.

What else about the liberal arts education prepares a businessperson for success?

Well, for our democracy to work — and the economic ‘engine’ makes democracy possible — we need people who are broadly educated. Government policy decisions that will affect all of us cannot be left only to policymakers. For instance, important issues in science — biotechnology, climate change, population growth and technological advances — need to be evaluated from multiple perspectives of the citizenry and consensus drawn.

The liberal arts graduate has learned to test assumptions and weigh critically the arguments of all sides. It’s not so much that the person knows this or that about the subject, but knows instead how to approach the topic. He or she has learned to construct arguments and counter arguments. To my mind, a successful businessperson is also an engaged, informed citizen.

How does a liberal arts education enhance a person’s ability to communicate?

Clear communication flows from clear understanding, and the liberal arts education exposes students to issues at the heart of our culture. Issues are presented, evaluated and argued in the classroom with students who may be of an entirely different background and opinion than you.

Multiculturalism, gender issues, racism, war, globalization, the environment: people have strong opinions about these issues, and the liberal arts graduate learns to listen, not necessarily to agree, but to hear with an open mind. Without question, this skill will help the businessperson.

But listening is only part of what it takes to be successful. The liberal arts curriculum emphasizes clear communication, especially in writing. The person who can get ideas across clearly and persuasively will have an advantage in the world of business.

MICHAEL MCANEAR, Ph.D., is dean of the National University College of Letters and Sciences, San Diego. Reach him at mmcanear@nu.edu.

Wednesday, 31 January 2007 19:00

Making a difference

In the world of commercial banking, personal relationships truly make a difference.

“Get to know several people at the bank, not just one person,” says Michael A. Silva, senior vice president/group manager, Comerica Bank, San Francisco. “This will ensure continuity if your primary contact leaves his or her position.”

Silva notes that not all banks are created equal. “Different banks have different credit-related hot buttons. If you’re looking for a new bank, understand what factors they place importance on. After you’ve made a decision, it’s important to maintain a backup relationship with another bank. Banks get acquired all the time, bankers leave, and issues can arise. What was once a great relationship may no longer be. Keep an alternate bank in the wings. This will also ensure that you’re getting market pricing and market structure in your financing.”

Smart Business asked Silva for pointers that borrowers can use when embarking on a relationship with a commercial banker and how to get the most out of an ongoing relationship.

How should a company begin to evaluate potential new bankers?

Understand the bank’s hot buttons. Where does it have the ability to bend? Where can’t it bend? Talk to its references — other clients that the bank will agree to have you speak with. Ask the references tough questions. How did the bank react when times were difficult? What was its level of responsiveness? Ask about their experiences with other bank products and services outside of just credit.

Find out what type of emphasis the bank puts on the balance sheet. For some banks, the balance sheet is important. For other banks, the balance sheet is not as important, provided the cash flow is sufficient to service debt.

Keep in mind that you shouldn’t trade price for structure and responsiveness. Loan pricing is certainly important, but if you negotiate all the bank’s profitability out, the bank may be compromised in terms of the service or flexibility it can provide.

It’s important to think at least one year down the road when evaluating the size and capabilities of a bank. It takes a great deal of time and effort to develop and build a relationship on both ends, so you don’t want to outgrow the bank in a year.

You mention relationships. Why are they so important?

Making yourself known is important for many reasons. For example, when you need additional financing or you’re having problems with cash flow, you want the bank to understand your business and your management style. You want to be more than just a name on a credit memorandum. Therefore, I suggest that clients develop relationships up the chain of command at their bank. Get to know your banker, his boss, and her boss. This will also help ensure continuity if people move on to other positions or leave the bank.

How can a company ensure a positive working relationship with its bank?

Communicate. If you’re not happy with a product or if you’re having other problems with your bank, don’t let it build up. Many times, blow-ups are the result of many things that have happened over a period of time that didn’t seem very important at the moment. Your banker wants to know about the problems so he can deal with them on a real-time basis.

Additionally, talk about issues in your business as they occur. Bankers hate surprises. They certainly don’t expect you to have all the answers, but be communicative and telegraph issues as they develop. This will go a long way should hard times hit down the road — or when good times result in the need for growth financing.

Finally, refer business to your banker. If you believe your bank is supportive of you, be supportive of it.

How important is it to find a banker with specific experience in a given industry?

In a perfect world that sounds good, but in reality, most bankers are generalists. You want a smart banker who is savvy enough to learn your business and who will be an advocate for your organization within the bank. Evaluate the skill sets of the banker. How long has she been there? How long do you expect her to stay there? What will happen if she leaves? What do her other clients tell you about her?

How can a banker help a company grow?

Take time together to explore all the products and services your banker can bring to bear. These might include an expanded line of credit to finance accounts receivable or inventory; real estate financing to obtain a building; trade finance to begin importing or exporting; and even private banking. There are plentiful opportunities, but you need to communicate in order to uncover those that will best benefit your business.

MICHAEL A. SILVA is senior vice president/group manager at Comerica Bank, San Francisco. Reach him at (415) 477-3274 or masilva@comerica.com.

Wednesday, 31 January 2007 19:00

Distance learning

According the to the “2006 Industry Report” in the December issue of Training magazine, companies spent approximately 15 percent of their training budgets on e-learning, a two-fold increase over 2005, signifying that online instruction is here to stay as a mainstream delivery vehicle.

The article notes that online programs are used most extensively for mandatory or compliance training, but are increasingly being used for customer service, retail process and soft skills instruction as well.

“Corporations are currently the largest users of online learning programs,” says Cindy Larson, Ed.D., president of Spectrum Pacific Learning Co. in La Jolla, which creates and supports distance and online learning systems. “However, the academic sector is expected to be the largest user within the next five years.”

Smart Business asked Larson what makes for a quality program and how corporations can make the most of their online training dollars.

What are some of the trends for employer-sponsored online learning programs?

Since 2000, the growth of online learning has been tremendous. Enrollment in online programs has more than doubled in the last few years, and this trend is likely to continue. Industry analysts predict that growth will double again in the next two years. This can greatly be attributed to lower costs and better use of technology to create engaging online learning.

How do corporations benefit by offering their employees online learning?

Online learning has the opportunity to engage all learning styles, offers flexibility and provides accessibility. There are three core learning styles: audio, visual and hands-on. Approximately 10 percent of adults are audio learners, 20 percent are visual, and 70 percent are hands-on. In a classroom, you’re typically only fully engaging about 10 percent of your audience — the audio learners. Online learning enables us to move beyond those limitations. Additionally, it is flexible and accessible, meaning that employees can take the classes at times that are most convenient to them, and that the employer can change, add to and update the programs in real-time.

Rather than the traditional testing that takes place in a classroom, online courses offer the opportunity to conduct pre-, during, post- and follow-up assessments. Students can always go back to areas they missed or still don’t completely understand. The post- and follow-up assessments enable the employer to quantify and qualify its investment and ensure that the employee has retained the information.

Also, when compared to a classroom, the online learning environment offers more opportunity to engage visual learners. As for the social aspect of the experience, separate ‘communities’ can be set up where learners can chat, engage in live discussions or participate in discussion threads.

How can companies that do not yet have an online learning program get started?

The first step is to undergo an assessment of the company’s training needs to determine whether an online program would be practical. Factors that are considered include the company’s business environment, culture and competitive marketplace. How much training do they need? What type? There is no one-size-fits-all solution. Companies should be judicious when selecting courses that make sense for their particular organization and start out with a pilot program.

How can companies that already offer online courses ensure that their programs are effective?

By conducting an audit. Audits will reveal if the company is on-target with the design, content and delivery of its programs. An audit should ensure that clear learning objectives are established; that benchmarks gauge comprehension; that training aids engage all three learning styles; that information is broken down into small chunks, and that 24/7 technical support is available.

In addition, trainers/facilitators should be accessible via e-mail and/or discussion threads.

How can employees get the most out of their online experience?

It depends on their learning style and place in the organization. For an exempt employee, taking a 45-minute online course on harassment prevention can be a huge time saver. For a nonexempt employee, is it relevant? Staff-level employees want to feel that the training is relevant to their specific job. They want to know ‘what’s in it for me’ if they complete the courses.

Help participants up-front by providing a questionnaire to assess what type of learner they are: visual, audio or hands-on. This can easily help them maneuver through the course. Done well, e-learning can have an incredible impact on learning, corporate culture and the bottom line.

CINDY LARSON, Ed.D., is president of Spectrum Pacific Learning Co. in La Jolla, which is part of the National University System. Reach her at clarson@spectrumpacific.com or (858) 642-8113.

Saturday, 25 April 2009 20:00

Operating in difficult times

In these difficult times, many companies are striving to become leaner.

But to do so, you can’t just make random cuts. Instead, running lean requires you to take a hard look at all areas of your company to assess how changes will affect your operations.

Whether you’re looking to cut costs by improving efficiencies, renegotiating contracts or reducing your work force, it is important to consider the big picture. You also have to involve those at the highest levels of your company.

“It is essential that the directors become more involved in the day-to-day operations of the firm,” says Adam Wadecki, manager of operations, Cendrowski Corporate Advisors LLC.

Doing so is important, Wadecki says, because the directors bring a different perspective than the management team and can help the firm’s members see issues from another angle.

Smart Business spoke with Wadecki about how to become a leaner company and streamline your operations.

How do you define a lean organization?

A lean organization is one that can quickly convert its resources into cash. The time it takes to convert resources into cash is equivalent to the time it takes the firm to convert raw materials into finished goods, finished goods into receivables and, finally, receivables into cash.

An organization becomes lean by decreasing the time between each of these steps. Many organizations track the average time spent in each of these conversion processes; however, a more thorough analysis will look at not only the mean time spent in each process but also at the distribution of the time spent in each process.

This should be included in an organization’s risk management strategy. Decreasing this time will help the organization improve its working capital management.

What steps can an organization take to start becoming leaner?

With respect to production processes, lean manufacturing and Six Sigma are probably the most widely used tools.

Each of these has gained in popularity in the last 20 years. Accountants also have developed tools to use when assessing operations, generally under the guise of internal control. For a long time, the accounting profession largely concentrated on what it called internal accounting controls within a business.

However, the profession has since moved to a broader definition of what it labels internal control, emphasizing that operations are indeed a part of an internal control assessment.

What types of analyses can management perform to improve a company’s operations?

Historically, managers in crises have placed great emphasis on cash management at all levels of the organization. This emphasis is underscored by the need of management to understand the day-to-day finances of the firm’s operations and also the ability of the firm to service any outstanding debt obligations. However, it also is important to quantify the risks to these cash flows based on the probability and magnitude of potential events. This should be an essential part of the organization’s risk management process.

How can an organization quantify risks to cash flow?

This is a process that both management and the board of directors must be involved in. Cash flow risk assessments must be performed with accurate and timely information.

It’s also important to consider the human element in the risk assessment process. For instance, when directors receive risk assessments from management, they should consider management’s track record in providing these assessments.

Are risks generally understated? How tolerant is management of low-probability risks? How does management test its risk assumptions? How are probability and magnitude estimates quantified? Management can pose similar questions to the company’s support staff.

By understanding risks, organizations can identify with a laser focus operations in need of improvement. This process is especially important for organizations that have lean operating strategies or those that are attempting to improve their leanness; such organizations often rely on steady, predictable operations to maintain high profitability.

What are some mistakes organizations make when proceeding toward lean?

Organizations need to ensure that they are, in fact, ready for change before they begin implementation. To borrow a phrase from the accounting profession, a proper tone at the top needs to be set, and employees must buy in to the process.

This tone is set not only by management but also by a firm’s directors. If these individuals are not able to garner worker support, any initiative is likely to fail. Where possible, it may be advantageous to tie employee performance with company profitability in order to make sure everyone is properly incentivized; workers must believe the benefits of their activities will exceed the costs.

However, organizations must be careful not to create incentives for workers to optimize myopically, rather than over the long term. This was a central problem at the heart of the current fiscal crisis — improper incentives that led to socially suboptimal decisions. Remember the adage, ‘What gets measured gets done.’

ADAM WADECKI is manager of operations for Cendrowski Corporate Advisors LLC. Reach him at aaw@cendsel.com or (866) 717-1607 or visit the company’s Web site at www.cca-advisors.com.