One of the most important decisions when creating a trust in a will or a stand-alone document is who to name as trustee. The decision often starts with whether to name a nonprofessional (a family member or a friend) trustee or a corporate trustee. While it is comforting to have friends or family members act as trustees because you know and trust them, they are often unskilled in managing trusts. Corporate trustees, on the other hand, are trained in the nuances of trust accounts and will probably be around for a long time. They charge a fee, but, at the same time, they are not likely to let emotions influence their decision-making, like a family member might.
“Being a family trustee can be an enjoyable and rewarding experience, but trustees need to be aware of their responsibilities and, more importantly, stay on top of the rules and regulations concerning trusts and estates,” says Carol Cantrell, a shareholder of Briggs & Veselka Co.
Smart Business spoke with Cantrell about family trustees and the top things they need to know in order to properly manage estates.
Of what laws should family trustees be particularly aware?
A hot topic today is the Uniform Prudent Investor Act (UPIA), which has been adopted by about 46 states. It requires a ‘modern portfolio theory’ or ‘total return’ approach to the exercise of fiduciary investment discretion. This approach allows fiduciaries to utilize modern portfolio theory to guide investment decisions and requires risk versus return analysis. Thus, investment performance is measured based on the entire portfolio, rather than individual investments.
More specifically, the UPIA requires the trustee to diversify the trust’s investments, unless the trust agreement specifies otherwise. No category or type of investment is inherently imprudent. Instead, suitability to the trust account’s purposes and the beneficiaries’ needs is the primary determinant. As a result, junior lien loans, investments in limited partnerships, derivatives, futures and similar investment vehicles are not imprudent per se. But while the fiduciary is now permitted to develop greater flexibility in overall portfolio management, speculation and outright risk-taking is not sanctioned by the rule either. For that reason, a fiduciary is encouraged to delegate some or all of its investment management functions if prudence dictates.
What are the trustee’s core responsibilities?
Trustees must remember that they hold title to someone else’s assets, and they must carry out the instructions in the trust agreement. They cannot mix trust assets with their own they must keep separate checking accounts and investments and may not use trust assets for their own benefit. Trustees must treat all trust beneficiaries impartially.
What else does a family trustee need to consider?
The trustee should review the will or the trust agreement for any special instructions given by the settlor, or creator. Did the creator want the trustee to be aggressive or hold onto assets? What kind of investment strategy did he or she suggest?
Another consideration is assets that may have emotional significance, such as a ranch that has been in the family for generations. A trustee may be tempted to sell it in order to diversify. But, the trustee must temper that decision with the asset’s special significance to the family and a host of other factors, including the impact of taxes, inflation and the special concerns of the family. Trustees also need to keep books and records, file tax returns, report to the beneficiaries and control costs.
One of the trustee’s biggest challenges is balancing the competing interests in the assets among the beneficiaries. For example, a trust agreement may require the trustee to pay all the current income to one beneficiary, typically the surviving spouse, and pass the remaining assets to another group of beneficiaries after the primary beneficiary dies. Thus, remaindermen are ‘waiting in the wings’ for what’s left when the income beneficiary dies. The remain-dermen typically favor investing the trust assets for maximum growth and minimum current income. However, the current income beneficiary prefers high income producing assets, such as corporate bonds that have limited growth potential. Striking a balance between the two classes of assets and beneficiaries can be difficult.
When is it a good idea to hire a corporate trustee?
A good rule of thumb is that estates under $1 million in assets can safely invest in mutual funds without a professional adviser or trustee. But when a trustee is responsible for larger sums of money, professional help is highly recommended if the trustee is not experienced in investing. In addition, naming a professional trustee may be wise when litigation is imminent, such as when a will may be contested.
CAROL A. CANTRELL, CPA, JD, CFP, is a shareholder of Briggs & Veselka Co. Reach her at (713) 667-9147 or firstname.lastname@example.org.
Today, more than 90 percent of all business-related documents are electronic in nature. Records such as word processing files, spreadsheets, e-mails, calendars, voice mails and photographs are digitally created and stored on computer hard drives, servers, backup tapes, hand-held devices and even cell phones.
Electronic discovery, also called e-discovery, is the process in which these types of electronic records are located, preserved and examined during the discovery stage of litigation. New federal court rules governing the discovery of electronically stored information went into effect last December, but many businesses remain unprepared. Now more than ever, companies must develop and implement detailed policies for the retention, preservation and destruction of their electronic records. Failure to do so needlessly exposes these companies to greater risk in litigation.
“Long gone are the days that a party to a lawsuit can just print electronic records and produce the hard copies to the other side,” says Matt Rechner, an associate in the litigation department of McDonald Hopkins LLC and the chair of the firm’s Electronic Discovery Practice Group and Response Team. “The reason for this is that not all electronic data is visible to the computer user. Electronic discovery captures that invisible data that does not appear by simply clicking the ‘print’ key.”
Smart Business spoke with Rechner about e-discovery and why it’s so important to the present and future of business.
What makes e-discovery unique?
‘Metadata’ is an example of one of those e-discovery buzzwords that is getting more and more attention these days. Metadata is essentially ‘the data behind the data.’ It is the information that describes how, when and by whom a particular electronic document was created, accessed, deleted, revised, modified and/or formatted. Some metadata is viewable by a computer user, while other metadata is hidden or embedded. However, whether visible or invisible, courts are now requiring parties to preserve — and, in some cases, produce this metadata in the course of e-discovery. Companies, as well as their attorneys, must be cognizant of the existence and content of any underlying metadata when engaging in e-discovery.
What’s important to consider in e-discovery?
Effective Dec. 1, 2006, the Federal Rules of Civil Procedure were amended to govern how parties conduct e-discovery in federal litigation. Among other things, these amended rules now direct parties to discuss and establish procedures for e-discovery early on in every lawsuit. Moreover, the rules outline a party’s data preservation and production obligations and provide for possible sanctions if relevant data is improperly deleted or destroyed. While some businesses have prepared for these rules, many still have not. Organizations unprepared for these amended rules expose themselves to greater risks in litigation but can avoid future costly mistakes with relatively simple steps.
What problems are businesses facing?
In light of the amended federal rules and with more and more state courts enacting their own e-discovery rules, companies must rethink how they approach litigation. If electronic data is potentially relevant to an ongoing or anticipated lawsuit, proper steps must be taken as soon as possible to prevent the destruction of this data or the company could be exposed to spoliation of evidence claims.
Unfortunately, electronic data is particularly susceptible to spoliation due to the inherent and necessary characteristics of a computer’s operating system. For instance, when data is tagged by a computer user for deletion, the operating system does not permanently erase the data. It simply ignores the data. The data is moved and rendered ‘invisible’ to the operating system, but it remains resident on the computer’s hard drive. When the computer user later needs to save new data in order to perform a function, the operating system will randomly overwrite this ‘invisible’ data that had been designated for deletion. If this ‘deleted’ data turns out to be potentially relevant to a lawsuit, a company must take proper care to prevent the overwriting of that data.
How can companies prepare themselves?
Because of the unique nature of e-discovery, companies must establish, implement and enforce formal data retention and destruction policies for their electronic data. These policies will reduce the volume of retained data by clearly defining what should be kept and what should be destroyed. An organization’s data retention and destruction policies must also include protocols for the initiation of ‘litigation holds.’ When a lawsuit is reasonably anticipated, companies are obligated to suspend their routine retention and destruction policies in order to prevent the destruction of potentially relevant data. Lastly, companies should designate a point person or response team to coordinate their internal electronic discovery procedures.
MATT RECHNER is an associate in the litigation department of McDonald Hopkins LLC and the chair of the firm’s Electronic Discovery Practice Group and Response Team. Reach him at (216) 348-5826 or email@example.com.
You’ve heard it all before social media is the wave of the future, and if you don’t get on board, your business will be left in the dust. It is true that in this day and age, a well-designed website is not enough. To be truly effective in marketing and promoting your business, you need social media. Whether you use Twitter, Facebook, LinkedIn or YouTube, a strong social media presence is vital to doing business in the new millennium.
But you can’t just jump into social media. Many considerations must be made, the first of which is the crafting of an effective social media policy.
The first step an employer needs to take before crafting a social media policy is to think about its particular business and what social media issues would be likely to come up in light of the business model or what the business does. Determine what issues are most important to control, and focus on those first.
“For example, if your business does a lot of research and development, the confidentiality of business information is something that must be covered,” says Charla Claypool, an associate with The Stolar Partnership LLP. “If you deal with children on a regular basis, your policy will want to address employees associating with, ‘friending’ or ‘following’ minors. You may want to consider customer privacy and publicity rights concerns, as well.”
Smart Business spoke with Claypool about social media, and what businesses should consider when crafting a social media policy.
What should employers consider when crafting a social media policy?
First, and most important, make sure that the policy complies with the law. As an employer, you have to keep yourself out of trouble for disciplining employees, and the best way to do that is to work with an attorney who has experience in both employment law and social media law. Look for an attorney with significant experience in promotions and/or advertising law, as he or she will also be able to address the legal issues related to business promotion via social media.
An experienced attorney will be able to spot any discrimination issues and will be well versed in any state laws that may come into play. For example, in Illinois, there is a law that does not allow employers to take adverse action against an employee based on information found on a social media site. The law makes it illegal for employers to discipline or discharge employees for use of lawful products off-premises during nonworking hours. So if an Illinois employer went to an employee’s Facebook page and saw a picture of that employee chugging a beer, the employer could not discipline the employee for this behavior, provided the employee is of legal drinking age. Currently, there is no law like this in Missouri, but many states are heading toward this type of legislation.
Another thing to consider when crafting a social media policy is to make sure the policy is consistent with all other office policies, particularly those that apply to computer usage.
What are pros and cons of using social media for business?
The biggest pro is that it’s a relatively inexpensive way to promote your business. Social media may give broader exposure to your business, even more so than hosting a company website. People aren’t going to find your business on the Internet unless they do a specific Google search about your business or what you do. But when you’re active in social media, people come to you, and all those people automatically find out about your business whenever you want them to. You can keep people informed about new products and services, you can offer customer support and you can tout awards and recognitions and all of this is targeted directly to your customers and clients.
The biggest drawback is that social media requires significant attention and monitoring. You have to be aware of that need and allocate the resources whether internally or externally necessary to keep your social media sites up and running. Social media sites have policies of their own (and those policies often change, especially when it comes to business pages), so you need to make sure you’re always operating in accordance with those policies. You don’t want your site to get shut down because you didn’t monitor and keep up with a policy change.
How can you minimize the risk posed by employees using social media?
Make sure you have a social media policy in place and that employees are adequately informed of and trained on that policy. Also, supervisors and human resources personnel must be trained on policy enforcement.
If you do monitor your employees’ social media, be very transparent about it make it a part of the policy and let employees know from day one that you will be monitoring them. Don’t ever monitor employees in deceptive ways. You cannot create a false persona online to gain access to your employees.
Are there any other social media considerations businesses should be aware of?
Be aware of Federal Trade Commission endorsement guidelines, which have been updated to address online promotion. If someone is promoting your product online and is receiving any type of compensation for it, or has a material connection to your company, certain disclosures must be made.
There was a case where a public relations agency was monitoring social media sites for comments about its clients’ products. The PR agency then posted positive comments and rebuffed negative comments about its clients’ products. The FTC said that was a violation of endorsement regulations because the PR agency didn’t disclose that it was essentially being compensated for its comments.
These guidelines may also come into play when employees promote or defend your company online. It is important to include as part of your social media policy a requirement that employees fully disclose their affiliation with your company when promoting or commenting on your company online.
CHARLA CLAYPOOL is an associate with The Stolar Partnership LLP and is a member of the firm’s Social Media Practice Group. Reach her at firstname.lastname@example.org.
If you’re in a business with branch offices, you may be able to benefit from Metro Ethernet, a computer network that connects business local area networks (LANs) and individual end users to a wide area network (WAN), or to the Internet.
Any large business or corporation can benefit from using Metro Ethernet to connect branch campuses or offices to an intranet. This connectivity, combined with cost effectiveness, reliability, scalability and bandwidth management, is superior to most proprietary networks and is vital to highly technological, fast-paced industries.
This is one reason that Metro Ethernet is gaining traction in the health care arena, says Steve Wreede, a sales engineer with Time Warner Cable Business Class.
“The technology and data needs of the health care industry are constantly growing, and that growth will only continue in the future,” says Wreede. “Metro Ethernet solutions can keep pace with and meet those needs.”
Smart Business spoke with Wreede about Metro Ethernet and how health care providers and other businesses can use it to create efficiencies and save money.
Why is Metro Ethernet so important in the health care arena?
More bandwidth is always needed in health care. Health care providers work heavily with medical imaging such as X-rays, MRIs, EKGs, endoscopies, microscopies, etc., and they need to be able to transfer that data between doctors and radiologists quickly and efficiently so that diagnoses and medical recommendations can be made.
Most health care systems use at least 100 megabits. Years ago, that much bandwidth was unheard of, but with all the medical technology today, that much bandwidth is absolutely necessary. Metro Ethernet can provide as much bandwidth as a health care provider needs.
Also, Metro Ethernet can make a health care provider’s whole network administration easier. Many hospitals have more computers than they do doctors, nurses and patients combined. Metro Ethernet can streamline all of those into one network, without traditional routing problems. This leads to more productive servers and higher bandwidth, which are integral to keeping modern medical equipment up and running.
What other benefits does Metro Ethernet offer?
For one, Metro Ethernet is easy to implement and cost effective. A Metro Ethernet solution lets health care providers centralize servers at one location, which means there is no server room or supporting remote servers. With one server handling the tasks of multiple servers, you’ll be on your way to a virtualized network.
This can also be tied in with cloud computing, so a health care site could have a private cloud providing application support.
Another efficiency of Metro Ethernet is diverse connections from a location to multiple hubs, so if one fiber connection or hub goes down, service will instantly connect to another hub, and your business won’t miss a beat something that’s very important when lives are at stake. Diverse connections also are beneficial whenever monitoring and/or diagnostic support is needed. So, if you suspect a problem, you can have someone looking at it and fixing it within minutes, without having to wait for a technician to come to your site.
Also, testing and diagnostics can be done while your servers and systems are up and running. In the past, your service provider would have to shut down part of your server to check and fix problems. Now, remote diagnostics can be done without any service interruption.
How do voice services tie into Metro Ethernet?
Most modern voice PBX (private branch exchange) systems are VoIP (Voice over Internet Protocol), and that data can be carried over very easily and tied into the other data traffic on a Metro Ethernet solution. Like all other aspects of Metro Ethernet, you can have one phone system serving multiple sites.
With health care providers building multiple neighborhood sites to put clinics and hospitals close to where people are, as opposed to one big, centrally located hospital, Metro Ethernet can make all of those sites appear as one network, creating a virtual ‘campus’ across a city.
How secure are Metro Ethernet solutions?
Security is always an important issue, especially when it comes to health care providers who are dealing with HIPAA (Health Insurance Portability and Accountability Act) concerns. Metro Ethernet is very secure, but to ensure an extra layer of security, users are able to easily add as much encryption and as many security components as needed. Metro Ethernet also covers Internet services, and you can put separate Internet services at each site to keep external traffic off of the main network. This would require multiple firewalls, but it would also offer more security.
Finally, there is a movement in the health care industry to have universal medical records, patient records that follow the patient wherever he or she may go for medical services. With a secure Metro Ethernet solution, those records can easily be supported and transported across health care providers.
Steve Wreede is a sales engineer with Time Warner Cable Business Class. Reach him at Stephen.Wreede@twcable.com.
On Sept. 27, 2010, President Barack Obama signed into law H.R. 5297, the Small Business Jobs and Credit Act of 2010.
In summary, the law will establish a $30 billion lending fund for small businesses, provide $12 billion in tax breaks and make changes to federal small business programs to address the ongoing effects of the financial crisis on small businesses.
“This new legislation also provides incentives targeted to small business owners,” says John T. Alfonsi, CPA, ABV, CFF, CFE, CVA, a shareholder at Cendrowski Selecky Professional Corp.
Smart Business spoke with Alfonsi about the Small Business Jobs and Credit Act of 2010 and how it could affect your business.
What are key provisions of the legislation?
Depreciation deductions are a key component of the legislation. Specifically, the expensing election under IRC Section 179 was enhanced. In addition, bonus depreciation was restored and start-up expense deductions were increased.
How will the new depreciation rules work?
Under IRC Section 179, businesses are allowed to deduct the cost of qualifying property placed in service during the year rather than capitalize the cost and depreciate it. Prior to the new legislation, the maximum amount a business could deduct under IRC Section 179 for 2010 was $250,000. This deduction amount was phased out, however, when the total cost of qualifying property acquired in the year was greater than $800,000.
The new law increases the maximum deduction amount to $500,000 for 2010 and 2011, with the phase-out threshold of $2 million. This will allow businesses to directly expense a large portion of fixed assets acquired in 2010 and 2011 rather than depreciate them over time.
What is happening with bonus depreciation?
Bonus depreciation expired in 2009. The legislation reinstates the bonus depreciation rules for 2010, whereby a business can claim a deduction equal to 50 percent of the cost of qualified assets, including vehicles. These assets generally must be placed in service by Dec. 31, 2010. The Section 179 deduction and bonus depreciation deductions can be combined to offset a large portion, if not all, of a business’s fixed asset acquisitions for 2010.
How does the legislation affect start-up expenses?
Prior to the law, taxpayers were allowed to deduct up to $5,000 of qualified business start-up expenditures for new businesses. This amount was phased out, however, for expenditures over $50,000. This legislation doubles the maximum amount that may be deducted in 2010 to $10,000 and increases the phase-out threshold to $60,000.
What other provisions of the act benefit small businesses?
The legislation authorized a $30 billion fund that will provide local community banks with capital to lend to small business owners. The purpose is to provide capital to new businesses and small enterprises that want to expand and hire new workers. To make sure the money creates jobs, Congress, the U.S. Government Accountability Office and the Inspector General will oversee the program. It should be noted, however, that while the legislation provides access to capital, it does not require banks to actually lend the funds.
What tax breaks are included for business owners?
The legislation includes a number of tax breaks for individual business owners. For instance, an investor could normally exclude 50 percent of the gain from the sale of qualified small business stock. This was increased to 75 percent with the 2009 tax act for stock acquired after Feb. 17, 2009, and before Jan. 1, 2011. The new law allows 100 percent exclusion for acquisitions from the date of enactment through Dec. 31, 2010. In addition, for 2010, self-employed individuals can deduct health insurance premiums from self-employment income.
Finally, cell phone recordkeeping rules were eased. Prior to the legislation, cell phone usage was required to be tracked for purposes of documenting the business and personal use. No documentation meant no deduction. The new legislation removes the recordkeeping requirement and treats employer-provided cell phones as a tax-free fringe benefit.
What revenue-raising provisions were included in the legislation?
To offset the cost of the tax incentives, the legislation includes provisions that will increase tax collections. For instance, beginning in 2011, landlords will now have to file Form 1099s for service providers such as plumbers, painters and landscapers to the extent that such payments are $600 or more. Penalties for the failure to file information returns were increased. Also, penalties for failure to make estimated tax payments by large corporations (those with taxable income of at least $1 million in any of the three preceding years) are increased beginning in 2015.
How should business owners address this new legislation?
Many of the provisions are effective only for 2010. Business owners and other individuals should review their financial operations for 2010 and, based on these and the other provisions included in the legislation, contact their tax adviser and plan for the remainder of the year.
As dictated by their tightly regulated industry, banks are required to maintain certain ratios. If the asset quality of a bank has been adversely affected during the last few years, chances are, it will be limited in soliciting and acquiring new loans on its books due to regulatory capital requirements as well as loan loss reserve requirements.
Even though the current administration is pressing banks to increase their lending activities, maintaining the required ratios is an inevitable barrier that’s keeping some banks from lending. Unfortunately, the banks do not have many options. They can raise capital by retaining earnings, perhaps by reducing or eliminating dividends, if they make money; sell stock, which will dilute the stock and upset the current investors; or reduce their outstanding loans.
“Interestingly enough, we have not been seeing a great demand for loans, due to the fact that many businesses are not expanding, investing into capital expenditures or increasing inventories,” says Sinem Mehterian, a vice president and relationship manager at Wells Fargo Bank. “And in the commercial real estate market, everyone is expecting to find a great deal, so we see limited transactions.”
Nevertheless, the market is rebounding and morale is improving. Because of this, now could be as good a time as any to apply for that loan to replace that older piece of equipment, buy that building, hire more man power, buy more raw materials or inventory and/or make more products. But, you have to be prepared and approach the banks in the proper way.
Smart Business spoke with Mehterian about lending in today’s environment and what businesses can do to position themselves for successful borrowing.
What are the biggest mistakes business owners make when applying for loans?
There are several mistakes businesses make when applying for a loan, including:
- Withholding personal guarantees. If the business owner does not trust his own business, why should the banker? A personal guarantee shows the bank that you’re willing to share the risk.
- Providing an incomplete and/or inaccurate application package and not correcting or providing the needed information in a timely manner.
- Not knowing your personal and business credit rating. Before even going to a bank to ask for an application form, make sure you know where you stand, especially in this environment where fraud is prevalent.
- Making a loan request without a clear explanation of the intended use of funds. Banks want to see that you know exactly what your needs are and how a loan will meet those needs. Also, don’t ever ask for ‘the most I qualify for’ on an application.
- Applying only to the most convenient lender or just at your current bank. Shop around at two or three banks, but don’t go overboard and drop an application at every single bank.
- Failing to offer some form of equity or collateral. Again, you want to show the bank that you’re willing to share the risk.
- Not having a team of good advisers, including CPAs, attorneys, business/commercial bankers and specialized insurance agent/brokers, that understand your business model and will help you minimize risk. You can’t do it all on your own.
- Not having a solid business plan and realistic projections. Be prepared to show what you will do in the best, probable and worst case scenarios, especially when it comes to startups and for SBA expansion loans. An SBA guarantee does not mean that banks will make loans that do not make sense.
- Having no experience whatsoever in the field in which you’d like to start a company.
What qualities should business owners look for in a bank?
First is the bank’s ability to lend. Check the FDIC, OCC and Federal Reserve websites and take a look at the bank’s recent financials, read the news about the bank in the media, and seek out other business owners’ opinions. Next, determine what different financial products and services the bank can offer that you could use now, as well as in the future. Are you going to have to find another bank in a couple of years because the bank has limited services, cannot offer solutions for FX hedging or letters of credit, and/or is expensive or antiquated when it comes to online banking or treasury management solutions? What’s the banker turnover? Will you need to keep re-establishing your relationship and explain what you do and what you want to accomplish over and over? Does the bank bring in a team of professionals to turn business challenges into opportunities?
Should a borrower disclose both the good and the bad when applying for a loan?
Definitely, your banker should know everything. If it’s a cyclical business, the bank can look at the future outlook and projections. It can also analyze how you did damage control. Did you ignore the fact that the business was failing, or did you put strict measures in place in a timely manner to cut expenses and return to profitability? Regardless, a bank can almost always look for alternatives such as asset based lending, factoring or purchase order financing if it makes sense.
How often should business owners consult with their commercial lenders?
You should consult with your commercial lender regularly. A good banker will understand your business, its operating cycle, its challenges and opportunities, and its risks and cash flows. Good bankers provide reliable guidance and appropriate solutions.
Sinem Mehterian is a vice president and relationship manager at Wells Fargo Bank. Reach her at email@example.com or (281) 362-6657.
It’s clearly a global marketplace, and companies are doing whatever they can to expand and thrive in overseas markets. But you can’t just set up shop overseas and start doing business. You need a plan, a strategy.
Foreign exchange strategies are opportunities to increase profits and/or savings from business overseas. Companies doing business internationally may occasionally have the opportunity to transact in a foreign currency. This is an excellent opportunity to experiment with exchange rate risks and rewards. In this way, you create a possible exchange rate gain. And, the strategy works equally well for buyers and sellers.
“A foreign exchange strategy is one that allows a company to both buy and sell foreign currency and also manage foreign exchange risk to help protect against adverse foreign exchange changes,” says Bart Brown Jr., vice president and principal business relationship manager with Wells Fargo Bank. “For example, if a company has foreign payables or receivables, they can hedge against an adverse move of the foreign currency rate against the dollar.”
Smart Business spoke with Brown about foreign exchange strategies, how to implement them and what risks come with them.
How does a company go about implementing a foreign exchange strategy?
A foreign exchange strategy will require three key elements. First, sufficient profit margin (or cost savings) must be built into the transaction to cover any variations in exchange rates and fees. Second, it is necessary to have a financial resource with access to foreign currencies at fair prices. Lastly, with the help of a foreign exchange adviser, determine the timing of currency trades and final payments.
Working with a trusted financial institution that has international capabilities is the best way to implement the strategies. Quality banks will have foreign exchange trading desks and local specialists that work directly with businesses of all sizes to help assess their needs and manage foreign exchange risk.
If I’m the CEO of a company, why should I care about this?
Many overseas customers are all too willing to accept U.S. dollars, as they understand and appreciate the strength of the greenback. So, why not participate in the risk and reward of foreign exchange trading with your customers? Paying for goods and services in foreign currencies is easier than you think, and it may generate additional profits and/or cost savings to your business. At the very least, when conducting business abroad, it is wise to understand the impact of exchange rates to your bottom line.
CEOs should understand and be aware of how foreign exchange rates and translation gains or losses can impact their profit margins. It is important for them to understand how a foreign payable or receivable in a foreign currency can be worth more or less than what they are expecting to potentially affect their bottom lines. For example, if a company is expecting receivables priced in euros and the currency depreciates relative to the dollar, the receivables will be worth less, as the foreign currency will purchase fewer dollars.
What problems or issues can arise from foreign exchanges?
As I said earlier there are risks involved in foreign exchange. The foreign exchange market trades over a trillion dollars daily and rates fluctuate every 24 hours. For these reasons it is highly recommended that a business owner understand his or her costs going into a transaction. In this way, you can design a plan that minimizes risk and maximizes reward. Once a business gains experience making and receiving payments in foreign currencies, then additional tools are available to assist with timing and budgeting strategies. I think the last issue related to foreign exchange trading is the additional accounting expertise required when reporting trading activities.
As I previously mentioned, foreign exchange problems result from companies not anticipating changes that may affect their non-dollar receivables or payables. They may also have an asset that they may need to purchase in a foreign currency at some point in the future. If they don’t lock in the rate today, the cost of the asset may be more than they were initially expecting if the currency strengthens. For example, if a company is purchasing equipment from Germany in euros in six months, they could hedge or lock in the rate today to eliminate any foreign exchange risk of the euro appreciating. If the euro appreciates relative to the dollar, the company will not be affected by the increase in the euro. If they choose not to hedge, then they may end up paying significantly more, as the strong euro will increase the cost in dollars.
What are the consequences a company faces if it doesn’t monitor and/or contain this?
The most significant consequences of ignoring foreign exchange in my opinion are lost opportunities. Very often domestic companies purchase goods overseas for the express purpose of cost savings. By paying in dollars, these companies may be leaving money on the table. Conversely, many American companies sell overseas to find new customers, but with the added risk of doing business abroad should come added rewards in the form of foreign exchanges.
Should a company take this on alone? Where can it turn for assistance?
Again, working with your trusted financial advisers and institutions is key. If you don’t already have one, find a bank with a strong foreign exchange presence and a dedicated local team of experts available to answer questions, assist with planning and execute your trades daily.
Bart Brown Jr. is a vice president and principal relationship manager with Wells Fargo Bank. Reach him at?(713) 319-1764 or firstname.lastname@example.org.
Now more than ever before, business owners are focused. They’re focused on production, payables, receivables and, of course, the bottom line.
In the past, a business owner may have passed bookkeeping and banking duties on to a staff member without giving it a second thought. Now, owners are adding oversight of their books and banking to their already long to-do lists.
Many business owners are turning to their banks and utilizing treasury management services online services that help companies accelerate cash flow, increase visibility and control over payments, reduce or eliminate exception handling, decrease exposure to fraud and lighten staff workloads.
“Treasury management services help a business save time and money, and they offer peace of mind,” says Ed Jurek, a senior business relationship manager for Wells Fargo Bank. “They allow you to do more with less.”
Smart Business spoke with Jurek about treasury management services and how they can help improve cash flow and protect against fraud.
How are treasury management services used to improve cash flow for businesses?
Basically, treasury management services allow a business to receive cash more quickly and provide more control over outgoing payments. The ability to automatically transfer funds between accounts means you’re not waiting around for checks to cash or deposits to clear.
With ACH transfers, for example, you can pay bills just days before they’re due, rather than sending out a check weeks in advance. With a lockbox, you have a P.O. Box address for customers to send payments to, and then the bank picks up the payments and deposits them into your account. Deposits are made daily as checks are received.
Besides improving cash flow, these services save you time, because you don’t have to do all the banking paperwork, spend time at the bank, and travel to and from. Plus, you can conduct banking business at any time; you’re not confined to the normal branch hours.
Why is it important to improve cash flow?
Many business owners that never had cash flow problems in the past have them now, due to the fluctuating economy. And these owners can’t take advantage of cash discounts and/or they can’t buy in bulk. Because of these issues, collections are more important than ever. You can’t afford slow pays or no pays. Without a steady flow of incoming funds, you’re dead in the water.
Again, this is where treasury management services come in. With smooth, automated collection, processing and documentation processes, for example, you’ll be able to receive payments efficiently and effectively, which, in turn, can improve your cash flow.
How have new technologies enhanced treasury management services?
While some business owners are still leery of conducting business online, every business uses cell phones and computers. And treasury management services enable a business to utilize the same technologies that the bank does. It’s like having your own ‘branch’ right in your office.
With treasury management services, you immediately know about any transactions that post to your account; you have up-to-date information at your fingertips. You can quickly and easily view your accounts, conduct wire transfers, make deposits and resolve disputes and you do it all online, from your office.
Even though treasury management services enable you to conduct all of your banking online, don’t think the personal touch is gone. Your bank and bankers are always there to guide you through the process. Treasury management services don’t eliminate banking relationships they enhance them.
How can you measure the ROI of treasury management services?
The time and money you save using treasury management services will be well worth your investment. Are you or your staff members wasting time on clerical tasks and running to and from the bank? Do you have more productive ways those people could be spending their time? If the answers are yes, then you have a need for treasury management services. Your ROI is right there more work can be done with less staff in less time.
How do business owners unknowingly set themselves up for fraud?
Often the person writing the checks and keeping the books isn’t the person who actually holds the account. A large part of fraud comes from internal embezzlement. If you’re not watching your accounts carefully, you could become a target for fraud.
I understand that businesses are forced to do more with less and are working with leaner staffs, but without the proper controls in place for your bookkeeping and banking, you could have a very tempting situation that even a normally trustworthy employee may not be able to resist.
How can treasury management services help a company reduce exposure to fraud?
Conducting your banking online provides high security and reliability. Plus, you take away the ability for someone in your office to fudge the numbers or embezzle funds. Treasury management services give you a real-time view of what’s happening with your accounts, so you can always be aware of any inconsistencies.
Another way treasury management services help protect against fraud is through positive pay an automated fraud management service that matches the account number, check number and dollar amount of each check presented for payment against a list of authorized checks issued by the company. All three components of the check must match exactly or the bank will present it as an exception.
Ed Jurek is a senior business relationship manager for Wells Fargo Bank. Reach him at Edward.C.Jurek@wellsfargo.com or (832) 251-5516.
Expenses are an expansive headache for most businesses. Whether it’s purchasing office supplies, business travel, client entertainment or vehicle maintenance logging and keeping track of everything is often much more work than it should be.
That is why more and more businesses are turning to commercial card programs.
A commercial card program is a single card product that can be used for purchasing goods and services, effectively consolidating multiple payment streams into a single program to manage expenses. The program’s reporting system provides a detailed description of who made a purchase, and where and when it was made. Each card can be assigned various limits to manage the dollar amounts and types of expenses authorized for individual employees.
This allows for the centralization of data, making it easy to obtain information on strategic sourcing opportunities and policy compliance. More accurate data enables managers to improve their ability to negotiate better pricing from vendors and ensure their employees are following corporate policies.
“A commercial card program is a convenient and cost-effective way to streamline your organization’s purchasing process,” says Suzanne Colmenero, a senior business relationship manager at Wells Fargo Bank. “You can use a commercial card to purchase anything, from travel expenses to supplies, and even fleet expenses.”
Smart Business spoke with Colmenero about commercial card programs and how to determine if they’re right for your business.
Why is the commercial card becoming an increasingly popular way to manage expenses?
Because it can streamline your company’s purchasing process by automating expense management processes and controlling expenses. With more and more businesses accepting Visa and MasterCard, commercial cards are becoming the preferred way to conduct business. A commercial card program can offer both hard and soft dollar savings for organizations using them, improved cash management, greater control over spending and streamlined expense management.
Commercial card programs have several other benefits. Employees who carried multiple credit cards can now use a single card for business purposes. Employees no longer have to decide when to use which card, eliminating confusion and decreasing reliance on other forms of payment, which often are more expensive to process. Also, a commercial card program can result in increased savings by centralizing the administration and support of the program. One monthly invoice is processed for your organization’s expenditures, and you get better information faster with online reporting features.
What specific savings can a business expect to realize?
According to the 2007 RPMG study, the average cost to process a payment transaction using a traditional purchase order method is $88.55. Compare that to the average cost to process a payment transaction using a commercial card ($19.49). You’ll see these savings thanks to the elimination of check processing, postage and other costs associated with check writing. Not to mention the savings you’ll see from the time saved by streamlining approval processes, which can be used for more value-added activities. You can also extend the time you have to settle payments for your purchases; commercial cards can have up to a 30-day cycle and/or a grace period before payment is due.
Of course, costs vary from organization to organization, but the extent to which a company is willing to revamp its purchasing and accounting processes will determine the amount of savings realized.
Which companies are best suited for commercial card programs?
Almost any organization can reap the benefits of a commercial card program. I find that organizations that have several different employees making on-the-spot purchases or those with at least 25 vendors see the most benefit. Also, companies that have employees that travel and entertain can benefit.
When employees make business purchases with commercial cards, you eliminate cash advances, purchase orders and checks. Plus, cardholders experience a significant reduction in procurement cycle time.
What controls do commercial cards offer?
You can control the amount of each purchase, total expenditures and access to supplier categories for each cardholder. Transactions are approved or declined at the point of sale based on these pre-set controls. Commercial cards also are accompanied by reporting and reconciliation applications that provide company administrators and managers of employees the ability to review purchases made within 24 hours of settlement. There are standard reports available to facilitate informal and formal audits of these purchases to ensure policy compliance.
What are the benefits of online administration?
Having real-time administrator access to your commercial card program enables you to make changes to limits and cancel cards immediately. It also makes reconciliation easier by automatically loading all commercial card transaction activity for each cardholder, along with pre-approved cost center and general ledger mapping combinations. Cardholders can also add in out-of-pocket transactions to facilitate their expense management process. Online approval workflows also help in reducing the time it takes to process commercial card payments.
Managers can monitor spending patterns of employees with real-time Internet access to their card balances and transaction information. An administrator can go online to perform a wide range of tasks, including changing cardholder limits, closing card accounts, ordering replacement cards, downloading transaction data, running reports, auditing the program and disputing transactions.
Suzanne Colmenero is a senior business relationship manager at Wells Fargo Bank. Reach her at (713) 319-1551 or email@example.com.
In planning for retirement, choosing appropriate investments is an important consideration. But equally significant is choosing the most appropriate retirement vehicle.
As a result of a tax law change that took effect this year, there are no longer income limitations for a conversion to a Roth IRA. Thus, wealthy taxpayers who may have been shut out of Roth IRAs in the past have new opportunities to convert some or all of their traditional retirement accounts into Roth IRAs, says Steven Y. Patler, JD, CPA, a senior manager at Cendrowski Selecky PC.
“One thing is certain about Roth IRAs: the conversion decision is complex and very taxpayer specific,” says Patler.
Smart Business spoke with Patler about what to consider when deciding whether a Roth IRA conversion makes economic sense for your situation.
How is a Roth IRA different from a traditional IRA?
The most significant difference is that all distributions from a Roth IRA can be income tax free if certain requirements are met, such as age and holding period. On the other hand, there is no tax deduction for contributing to a Roth IRA.
Also, unlike traditional IRAs, there are no minimum required distributions during one’s lifetime. Eligibility for making contributions to a Roth IRA also differs.
How is a Roth IRA funded?
Basically there are two methods to fund a Roth IRA, annual nondeductible contributions and qualified rollover contributions, also known as conversion. Currently, annual contributions are limited to a maximum of $5,000 $6,000 for those ages 50 and older per year, and contributions made during the year to other IRAs may reduce this amount.
There are also income limitations for annual contributions, and no annual contributions can be made if a married couple’s modified adjusted gross income exceeds $177,000 ($120,000 for single) in 2010.
By far the biggest opportunity to fund a Roth IRA is through conversion. Unlike annual contributions, there are no income limitations for Roth IRA conversions starting in 2010, and any individual can convert a traditional IRA, SEP IRA, Simple IRA and eligible qualified retirement plan rollovers (including 401(k), etc.) to a Roth IRA.
Is there a cost to convert to a Roth IRA?
Yes. All amounts converted to a Roth IRA, except for after-tax contributions, are treated as taxable income and subject to tax on the individual’s tax return. After-tax contributions are those contributions made to an IRA or retirement plan in which the taxpayer did not obtain a deduction.
Paying tax on a Roth conversion is inherently contrary to most people’s thought process of paying less tax now. Although this is by far the biggest obstacle, the effects may be mitigated with proper planning.
Why would someone consider a conversion to a Roth IRA if there are tax consequences?
Because for many taxpayers, the current tax cost on a conversion will be overshadowed by potentially substantial tax savings in the future. The determination of whether a conversion should be made is quite involved, and because it involves projecting the future, it will be partially assumption based.
Only a person who is very knowledgeable about the tax law and about an individual’s particular family and tax situation should perform this analysis.
One factor to evaluate in determining whether a Roth conversion makes sense is the taxpayer’s current marginal tax rate and his or her expected marginal tax rates in the future. Obviously, predicting future tax rates is not something that can be done with precision; however, one can model various scenarios to determine the impact at varying tax rates. In general, if one predicts the taxpayer and/or his or her heirs will be in higher tax brackets in the future, it is more likely that conversion will be beneficial.
Another factor to consider is whether the taxpayer will be able to pay the taxes due on conversion with funds that are not in a retirement plan. The benefits of converting to a Roth IRA will be lessened if outside funds aren’t available to pay taxes due on conversion.
When does a taxpayer have to pay tax on the conversion?
For this year only, there is a special rule that takes the Roth conversion income and removes it from a taxpayer’s 2010 tax return and places half of the income in 2011 and the other half in 2012. Although this may sound like a great deal, it may not be because a taxpayer’s marginal tax rate may be higher in 2011 and 2012 than it is now.
Fortunately, taxpayers can opt out of this special rule if they wish and instead include all of their income in their 2010 tax return.
What if a taxpayer converts funds to a Roth IRA now and then his or her portfolio declines in value?
If the decline occurs prior to the extended due date of the tax return for the year of the conversion, the taxpayer can undo the conversion. For conversions in 2010, that would mean a taxpayer may have until Oct. 17, 2011, to decide what to do.
But the trustee must be alerted of the taxpayer’s desire to recharacterize the conversion. <<
Steven Y. Patler, JD, CPA, is a senior manager at Cendrowski Selecky PC. Reach him at (248) 540-5760 or firstname.lastname@example.org.