Entrepreneurial companies are facing headwinds going into 2013, including fiscal cliff uncertainty, the prospect of higher taxes, more regulation and continued slow economic growth, says Tullus Miller, Bay Area partner-in-charge at Moss Adams.
“Having a trusted business adviser to help navigate these uncertainties and measure the impact on your key business decisions is most important,” he says.
Smart Business spoke with Miller about how a trusted business adviser gives you the information you need to know — not what you want to hear.
What should entrepreneurial companies consider in a trusted business adviser?
Entrepreneurial companies are very dynamic and have various business needs during their life cycle, including, but not limited to, expanding business offerings nationally or internationally, developing new revenue sources and restructuring operations. These types of activities are generally complex and require substantial capital investment, so trusted business advice can help make decisions simpler, while shortening the timeline. For example, with a growing startup company, an entrepreneur can get advice on what kind of systems to use; how many people to have in the back office; or what kind of tax structure to implement, e.g. a pass-through or corporation.
In considering a trusted business adviser, weigh a few key questions:
- Does the adviser understand your business and how the activities might fit into your long-term goals?
- Does the adviser have insight into complex areas such as tax consequences and how it affects profitability?
- Has the adviser provided sound, practical advice over time that helped the business?
- Does the adviser have your best interest at heart and tells you what you need to hear as opposed to what you want to hear?
- Does the adviser have a deep network of professionals from which to help provide you with appropriate counsel, including legal, banking, etc.?
Having appropriate business advice — based on your medium- to long-term goals and objectives — from an unbiased, trustworthy and experienced source is, and should be, an important part of any decision-making process.
What mistakes do some entrepreneurs make when seeking an adviser?
A lot of times entrepreneurs are impatient, just by nature, as they are go-getters who want things to happen. Therefore, they need to guard against not taking the appropriate time to vet the business adviser. It’s critical to talk to two or three different advisers to ensure you find the right fit, looking at your personality and their knowledge base and reputation, etc. And, then it’s going to come down to pretty much a judgment call. There’s very little science in this. It’s mostly art.
You want to get as much information, even in a dynamic environment, as possible because you must minimize capital-intensive mistakes in an entrepreneurial company.
Do you have any tips on how to organize your adviser(s)?
Depending where you are in your business life cycle, the more nascent you are, the more external advisers you want to use, while making sure you control their costs, too. As you move up the business life cycle curve to maturity — even in a high growth mode — you have to decide at some point to bring experts in-house, and there’s no bright line on how to do that.
A trusted adviser with integrity will tell you what you need to hear, even at the short-term expense of his or her own business. Someone who says, ‘It looks like you’re spending a lot of money here, and you’re starting to grow. You either need to upgrade your staffing, getting people who are more experienced, or expand the number of folks to help you do what you need to do.’
Once advisers are in place, what can be done to maximize the relationship?
Before you close a deal — even if you’re anxious to move ahead on an expansion, re-organization or a new compensation plan with more performance indicators — you allow your trusted adviser to look at the agreements being drawn up. It may not be in the adviser’s area of expertise, but he or she, or others in that firm, could see something that needs to be changed, allowing you to avoid unintended consequences.
Tullus Miller is Bay Area partner-in-charge at Moss Adams. Reach him at (415) 956-1500 or email@example.com.
Insights Accounting & Consulting is brought to you by Moss Adams
Some people are in denial about their personal finances, thinking that they’ll get to it one of these days.
“You need to have a lot of discipline around your finances because getting into financial shape is tough,” says Jeanine Fallon, Senior Vice President and Market Executive, First Commonwealth Bank®. “It requires focus, planning and a lot of sweat, but the end result is a happier and more fulfilled life.”
Smart Business spoke with Fallon about taking control of your debt and spending habits.
How should you assess your debt situation?
Look at your current obligations by gathering monthly statements and listing loans and debt. Think about the creditor and your balances, interest rates and payments. Total all payments and divide your gross income by the debt to find your debt to income ratio. The target should be around 36 percent, but those with high disposable income can go a few percent higher. Then, use your partnership with a lender you trust to create a solid financial plan.
It’s also helpful to pull your credit report three times per year from annualcreditreport.com because not all credit reports are free.
What are some warning signs your finances are heading out of control?
Some warning signs are if you have no emergency fund, typically three to six months of your income, to fall back on; you experience stress when thinking about your debt; you don’t know what you owe; and/or you continually charge more on your credit cards than you can pay back.
How can a debt consolidation loan help?
Consolidation loans don’t reduce your debt but can reduce your payments. You take your debt and consolidate it into one big loan to simplify your payment and tracking. Your banker will help you decide on a secured loan or an unsecured loan, the right term to quickly pay off your debt without creating hardship, and choosing between a term loan or line of credit. Keep the end number in mind, which is what you’re paying back with principal and interest.
What are some best practices to help stay debt free?
Even if you consolidate your debt, it’s important to take steps to ensure you don’t end up right back in the same financial bind you were in before. Manage your expenses by establishing a budget. Keep a spending diary of every penny you spend for at least a month — similar to a food diary when on a diet. When looking at your funds, break it into percentages:
• Foundation expenses, such as shelter, groceries and transportation, should be 45 percent of your take-home income.
• Include 15 percent for fun, vacation, dinner, clothes or whatever your passion is.
• Typically at least 25 percent is used for taxes.
• Keep about 15 percent for savings — 10 percent for retirement and 5 percent for emergency or big-ticket items.
Then, manage, reduce and eliminate debt. It is important to make wise decisions when assuming new debt by using good debt to improve your net worth. Tie savings and spending plans with what’s important to helping you to live with a purpose. For example, if vacation time away with your extended family is important to you, yet you own a huge, expensive house, your financial obligations may not be in line with your values. Also, prepare for life events by taking a disciplined approach to building up the money you put into your retirement plan as well as your emergency fund. Ultimately, if you don’t change the way that you’re spending money when you experience significant life changes, it can cause hardship in the end.
Jeanine Fallon is a senior vice president and market executive at First Commonwealth Bank. Reach her at (412) 886-2540 or JFallon@fcbanking.com.
For a debt consolidation calculator, visit http://www.fcbanking.com/planning/calculators.html?CALCULATORID=PC10&TEMPLATE_ID=www.fcbanking.com_1.
Insights Wealth Management is brought to you by First Commonwealth Bank
Stop-loss or reinsurance is a “backup” policy designed to limit claim coverage or losses to a specific amount. This type of coverage ensures catastrophic (specific stop-loss) claims or numerous (aggregate stop-loss) claims don’t deplete your reserves in a self-funded arrangement.
“There are a lot of companies in this stop-loss space, and there are more and more getting into it because the health care law eliminated lifetime limits, and health care costs are driving employers into self-funding,” says Mark Haegele, director, sales and account management at HealthLink.
Smart Business spoke with Haegele about what employers should look for when shopping for reinsurance.
What should employers know about the fixed cost of reinsurance?
The main components of a partially self-funded model are the third-party administrator (TPA) that pays claims; pharmacy benefit manager (PBM) network that contracts with doctors and hospitals for discounts; and the reinsurance carrier, which has the highest cost.
Stop-loss represents a disproportionate amount of the fixed costs for an employer. The smaller the employer, the less risk they’re willing to take, the more stop-loss they’ll need to buy and the more expensive it is. For smaller employers, the reinsurance purchasing decision becomes more relative and important. For example, a self-funded employer with a 500-life health policy might purchase specific stop-loss, paying $200,000 in claims for every member before the insurance kicks in. However, if a 20-life employer purchases $10,000 specific stop-loss, the stop-loss cost will be higher.
How can employers and brokers negotiate with stop-loss carriers?
In the eyes of the reinsurance carriers, there is no perfect model of self-funding components. This opens the door for the employer and broker to play a vital role in controlling the premium and overall stop-loss cost. If you can sell the reinsurance carrier on your vendor alignment — your TPA, network and PBM — you can decrease the premium.
Don’t go to the stop-loss carrier and say ‘I’m a 300-life employer and I want to buy $125,000 specific stop-loss,’ while providing your claims experience. Instead, demonstrate, in a refined and focused way, how you are working to lower the impact of large claims. Your premium might have been X, but you could now get X minus 20 percent. Employers and brokers don’t realize how much negotiation room is available.
How can you demonstrate your management of large claims?
Some ways to control large claim costs are having a dialysis or transplant carve out. You pay a small premium for a transplant insurance policy where any transplant will be completely covered, and then the reinsurance carrier gives you a credit, which often pays for the transplant policy premium.
Another option is working with your PBM. For one reinsurance carrier, more than 25 percent of all of the large claims is represented by prescription drugs. For instance, J-codes — high-cost injectable drugs used for hormone therapy or to treat cancer — often run through the medical plan. Finding a PBM that will further negotiate these J-codes while having a focused managed program can reduce that expense by upward of 30 percent.
When you follow these practices, it helps you when you’re paying your premium upfront with the stop loss carrier and downstream by controlling your overall claims.
How should employers and brokers examine stop-loss carriers to find the best price?
It’s important to know how reinsurance carriers have networks rated. If your network is that stop-loss carrier’s best-rated network, the premium will be lower. Reinsurance carriers evaluate networks with different levels of intensity, and therefore get wide ranging results.
Also, carriers give networks different levels of credibility with respect to discounts. For example, if your network gets a 52 percent discount in metro St. Louis, but the carrier only gives 60 percent credibility to that, that’s only a 31 percent discount. Some carriers give 100 percent credibility to the network.
Mark Haegele, director, sales and account management HealthLink. Reach him at (314) 753-2100 or firstname.lastname@example.org
Insights Health Care is brought to you by HealthLink
As the Patient Protection and Affordable Care Act (PPACA) implementation unfolds, health lawyers continue to answer employers’ questions about its impact.
“The act has multiple potential penalties for failure to comply with its various requirements. The risk of not complying is a financial risk,” says Jules S. Henshell, of counsel at Semanoff Ormsby Greenberg & Torchia, LLC.
Smart Business spoke with Henshell about what employers need to be aware of as they take their next steps under the PPACA.
What do employers most frequently ask?
The most frequent questions relate to the ‘pay or play’ penalties in the law. The majority of employers are currently providing health care coverage through group insurance plans. However, it’s too early to determine whether to provide coverage at levels required by the act or pay the penalties because future premium costs and the affordability of employer offerings through health exchanges are uncertain.
Employers also are concerned about reporting health care benefits on W-2 forms, whether they qualify for transitional relief, and the provisions against discrimination in favor of highly compensated individuals.
What’s important to know about W-2 reporting and IRS transitional relief?
In 2012, employers are required to report health care costs to the employer and employee on employee W-2 forms or face a $200 per-form penalty.
The IRS has provided transitional relief from reporting for employers that file fewer than 250 W-2 forms. Some employers question if they are entitled to relief from reporting when their company files fewer than 250 W-2 forms but is one of a number of related companies. The IRS’s informational Q&A suggests that it will not aggregate among related companies to calculate the threshold for reporting.
Whether the W-2 reporting currently applies or not, it’s a good idea to formalize the practice of tracking these health insurance costs to better enable retrieval of information in the future.
How do provisions about non-discrimination impact employers?
The PPACA prohibits discriminatory practices in favor of highly compensated individuals. Prohibited practices include providing benefits to highly compensated individuals that are not provided to other employees as well as affording greater choice, higher amounts, lower premiums, a higher employer subsidy or more favorable benefits. Many companies have used such practices to create competitive compensation packages for executives and management. Penalties include an excise tax or civil monetary penalty or civil action to compel provision of nondiscriminatory benefits.
The IRS, U.S. Department of Labor and U.S. Department of Health and Human Services (HHS) have stated that non-discrimination requirements will not be enforced until the first plan year after regulations are issued. And so far, they have not issued regulations.
Employer health plans with grandfather status are not impacted, but should be conscious of how their status could be jeopardized. Raising co-insurance, significantly raising co-pays and deductibles, lowering employer contributions, and adding or tightening annual limits on what the insurer pays will result in loss of grandfather status. Those without grandfather status need to review their compensation packages and practices in anticipation of future regulation and enforcement.
Do any significant PPACA cases remain?
The most active litigation challenging the PPACA in multiple jurisdictions target the requirement that new, non-grandfathered group insurance plans provide contraceptive coverage. The lawsuits focus on alleged violations of either the First Amendment right to free exercise of religion or the Religious Freedom Restoration Act.
Regulations have granted exceptions for certain religious employers and provided a one-year safe harbor for religiously affiliated institutions that wouldn’t otherwise qualify for exemption. HHS has stated it will provide further accommodations before the end of the safe harbor period.
Jules S. Henshell, of counsel, Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-3754 or email@example.com.
Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC
Your company’s goals aren’t just a to-do list of action steps, they’re a vision of where you want to be. Employee engagement can be a way to make your business exciting while unleashing the creativity of your intellectual capital.
“It can seem overwhelming if you don’t have experience setting goals, especially if you’re a business owner who is really working in business,” says Ricci M. Victorio, CSP, CPCC, managing partner at Mosaic Family Business Center. “So, it’s not a sign of weaknesses to ask for help and bring in someone who knows how to coach you, train your organization and facilitate those discussions. If it can move your business forward, energize it and make your life easier so you can enjoy being in the business, it’s really worth it.”
Smart Business spoke with Victorio about what steps to take when setting goals and following through to ensure your vision comes to fruition.
How should business owners set goals?
Once the company’s growth and revenue goals have been established, ask your team for their ideas regarding how to get there. Engage your employees in building the road map to success.
Create breakout groups to work on an annual Strength, Weakness, Opportunity and Threats (SWOT) analysis. By graphing these and seeing correlations, employees help prioritize the two to five opportunities that will significantly help your company. With employees sufficiently motivated to take full ownership in the idea, they can then work in teams to help see the project through development and ultimately reach the goal, which is done in addition to the day-to-day duties.
How can you tell employees aren’t engaged?
There will be complacency and all kinds of reasons, excuses and blame for why employees can’t accomplish the goals set before them. They sit around waiting to be told what to do. There’s a sense of isolation and feeling that nobody is paying attention. You’ll see flat production and even downward trends, as well as higher absentee rates.
Lead employees, rather than dictate assignments, and then get out of their way. A leader removes obstacles so the team can achieve the goal. By giving employees authority, you show respect for their intelligence and ability to solve problems. Successful organizations recognize intellectual capital goes beyond the executive circle. If all employees engage in the company’s vision, regardless of their level or position within the organization, then leadership trickles down so everyone contributes to furthering the company’s goals, which are their goals, too. Actively engaged employees do more than you would have asked and hold themselves accountable to goals they helped set.
In addition to treating employees with respect, acknowledge what’s being done right. Recognize that if there’s failure, it’s more the manager’s failure than the employee’s.
Once you’ve set goals, what’s the key to keeping on track throughout the year?
At minimum, hold quarterly or monthly check-ins that provide opportunities to make course corrections. With the business plan and goals, you can create an action spreadsheet to see progress and identify what’s stopping forward movement. The more intimate the check-ins, the more effective they’ll be.
Also, communicate back to employees to keep them engaged. Some companies have adopted a report card with updates on strategic projects. The strategic projects that change the way you do business are exciting, creative and generate a lot of energy.
How can you learn how to lead this way?
There are books and successful examples, and you can work with a coach who knows the process, can motivate people and teach managers how to lead meetings. It’s hard to facilitate your own meeting and take an objective, honest look at how you’re doing.
Setting and achieving goals doesn’t have to be difficult. Once you put these practices in place and overcome the learning curve, life will be easier. You won’t have to spend all your time feeling like you are grasping at loose ends — and you’ll begin to see the grand design weaving together into a cohesive and beautiful creation.
Ricci M. Victorio, CSP, CPCC, is managing partner at Mosaic Family Business Center. Reach her at (415) 788-1952 or firstname.lastname@example.org.
Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners
Irving, Texas is a recipient of the 2012 Malcolm Baldrige National Quality Award, the nation’s highest Presidential honor for performance through innovation, improvement and visionary leadership. Irving is only the second municipality to receive the award in its 25-year history.
City Manager Tommy Gonzalez said Irving has reduced costs by $44 million and improved satisfaction service levels by double digits.
“We reduced our work force by 10 percent without laying anyone off or implementing furloughs and, at the same time, increased benefits,” he says. “We identified numerous efficiencies that resulted in 50,000 labor hours saved. Code enforcement improved by 88 percent, and we dropped the number of days to turn around commercial building permits from 16 to three and a half. These efforts culminated with Irving retaining its AAA bond rating from Standard & Poor’s and Moody’s during a recession, while offering residents and business owners among the lowest tax rates and water fees in North Texas.”
Smart Business spoke with Gonzalez about the way Irving works with businesses and how to apply these lessons.
How should a good relationship between a business owner and the municipality work?
Good communication between the city and business community is important. By having a proactive communication flow, the city gets intelligence on issues business owners are having with city processes. For example, Irving was considering an ordinance that would impact the certification of restaurant servers. Because the city reached out to businesses, it was able to make the ordinance helpful to customer safety but not so onerous to implement. Another example was a state highway project through the middle of Irving where the city and the chamber of commerce coordinated with the state to help businesses relocate and/or work with the department of transportation.
So, both sides need to reach out to each other?
Yes. Irving has 39 different ways to communicate with customers — in this case businesses — like newsletters, our website, Facebook, Twitter, email blasts, etc. If there’s a new project, the city can let others know how it might impact them and keep them in the loop.
What are some of the best ways through government bureaucracy and red tape, including navigating the permit process?
The city made an effort to speed up the permit process because when a business is building a large structure, in order to create several hundred jobs, and in some cases thousands of jobs, you don’t want to hold up the work. Irving’s permitting process now takes three and a half days after eliminating unnecessary steps. Using incentives, Irving built a new culture and a new way of thinking. Another way to minimize the red tape is through surveys. Between random and point of service surveys, done at the departmental level, the city can listen and then change the way it does business. Many times problems or improvements are obvious to business owners, but not to the city.
Aside from letting the municipality know about issues, when business owners show up for permits, bring as much information — plans and documents — as you can. Those that come forward with complete and comprehensive information in hand will get processed quicker.
How can local entities assist employers with state or federal issues?
Cities can work in cooperation with businesses on some developmental opportunities. In some cases Irving has received federal grants that not only help the public sector but also tie in with private development, especially for environmental issues. The local government also can supplement state or federal services. For example, the state picks up litter along state highways twice a year, but Irving stepped in to pick up litter more often, resulting in a cleaner highway that people assume is safer, which in turn increases the community’s value.
Tommy Gonzalez is city manager of Irving, Texas. Reach him at (972) 721-2521 or email@example.com. Visit the Greater Irving-Las Colinas Chamber of Commerce at www.irvingchamber.com.
Click for the National Institute of Standards and Technology’s profile on Irving — Baldrige: Irving is ‘A Lone Star Model of Fiscal Achievement.'
Insights Economic Development is brought to you by the Greater Irving-Las Colinas Chamber of Commerce
As a result of the Patient Protection and Affordable Care Act (PPACA) and its effects, employers are taking steps to manage the cost of care by moving toward self-funded insurance and greater oversight of health benefit plan subcontractors. Others are making a cost trade-off between the tax burden of providing versus not providing coverage.
Selvadas Govind, a senior manager in Assurance Services at Weaver, says it’s too soon to say whether costs will go up or down in our complex health care system.
“The only thing one can do is try to manage the risks that are presented at a particular point in time,” he says. “You’re not going to be able to influence the market or analyze it in any significant way.”
Smart Business spoke with Govind about some of the risks employers face in this new era of health plan benefits.
What is the impact of companies increasingly self-insuring?
Larger businesses are making the shift toward self-insurance, which is more transparent in terms of management. Insurers no longer go to a company and give them a rate; rather, companies can pay medical costs themselves and hire a third-party administrator (TPA) to handle administration. It’s a great business practice, but the downside is employers are on a less-than-level playing field with insurance companies that know how the industry works.
It’s a big risk that needs to be managed, and many organizations are not in a position to mitigate those risks. In fact, one study found employer audits of TPAs had error rates for medical claims of 3 percent to 16.8 percent. Similarly for pharmacy benefit programs, errors ranged between 3 percent and 8 percent. A 3 percent error rate by a plan’s pharmacy benefit manager in a medium-sized entity of 2,000 employees can amount to an overpayment of $155,000. For this reason, it is often worthwhile to bring in external auditors with specialized knowledge to mitigate this risk exposure.
Employers also need greater oversight of health benefit plan subcontractors. For example, after an employee pays his or her pharmacy co-pay, the balance is charged to a pharmacy benefit manager (PBM) which, in turn, pays off the distributor or manufacturer and submits the claim to the self-insured company. However, there is usually a rebate from the distributor or manufacturer to the PBM. By right, that rebate — which can be quite substantial — belongs to the employer, not the PBM.
How does the individual mandate create new risks for employers?
With the individual mandate and the increased dependent eligibility age of 26, there’s a financial incentive for children to remain on their parents’ health care plans. The risk companies should consider is that some may try to retain children on their plans beyond age 26 and/or include dependents who are not necessarily their own. The benefit of this abuse to perpetrators is that they can choose to pay the lower tax penalty for not having individual coverage and still obtain coverage through their parents at employer-subsidized rates. So, the situation leads to an educated decision on whether it is more cost effective to try to stay on the parents’ plan, pay the penalty for not buying coverage, or buy coverage through an employer or a health benefit exchange.
You can audit this risk, but health benefit plan audits tend to be invasive, which could irritate employees. A way to sensitively handle it is to educate employees on the potential issue and what the cost could be if even a small percentage of employees are dishonest. Companies should also review the amount of evidence required to justify a dependent; however, if the requirements are too stringent, employees could resist.
Are many employers deciding to take the penalties and not offer insurance?
It depends on the attitude of the employer and the type of work force. There will always be employers who offer better benefits than others. However, it’s a very industry-specific question, and in an industry with narrow margins, businesses may simply not be able to offer insurance. There could also be a shift away from full-time employees who qualify for health care benefits to the use of more part-time employees who would not qualify for employee-sponsored health benefits.
Selvadas Govind, MPA, CPA, CIA, CICA, CRMA, senior manager, Assurance Services, Weaver. Reach him at (512) 609-1940 or Selvadas.Govind@WeaverLLP.com.
Insights Accounting is brought to you by Weaver
Small business owners are increasingly concerned about obtaining long-term or short-term business loans, according to a survey by the National Federation of Independent Business. However, by showing enthusiasm and understanding for your business, you can get started in a good way with your banking relationship, thereby increasing your changes of securing a loan.
“Build a support group, have good financial understanding and really keep your books in the best possible order that you can,” says Hank Holmes, president, Texas Region, of Cadence Bank.
Smart Business spoke with Holmes about how business owners can use good financial practices and a trusted relationship with their bank as a foundation for future lending needs.
What does a bank look for in a good borrower?
It’s important for borrowers to be prepared and understand their business as much as possible, including the risks. Often you can talk about the upside — what you can do to generate new revenue — but you also need to understand what could cause you to miss your revenue goals, such as increased expenses from health care or a change in the industry’s environment.
Additionally, many times credit decisions are a function of a small or mid-sized business owner’s personal financial performance and credit history. So, as you’re developing your business, it’s important to maintain your personal financial affairs.
How do you find the right bank?
Start developing a relationship with your current bank. The earlier you can develop that trust and understanding with your banker, the better.
You want a bank that meets your needs and understands it’s a relationship-driven business. That way the banker can alert you when your business could be impacted by trends in other industries. If you have a banker that you’ve dealt with — that you’ve developed a relationship with — typically he or she will know that kind of thing is happening at the same time as you do. They can see when there’s an improvement versus a potential bump in the road.
As a business owner, you also can use your contacts in trade organizations or the industry to reach out and find a bank that understands your industry.
What steps can you take to best prepare for meeting with your prospective banker?
• Have your financial statements in order. Understand the revenue/expense side of your business — have a good grasp of the things that are going to positively and negatively impact your company. There are a number of good options, such as QuickBooks, that can be used to maintain your finances at the highest level you possibly can.
• Be able to explain what your business is and what would influence your financial statements. Is it the price of oil and gas? Is it the cost of electricity? Are you going to be able to get the inventory you need in order to meet the revenue needs of your clients?
• Be aware of your personal capacity and credit worthiness. It’s important to not only be able to run and understand your business, but also maintain your personal credit worthiness as positively as you can. In general, if you’re a company that has revenue of a million dollars or less, banks look at the individual who is driving that business, who is there on a day-to-day basis. And, it’s important for that person to show his or her capacity and support for that credit.
When you build and maintain a relationship with your banker, especially one who understands your business, you can take it one step further. If for some reason you get turned down for a loan, then find out why in order to determine what you can do on the next effort.
Hank Holmes is president, Texas Region, at Cadence Bank. Reach him at (713) 871-3913 or firstname.lastname@example.org.
Insights Banking & Finance is brought to you by Cadence Bank
An effective screening process tailored to each job opening can help eliminate candidates who are unsuitable for a position early in the hiring process and minimize hiring mistakes. And in today’s sluggish economic environment, the process of pre-screening applicants is more critical than ever.
Lisa Deramo, branch manager at The Daniel Group, says taking the time to create individualized assessments is worth the effort.
“You need to be thorough with your interview questions and your screening process,” she says. “Make sure you’re setting somebody up for an assessment or pre-employment test based on the kind of job for which the person is applying.”
Smart Business spoke with Deramo about the importance of assessing a job applicant’s skills, knowledge and personality through testing.
Why should employers use pre-employment assessments?
Tests and other selection procedures screen applicants by gauging skill levels, which helps determine the most qualified candidate for a particular job. A number of assessment tools can be used, including cognitive and personality tests, medical exams, and credit and criminal background checks.
Pre-employment assessments are important for high-skill jobs such as machinists or welders in the manufacturing and oil and gas industries. A welder applicant, for example, might be required to take a welding test and demonstrate his or her ability to read a blueprint. For other jobs, such as receptionist, the applicant should take a software test to prove they can utilize common programs like Excel.
How should the interviewer approach the interview?
As an interviewer, you should tailor your interview questions to each candidate and ask probing questions. It’s important to investigate any gaps in the resume and discover the applicant’s exact experience. For example, if the job opening is for a machinist, it’s important to determine what kinds of products or materials the applicant has worked on.
In addition, look at the candidate’s social skills, personal presentation and other contextual factors while the interview is being conducted. How are they presenting their self? Are they twitching or not making eye contact? Are they outgoing or just sitting back as if they don’t care?
If an inexperienced employee is doing the hiring, it is a good idea have an experienced mentor help throughout the process and possibly sit in on the interview.
How essential are testing or screening measures?
They are important and are commonly used to screen out unsuitable applicants and minimize hiring mistakes. You might do drug and personality testing as well as aptitude and integrity tests. It’s worth taking the time to create the best tests for the job opening.
With aptitude tests, it’s a good idea to have job applicants take both written and performance exams. For example, if the job requires driving a forklift, applicants should be qualified by a skills test, where they’re asked to successfully perform certain commonly used maneuvers, and a written forklift safety test. It’s surprising how many applicants aren’t as strong on the forklift as they claim to be, which can be shown by how they do with the safety questions.
Personality testing is used a lot. Does it make much of a difference?
Personality testing can make a difference. Maybe you’ve got a number of quiet people working in an office and then someone with a strong, dominant personality comes in, making a big impact.
The personality tests are customized, based on what you’re looking for, and give an indication of how people will likely work with each other. Outside sales is a good position for employers to apply that type of test because it can offer clues as to how successful a candidate is going to be.
The outlook for traditional bonds and bond funds doesn’t look great with historically low yields today, and perhaps even lower yields and values on the horizon.
“Our concern today is that people are putting a lot of money into traditional bond funds, seeing the income that these bond funds produce,” says Jim Bernard, CFA, senior vice president and director of fixed income portfolio management, as well as an investment advisor representative at Ancora Advisors LLC.
However, that income is already falling and Bernard says it is going to continue to drop significantly.
“On top of that, the net asset values of these funds will be falling as the bonds they hold move closer to maturity because values today, in many cases, are significantly higher than the face value at which the bonds will pay off,” he says.
Smart Business spoke with Bernard about how the bond market works and what that means for investors’ portfolios.
How does the traditional bond market work?
Bonds are continuously traded based on two things: the risk of the investment and the current interest rate environment. Currently, the likelihood of credit defaults is low for both corporate and government bonds. However, if a company has a history of losing money, you will want to pay a lower price for that bond or demand a higher interest rate in order to offset the risk of not getting your money back at maturity.
Interest rates and bond prices have an inverse relationship — as interest rates go down, bond prices go up. If you own a bond that pays a stated interest rate of 5 percent, due in three years, it would currently be worth more than face value to an investor because bonds maturing in three years are currently only paying 2 percent.
What do low interest rates and falling bond yields mean for investors?
Interest rates are low and have been for almost five years. They will likely stay this way for another two to five years. So the challenge is deciding whether investors should buy bonds that pay low rates of interest or put money in other places — the stock market, commodities, gold, real estate, etc.
If you bought a 15-year bond 10 years ago when interest rates were 5 percent or more, you might be happy. Unfortunately, most people tend to invest in bonds maturing within five years or sooner, and that means their bond holdings are at historically low yields.
What is the difference between owning an individual bond and a bond fund?
With individual bonds, you get the face value of your bonds back at the maturity date or call date, barring a default. In a bond fund, because it is perpetual, you never know what the future value will be.
Most investment advisers would prefer people invest in individual bonds if they have enough money to adequately diversify simply because of the added comfort of knowing what your bonds will be worth at maturity.
If you do not have enough capital to adequately diversify, or are in an instrument such as a 401(k), where individual bonds are unavailable, you may have to invest in bond funds if you want fixed-income exposure. You then must decide whether you are more concerned about the value of your fund or the income it produces.
What can we expect from bond funds in the future, and what should investors in bond funds do now?
Most individuals invest in bond funds in order to receive income, but that income has dropped dramatically as interest rates have fallen. For instance, one intermediate-term corporate bond fund has paid an average dividend yield of 5.4 percent over the past 12 months, but the current yield has already dropped to 3.3 percent. With five-year government bonds currently yielding 0.63 percent, is it not likely that the current 3.3 percent yield will be maintained.
The second reason an investor would buy a bond fund is for the net asset value of the fund. The net asset value of a bond fund typically only goes up when interest rates go down, but can interest rates go much lower, and therefore can bond prices go much higher? And even if interest rates stay flat, the net asset value will decrease as bonds within the bond fund get closer to maturity since the majority of bond prices are currently above face value.
So in general, concerning traditional bonds and bond funds, this is not a great time to be in either. If you have owned bonds or a bond fund for many years, you may be comfortable. However, for new money or money from maturing or called bonds, there are other, more attractive sectors with bond-like returns that are not as tied to interest rates. These include:
• Master limited partnerships, which pay a rate of interest through the infrastructure of the U.S. energy system, pipelines, etc.
• Certain real estate investment trusts, where income is derived from real estate projects.
• Certain sovereign bonds, which are non-U.S. government bonds and offer a way to diversify from the U.S. dollar.
• Merger arbitrage funds, which have bond return characteristics but are invested in equities.
If your bonds are still paying a good rate of interest, there is no need to be too concerned about selling as long as you are confident you are going to get your money back at maturity. However, right now may not be a good time to allocate new investments to the bond market.
Jim Bernard, CFA, is senior vice president and director of fixed income portfolio management as well as an investment advisor representative at Ancora Advisors LLC, an SEC-registered investment adviser. He is also a registered representative and a registered principal at Ancora Securities, Inc., member FINRA/SIPC. Reach him at (216) 593-5063 or email@example.com.