Similar to for-profit corporations, nonprofits and charitable organizations (hereafter “nonprofits”) are highly susceptible to myriad risks. Faced with pressures created by today’s economic environment, nonprofits participate in a fiercely competitive environment. Barriers to entry for new organizations are low, and donors can easily shift their giving to alternate organizations. Additionally, nonprofits are generally staffed with employees and volunteers who are first committed to helping the organization achieve its mission. The achievement of this mission requires considerable resources, often leaving less than adequate time for these individuals to establish and/or maintain enterprise risk management (ERM) processes.
When properly implemented, “ERM processes can not only help nonprofits safeguard assets and their reputation, they can also allow the organization to capitalize on opportunities afforded by risk taking,” says Harry Cendrowski, managing director, Cendrowski Corporate Advisors. “In this manner, ERM implementation is similar to corporate strategy initiatives.”
Smart Business spoke with Cendrowski about the risks faced by nonprofits and the manner in which a nonprofit can develop and implement an effective ERM process.
How should a nonprofit develop an ERM process?
Risk management for nonprofits begins at the highest levels of the organization, with the board and C-suite executives. Before risk management processes can be devised and implemented, these individuals must work together to identify an overarching, balanced philosophy of risk. This philosophy should detail the risks the organization is willing to bear, as well as the expected reward for taking such risks. It should also be accepted uniformly among high-level individuals, for if it is not, downstream employees and volunteers will see a fractured view of not only the organization’s risk philosophy but also the vision by which the organization will achieve its mission. This may, in turn, lead these individuals to make decisions that are not necessarily in the nonprofit’s best interest and most certainly not aligned with its balanced risk philosophy.
Once a balanced risk philosophy has been established, the risks faced by a nonprofit should be enumerated and evaluated according to their potential impact to the organization and likelihood of occurrence. A priority should be placed on mitigating high-impact/high-likelihood events, as these risks pose the greatest threat to the organization. Mitigation might include the implementation of processes designed to detect and correct risks once they have occurred, or processes designed to prevent risks from occurring.
What mistakes do organizations make in establishing ERM processes?
Many nonprofits and for-profit corporations do not allow enough time for an ERM process to take hold within the organization. They sometimes rush implementation, which, in turn, causes a lack of process ownership at the employee or volunteer level.
The implementation of an ERM process first requires significant cultural change; this is not something that can be altered overnight. Cultural change is an indirect effect of other organizational changes and leadership behavior; it cannot be directly effected by leadership. However, once cultural change has been embraced, and a risk-focused culture has been adopted, employees and volunteers will be conscious about the risks associated with their jobs and the impact such risks may have on the organization.
How much time should leaders and the board allot for the implementation of an ERM process?
The amount of time required for an ERM process’s implementation varies for every organization. In addition to being a function of the organization’s size, it is also a function of the current state of the organization’s environment and the approach of its employees and volunteers. If these individuals have rarely had to think about risk, an ERM process will take a considerable amount of time to implement. ERM is very similar to corporate strategy in that changes can certainly take place, but they may require considerable time to implement. Short- and long-range ERM plans should be developed, complete with key milestones and roles and responsibilities for process managers. These plans should subsequently be monitored to ensure that the organization is progressing and that the ERM process is evolving as the organization intended. This will ensure that realized benefits of the ERM process are maximized.
What benefits can nonprofits realize from ERM processes?
ERM helps nonprofits maintain their relevance and capitalize on opportunities presented by risk. For example, when its goal of defeating polio was achieved, the March of Dimes made a conscious change to focus its efforts on preventing birth defects. Without this change — or the support of the change from its donor base — the organization would probably have become irrelevant to its donors. ERM also helps nonprofits mitigate perhaps the largest risk they face: reputational risk. Stripped of a once-sterling reputation, a nonprofit will find it extremely difficult to rebuild its image. This could have far-reaching consequences beyond the direct realization of a risky event.
For example, in a university setting, misappropriation or misuse of university endowment funds could have a significant impact on the organization’s overall reputation. Both Princeton and Yale University recently settled lawsuits in which the plaintiffs alleged the universities misused millions of dollars of endowment funds. The lawsuits harmed the reputation of the university not only in the eyes of existing donors, but also potential donors looking to make contributions, faculty, staff and even potential students.
It is important to note that what begins as the realization of a seemingly isolated risk may soon impact the organization as a whole — on many levels — if a functioning ERM process is not in place.
No matter how well-run your company may be, or how close-knit your employees are, no company is immune to fraud. Corporate fraud, misappropriation of assets and financial statement abuse are not new problems, but they still need to be closely monitored.
“Managers of companies that experience fraud are often shocked to learn the fraud was perpetrated by a trusted employee of the business,” says Adam Wadecki, manager of operations, Cendrowski Corporate Advisors LLC. “It’s important to ensure safeguards are in place protecting the firm’s assets and reputation, irrespective of the level of confidence and trust managers may have in employees.”
Smart Business spoke with Wadecki about fraud, the impact it can have on an organization and what steps organizations can take to prevent it.
What impact can fraud have on an organization?
In its latest Report to the Nation, a document summarizing results and presenting conclusions from distributed surveys, the Association of Certified Fraud Examiners (ACFE) estimates that U.S. organizations lose 7 percent of their annual revenue to fraud. When applied to U.S. GDP, this figure represents nearly $1 trillion in fraud losses.
The ACFE also found that the median loss due to an incidence of fraud is roughly $175,000 and that the most commonly cited factor that permitted fraud to occur was a lack of adequate internal controls. However, these figures may underestimate actual fraud losses. Many companies that experience fraud are reticent to disclose facts about the incident, fearing that their reputation will be damaged if customers and suppliers learn a fraud was committed at their organization.
What characteristics define a fraudster?
Less than 10 percent of fraud perpetrators have prior criminal convictions; those who commit fraud are largely first-time offenders, even though the average fraud perpetrator is older than 40 years of age. Additionally, fraudsters generally exhibit one of two behavioral traits: They either live beyond their apparent means, or they are experiencing financial difficulties. They may also be trusted employees of an organization.
Many organizational managers are taken aback when they learn a long-time, trusted employee has committed fraud. It’s an unfortunately common event that few organizations prepared for or even envisioned. However, one often-forgotten characteristic all fraudsters possess is humanity. It’s important to remember that individuals who commit fraud aren’t necessarily bad people. Even the most honest person can turn to fraud if, for instance, he cannot afford treatments for his wife’s terminal illness.
For these reasons, and numerous others, it’s important for firms to have internal controls in place that preclude the opportunity for fraud, minimizing this causal factor so that the risk of fraud is significantly decreased.
Where within an organization is fraud more likely to occur?
Fraud will most likely occur in organizations where highly people-oriented processes are used to control the flow of funds, especially cash, and also monitor the flow of funds. While people are the key element of any organization, it’s essential that organizations not overlook the ‘humanness’ of employees and provide them with unfair temptation.
While we may not view it as such, almost all of us break the law multiple times during the day especially if we’re commuting into Chicago from the suburbs. Speeding is illegal. However, many of us commit this act frequently because 1) we’re often pressed for time (motive); 2) most cars are powerful enough to break the speed limit (opportunity); and 3) we feel it’s justified and the perceived penalty is low (rationalization). If, however, our cars were electronically programmed not to exceed the speed limit, the ability to break the law would not exist.
In much the same manner, it’s essential that organizations remove the opportunity for fraud from people-oriented processes to ensure that frauds cannot occur.
Are frauds typically committed at higher levels of the organization, or at the employee level?
Interestingly, though the frequency of fraud decreases as one progresses up the organizational ranks, the median loss of frauds grows significantly the higher the fraud occurs. For instance, roughly one-third of all frauds are committed by nonmanagerial employees, but the median loss for such frauds is less than $100,000. On the other hand, frauds committed by executives and owners are much less frequent, but the median loss for such frauds at that level is nearly $1 million.
Many firms concentrate on fraud controls at the employee level, but it’s also important to concentrate on the executive level. For example, we recently were engaged on a case in which a rental company had stringent controls on the rent collection process, making it very difficult for employees to commit fraud. What the company didn’t realize, however, was that the CFO was taking money out the back door because he had the power to override fraud-related controls and did so at his leisure.
How can organizations safeguard their assets against fraud?
The best way to guard against fraud is by assessing areas of vulnerability at all hierarchical levels of the organization through a comprehensive operational assessment. Such an assessment will examine the key processes in place throughout the organization, potential risks within each process and mitigating factors designed to minimize these risks.
By examining each of these elements, an operational assessment can help senior managers not only understand which areas are susceptible to fraud but can facilitate a discussion centered on re-engineering vulnerable processes to minimize the opportunity for fraud, as well as on the development of new mitigating factors to minimize risk.
When President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Act”) on July 21, 2010, it was the most sweeping change to financial regulation in the United States since the Great Depression. Among other things, the Act created the Financial Stability Oversight Council, whose role is to identify and respond to emerging risks that may pose a threat to the U.S. financial system. Members of the Council will include the Secretary of the Treasury, the Federal Reserve Board and SEC administrators.
The Act also affects all federal financial regulatory agencies and almost every aspect of the nation’s financial services industry.
“Many organizations outside the financial services industry can benefit from implementing best practices specified in the Dodd-Frank Act,” says Jim Martin, CMA, CIA, CFE, managing director of Cendrowski Corporate Advisors. “However, the Act does not address some key concerns that may remain with today’s executives and investors. One such concern is the valuation of illiquid assets.”
Smart Business spoke with Martin about the Dodd-Frank Act, how it will affect both companies and industry, and the valuation of illiquid assets.
Who does the Act affect?
The Act applies to all public, nonbank financial companies, as well as larger public bank holding companies. However, the Act’s implications can and should be used as best practices in other types of organizations. For example, private companies can benefit by implementing risk management processes in the same vein as those discussed in the Act.
One of the provisions of the Dodd-Frank Act is the establishment of a systemic regulator to analyze financial marketwide risks. However, no organization, including those outside of the financial industry, should analyze risks in a vacuum. Companies often place significant attention on analyzing unique risks associated with their organizations. It is also important to consider the impact of industry and systemic risks and the way an organization might capitalize on the opportunities presented by those risks. Risk management processes should consider plans of action in the event that a business’s competitor falters and how the organization is prepared to capitalize on such an event. Systemic risks should also be scrutinized by an organization’s risk management process, as these may also present potential opportunities for value creation if successfully mitigated.
What ramifications will the Act have for holders of illiquid assets?
In its current form, the Act encourages that various derivative securities be traded through exchanges or clearinghouses. However, other forms of illiquid assets are not discussed in the Act. It does not discuss how valuation issues in private placement, private equity and venture capital fund transactions can be mitigated, though many investors, including corporate and public pension funds, endowments and insurance companies, hold these assets. Financial accounting standards have been implemented requiring these assets to be marked to market on a periodic basis; however, this is difficult and the Act provides no assistance. Valuation theory is premised on liquid markets and has significant difficulty dealing with illiquidity. The theory assumes an investor wishes to maximize return while minimizing risk over a single period. While this period could be lengthy, the key issue is that valuation theory assumes away liquidity risk, leaving an estimate of this quantity up to a valuation professional.
Overall, while increased transparency through more liquid trading is a laudable goal, it will be interesting to see what significant procedural changes occur.
Can you elaborate on the valuation issues you mentioned?
Assets are often valued through a market or income approach. In the market approach, an analyst might look at comparable transactions or at the trading multiples of public companies. This becomes difficult as the number of comparable transactions and comparable companies decreases. For instance, many venture capital funds struggle to find such comparable companies upon which to base a valuation an idea may be so new and radical that nothing similar has preceded it.
With respect to the income approach, much of today’s valuation theory is based upon the principle that all investors hold an identical and diversified market, or ‘risky’ portfolio. This is not the case on either front, as investors each hold different portfolios. Moreover, when the values of different asset classes move in virtual lock step with one another, how can you be diversified?
Heuristic methods have developed over the years, modifying underlying valuation theory, but these were not originally a component of the theory. The valuation tools that we have developed over the past 50 years are invaluable, but they are also difficult to directly apply to some areas of modern markets and speak little to the assessment of systematic risks outside of the sensitivity of a particular asset to such risks.
How should companies and investors respond to today’s risky environment?
As we mentioned in last month’s article and complementary insert, risk management is a continuous, recurring process. Irrespective of the environment in which a company participates, risk managers should focus on four primary areas of risk: strategic, operational, process and compliance risks. The latter element was explicitly specified as a requirement in the Dodd-Frank Act. Risks pertaining to each of these areas must be frequently elaborated and analyzed by members from all levels of the organization. Companies should also focus on the risks associated with their illiquid asset holdings to ensure they are not overexposed to risks associated with these assets.
For more information on the specifics of risk management process implementation, visit www.cca-advisors.com/risk-assessment.html.
Businesses of all sizes can benefit from two tax breaks passed by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. This act was signed into law on March 18 by President Barack Obama. Its provisions the Payroll Tax Exemption (the “exemption”) and the New Hire Retention Credit (the “credit”) are available to most U.S. employers and differ from the Work Opportunity Tax Credits that have been in place since the 1990s.
The exemption provides qualified employers with savings of the 6.2 percent Social Security portion of an employer’s employment tax liability on the wages of qualified employees. However, the exemption does not apply to the 1.45 percent portion (the so-called Medicare tax) of an employer’s employment tax liability.
The credit, in contrast, is an offset against a qualified employer’s income tax liability. The total credit amount per employee is equal to whichever is less 6.2 percent of wages paid to a qualified employee over 52 weeks, or $1,000. If an employer is otherwise qualified, it can get the benefit of the exemption and the credit relative to the same qualified employee.
“The definition of qualified employee and employer are the same under each tax savings opportunity,” says Walter M. McGrail, JD, CPA, a senior manager at Cendrowski Selecky PC. “While each tax savings employs a 6.2 percent rate of wages in its calculation, the manner of determining the savings and realizing its associated benefit differs.”
Smart Business spoke with McGrail about the exemption and the credit, and about how employers and employees can take advantage of them.
What is the time frame to qualify for the tax savings?
The exemption applies to wages paid to a qualified employee at any time during calendar year 2010, so it is available through the end of 2010. The credit, on the other hand, applies to wages that span a 52-week period for any qualified hire from Feb. 4, 2010, through Dec. 31, 2010. So, at the latest, it could apply to wages paid through December 2011.
Which employers qualify for the exemption and/or credit?
Generally, any U. S. business entity subject to employment tax qualifies. Taxable businesses and tax-exempt organizations qualify, and employers in U.S. territories that are subject to federal Social Security tax also qualify. Public colleges and universities can qualify for the exemption, but federal, state and local government employers generally do not qualify, nor do household employers.
The credit is a general business credit to encourage retention of new hires, so any taxpayers that can make use of federal business income tax credits can claim the credit as long as the wages and employees otherwise qualify.
The credit may not offset alternative minimum tax and may not be carried back to taxable years prior to 2010.
Which employees qualify for the exemption and/or credit?
A qualified employee is someone hired from Feb. 4, 2010, to Dec. 31, 2010, who was unemployed, or employed for 40 hours or fewer during the 60-day period before the date he or she is hired. Employers may also be entitled to the exemption for amounts paid to a rehired employee as long as the rehired person is otherwise a qualified employee. Employees do not qualify if they are hired to replace another employee, unless the other employee quit or was terminated for cause. Family members or relatives of an employer do not qualify, either.
Employees must sign an affidavit with the new employer affirming that they have been unemployed, or underemployed, during the previous 60 days. They can either use IRS Form W-11 or the employer’s own affidavit, as long as it includes the same information as IRS Form W-11. The employer does not need to file or send signed employee affidavits to the IRS but should retain them with other payroll and income tax records.
In addition, to qualify for the credit, a qualified employee (as defined for purposes of the exemption) must remain an employee for at least 52 consecutive weeks. Also, the wages paid to the employee for the last 26 weeks must equal at least 80 percent of the wages that were paid to the employee for the first 26 weeks.
How can employers claim the exemption or credit?
The exemption is claimed on an employer’s quarterly U.S. Form 941. It reduces the amount that the employer must pay for quarterly employment tax.
The credit is claimed in the employer’s income tax return for the taxable year that includes the end of the 52-week period.
How does the exemption or credit affect other incentives?
The exemption and the credit can both be claimed relative to the wages paid to the same qualifying employee. However, while the Work Opportunity Tax Credit (WOTC) and the credit may be claimed for the same qualified employee, the WOTC may not be claimed in conjunction with a claim for the exemption.
Also, an employer may claim the COBRA premium assistance credit and the payroll tax exemption for new hires on the same employment tax return.
What else does an employer need to know about the HIRE exemption or credit?
The qualifications are fairly straightforward. As with anything to do with taxes, make sure you call your tax adviser to see if there are any nuances or to find out whether you can actually use the credit to save tax.
WALTER M. McGRAIL, JD, CPA, is a senior manager at Cendrowski Selecky PC. Reach him at (248) 540-5760 or email@example.com.
E-commerce is here to stay, and it’s easy to see why transacting business online offers near-instant communication and the ability to retain all correspondence in an easily storable and retrievable digital form.
However, with those abilities come special considerations. For example, does an e-mail meet the procedural or formal requirements of a contract? After all, most of us think of a contract as a paper document that is signed in ink by the parties involved. Can this “signing” be done online?
“A company that conducts a substantial or even a small portion of its business via e-mail would do well to carefully consider whether it is properly documenting all of its transactions,” says Courtney D. Tedrowe, a partner with Novack and Macey LLP.
Smart Business spoke with Tedrowe about how doing business online affects contract issues and about some things you may need to consider.
Has the advent of e-mail as a means of transacting business changed the law regarding what is needed to form a contract?
No, the fundamental elements of contract formation remain the same. In general, there must be an offer, an acceptance of that offer, mutuality and then consideration given by each side. However, although these fundamental contract elements remain unchanged, the media used in contract formation have changed radically over the past few decades.
Now that business is conducted through e-mail, instant messaging and Web sites, the law has been forced to adapt old rules to these new practical commercial realities. For example, there are many laws some ancient that require contracts to be in writing and signed by one or all parties to the contract. The law has been grappling with the question of whether and to what extent e-mail confirmations or e-mail chains are sufficient ‘writings,’ and whether they contain valid signatures.
What is a situation in which this would be an issue?
One major example is the Statute of Frauds, which exists in some form in all 50 states and which requires that certain contracts be, among other things, in writing and signed by the party to be bound by the contract. Ordinarily, the Statute of Frauds requires a signed writing when the contract is for a sale of goods for a price in excess of a certain amount, when it cannot be completed within the year, when it relates to marriage, when it is a contract for the sale of real estate or when it creates a surety obligation.
If your contract falls within one of these five categories, then it is highly likely that a signed writing is necessary for that contract to be enforceable.
Assuming a signed writing is required, do e-mails and other electronic media satisfy these requirements?
Courts have found, with some exceptions, that e-mails and other electronic media can satisfy writing requirements. Interestingly, although the UCC defines a ‘writing’ as ‘printing, typewriting or any intentional reduction to tangible form,’ in the majority of cases, courts have had little difficulty overcoming the word ‘tangible’ and have concluded that electronic records are writings.
The signature requirement has proven to be more problematic, however, and deserves special attention. In cases in which a signature is required and the communication is electronic, courts frequently examine whether there is sufficient evidence that the party intentionally and deliberately typed or caused his or her name to be affixed to the specific electronic document at issue.
Courts are much more likely to find that the signature requirement has been satisfied in cases in which, for instance, the sender actually typed his or her name into the document, rather than in those in which the party’s name was generated by some preset automatic process, such as by a fax machine header.
Are there state or federal laws that specifically address the issue of the validity of electronic writings or signatures?
There are both federal and state statutes that may apply and, where they are applicable, they take much of the guesswork out of this issue. The federal statute is the Electronic Signatures In Global and National Commerce Act (ESIGN). The uniform state statute is the Uniform Electronic Transactions Act (UETA).
ESIGN, which applies to transactions in foreign and interstate commerce, establishes as a basic core principle that, subject to listed exceptions, electronic signatures and records cannot be denied legal effect solely because they are in electronic format, as opposed to being on paper. The concept of an electronic signature here is very broad, for it is defined as ‘an electronic sound, symbol or process, attached to or logically associated with a contract or other record and executed or adopted by a person with intent to sign the record.’ Thus, where ESIGN applies, and the forgoing definition is satisfied, it could resolve any question regarding the status of an electronic writing or signature.
Where not pre-empted by ESIGN, the UETA (which has been adopted by 48 states to date) also provides that electronic agreements and electronic signatures on agreements cannot be held invalid merely because they are in electronic form. Moreover, like ESIGN, because the UETA applies to ‘electronic records and electronic signatures relating to a transaction,’ its reach is far broader than the writing and signature requirements of the Statute of Frauds.
There is a crucial restriction on UETA’s application, however, which may prove to limit its usefulness. Namely, the UETA applies only where the parties involved agree in advance that they will conduct transactions through electronic means. Accordingly, if you wish to take advantage of the UETA’s protections, you must obtain such an agreement.
Courtney D. Tedrowe is a partner with Novack and Macey LLP. Reach him at (312) 419-6900 or firstname.lastname@example.org.
You know your business needs a fast, reliable system in order to keep up with the highly technological, ever-changing world of business. But the latest and greatest systems and programs are useless if you don’t have the bandwidth to support them.
To that end, if you’re still using a copper-based service, it’s probably time to look into fiber optics, which use light over glass to transfer data. Made of a very thin thread of glass surrounded in layers of protective coatings, fiber optics provide a much larger amount of bandwidth at longer distances than can copper.
“There are two types of fiber: single-mode, which is for long-distance transmission, typically used for businesses with multiple locations, and multimode, which is for shorter distances, typically used in the same building,” says Dave Elsbernd, a sales engineer for Time Warner Cable Business Class.
Smart Business spoke with Elsbernd about fiber optics and how they can help your business save and make more money.
What are the benefits of fiber?
Fiber provides many benefits over traditional copper services. Fiber optics are more scalable than traditional copper services.
There are no limitations to the amount of bandwidth you can transmit over fiber; it is only limited to the type of optics, or laser, that is transmitting the light on the fiber. Typical optics today transmit at one gigabit per second (Gbps) and 10 Gbps, and as technology advances, those speeds will certainly increase.
Fiber optics can be used for a variety of networking protocols other than traditional Ethernet services, such as SONET, which is used for TDM services and Fiber Channel, which is used for storage networking.
Also, because fiber optics cables are made of glass, they are less susceptible than metal cables to interference, and they are much thinner and lighter than metal wires. Data can be transmitted digitally rather than analogically.
Fiber also offers great scalability and reliability. Businesses are able to increase the bandwidth of the fiber without replacing the fiber itself. You would typically only need to replace the optics that transmit the signal on the fiber.
You can also implement a Wavelength Division Multiplexing (WDM) solution over fiber optics to increase the capacity of the fiber. WDM is a technology that allows different frequencies to be transmitted over the fiber at the same time.
What exactly is Wavelength Division Multiplexing?
Wavelength Division Multiplexing is a technology that combines optical signals, called wavelengths, on a single fiber. WDM uses a multiplexer to combine signals being transmitted over the fiber and a demultiplexer to separate the wavelengths on the receiving end. There are two different types of WDM, dense and coarse wavelength division multiplexing.
Each type uses a different pattern to space the wavelengths, which determines how many channels you can use on the fiber.
Dense wavelength division multiplexing (DWDM) is a technology that puts data from different sources together on an optical fiber, with each signal carried at the same time on its own separate light wavelength. Using DWDM, more than 80 separate wavelengths or channels of data can be multiplexed into a light stream and transmitted on a single optical fiber.
Coarse wavelength division multiplexing (CWDM) is a method of combining multiple signals on laser beams at various wavelengths for transmission along fiber optic cables. The number of channels is fewer than in DWDM.
If a company wants to implement fiber, how does it get started?
If a company wants to implement fiber, it should first evaluate its needs. What, exactly, do you need to do? Consolidate storage? Save on costs? Streamline user accessibility? Add backup or restore capabilities? Speed up access to information? All of the above?
Then you need to determine if your needs justify the cost of fiber. If the answer is yes, where is the fiber needed? Same building? Remote locations?
If the installation of the fiber is not in the same room or building, a specialist will likely need to be called in to give the company an estimate of running and splicing the fiber optic cable.
Are there any drawbacks to fiber?
Implementing fiber optics is typically more expensive than traditional copper wire solutions. Not only is the cost of the cable itself more expensive, it has to be fusion spliced, that is the method of connecting fibers together using heat, which is more expensive than connecting copper wires.
That being said, the technical benefits of fiber optics more than justify the cost. Once you have fiber optics in place, you will be technically set to grow your network as your business needs without the cost of replacing existing wires.
Dave Elsbernd is a sales engineer for Time Warner Cable Business Class. Reach him at or email@example.com or (513) 386-5544.
Every organization needs a bank, but not every organization has the same needs when it comes to its banking relationship and services. While government entities cities, school districts, etc. also require this essential business relationship, they may not know that there are government banking services available that go beyond traditional banking.
While the basic banking needs of the public and private sectors are similar, the demands each faces are often very different. Government entities face more stringent audits, tighter budget restrictions and state and federal regulations. Because of this, government banking is a highly specialized process, one that requires specific skills and a strong bank.
“In banking, all customers have different needs,” says Logan Thibodeaux, a relationship manager and an industry specialist focusing on the government sector for Wells Fargo Bank. “Government banking offers a solution to the specific and unique needs of public entities.”
Smart Business spoke to Thibodeaux about the differences in government banking and how they can benefit public entities.
How can banks inform public entities about the existence of government banking?
Like anything else, it’s about working the phones, pounding the pavement and spreading the word. Nothing is better than a good word-of-mouth referral. Once you establish a great working relationship with one government entity, it’s easier to go out and build deep, long-lasting relationships with other government entities. Also, you have to stay active in the community. Attend conferences, network, and get involved in charitable endeavors. Great human relationships can lead to great business relationships.
What should an organization look for in a government banking program?
Expertise and broad capabilities: The bank’s relationship managers must be seasoned professionals who understand the unique needs and challenges facing government and institutional clients and have the power of a national practice that combines both specialized relationship banking with capital markets-based financial solutions.??
Coast-to-coast practice: Look for a national government and institutional practice with clients representing state and local governments, not-for-profit health care organizations, institutions of higher education and tax-exempt institutions.??
A trusted adviser: The bank’s clients should think of it as a trusted adviser, and it should be committed to earning this reputation by leveraging its expertise to bring relevant ideas and recommendations that will help them articulate and achieve their organizational goals today and 10 years from now.??
Fast, local decision-making: It’s beneficial if the decision-making authority is at the regional level so local relationship managers can provide rapid responses to credit requests. Ask the bank if it has a dedicated service team available whenever it is needed.??
Treasury services leader: The bank should be able to provide a robust offering of treasury services that meet a high level of product quality as well as your current and emerging needs.
Is government banking conducted on a larger scale than traditional banking?
In this case, the two are very similar. Just as there are large corporations and small mom-and-pop companies in the private sector, there are small, quiet government entities as well as large, complex entities. Like traditional banking, the key is offering the same focused, hands-on service to all clients, no matter how big or small they may be.
What are the biggest differences between government banking and traditional banking?
When you work with a traditional company, it’s usually pretty straightforward. They sell widgets; they need accounts receivable and payable, payroll, check cashing and depositing, and things of that nature. You generally know what you’re getting into and what that client needs.
In government banking, it’s more about what the government entity is required to do, how it’s required to do it and when it’s required to do it. The accounting rules are different; the balance sheets are different.
You have to be mindful that a government entity is responsible for allocating its resources in the proper channels and evaluating its budget; government banking provides the products and services to help them do that.
Also, with accounting and auditing procedures, you have to be very responsive. Auditors, as required by state and federal statutes, will be closely watching those government entities, so you have to be responsive to those needs. When a government entity needs confirmation of collateralization or balance of interest rates, you need to have that information available in a timely fashion.
Are government entities more heavily regulated by state or federal authorities?
There is definitely more regulation from the state, so you always need to be mindful of any legislative changes occurring in your state. New laws that impact municipalities are passed every year, so you need to stay on top of that. Still, keep an eye on federal regulations as well. Particularly in this economic environment, you never know when a new piece of legislation will affect your city or state.
Logan Thibodeaux is a relationship manager and an industry specialist focusing on the government sector for Wells Fargo Bank. Reach him at (281) 652-4029 or Logan.Thibodeaux@wellsfargo.com.
S corporations generally do not pay federal income tax. Instead, S corporation shareholders pay federal income tax on their share of the S corporation’s taxable income, whether or not the S corporation distributes such earnings.
Currently, S corporation shareholders are not subject to employment taxes on their share of S corporation earnings. However, when a person receives compensation as an employee of an S corporation, in addition to being subject to income tax, those wages are subject to taxes for payroll, Social Security and Medicare.
For calendar year 2010, the first $106,800 of wages is subject to a combined employee and employer Social Security tax and Medicare tax at a rate of 12.4 percent and 2.9 percent, respectively. After the Health Care Reform Act of 2010 phases in during 2013, the employee portion of the Medicare tax increases by 0.9 percent on wages in excess of $200,000 for individual filers and $250,000 for joint filers.
The changes will result in an extra $9 in tax on every $1,000 earned over $106,800 of wages.
“This tax burden did not go unnoticed by taxpayers or by the IRS,” says Walter M. McGrail, JD, CPA, a senior manager at Cendrowski Selecky PC. “Shareholders of closely held S corporations began to forego their salaries and instead drew all of their earnings as S corporation distributions, thereby avoiding employment taxes. Not surprisingly, the IRS objected to this treatment and soon began auditing closely held S corporations and assessing liabilities for underpaid employment taxes and related interests and penalties.”
Smart Business spoke with McGrail about how the taxation of S corporation wages has changed in recent years and what to watch out for in the future.
How can S corporation shareholders avoid IRS scrutiny?
An appropriate balance must be achieved between wages and distributions that minimizes a shareholder’s tax burden and the potential for IRS scrutiny. This balance is different for every S corporation and is a function of the nature of the business, the number of shareholders and numerous other factors. A properly arranged allocation can save thousands of dollars in employment taxes.
The following is a fairly typical example: Assume a professional services firm comprised of three principal shareholders and six other professional employees files returns as an S corporation and has $600,000 of earnings before considering shareholder salaries. If the shareholders ignore the value of their services, then there are no wages or related employment taxes. This type of shareholder compensation has led to the increased IRS scrutiny.
Upon audit, the IRS will likely argue that all $600,000 of the corporate earnings is the salary of the three shareholders. If each shareholder is assessed employment taxes as if the $200,000 ratable share of such earnings is wage compensation, the assessed employment taxes will total approximately $63,000 before the IRS adds penalties and interest to its assessment, which can often equal or exceed the assessed tax.
Instead of taking an all or nothing approach to employment taxes, assume that the shareholders proactively seek guidance as to the reasonable salary associated with managing the practice and the performance of professional services. If it is determined that a reasonable salary for each shareholder managing the practice and performing services is $100,000, the self-assessed employment taxes on such salaries would be approximately $48,000. While this is more employment tax incurred than ignoring the issue, it’s a $15,000 savings compared to the audit assessment and generally avoids penalty and interest.
Taxpayers may want to play the audit lottery and hope to get to the reasonable position on audit. However, in audit, this becomes a contentious uphill battle with the IRS, and audits are a very expensive proposition all around.
Is there any legislation before Congress concerning S corporations?
In large part due to the increased avoidance of employment taxes, Congress is looking to pass legislation that will do away with any reasonable allocation between wages and S corporation earnings. House Bill 4213 proposes to tax all earnings from select S corporations as self-employment income subject to self-employment tax. This would eliminate any planning with reasonable allocation arrangements.
The current proposal would apply to any S corporation that has, as a significant asset, the business reputation of three or fewer persons. For example, the earnings of a law firm owned by two attorneys who are also the only persons performing legal services on behalf of the firm would be completely subject to self-employment taxes whether paid as wages or distributed as S corporation earnings.
Standards such as significant assets and business reputation of three or fewer persons will inevitably require further guidance from Congress or the Treasury. If the legislation becomes law, it also will inevitably lead taxpayers to merge or add other employees to avoid the application of these new rules.
Are there advantages to the proposed legislation?
Early in the development of S corporations as a choice of business entity, shareholders attempted to include the earnings from the S corporations as self-employment income for purposes of funding their own qualified retirement plans.
The IRS ruled quickly on these attempts and concluded that because S corporation earnings were not subject to self-employment tax, they could not be considered as self-employment income for purposes of funding qualified retirement plans.
It remains to be seen how the new legislation will impact qualified retirement planning.
WALTER M. McGRAIL, JD, CPA, is a senior manager at Cendrowski Selecky PC. Reach him at (248) 540-5760 or firstname.lastname@example.org.
Today’s businesses are powered by technology, and with more and more business being conducted over the Internet, the need for bandwidth has become paramount.
More bandwidth allows you to conduct business more rapidly, increasing your efficiency, decreasing turnaround times and increasing your sales.
“If all of your sales are conducted over the phone and/or the Internet, and your connection is too slow, it doesn’t help your business,” says Dan Barlow, a sales engineer for Time Warner Cable Business Class. “Too often, companies go for the lowest price and don’t properly assess their needs.”
Barlow recommends working with a service provider to perform a technology assessment for your business.
By taking the time upfront to determine your needs, you’ll save headaches and hassles in the future, allowing you to successfully conduct your business.
Smart Business spoke with Barlow about how to assess and manage your company’s bandwidth needs.
How can a business assess the amount of bandwidth it needs?
Bandwidth is defined as the amount of data (measured in megabits per second) that can travel from point A to point Z and all spots in between.
In order to assess your needs, first determine how you are using your bandwidth. Is it just for the Internet and e-mail, or are you sending and receiving large files?
How much data are you sending, and is it getting to the recipient in a timely manner? Can it handle all the users that are currently sharing it? And what happens if you add more users to it? Is your solution scalable? How much time would it take for your current provider to increase your bandwidth?
Also, look at your company’s Web site. How many hits does it get? Are users downloading audio/video files? Are you streaming media for videoconferencing?
A complete evaluation of these activities will help you to determine your bandwidth needs.
Why is bandwidth so important?
In this modern, technological world, it’s all about how fast you can do business. So, you need to make sure that you have enough bandwidth to keep up with the needs of your business.
Having the right amount of bandwidth can mean the difference between sending a file in five minutes, five hours, or five days. If it’s taking you hours to do something your competitor can do in minutes, who do you think the customer is going to choose?
What technologies can help make a business more efficient?
Again, bandwidth is king, so the popular technologies are ones that enhance bandwidth, such as firewalls and content filters.
These technologies limit what your users are capable of doing on the Internet and over your local area network, so the bandwidth remains available for business necessities.
There are also bandwidth optimizers and compressors that increase speeds; however, the more you compress/decompress a file, the more its quality suffers.
What type of return on investment does bandwidth offer?
The real ROI of bandwidth comes from seeing what you’re losing if you don’t have enough. If you can’t efficiently and effectively conduct business, you’ll lose sales, opportunities and repeat customers. How much can your business stand to lose? In this economic climate, having enough bandwidth is vital.
It’s hard to put a true value on increased efficiencies and improved productivity, but it’s pretty safe to say that properly increasing your bandwidth will more than pay for itself.
What bandwidth options are available?
There are two different bandwidth solutions: a shared network, or a dedicated private network. A shared network is like a cable modem you’re sharing bandwidth with other traffic in your area. A dedicated network is dedicated to your business traffic.
But remember, you’re only as fast as the slowest link in your chain. So, if you’re on a shared network, upstream users could be slowing it down if utilization isn’t managed correctly.
If a business isn’t properly managing its bandwidth, what consequences could it face?
If your bandwidth is compromised, you’re in danger of losing customers and productivity.
Not managing bandwidth can result in longer wait times for customers and incoming/outgoing data. This can lead to lost sales and lost time. What can you afford to lose? How long do you want to stay in business? In this day and age, if you don’t have bandwidth, you don’t have business.
Dan Barlow is a sales engineer for the Cincinnati office of Time Warner Cable Business Class. Reach him at (513) 386-5642 or email@example.com.
Believe it or not, the recent recession has had its advantages. A significant one is the big increase in the availability of talented executives.
The question is: Are you missing out on these top executives because of reorganization and/or belt tightening?
“Take advantage of this opportunity to market your company to prospective executive candidates,” says M.J. Helms, director of operations for The Ashton Group. “No one can really predict how long the economy will stay soft. Now is the time to rethink your corporate strategy, restructure your business and possibly hire a few leaders to move your business forward.
To do this, says Helms, first examine the current leadership in your company. Then, if you are short on talent from within, do an external search.
Smart Business spoke with Helms about hiring in today’s economy and why the time is right to find your future leaders.
How can a company bolster its recruiting process?
Planning for the future is key. There is a strong possibility you may want to rehire some of your downsized employees, now that the recession (seemingly) has passed. However, how you treated those employees when you let them go will no doubt play a role in their decision to come back to your company. One example of a good way to let someone go would be to offer that person solid outplacement services.
Your company’s reputation is at stake and how you handle this will be watched closely by employees and future potential candidates.
What are some of the ways to properly handle this?
Branding your company is one of the steps that you can take to help in the recruiting process. Create the image of your company as a great place to work. Employment branding is important, so take advantage of social networking opportunities like setting up free professional pages on both LinkedIn and Facebook. On LinkedIn, it is important to also make as many professional contacts and recommendations as possible.
Also, consider setting up your own company blog that offers professional advice in your industry. This will create a link that routes back to your company name in search engines. You may want to consider a press release when a new product is launched, as well. Publish articles about your company’s successes in trade magazines. Engage your company with top executive recruiters who have the experience and contacts to attract the right candidate for your company.
Recruiting for talented executives can take from three to six months in some cases for certain professionals, such as top information technology and software executives, so don’t wait too long to begin your search.
What are some other vital parts of the hiring process?
For one, conduct an in-depth background check. Find out about a candidate’s work history, but also find out what that candidate is passionate about. In what areas did the candidate excel in the past? In which organizations were they most successful? Did they receive any achievements or recognition? Asking those types of questions will help you determine whether or not the candidate will properly fill the position and, eventually, become a future leader of your company.
Also, evaluate both job skills and personality through skills-based and job-knowledge questioning. Having the right skills and qualifications is important, but you also have to make sure that the candidate is the right fit for your culture. Does the candidate thrive under pressure? Does he or she work well with other team members? How large of a workload can the candidate handle? Understanding a candidate’s personality is vital.
Why is now the time to find new talent?
This is a seller’s market and a great time to attract talent and pay more reasonable compensation than a year ago. Search firms have been inundated with resumes over the last several months. Online employment sites have reported record entries of new executives currently available. Placing an ad in The Wall Street Journal will get an enormous response these days. You have to remain competitive in the marketplace.
Even though I have seen a decrease in compensation packages in the last year, I would encourage you to provide a competitive compensation package and benefits packages that will motivate long-term performance. A well-designed supplemental benefits plan can provide additional post-retirement income for selected executives. You can establish performance benchmarks that must be attained before these benefits are awarded. You may consider requiring continued employment for executives to reap these benefits.
Try some of these steps to ensure that top executive talent seeks out your company for employment.
M.J. Helms is the director of operations with The Ashton Group. Reach her at (706) 636-3343 or firstname.lastname@example.org.