Kristen Hampshire

Wednesday, 25 November 2009 19:00

EPLI: The new workers’ comp

Emotions run high when companies downsize and reorganize to meet the demands of a tough economy. Some employees will do whatever it takes to raise cash if their financial situation is desperate or if they are disgruntled with their employer. In this litigious society, no business can rest easy, especially with the steady increase in employment practices allegations. With attorney fees alone averaging $200,000 per claim, businesses can’t afford to ignore potential lawsuits that employees can instigate — and today, filing employment practices claims is more common than ever before.

Michael Finn, account executive, GMGS Insurance Services, has noticed a sharp incline in employment practices cases. Presently, he is handling 12 claims whereas his clients had two claims in the prior decade.

“No business is immune to employment practices lawsuits,” Finn says, noting that the state of California in 2004 cracked down on workers’ compensation claims with tighter regulations. “Employment-related practices claims seem to be the new workers’ comp,” he says. “And business owners don’t have to do anything wrong. No one has to actually discriminate against or harass the employee. An employee may simply allege that they were treated wrongfully and the court doors will fly open.”

Smart Business spoke to Finn about how businesses can protect themselves in this litigious environment.

What constitutes an employment practices claim?

Employment practices covers the human resources spectrum, including sexual harassment, wrongful termination and employee discrimination because of race, religion, age or any other reason. It also includes wage and hour claims, which allege that a company did not abide by the Fair Labor Standards Act (FLSA). Employees may claim overtime violations, saying that they were not paid for hours worked, or they can claim failure to pay wages for hours of work. Wage and hour claims may also allege that a company didn’t allow the legally allotted meal or rest time.

The problem with all employment practices claims is that a business does not have to be in the wrong for an employee to make a claim. A claim is as simple as an employee ‘saying so.’ Even frivolous, unsupported claims are not quickly dismissed. Aside from claims being litigated in court, the U.S. Equal Employment Opportunity Commission (EEOC) is required to investigate all claims.

Why are employment practices claims more common today?

We can blame it on our litigious society, the present economy and people’s desperation to find money any place they can. And the fact is, word-of-mouth travels very fast. Employees talk. When they learn how relatively easy it is to make an employment practices claim, it becomes an attractive option for almost anyone. Many employees do not automatically assume they are hurting their employer (or former employer). Often their legal counsel convinces the employee that the insurance company is picking up the tab at no cost to the employer. However, for businesses that do not have employment practices liability insurance (EPLI), the cost of litigation can cause serious financial harm — especially with repeated or class-action lawsuits.

What implications does a business suffer when facing an employment practices lawsuit?

Time, money and reputation are at stake for businesses that face these claims. No company wants to spend time in court, and these cases can go on for some time since they are also investigated by a government agency. Again, the average defense costs are presently $200,000 per EPL claim. For businesses without EPLI, these fees can hit the bottom line hard, especially in this economy. There are also additional costs if a business decides to bring in human resources specialists to ramp up policies and procedures and expand company training. Many insurance companies that offer EPLI will provide these services for free.

What can businesses do on the front end to protect themselves against these claims?

First and foremost, maintain proper documentation of all human resource activities, from hiring to termination. Scrutinize company policies and procedures and ensure that everything is properly documented, from hours worked to when and how long employees take breaks. Take proper steps when terminating employees. Make sure there is a plan in place so the termination complies with state and federal laws. That documentation will serve as a defense when a lawsuit arises. Ensure that managers and employees have proper training in the areas of sexual harassment and discrimination. Document all training. Consult with an HR professional if you do not have an individual in house who can verify that all policies are airtight. Finally, an EPLI policy is essential to protect your business just in case an employee files a claim. Paying a small premium as opposed to the total cost of litigation is the best safety net to protect a business.

How does an employer place proper coverage?

Premiums can range from $2,500 to $25,000 for companies with 200 employees or less. The premium really depends on the size of the business, number of employees and historical turnover. In reality, for the price of 10 to 15 hours with a lawyer you can place a $1 million policy to protect your business. To secure proper coverage, consult with a risk management broker who can provide the proper guidance.

Michael Finn, CIC, is an account executive at GMGS Insurance Services. Contact him at mikef@garrett-mosier.com or (949) 559-3376.

Saturday, 25 April 2009 20:00

Easing a name change

From a customer perspective, the most visible way that companies unite following an acquisition is through a name change. Sometimes the switch is gradual, as when Franklin Bank joined First Place Bank, its parent company, in 2004. For the past five years, signage, statements and other bank documents read, “Franklin Bank, a division of First Place Bank.”

In April, Franklin Bank adopted its parent company’s name entirely.

For clients and employees, the change means little more than a different name on branch offices. The bank will continue to operate as it always has. Essentially, the name-change decision made sense as the bank’s territories grew together.

“Franklin Bank has a highly recognizable name in the southeastern Michigan marketplace and, over the years, the geographical gap between First Place Bank’s primary territory and ours has closed as our company has expanded,” says Craig Johnson, president and CEO, Franklin Bank, Southfield, Mich.

Merging companies often realize infrastructural efficiencies and branding advantages when they operate under one name.

Still, communication with shareholders and the community is important when making a change that customers can see so plainly. Many companies that have undergone acquisitions and mergers make tough decisions about a name change as it relates to branding, internal operations, efficiencies, savings and other considerations.

Smart Business spoke to Johnson about factors that go into a name-change decision and how companies can effectively make the transition to a new brand.

Does an acquisition always mean a name change will result?

Not always. In most cases, a parent company will immediately or gradually change the acquired party’s name to reflect the corporate brand. The way a name change is handled depends on the brand recognition of all parties and what a change could mean for business. For instance, a company with a strong reputation in a marketplace and a loyal customer following may require a transition name. This was the case for Franklin Bank. Because our parent company’s territory did not overlap with ours at the time of acquisition, it made sense to retain the Franklin Bank name for some time. Over time, we altered product offerings so they were the same for both Franklin Bank and First Place customers. For customers and employees, the acquisition was seamless. We have been subtly introducing First Place Bank to our longtime customers for years. Now we’re going to make the formal change. This is a common strategy for companies in our position.

What benefits can a name change bring for a business?

From a branding perspective, it’s back to the old math lesson: The whole is greater than the sum of its parts. Rather than branding the company as a division of the parent, the entire business can make a greater impact with a unified name. Just in advertising and marketing efforts, the company can benefit from efficiencies in terms of sheer paper: statements, letterhead, receipts, promotions, brochures and many other items. There are clear volume purchase advantages, not to mention the internal time saving of unifying processes that relate to messaging. One name keeps it all simple. But as noted, many companies gradually work toward that change so the marketplace understands that they can still depend on the company for the same services. Also, there are emotional attachments to long-standing names. People in general do not like change. Some corporations decide to ease acquired companies into the parent name to maintain consumer confidence.

How does a company prepare for a name change?

A company can’t communicate enough during this time. Send a letter to customers explaining the change and what it means — and perhaps most important, what the change does not mean. If clients will continue to work with the same personnel and conduct business in the same way, say so. Dispel myths and fears customers may have about the change. Meet with employees regularly to discuss how to present the change to clients and how to respond to questions. Provide a script to help guide the conversation. If necessary, meet individually with salespeople and employees who have direct contact with customers; listen to their concerns about communicating the change and offer solutions. It’s critical that everyone be on the same page so the change can be seamless for clients.

What does the Franklin Bank name change mean for employees and customers?

This change is purely branding. Customers will bank at the same locations and see the same faces when they conduct business. The difference is that the building they enter will be called First Place Bank. Employees will experience no organizational change. Essentially, this ‘new’ name is a belated branding result of our acquisition by First Place Bank five years ago. We’re pleased with the growth and market expansion the company has experienced since that time, and the name change is a reflection of the merger’s success.

CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at CLJohnson@franklinbank.com or (248) 358-6459.

Thursday, 26 March 2009 20:00

Go green, go paperless

For businesses considering new ways to “go green”— and today many organizations are looking for ways to reduce their footprint for ecological and economic reasons — one of the main culprits organizations identify during a waste audit is plain-and-simple paper.

Consider how much paper we use daily, how many file cabinets are jammed with invoices, purchase orders, financial records, internal communications and more. The paper amassed while conducting business is daunting. Even more overwhelming is spear-heading an effort to go paperless. But the process doesn’t have to be that way.

“Business owners that create a road map to go paperless and break their strategy down into manageable phases can accomplish their goals for going green,” says Sassan Hejazi, director of technology solutions at Kreischer Miller.

Hejazi talked to Smart Business about how to launch a paperless strategy and why this green effort is good for the bottom line.

What issues should businesses consider as they develop a paperless strategy?

Many elements come into play when an organization embarks on a paperless plan. First, there are decisions regarding what elements of the business will go paperless — and what areas can go paperless in light of regulatory requirements, such as IRS and HIPAA, for record access and retention. There is also investment in software and equipment required to accomplish the process, though the greatest investment is time. Managers must start the project by learning about various paper-intensive processes through asking who, what, when, where, why and how. Who else does the organization interact with to conduct business, and how will the paperless effort affect other entities, such as suppliers or vendors? What aspects of the business should be addressed for converting paper to electronic files? When will paperless efforts ‘kick off’? Where can the greatest efficiency and return on investment be realized? Why go paperless — what are the goals? How much paper will be converted to electronic files? How will the company integrate and implement an information access and retrieval process involving electronic and paper documents?

Answers to these questions are key in structuring the paperless road map and developing buy-in from employees who will help with the effort.

How can a paperless effort be effectively orchestrated?

Many companies find it valuable to enlist an adviser to manage the paperless process. First, bringing a professional on board is one way of committing to the strategy and getting the ball rolling. Companies can get stuck in the midst of the process because other business priorities derail paperless efforts. An adviser with experience in going paperless can recommend software and equipment to make the job easier and help engineer a paperless process that makes sense for the business. Going paperless is a collaborative effort that requires buy-in and support from everyone in the organization. It helps to have a third party leading the effort who has not been ‘living’ in the paperwork for years. Someone from the outside has an objective view of the waste stream and may come to the table with a different perspective to give the project momentum.

What is generally the first phase businesses tackle in their efforts to go paperless?

Once a company designs a road map of target conversion areas of the business, the best approach is to isolate one goal — one part of the organization to transfer that is manageable and will yield high success. For instance, if a company has been sending paper invoices to customers, converting this portion of the business to electronic invoicing will speed up the accounts receivable process, which will affect cash flow. Take baby steps and measure the results of each paperless effort. Celebrate these successes and share with employees how their contributions are helping the business at-large. Treat the paperless process like a checklist, starting with goals that can be accomplished in reasonable time. Build a high level of excitement in the organization that will set the stage for other phases of the project.

What are some key areas that realize efficiency once a paperless program is implemented?

Consider business transactions currently managed ‘on paper’ and how they affect efficiency, profitability and, ultimately, the bottom line. Go paperless in areas of the business that will help you:

  1. speed up cash flow;
  2. reduce the number of hands touching a document;
  3. aid in employees’ access to critical information;
  4. improve inventory accuracy and efficiency; and
  5. ease vendor, customer and internal communications. Ultimately, going paperless can change the way an organization makes long-term business decisions. Information is easily shared electronically in support of a more collaborative and proactive decision-making process.

 

A paperless organization improves efficiency, visibility of key performance information and can even jump-start lagging cash flow by shaving days or weeks off of the billing cycle. In this economy, the flexibility to invoice, receive payments and communicate information with customers with the click of a button is critical.

SASSAN HEJAZI is director of technology solutions at Kreischer Miller, Horsham, Pa. and faculty of management systems at Arcadia University. Reach him at (215) 441-4600 or shejazi@kmco.com.

Thursday, 26 March 2009 20:00

Stimulating cash flow

The stimulus bill signed into law in late February contains several tax provisions that could help businesses that need a lift in this economy. The American Recovery and Reinvestment Act includes tax deductions and credits designed to fuel business growth, expansion and innovation.

“During these trying times when credit is tight, it’s difficult to get loans from banks,” says John Carey, CPA, JD, an associate director in the tax department at SS&G Financial Services, Inc. “And, your customers are likely feeling the same credit squeeze you are, so your cash flow may be suffering. Creative use of the tax law can help improve cash flow or even save a business that is in dire straits.”

Smart Business spoke with Carey about tax provisions in the new law that businesses can take advantage of to generate cash flow.

What depreciation allowances are in effect for those considering capital expenditures?

A provision in the tax law allows for an extra 50 percent ‘bonus depreciation’ of the total cost of an asset in the same year a business acquires the asset (which must be qualified property). Ultimately, this translates into increased cash flow for businesses by allowing a deduction for expenditures on the front end rather than requiring that the entire cost of the assets be written off over an extended period. Bonus appreciation was set to expire at the end of 2008, but the new law continues the extra deduction through 2009. If you plan to spend $100,000 on a piece of equipment, you can write off 50 percent of the cost in 2009. That amounts to a $50,000 deduction. Say you plan to put $10,000 down on the equipment and make payments over several years. Because of this tax provision, you may actually realize a greater tax savings than your down payment. This is why you should discuss business expansion plans with an accountant who can help strategize the best way to keep cash in the company but still spend to fuel business growth.

Is Section 179 expensing for qualified property still in place?

Section 179 allows businesses to elect to deduct the full purchase price of a qualifying piece of equipment purchased during the tax year. Like bonus depreciation, this incentive is designed to encourage businesses to invest in themselves and spend on equipment and other property that will help fuel growth. Of course, there are limits. A total of $250,000 can be written off, and the total amount of equipment purchased is limited to $800,000. The deduction phases out after this point. The government did not roll back expensing limits to $125,000 and $500,000 as planned, but extended the higher limits through 2009. Businesses can now take advantage of both Section 179 and bonus depreciation.

Are there tax advantages for companies that do not elect to apply bonus depreciation to qualified purchases this year?

There is an opportunity to forgo bonus depreciation, and instead elect to take certain refundable tax credits. In particular, companies that are operating at a loss this year and have credits such as the alternative minimum tax or research and experimentation credits that were generated in prior years, but were not used and have been carried forward, can ‘cash in’ on those credits by electing to not implement bonus depreciation. These credits are refundable, which can turn them into cash.

A company that takes these credits can still apply Section 179 expensing to qualified property purchased this year. Careful planning is important to coordinate these benefits in order to take full advantage of them.

What tax provisions can help companies operating at a loss this year?

Previously, companies operating at a loss could carry that loss back and earn a refund on taxes paid in the two previous years. That time period has been extended to five years, which means a business that operated at a loss in 2008 can carry that loss back to 2003, 2004, and so on (for five years), and get a refund from taxes paid in those profitable years. This refund can be a significant cash source for companies that need the extra boost to recover from a loss.

For companies that have converted from C corp. status to S corp. status, what can be expected?

If a company has converted from a C corp. to an S corp. and has assets that have appreciated in value (built-in gains), those assets can be taxed if they are sold. Previously, the built-in gains tax period was 10 years. Now it’s seven years. This benefits companies that changed status in 2003 or prior, alleviating them from having to pay a burdensome tax on a sale of appreciated assets.

What hiring decisions may represent a tax advantage?

The Work Opportunity Tax Credit applies to businesses that hire from specified categories of employees. The stimulus bill added two categories of individuals to this credit: unemployed veterans and unemployed youths ages 16 to 25. Businesses that hire workers in these two categories — or any other population previously identified in the provision — can earn a tax credit.

The key is to meet with your adviser early to discuss ways to take advantage of these tax provisions. With the stimulus bill credits and depreciation allowances, there are ways to generate cash flow, now.

JOHN CAREY, CPA, JD, is an associate director in the tax department at SS&G Financial Services, Inc. Reach him at (330) 668-9696 or JCarey@SSandG.com.

Tuesday, 25 November 2008 19:00

Tax planning

No one knows exactly what the tax landscape will look like in 2009. After a presidential election, a mortgage crisis, the downfall of several major financial institutions and a government bailout, the one thing we can be sure of is change.

The best tax planning advice possible for businesses and individuals is to take advantage of opportunities that exist today. It is always important to talk to your accountant prior to the end of a year to ensure there are no surprises come April 15 and that your company is positioned to fully benefit from the tax advantages available.

“Companies looking to make capital investments in 2009 should consider accelerating those purchases, assuming it makes good business sense, to take advantage of write-off opportunities,” says Clifford Sussman, CPA, director in the entrepreneurial services group at SS&G Financial Services, Inc.

Likewise, businesses that are in the midst of a buy-sell process should aim to wrap up dealings by year-end to benefit from the current capital gains tax rate and avoid a potential increase from the new administration.

Smart Business spoke with Sussman about tax opportunities for businesses and individuals and why now is the time to exercise one’s right to various deductions.

What legislation passed in 2008 will affect individual and business tax planning?

In early 2008, the Economic Stimulus Act gained public attention because of rebates granted to taxpayers. Meanwhile, this legislation afforded businesses enhanced expensing capabilities with respect to capital expenditures. The Section 179 deduction for qualifying fixed assets, placed in service in 2008, was increased from $128,000 to $250,000. The phaseout of the deduction was also increased from $400,000 to $800,000. The incentive was designed to encourage business owners to invest in their companies. Over and above the Section 179 deduction, business owners may qualify for an accelerated bonus first-year depreciation on qualified depreciable property. The bonus depreciation provides for 50 percent depreciation during the first year on qualifying assets and may include software and qualified leasehold improvements. Aside from tax opportunities created by the Economic Stimulus Act, the Housing Assistance Tax Act provided certain first-time homeowners a one-year credit of up to $7,500 for purchasing a house between April 9, 2008, and June 30, 2009.

How does the bailout affect tax planning?

In particular, the bailout package extended available research and development tax credits to businesses. On an individual note, the bailout legislation increased the alternative minimum tax (AMT) patch from $45,000 to $69,950 for joint filers. The purpose is to alleviate the burdensome tax from the middle class. An accountant can better advise how the R&D credit and AMT patch affect tax liability for individuals and businesses.

Why should businesses act now when it comes to buying or selling a business?

With a possible increase in capital gains legislation — some say up to 10 percent — businesses that are in the process of buy/sell transactions or are considering capital investments should work to complete those deals before the close of fiscal 2008. We can count on established capital gains tax rates today. But next year, there are no guarantees as to what the rates will be.

What should investors do to convert market losses into tax advantages?

Individual investors should sit down with their financial planners and discuss the current market and the performance of stocks and mutual funds in their portfolios. Based on that advice, it may be a good idea to consider selling nonperformers before year-end to realize the losses and tax benefits that come with them. Married individuals filing jointly can deduct up to $3,000 a year for capital losses. Harvest capital losses this month, before the calendar year turns.

What conversations should business owners have with lenders as they plan for 2009?

Business owners should be proactive and initiate discussions with lenders regarding debt. While this is more of a business strategy than a tax planning remark, in this economy, business owners should keep open lines of communication with lenders to ensure they are meeting the lenders’ requirements and really understand what their lenders are looking for. Review loan covenants and discuss any implications that might deter the business from meeting those requirements. With the state of the credit markets, these discussions are best not left on the back burner until 2009. Businesses should be open, ask questions and make sure lenders understand their market position and growth goals.

Will any additional tax benefits be available?

Individuals 70.5 years of age and older can donate up to $100,000 of their IRA to charitable organizations in 2008 and 2009 without recognizing reportable income and without taking a charitable deduction. This law ended in 2007, but was reinstituted through the Emergency Economic Stabilization Act of 2008. The extension of this provision will allow for additional tax and estate planning opportunities through 2009. As a result, individuals who do not need to take distributions from their IRAs and prefer to avoid tax on the minimum required distributions may again donate up to $100,000 in 2008 and 2009 with no reportable income and no deduction.

CLIFFORD SUSSMAN, CPA, is a director in the entrepreneurial services group at SS&G Financial Services, Inc. (www.SSandG.com). Reach him at (800) 869-1834 or CSussman@SSandG.com.

Sunday, 26 October 2008 20:00

Inventory purchases

Companies that control their inventory levels and maintain careful tracking systems will present a stronger case to the bank when seeking funds. In these times, banks have tightened their lending procedures. Bankers must feel confident that the loans they grant for inventory purchases will be paid back in a timely fashion.

“Businesses that are heavily laden with inventory need to provide great detail to the bank in terms of what type of inventory they carry, how much is warehoused and how fast inventory is turned,” says Craig Johnson, president and CEO, Franklin Bank, Southfield, Mich.

Smart Business spoke with Johnson to learn how companies can position themselves to obtain loans to fund inventory purchases.

What type of inventory is a ‘safe bet’ from the bank’s perspective?

One of the first questions a banker will ask is whether inventory is raw materials, finished products or ‘work-in-process’ inventory. Raw materials include steel, nuts, bolts and other parts that manufacturers need to build a product; these and finished products are much easier for a bank to liquidate. (Banks must consider this worst-case scenario when evaluating a company’s inventory.) Raw materials are a commodity, and there is a ready market for discounted finished goods. However, banks consider work-in-process inventory a riskier investment. Say your company purchases partly complete widgets from a supplier. Your facility puts the finishing touches on the widget to make it a finished product. The problem is, in the event of liquidation, the bank generally is not in a position to ‘finish the process.’

The bank must be quite certain that your company is sound and inventory controls are in place to ensure that ‘in-process’ goods are completed, shipped and paid for. The paperwork and inventory histories you provide will build a banker’s confidence if your company purchases work-in-process inventory.

What paperwork should a company provide to describe its inventory to the bank?

If you have multiple facilities where inventory is warehoused, show records of how much inventory is contained in each location. Prove that you perform regular inventory checkups to verify that your paper records correspond with your physical inventory. Track and document any time inventory is moved, shipped, received or fluctuates in any way. Who are your suppliers? List each vendor, and also keep on record the customers who purchase/use your product. The bank will also ask to see a record of inventory turns, sales histories and company financials.

How are inventory loans generally structured?

Typically, the bank will grant the loan as part of an overall line of credit, which typically involves an advance formula against accounts receivables. There may also be an advance formula as part of the overall inventory. In many cases, the inventory advance is a fixed dollar amount and a set inventory level is named. For example, for a $5 million line of credit, the bank may lend $1 million against the inventory value at a 50 percent advance with a minimum inventory level of $2 million. The remainder of the credit line ($4 million) might be advanced at 75 percent of billed accounts receivables with aging of under 90 days.

What red flags alert a bank that a company is not managing its inventory properly?

If auditors make large inventory adjustments at year-end, that’s a red flag that you are not properly maintaining inventory during the course of the year. Be sure to conduct periodic inventory checks. If your turns are inconsistent with similar companies in the industry, the banker will want to know why. Perhaps you have obsolete or slow-moving inventory on hand. Finally, the bank does not want to see continuously building inventory levels and stagnant or lower sales. This reflects low inventory turns and also indicates that there is slow-moving or obsolete inventory in the warehouse. Most banks will not want to grant a loan if a company already has a warehouse stocked full of goods that the business isn’t collecting on.

What can a company do to remove the financial burden of slow-moving inventory?

The bank wants to see that you are working hard to sell or ‘move’ inventory. If items are slow-moving or obsolete, they should be discounted and turned over quickly. Offer salespeople incentive and higher commissions to move those products. Focus on clearing out that inventory, even if you sell goods for less than you paid for materials. If inventory is stagnant and sitting on shelves, the best thing you can do is take a loss, return cash to the company and move on.

CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at CLJohnson@franklinbank.com or (248) 358-6459.

Thursday, 25 September 2008 20:00

The business of boards

Individuals serving as nonprofit board members are not mere placeholders. The board of directors is the backbone and governing body of the nonprofit organization. Your responsibilities extend far beyond regular attendance at meetings. Not-for-profit organizations succeed only when they are run by dedicated board members who treat these organizations like corporations.

“Executives that accept board positions are responsible to ensure the organization is being run efficiently and effectively in order to accomplish its mission,” says Janet Ramey, manager of the not-for-profit practice at Brown Smith Wallace LLC.

“The board has a tough job,” adds Don Mitchell, a member in the audit practice at Brown Smith Wallace LLC. “The IRS is asking nonprofits: How involved is the board? Who are its members? How often do they meet? Do they have written policies and satisfactory internal controls?”

Smart Business spoke with Ramey and Mitchell to learn how nonprofit boards are structured and what expectations executives should understand before agreeing to serve.

What changes are we seeing in the way nonprofits are governed today?

In the past, board members placed more reliance on the management of the organization to do the decision-making. In today’s post-Sarbanes-Oxley world, higher expectations are being placed on board members to pay greater attention to compliance and corporate governance. The board of directors runs the organization. It is responsible for accomplishing the mission and providing direction to management — not vice-versa. More attention is being paid to board activity, fiduciary responsibility, auditing practices and the overall management of the funds granted to nonprofits. If you consider the fact that large nonprofits may have assets in the billions, it only makes sense that they should be run like for-profit corporations.

Executives working for large, public companies are certainly aware of Sarbanes-Oxley, and they are wisely adopting the same corporate governance practices to the nonprofit boards they serve. This includes policies to outline internal controls such as segregation of duties, dealing with audit financials and just overall fiscal responsibility. For example, boards should have separate finance/audit committees.

Could you describe the structure of a nonprofit organization?

Many nonprofits operate with a committee structure. The board of directors divides their talents among committees, such as finance, fund-raising, bylaws, programs, etc. One committee will liaise with auditors on an annual basis to ensure systems are in place and communications are effective. Ideally, each committee is staffed with at least one or two board members that possess skill sets necessary to accomplish each committee’s objectives. The organization’s management (which carries out daily duties and tasks directed by the board) reports to the board and may attend regular meetings. When it is necessary, board members are expected to step in and provide specific functions for the organization when sufficient experienced staff or other resources are lacking.

What activities must the board engage in to properly govern the organization?

Ultimately, the board is accountable for the organization meeting its mission. It ensures that the money provided from donors’ discretionary income and government grants is spent appropriately. Board members set

benchmarks for the organization in keeping with the mission. They hold regular meetings and compile and review monthly financial results. That financial information should be scrutinized, and the board should compare the budget with actual results, noting any disparities and determining the cause.

What can happen when the board does not fulfill its fiduciary responsibilities?

When an organization receives a grant, the grantor expects the nonprofit to spend the money to support the mission. This means making good financial decisions as well as managing the money along the way. Recently, we have seen organizations lose funding from grant authorities because they are not in compliance with grant requirements.

Board members need to oversee the operation to make sure the organization is in compliance. If it isn’t, it’s their responsibility to work with management to help resolve any issues. If the board does not ensure policies are being carried out and does not question management on procedures and control processes, the government certainly will. When a board does not fulfill its governing responsibilities, the nonprofit could potentially lose its tax-exempt status.

What should executives ask before joining a nonprofit board?

Strategic planning and direction are critical to the organization’s success. Before joining a board, ask other members how they fulfill the organization’s mission. Find out what programs the nonprofit sponsors and understand any expansion plans. Know what funding sources the organization is seeking to fund its goals. All of these responsibilities fall on the board of directors. Be aware of the time needed to fulfill any required committee work. Ask if they offer a board member orientation. When you take a board position, ask yourself what you are really getting into. Be sure you understand the seriousness of the role. Today, nonprofit boards are being held to similar governance standards as for-profit corporations.

JANET RAMEY is the manager of the not-for-profit practice and DON MITCHELL is a member of the audit practice at Brown Smith Wallace LLC. Reach them at (888) 279-2792 or jramey@bswllc.com and dmitchell@bswllc.com.

 

 

Thursday, 25 September 2008 20:00

Top-line growth overrated

You’ve seen community business awards for fast growth and plaques doled out to companies for their “dramatic” performance increase. But what numbers do those awards recognize, and are they a true indication of a company’s success?

“Revenues drive a business, and there’s no arguing that, without top line, a healthy bottom line would be hard to come by,” says Ryan Bailey, Chief Financial Officer, DYONYX, Houston. “But to maintain financial success, you must control costs and monitor revenue structures to ensure that your sales are generating the profit your company requires to truly thrive. The ‘net’ bottom line gauges the effectiveness of these techniques and alerts management to unexpected results.”

Smart Business spoke to Bailey to learn ways that businesses can convert top line into a profitable bottom line and plan for future success.

What confuses people about top-line revenue versus ‘net’ bottom-line numbers?

Top-line revenue gives the public a snapshot of your business. By using this number, outsiders can compare industry benchmarks to make assumptions about a business, such as the number of resources, rate of growth, expected profits and even ballpark company value based on a specific industry.

Internally, revenue assessment provides management with insight into the productivity of the sales force as well as an indication of the overall direction of the business. While such valuable information is derived from analyzing revenue, top line does not paint the entire picture as to the success of a business.

The bottom line is more telling of a company’s performance. In a sense, the bottom line is the report card for a management team answering several key questions: How effective are operations? Are costs within the budget? Is the revenue model properly structured? The value added from answers such as these is why ‘net’ is the true metric to gauge success.

What are the first steps toward improving the bottom line?

An often overlooked management tool to increase the bottom line is to simply analyze the profit streams. Every management team should understand what drives profitability for its company and define the measurement of those drivers.

For instance, management at our company keys on resource utilization and overhead burden knowing that resources are actually our profit centers. As such, our management regularly reviews both utilization and profitability reports to ensure that expectations set forth for utilization rates still translate into desired profitability. No matter what factors drive a business, management teams must be able to identify and control these variables that affect the ‘net.’

Another valuable step in improving profits is the use of a budget. The budgeting process will reinforce your pricing models to solidify your revenue structure and provide management expectations in order to control costs. Continuously revisit your goals and budget to avoid a dangerous gap between the top line and bottom line that will, over time, inhibit your company’s ability to succeed.

What cash flow issues might a business confront if the profit margins realized do not keep pace with top-line revenue?

If you focus on top-line growth with little attention to the net bottom line, before too long, the hands of time will catch up with your diminishing cash reserves. As companies increase top line, they will inherently ramp up expenditures and owe more to vendors and contractors. This is not a bad thing if you have the profit/cash flow to pay increased expenses. And let’s not forget employees. You’ll hire more people to satisfy increased sales volume. You need more manpower to fulfill customer orders for products and services. But if the bottom line doesn’t increase as the top line surges, how will you pay these employees? Your margins will continue to get squeezed by an operation that is overworked but undercapitalized. This happens often in business. The best fix is to take internal and external inventories of employees, clients, vendors, operating costs, etc. You may need to increase prices or refocus your business if you have waned from your core services. Focus on the core, meet profit margin goals and justify resources by ensuring each (employee) generates billable dollars.

What should management concentrate on to get to the next level of success?

First, define success. Is it market-driven? Do you want to earn business from certain customers? Do you want to meet certain sales goals or increase your profit margin? Ideally, you will set goals in each of these categories and also define objectives within your company regarding efficiency. Keep in mind your goals and revisit them monthly and quarterly. Don’t lose sight of your business drivers and budget, as in conjunction they can significantly boost the bottom line. Remember the top line may be eye-catching, but it doesn’t define your success.

RYAN BAILEY is Chief Financial Officer of DYONYX in Houston. Reach him at (713) 293-6303 or ryan.bailey@dyonyx.com.

Saturday, 26 July 2008 20:00

Coaching the coach

Sometimes, even the coach needs coaching. CEO coaching is an integral step to change an organization for the better. After all, change must start at the top, and the top should recognize strengths and, more importantly, weaknesses that a company must overcome to compete effectively and grow.

“A lot of times, CEOs are experiencing a level of pain or are looking to raise the bar,” says Bill Willbrand, member, Brown Smith Wallace LLC. “They know something can be improved and realize they have to change to accomplish that.”

Accepting that change is necessary in order to boost the bottom line, attract talent, fix or streamline an operations problem, expand the company, or attend to any number of areas in a company. How you effectively work with a “coach” or adviser to embrace and execute change in the organization is the key, he says. Like therapy, the first step is to admit there is a problem or opportunity, and then be willing to take sometimes-uncomfortable steps to change.

Smart Business spoke with Willbrand and John Wunderlich, a senior consultant with Brown Smith Wallace, about the benefits of CEO coaching and how change effected from the top can reignite employee morale and jump-start a company’s performance.

How does a CEO know when to seek coaching and execute change in the business?

You may have been focusing on growing the top line, and your bottom line doesn’t budge or it drops or moves up imperceptibly, and something inside you says, ‘Wait a minute. We work so hard, and we increased our revenue 50 percent compared to last year. This doesn’t make sense.’

Another sign that you may need a coach to help you ignite change is the loss of a key person in the organization that has been with your company for a long time. Maybe two or three managers leave before you wake up and realize there is a trend occurring. It means that something is rotting at the core of the organization.

Or, you may seek a coach to assist with succession planning, which involves quite a bit of change as you prepare the company to pass down to another generation or to sell.

What steps should a CEO take after identifying a problem?

First, you must really want to embrace change, and recognize that if you continue to do the same things, you will get the same results. Also, it’s important for most CEOs and their employees to get some instant gratification — fast results, whether improved sales, more efficient operations or a happier work force. CEOs need to seek out the ‘low-hanging fruit’ to get momentum going.

The best framework for moving forward with a plan to change is to get all key people on board. This includes managers and employees who play critical roles in your operation. For instance, a manufacturing company may invite a shop worker who knows the operation in and out to the table. During this initial meeting, which generally should be off-site, initiate a mini-strategic planning session where strengths and weaknesses are identified. The weaknesses are actually the most important. A company that can successfully address weaknesses head-on and overcome them will improve.

How can a CEO measure the success of new initiatives?

You must identify the critical success factors for your organization. A critical success factor is any measurable occurrence that must happen for a project to meet its goals and objectives. These factors revolve around your organization’s strengths and weaknesses.

For instance, if your production lines are not as efficient as they could be, a critical success factor is to manufacture more products with less manpower in less time. Then, you establish key performance indicators (KPI), which are leading indicators. These are real-time measurements, such as how many products are produced per minute. By measuring KPIs and setting goals, you can evaluate your progress toward improvement.

This manufacturing example can be applied to any industry. The change process is different for every company — and so are the critical success factors and KPIs. Also, KPIs and critical success factors will change over time — this is a fluid process. The nice thing about KPI is that you are measuring performance during the process rather than after, like in accounting when you reflect on past numbers and make historic observations. Because this method of tracking and measuring success is ‘right here, right now,’ you always know where your company stands.

How will the CEO know if the rest of the organization is embracing the plan?

The most obvious sign is meeting goals and driving key performance indicators. Your measurements should tell you whether your company is headed in the right direction. Also, as you delegate roles to managers and employees, and everyone in the organization gets involved in the process, you will find that you have more time to plan and strategize what’s next. If you can take a vacation, are having more fun at work and are putting out fewer fires, the business is running behind you and supporting you. The plan is working. You should notice improvements in your organization within 60 days if your people are truly embracing change.

BILL WILLBRAND is a member at Brown Smith Wallace LLC. Reach him at billw@bswllc.com or (636) 754-0200.

JOHN WUNDERLICH is a senior consultant at Brown Smith Wallace LLC. Reach him at johnw@bswllc.com or (636) 754-0214.

 

 

Wednesday, 25 June 2008 20:00

Plan a profitable exit

Many baby boomers are now ready to taper off, slow down, travel and do all those things that have been on the back burner for the last 30 years. Often with a sense of urgency, and a self-imposed deadline (such as age 60), an executive will scrape together a fast strategy to retire. Emotion, rather than solid planning, drives the business sale. Once a transaction is complete, there’s no way to get back what was sold. An owner may feel displaced. What’s next?

“Exit planning is a long-term process, and owners should not make these decisions precipitously,” says Barry Worth, a member responsible for mergers and acquisitions at Brown Smith Wallace LLC. “They should line up their goals and objectives and seriously consider how they will spend their time once the business is sold.”

Smart Business spoke with Worth about exit strategies and how to address and prepare for life after the business.

Before you begin preparing for a sale, what lifestyle issues should be addressed?

The first questions to ask are: Have you thought about how you want to live after the business is sold? What will you do when you no longer go to the office every day? How will you maintain an income to continue living the way you prefer? If you want to travel, you may have plenty of time once the business is sold, but will you have the resources to make it happen? Start the exit planning process by outlining goals and objectives, which leads into wealth and financial planning. Most owners fall into two camps. The first group has thought seriously about the business not being a part of their lives, and they are confident that they have many interests or other business ventures to pursue. The other group isn’t so sure what life will be like without the business, and they don’t know how they will replace their incomes.

What about owners who want to exit but aren’t prepared to completely pull away?

An owner can recapitalize the business and get a second bite of the apple, so to speak, by selling a majority of the business to a buyer and maintaining a minority share, still working in the business’s daily operations. Many times, this buyer is a private equity group or other strategic investor that plans to grow the business and sell it down the road. This arrangement can be beneficial for owners who plan to exit in the near future, still want a revenue stream from their business and some involvement, but no longer want the financial burden of investing in the business. The benefit for buyers is having the former owner involved in management. Eventually, the private equity group will sell the business and both parties will move on profitably.

How do you prepare for a sale?

While this process is an entire topic in itself, analyzing and valuing a business to prepare it for the market is a critical part of an owner’s exit plan. Generally, an owner has one shot at maximizing his or her return, and it’s usually on the first go-around. Therefore, the owner and advisers must analyze the business with the goal of presenting the best package to potential buyers. This means evaluating personnel, operational efficiency and record-keeping processes. Every component of a business is raked over with a fine-tooth comb, and areas that need polishing are tended to before the business is listed for sale. An owner’s greatest asset is his or her business. When exiting, every weakness will subtract from the owner’s take-away value.

What about ‘Plan B?’

An important part of exit planning is addressing contingency planning. What happens if the owner’s post-exit financial plan is built around a certain number that the best buyer simply will not pay? There must be a ‘backup’ number — a second best. While a business valuation is a key indicator, the market puts a value on businesses and it may not match a formal valuation.

Who is involved in exit planning?

Exit planning is truly a team effort, and it generally involves an accountant, attorney and often a trusted business confidante and investment banker. After the owner identifies goals and objectives, responsibilities are divided among team members. The process is no different than a sports game. Each player’s individual strength and contribution leads to a team win. In an exit plan, each adviser plays a key role in carrying out the strategy and, eventually, obtaining the goals and objectives of the owner. That said, someone besides the owner should play quarterback and direct the exit planning process. If a third party is keeping score, the owner is more likely to stay on track. Otherwise, forward-looking plans are easily shifted to the back burner as the owner puts out daily fires.

How does the economy affect the acquisitions market for owners looking to sell?

In today’s economy, the credit crunch certainly introduces challenges in completing smaller deals, but there is a strong market for solid companies that are well organized. Acquisitions are, frankly, the quickest way to improve market share. Owners who carefully prepare their businesses for sale, and understand what they must get out of the transaction to live the lifestyle they choose, may discover there are plenty of buyers ready to make a move.

BARRY WORTH is a member responsible for mergers and acquisitions at Brown Smith Wallace LLC. Reach him at (314) 983-1202 or bworth@bswllc.com.