Although the stock market has rebounded, most defined benefit pension plans are still facing difficult decisions related to their retirement philosophy and related workforce strategy. General Motors, Sears and Bank of America are a few of the companies that have recently announced major plan changes, but even small and mid-size companies are reviewing their retirement strategy.
The underfunding and asset-liability mismatch continues to challenge plan sponsors. According to the 2012 MetLife U.S. Pension Risk Behavior Index Study, plan sponsors no longer believe they can rely on traditional portfolio diversification alone to meet future obligations; many are considering changes.
“Despite on-going cash funding of pension plans over the past 10 years, many plan sponsors still find their plans underfunded due to market volatility and low interest rates,” says Steve Parsons, FCA, MAAA, and principal with Findley Davies, Inc. “This situation has resulted in employers reevaluating their pension strategies. This evaluation process includes a review of potential changes to plan design, funding, and asset allocation strategies. Several have reduced their commitment via plan changes, plan freezing, or terminating a defined benefit pension plan.”
Smart Business spoke with Parsons about the current pension underfunding crisis and the possible solutions for plan sponsors.
Why has pension underfunding reached a crisis point?
Although pension portfolios took a hit during the 2008 market correction, the current crisis has really been brewing over the last 10 years. Marketplace volatility, low interest rates and changes in accounting procedures and cash funding rules have converged and boosted the number of companies with underfunded plans by 20 to 30 percent. The Pension Protection Act of 2006 reduced the opportunity for employers to have funding strategy options and now requires them to fund shortfalls over a seven-year period. The bottom line is that companies have taken this opportunity to reevaluate their retirement strategy and philosophy. As a result, employers tended to elect one of three paths: maintain their commitment to the current plan, keep their current plan with a reduced formula, or freeze their pension plan and shift to a 401(k) strategy.
When is freezing a plan a viable solution?
Defining options and strategy can empower an employer to properly align market competitiveness, cash funding strategies, and strategic work force plan. When evaluating a freeze to the pension plan, an employer should consider how the decision to freeze its defined benefit pension plan will impact talent acquisition, morale and retention down the road.
Freezing the pension plan can be accomplished several ways, including closing the plan to new participants, partially freezing the plan that protects older participants, or a hard freeze impacting all participants.
A soft freeze allows companies to grandfather the current plan for older employees based on age and/or service and move everyone else to a 401(k) plan. A hard freeze shifts the risk to all employees via a defined contribution plan from the plan freeze date forward. The transition may cost the employer more to shift to a 401(k) plan in the interim years as the employer continues to fund the pension plan while contributing to the new 401(k) strategy.
What are employers doing to target plan termination in the future?
Terminating the plan and providing a lump-sum payment or purchasing annuities with the proceeds is certainly an option for participants. But given today’s low interest rates, most companies need to provide additional funding to purchase annuities that fulfill their long-term pension obligations. The key is connecting your actuary, financial staff, and investment advisors, defining the glide path and seeing when it might be advantageous to pull the trigger. We could see higher interest rates or get regulatory relief down the road, impacting the timing of the decision. As of now, about a third of our clients are committed to their current plans, a third have frozen their plans and shifted the risk of retirement planning to employees, and a third are still considering whether to freeze or terminate their defined benefit plan in the future.
Should employers be considering other solutions?
Employers should redefine their pension strategy in relation to total rewards and how they want to allocate internal resources in the future. For example, administrating a frozen plan may not be the optimal use of internal staff and resources. They will also need a comprehensive communications plan to explain pension plan changes to current staff and retirees. If stakeholders will be assuming responsibility for selecting investments and planning for retirement, they should be given the opportunity to provide feedback through a compression planning process. All of these issues must be considered and addressed before a company decides to freeze or terminate their defined benefit pension plan.
What’s the best way to evaluate the various options and select the right solution?
Consider how each option will impact the company and employees both short-term and down the road, because among other things, companies may no longer be able to control turnover or the timing of employee retirements if they switch to a defined contribution plan. Examine the impact of the change on administrative policies and procedures to determine the cost benefit of internal versus external management to minimize cost and liability. For a frozen or terminated plan, allow sufficient time for the transition, because employees will need considerable education before they’re ready to take the reigns of their retirement planning process. Finally, don’t be hasty. The solution to the pension plan crisis is different for everyone and changes can be reevaluated down the road if the pension plan is maintained in either an active or frozen state. This will give employers options for future work force issues and strategies.
Steve Parsons, FCA, MAAA, is a principal with Findley Davies, Inc. Reach him at (216) 875-1924 or SParsons@findleydavies.com
Insights Human Capital is brought to you by Findley Davies, Inc.
Despite a stabilizing economy and a letup in the banking crisis, small community banks approved approximately 47.5 percent of commercial loan applications in January, while banks with more than $10 billion in assets approved just 11.7 percent, according to Biz2Credit.
In comparison, lenders like community development financial institutions, accounts receivable financers, merchant cash advance companies, micro lenders and others approved more than two-thirds of applications from potential borrowers. The data confirm that executives have to be resourceful and think outside the box to secure the funding they need to expand their small or mid-size business in today’s tight credit market.
“Executives may be forced to restructure, cede market share or relinquish prime opportunities unless they avoid a short-term cash crunch by securing alternative funding,” says Eric Fricke, assistant professor of finance, Department of Accounting and Finance at California State University, East Bay.
Smart Business spoke with Fricke about the ways to finance growth by tapping alternative funding sources.
How can alternative financing help small and mid-size companies grow?
It’s great when a small business consummates a big sale, but it often ends up being a catch-22, because small and mid-size companies may not have the cash to purchase equipment or inventory to fulfill a substantial order. Alternative financing provides up-front capital when traditional commercial loans aren’t available. Best of all, the loans are scalable and may be easier to secure because they’re tied to a specific asset or invoice, so you may not need to submit a full business plan, financial statements and cash flow projections as is normally necessary to comply with today’s strict underwriting requirements.
When is alternative financing appropriate?
Alternative loans are perfect for businesses that have predictable cash conversion cycles. For example, importers and exporters have to advance cash to purchase products, and then wait until they reach stores and finally sell. And retailers and restaurateurs may have immediate needs for cash but can’t wait for future credit card transactions to finalize. Companies can close the gap in cash conversion cycles by securing a loan tied to a particular transaction, like accounts receivable, inventory, machinery, equipment and/or real estate.
What’s the best way to research and uncover alternative funding sources?
Sometimes traditional banks offer asset-based loans and other forms of alternative financing. But, you can find additional sources by searching the Internet or contacting your industry association and equipment manufacturers, since some vendors offer financing if you purchase their products.
What are the best sources of funding?
These are common sources of alternative funding.
- Asset-backed loans. Asset-backed loans are secured by collateral like accounts receivable, inventory or equipment and they may be easier to get because the lender may consider the credit worthiness of your customer. So, if you’ve sold a large number of T-shirts to a major retailer, a lender may be willing to lend you money against that invoice because of the retailer’s ability to pay.
- Equipment leasing. Equipment leasing is a popular option for companies with limited capital because the bank or equipment manufacturer purchases the equipment and leases it back to them in exchange for a monthly payment.
- Factoring. Factoring lets you sell your accounts receivable to a third party. The factoring company buys your invoice from you for an amount below the actual invoice amount. You get the up-front cash you need to fulfil the order and the factor collects the invoice once the transaction is complete.
- Merchant cash advance. This provides a lump sum cash payment in exchange for a percentage of future credit card or debit card sales. It facilitates cash flow because the lender deducts a portion of every credit or debit transaction until the debt is repaid.
What’s the downside to alternative funding?
Alternative loans tend to be more expensive than traditional loans, but the costs may be more easily allocated to certain customers, so you can more easily build the costs into the price of your products and services. Plus, the loan amount is scalable with your sales or a particular transaction instead of being tied to your net worth or cash flows. Some executives view the outsourcing of accounts receivable to a third party as a welcome benefit, while others like to maintain control of the collections process and client communications. But, for most owners, the benefits of accessing funds on an as-needed basis without navigating a grueling underwriting process far outweigh any drawbacks.
What else should owners know before pursuing an alternative loan?
Shop around, because the costs of alternative funding vary among banks and other financial institutions, and if possible factor the cost of your financing into your pricing. Finally, read the fine print to make sure you understand not only the costs, but also the process and timeline for distributing funds, since some lenders may collect receivables for you and delay dispersal of funds from risky sales orders.
Eric Fricke is an assistant professor of finance in the Department of Accounting and Finance at California State University, East Bay. Reach him at (510) 885-2064 or firstname.lastname@example.org.
Insights Executive Education is brought to you by California State University, East Bay
As if competing against corporate America and big box retailers weren’t enough of a challenge, smaller merchants have to contend with tectonic shifts in the way consumers shop and pay for goods and services.
For instance, e-commerce wasn’t a factor just 10 years ago, but in 2011, U.S. online sales reached $194.3 billion according to the Commerce Department, and more than 90 percent of online transactions are paid by credit or debit card. Gift cards are the latest craze, according to First Data’s “2011 U.S. Gift Card Consumer Insight Study.” So merchants need to stay abreast of the latest and greatest in technology to support their revenue goals.
“Offering customers multiple payment channels opens up new sales opportunities, and, best of all, merchant services provides the ability to increase revenue without investing in additional staff, technology or brick and mortar,” says Lynne Duke, vice president and merchant services manager for California Bank & Trust.
Smart Business spoke with Duke about the opportunity to cost-effectively attract new customers through merchant services.
How has merchant services evolved to meet shifting customer preferences?
When credit and charge cards became popular during the 1950s, retailers needed a way to accommodate their customers and provide payment alternatives, so merchant services was born. Over time, both the services and technology have evolved due to changes in customer buying habits and preferences. Today, even the smallest merchant can compete against giant e-tailers by giving customers the ability to buy products online; purchase, redeem and reload cards; and even use a smart phone or tablet app to pay for goods and services.
How can merchant services improve the customer experience and help small retailers compete?
Providing customers with every possible purchase or payment option increases customer convenience and satisfaction. This will make it more likely that they’ll be a return customer. Many customers prefer to shop online or avoid credit card debt by paying with a check or debit card, so by providing these payment options you’ll help ensure prosperity.
How do merchant services help boost the bottom line?
Business of all sizes are now able to cost effectively sell their products and services across the globe. The only requirement is to have a merchant account with Web access and online processing. In today’s market, there is no need to invest in pricey point-of-sale systems when you can easily transact business 24/7 by accessing a virtual terminal via a personal computer. If a customer requires mobile processing for events such as fairs and art shows, wireless terminals and technology support those venues.
Which merchant services are most helpful?
Merchant services provides solutions to meet business needs for many industries, and helps level the playing field between small and large merchants by providing several benefits:
? Robust online reporting: Provides a real-time view of sales transactions and detail for customized reporting, transaction analysis and trend monitoring.
? Online gateway/virtual terminal: Eliminates boundaries by allowing customers to complete secure online transactions using any major credit or debit card. A virtual terminal provides the best solution for the ‘card not present’ environment.
? Wireless solutions: Accept credit card payments and print receipts at trade shows, farmer’s markets and other remote venues through a wireless credit card processing machine. Smart phones are entering the race and provide another avenue for payment processing.
What should merchants consider when selecting a provider?
The industry is very competitive with a mostly generic product offering; however, pricing strategies for merchant services are complex and vary dramatically by provider. Consequently, merchants need to scrutinize proposals, review pricing components, calculate the effective rate and estimate the bottom line impact of each pricing model before selecting a provider. For instance, the options available today are bundled, tiered or pass through. Each includes a per-item fee and a discount rate. Each price plan carries its own pros and cons. Always be vigilant about hidden charges and know exactly how much you’ll be paying each month for merchant services before you sign a contract.
Service levels and reliability also vary by provider. Surprisingly, some of the biggest processors actually have the least favorable service. Will someone be there to take your call 24/7? Will you be talking to a bank employee or an offshore representative? How quickly will they respond to equipment failures? Ask to see a copy of the provider’s service level agreement, and make sure the provider has a solid reputation in the marketplace, because success abounds when you partner with a trustworthy merchant services provider.
Lynne Duke is vice president and merchant services manager for California Bank & Trust. Reach her at Lynne.Duke@calbt.com or (619) 446-2240.
Insights Banking & Finance is brought to you by California Bank & Trust
Although energy executives can’t control some factors that influence the IPO market — like economic conditions, global turmoil and interest rate changes — they certainly have the power to ensure their company’s readiness for the big event. Creating a scalable infrastructure well before a public offering not only helps private companies manage growth and thrive in a highly regulated environment, but it also ensures a smooth transition by imposing a diligent, sequential preparation regimen.
“Building a strong, scalable infrastructure helps private energy companies handle the growth that accompanies public registration in a well-managed, compliant fashion,” says Alyssa Martin, executive partner in advisory services at Weaver.
Smart Business spoke with Martin about the steps executives should take to proactively prepare their private energy company for an IPO.
Why is creating a scalable infrastructure the top priority?
You’ll crash if you try to build the airplane once you’ve left the ground, so energy executives need to proactively prepare their company for future growth by uniting people, process and technology to create a scalable infrastructure. Of course, it’s important to assemble an upper and middle management team of veterans with energy experience and public company expertise, but preparing for the event in an organized manner is vital, particularly in private companies that may have limited staff and resources. Otherwise, your team can become overwhelmed with trying to juggle their regular duties with a hefty list of complex, pre-IPO tasks.
A best practice is for senior management to create a roadmap to shepherd their staff through the daunting IPO preparation process, as well as enhance the private company foundation to become a company that is publicly fit.
What are the first steps in the IPO preparation process?
Start by enhancing your financial reporting capabilities so you understand the key critical risks and key performance indicators that drive the business. Timely, accurate and usable financial reports allow you to make informed business decisions, meet shareholder expectations and prepare accurate disclosure statements. In addition, the data will help you analyze trends and craft a strategy so you’re ready to answer questions from underwriters, attorneys and auditors.
These experts want to hear the story behind the numbers, including a description of the factors that drive the business up and down. They also want assurances that the company has the necessary procedures to comply with the regulations imposed on public companies.
Creating robust procedures is the next step because they emanate from the financial reporting system. The procedures will help you spot and report changes in control and material contracts, since public companies must demonstrate that they can comply with SEC reporting rules and stay ahead of disclosure requirements by creating a warning system that alerts them to reportable activities.
Once you have enhanced the financial reporting process and created robust procedures, its time to undergo a comprehensive risk assessment. A facilitated risk assessment not only helps your company comply with regulations like Sarbanes-Oxley, the risk analysis and response plan also allows your team to view the entire risk portfolio, agree on the priorities, and tackle mitigation and other related tasks in a logical manner.
It’s important not to overload employees during the IPO preparation or the early stages of implementing public company standards, since people can only initiate and absorb so much change at once.
How can private companies prepare for an IPO by instituting corporate governance practices?
Using external consultants to assess risk, conduct gap analysis and implement procedures helps private energy companies evolve from being lean, internally driven organizations to substantial, regulatory-driven public companies. Policies tend to be unstructured and undocumented in private energy firms, but internal audit consultants working under the direction of an audit committee can help institute written procedures and documentation guidelines.
This provides employees with a chance to form new habits and comply with governance practices well before an IPO.
How can private companies strengthen internal controls and IT systems?
In private companies, risk is usually managed at the process level based on comfort with the employee base. In public companies, it must be managed at the enterprise level first and then balanced through controls at the process level to comply with the strict guidelines for business operations and Section 404 financial reporting requirements.
Accordingly, it can take 12 to 24 months and a hefty financial investment for private companies to adequately strengthen their internal controls and IT systems to meet public company standards. Have internal audit consultants assess your internal controls, highlight areas of potential risk and provide recommendations for improvement. Then start early, so your IT staff has the bandwidth to implement the required changes while performing their regular duties.
Finally, facilitate a smooth transition by building control components into each step as you navigate the public company requirements.
Do you have any other tips to help energy executives prepare for an IPO?
Seek outside assistance and guidance before embarking on the journey from private to public status. External consulting experts who have travelled the path and understand your industry can help you navigate the process and reduce the chances of a false start. Prevent errors, costly rework and stress by tackling each step in the process logically and sequentially.
Finally, create a scalable infrastructure so your company is ready to handle the growth that accompanies public status.
Alyssa Martin, CPA, MBA, is an executive partner in advisory services at Weaver. Reach her at Alyssa.Martin@WeaverLLP.com or (972) 448-6975.
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A popular theory in the business world is that three decades of burgeoning environmental controls and regulations have strangled the economy and undermined our economic competitiveness. Given the buzz, it’s no wonder executives often prefer to do the bare minimum or delay regulatory compliance as long as possible.
But what if adhering to the planet’s highest environmental standards actually created a competitive advantage by allowing agile, mid-size firms to zoom past their monolithic competitors? And what if compliance led to reductions in manufacturing and distribution costs? Being proactive and viewing compliance as an opportunity instead of an obligation could be just what the doctor ordered to heal our ailing economy.
“Adhering to the highest environmental standards can inspire innovation and the development of cutting edge products, because it can force everyone in the organization to coalesce around ways to meet the most stringent requirements,” says Dr. Gregory Theyel, associate professor of Business Management at California State University, East Bay. He teaches undergraduates and graduates about environmental, social and economic sustainability and helps companies with business development and the introduction of sustainability into their daily practices.
Smart Business spoke with Theyel about creating a competitive advantage by treating environmental compliance as an opportunity instead of an obligation.
Why should executives consider adhering to the highest global standards?
First movers often have the upper hand in the marketplace, and developing a product that adheres to the highest environmental standards can allow you to sell it anywhere on the planet without changing the design or manufacturing process to meet disparate regulations. Plus, proactive companies have more time to adapt to new regulations and grab market share by appealing to green-minded customers and touting their environmental stewardship. Meanwhile, the laggards stymie production, efficiency and profits when they wait until the eleventh hour to find new vendors or secure alternate manufacturing materials.
How can companies spot opportunities to benefit from environmental compliance?
First, interact with stakeholders to find out what they care about and anticipate their needs. Second, observe social change and stay connected to the community, because environmental laws usually begin as social movements before giving rise to new policies and regulations. For example, after environmental concerns surfaced following the Fukushima disaster in Japan, Germany decided to shut down its 17 nuclear power stations by 2022. The law has spawned a spate of new ideas for producing environmentally safe power across the European Union. Finally, stay in touch with regulators and engage in the law making process to give you a preview of pending legislation and the chance to influence the regulatory process by sharing information and ideas with political leaders and committee members. Regulators often seek input and solutions from the business community when evaluating new laws.
How can companies use open innovation to solve sustainability issues and reduce operating expenses?
Don’t focus on just R&D or fixing a single problem; invite everyone into the discussion and rethink your entire innovation process and business model. By attacking the problem holistically, you may uncover opportunities to sell ancillary services, reduce production costs, boost margins or enter new markets. For example, when an electronics manufacturer needed to find a substitute coating for its wiring products, it brought in customers and members of the supply chain to brainstorm solutions. In the process, they created an environmentally safe, yet more pliable material that not only opened the door to new markets, but also reduced manufacturing costs by facilitating the consolidation of several production lines. This company didn’t focus on meeting the minimum standards; it was successful because it seized the opportunity to rethink how it does business.
How can executives orchestrate an attitudinal shift?
The idea is to weave compliance and innovation into the culture of the organization and ensure that everyone is looking out for new ideas and the advent of environmental regulations. Start by asking employees to interact with stakeholders and participate in industry associations, and by hiring employees with collaboration skills so everyone is capable of nurturing relationships and developing strategic alliances across the entire supply chain. The idea of excluding outsiders is old school; successful companies remove the barriers to innovation by inviting everyone into the process. They even collaborate with competitors when it benefits the entire industry, such as for infrastructure development or standard setting. Finally, examine every component and step in the manufacturing and distribution process to identify chemicals and activities that are harmful to the environment. Once you’ve created a list, stay ahead of new regulations by investigating alternative systems and solutions. In the process, you may uncover ways to reduce waste, negotiate lower prices for raw products, substitute nontoxic chemicals or consolidate distribution simply by viewing compliance as an opportunity instead of an obligation.
Dr. Gregory Theyel is an associate professor of Business Management at California State University, East Bay. Reach him at email@example.com or (510) 885-3078.
Volatile exchange rates have become a permanent fixture of the post-2008 financial markets, turning a foray into the global marketplace into a fiscal roller coaster ride. Instead of reducing risk by locking in exchange rates from the outset, companies face uncertain profitability, cash flow and market value when they attempt to time transactions to capitalize on favorable exchange rates.
“You don’t have to put your hard-earned profits at risk to compete in the global marketplace,” says Doug Reichman, corporate foreign exchange advisor for California Bank & Trust. “You can enhance your competitive position and overcome vacillating currency values by utilizing foreign exchange services.”
Smart Business spoke with Reichman about managing currency exchange exposure by utilizing foreign exchange services.
What is foreign exchange exposure and how does it impact profitability?
Companies want to grow their top line by selling products and services overseas, but unless they solidify the currency exchange rate, the price and margin may go up or down each time an invoice is processed. If you buy parts overseas, manufacture in the U.S. and sell finished goods to a company in a foreign country, it’s difficult to forecast sales and profitability given the number of currency exchanges that occur over the course of a transaction. Executives often try to avoid volatility by demanding payment in U.S. dollars, but savvy competitors who deal in foreign currency have a distinct advantage in overseas markets.
How can business leaders identify foreign exchange exposures and opportunities?
You need to forecast sales and profits using a variety of exchange rates and scenarios to recognize and exploit the arbitrage. For example, if you plan to ship $1 million worth of goods to France in three months, you need to look at the current exchange rate and the recent swings to see what you may ultimately collect. In the process of reviewing the best and worst case scenarios, you may recognize an opportunity to manage risk or find that selling products in Asia is more profitable than Europe.
What constitutes an effective hedging strategy?
Effective strategies are customized, mitigate currency exchange risk and help the company achieve its financial goals. The challenge is that most companies don’t have the time or expertise to develop and execute an in-house strategy that relies on precise calculations, great timing and luck to balance gains and losses. For example, some executives try to protect their margins by paying early or late for products, depending on whether they expect the exchange rate to rise or fall in the future. Still others hope that gains and losses balance out over time, but that approach is a gamble in a volatile currency market.
How can a currency advisor help?
Whether your goal is to increase sales, enter new markets, protect profits or improve supplier relationships, a currency advisor has the expertise to help you meet your objectives. First, he’ll review your budget and understand your objectives; then he’ll trace every dollar to expose the risks and opportunities that occur during currency exchanges over the course of the business cycle. Finally, he’ll recommend a hedging strategy and customized suite of services so you can focus on your core business instead of monitoring the hourly swings in the foreign currency market.
Which banking services are most effective for controlling risk and why?
While banks offer many types of foreign exchange services, businesses often use the following products to facilitate profitable global commerce.
? Spot contracts: A simple way to handle payables and receivables in a foreign currency. Currency is converted based on the current rate, funds are wired and your account is credited or debited within two days.
? Forward contracts: Allow you to secure an exchange rate now for a specific settlement date within the next 12 months. Whether you’re buying or selling a piece of equipment, both parties are protected from swings in the exchange rate when the deal is settled.
? Window forward contracts: Essentially the same as a forward contract, except the settlement date is flexible in cases where the manufacturing process or product delivery date hinges on uncertain factors.
? Vanilla currency options: Like insurance, a currency option allows you to exchange currency at a pre-agreed rate on a specific date for a fee, providing protection in case the market moves against you.
? Demand-deposit accounts: Allow you to hold foreign currency and use it to pay employees or bills without exchanging the money to U.S. dollars.
Do you have any other tips for executives venturing into the international marketplace?
First, understand your financial objectives before you engage in international commerce. Develop a forecast and budget and consult with a qualified professional to ensure that your goals are realistic and achievable. Second, understand the exposures and don’t take unnecessary risks, because speculators can get burned in today’s foreign currency market.
Finally, talk to your banker before you make any decisions. Your banker can explain foreign exchange products in simple terms and recommend a strategy and portfolio of services to help you meet your business objectives. There’s no need to put your profits at risk, when your banker has the knowledge and tools to help you succeed in the international marketplace.
Doug Reichman is corporate foreign exchange advisor for California Bank & Trust. Reach him at firstname.lastname@example.org or (213) 593-2113
Not only is Texas a leading provider of crude oil and natural gas, but the state’s abundant sunlight and persistent winds offer businesses yet another opportunity to lead the nation, by tapping renewable energy sources to power manufacturing plants, distribution centers and office buildings.
But despite the fact that Texas companies can leverage more than 80 federal, state and local incentive programs to defray the cost of purchasing and installing renewable energy systems and energy conservation equipment, executives in the Lone Star state are still leaving money on the table.
“Renewable energy and conservation incentives and credits allow companies to demonstrate environmental stewardship, increase operating efficiencies and lower income taxes by defraying the cost of purchasing renewable energy and energy conservation equipment and systems,” says Laura Roman, CPA, CMAP, partner in tax and strategic business services at Weaver. “Unfortunately, the funds often go unused, and the programs won’t last forever.”
Smart Business spoke with Roman about the opportunities to lower taxes and operating expenses and positively impact the environment by taking advantage of underutilized conservation and renewable energy credits and incentives.
Why should companies consider switching to renewable energy or energy efficient building materials?
The benefits include the opportunity to lower energy consumption and utility bills by installing modern, energy-efficient manufacturing equipment, windows or HVAC systems, and the chance to promote a positive public image by launching green initiatives and supporting environmental stewardship. Plus, both tenants and building owners can utilize the incentive programs and reap the financial rewards. For example, the improvements help owners by boosting property values, while tenants benefit from increased energy efficiency, which ultimately reduces operating costs.
What types of incentives are available?
There are more than 54 federal and 28 state and local programs that can be used for equipment purchases or upgrades that reduce energy consumption or utilize solar, wind, ethanol and biodiesel energy. The programs include: tax deductions, credits and exemptions, loans and grants, rebates and performance-based incentives. For example, Texas businesses can qualify for commercial energy efficiency rebates, energy efficient incentive programs, green building corporate tax credits and sales tax exemptions for purchasing energy and water efficient products. While the U.S. Treasury Department offers renewable energy grants for projects involving: solar photovoltaics, landfill gas, wind, biomass, hydroelectric, geothermal, municipal solid waste, CHP/cogeneration, solar hybrid lighting, hydrokinetic, tidal/wave energy, and ocean and fuel cells using renewable fuels or micro turbines.
Best of all, executives don’t have to commandeer large amounts of cash to complete the projects because companies can tap different programs to train employees, purchase equipment or pay for installation contractors. So, companies can still invest in that much-needed marketing program or software upgrade if they utilize renewable energy incentives and credits to hire renewable energy specialists, replace inefficient manufacturing equipment or install a new HVAC system.
How do the incentives provide financial benefits?
Essentially there are five areas where companies benefit from renewable energy incentives and tax credits.
- Gross income exclusions. Companies can deduct the full amount of incentive payments or grant funds they receive for qualified renewable energy or energy conservation projects from gross income.
- Dollar-for-dollar deductions. There are no sliding scales or phased-out deductions. Companies can use every dollar they invest in qualified renewable energy and energy conservation projects to reduce their tax liability.
- Accelerated depreciation. Under IRS 179D, companies can depreciate the cost of purchasing new plant and energy equipment at a faster rate than typically allowed. So, instead of taking 39 years to recover the cost of a new lighting, HVAC system or building envelope, the owner of a 100,000-square-foot building can deduct up to $1.80 per square foot, or up to $180,000 in the first year.
- Ancillary funding and allowances. Funding is available to hire specialized workers or train current employees on the use of renewable energy equipment and processes.
- Multiple opportunities. Companies can tap multiple incentives for each project including loans, performance-based incentives, deductions, tax exemptions and grants, as well as property and sales tax rebates.
Should executives be aware of any special qualifications or rules?
The incentive plans and tax codes are fairly straightforward, but there’s no need to spend hours interpreting the criteria or deciphering nebulous clauses when a tax professional is intimately familiar with the nuances of each program. At the same time, he or she may help identify additional opportunities to complete the project without tapping cash reserves, and can often share tips and ideas from experience helping other companies navigate the process.
How can executives evaluate the ROI and choose the most advantageous projects?
Companies should discuss ideas and energy needs with architects, contractors and energy professionals so they can create a list of feasible projects and determine the material and labor cost for the various improvements. Review the list with an accountant, since he or she is familiar with the tax code and incentives and can provide an estimate of the cash outlay and ROI. Finally, act now. Remember, it costs virtually nothing to investigate these opportunities, and there’s no sense in waiting when the money to complete renewable energy or energy conservation projects is there for the taking.
Laura Roman, CPA, CMAP, is a partner in tax and strategic business services at Weaver. Reach her at Laura.Roman@weaverllp.com or (432) 570-3030.
Beginning in May, approximately 60 million people will discover some new information in their 401(k) statements. Not only will they find out whether they made or lost money, for the first time, many will see how much they paid in plan fees and expenses.
Of course, plan sponsors not only have to comply with the new regulations and meet their fiduciary responsibilities, but they also have to justify the plan’s administrative costs to participants, who have been resorting to class action lawsuits after enduring more than a decade of lackluster returns.
“Plan sponsors may face a tsunami of anger and questions from participants unless they get out in front of this change,” says Kyle Pifher, principal, retirement plan services for Findley Davies. “Otherwise, some participants may be shocked to discover how much they’re paying in plan fees.”
Smart Business spoke with Pifher about the impact of the new disclosure regulations and why plan sponsors need to take proactive steps to address employee concerns.
What are the new mandates?
There are two critical components in the new regulations. First, beginning in April 2012, third party providers and recordkeepers must disclose a detailed summary of all fees and charges that exceed $1,000 to plan sponsors as mandated by 408(b)(2). Then starting May 31, individual participants will see their portion of those fees on their plan statements as mandated by ERISA Section 404(a)(5).
Why did the DOL propose new regulations?
The need for greater transparency became apparent following the market correction in 2008, when participants openly questioned fees as their account balances plummeted. Essentially, there was no consistency in the way fees were assessed or disclosed, making it difficult for plan sponsors to uphold their fiduciary responsibilities, which include prudent selection of service providers, monitoring fees and ensuring that reasonable compensation is paid for services to maintain the plan. In other words, the DOL is simply responding to the long-standing need to disclose a detailed break-out of fees and expenses that were often consolidated into a single charge or hidden in the fine print.
How do the changes shift or alter the duties and responsibilities of plan sponsors?
The fiduciary responsibilities of plan sponsors are essentially the same, but the new laws and detailed fee disclosures will certainly illuminate their rigor and performance. For example, participants may wonder whether the fees are reasonable given the plan’s risk and returns, since fiduciaries have an obligation to act prudently and solely in the interest of participants by monitoring plan fees and ensuring that the charges aren’t excessive. So, sponsors will need to show how they benchmark third party fees and be prepared to explain their selection and oversight methodology. Participants may also question their investment choices.
What are the benefits for plan sponsors and the possible drawbacks or unintended consequences?
Certainly the increased transparency will help sponsors benchmark and compare fees across companies and industries and negotiate every charge, which could ultimately lower the total cost of the plan. The good news is that the fee disclosures may encourage participants to read their statements and manage their investments, because optimizing retirement plan returns benefits everyone in the organization. On the negative side, this could create animosity toward the employer if fees have not been disclosed and employees feel as if they have been left in the dark. And we’re seeing more class action lawsuits from disenchanted participants, who are protected by the prudent man rule, which states that trustees must manage another’s money using skill and care.
How are companies using this new information to assess service provider fees?
We’re seeing more companies engage an outside consultant to conduct plan reviews and side-by-side fee comparisons along with a greater desire to benchmark current fees against industry standards. As a result, more companies are soliciting bids and changing providers, especially if they feel that plan providers aren’t charging reasonable fees or delivering value.
How can plan sponsors head off problems before they occur?
Follow these steps to head off problems before they occur.
- Review third party fees and expenses: Know where you stand before participants receive their May or June statements, so you can anticipate their concerns and negotiate fee reductions or even change providers. It’s also prudent to review your plan’s investment choices to see if they are aligned with your employees’ risk tolerance and desired rate of return based upon the current needs and demographics of your employee population.
- Communicate transparently and proactively: Fully disclose all service fees using language and terms that resonate with your employee base. Describe the services they provide and how your current fees compare to those charged by other providers.
- Provide education: Offer educational meetings, brochures and call center support, so employees understand the role of plan providers and how they develop their fees. In fact, this is the perfect time to review retirement plan fundamentals and the current investment options; because your 401(k) isn’t a benefit unless it actually helps your employees meet their retirement goals.
Kyle Pifher is principal, retirement plan services at Findley Davies. Reach him at KPifher@findleydavies.com or (614) 458-4651.
Why let a lack of staff or resources curtail your expansion plans, when the expertise you need to develop new markets is just around the corner. Business school students have the ability to conduct research, assess opportunities and develop comprehensive marketing plans, and since they’re supervised by faculty, you don’t have to spend a fortune to tap some great business minds.
“You don’t have to hire additional staff or expensive consultants to solve business problems, when students and faculty are capable of doing the work for a fraction of the cost,” says Dr. Terri Swartz, dean and professor of Marketing for the College of Business and Economics at California State University, East Bay.
“Instead of shifting projects to the back burner, tackle them by leveraging the resources at your local B-school,” says Luanne Meyer, director of the Business Opportunity Program at California State University, East Bay.
Smart Business spoke with Swartz and Meyer about the advantages of developing a partnership with a local business school.
Why should executives consider partnering with a local business school?
Swartz: Student projects provide companies with the opportunity to develop the work force of the future and evaluate prospective employees, without incurring the managerial responsibilities and costs of a formal internship program. We help company representatives scope out the project, while course professors guide and supervise the undergraduate and graduate students during the assignment. The concept is similar to the tried and true programs used in teaching hospitals and dental schools, where students gain hands-on experience under the close supervision of faculty experts.
Meyer: Busy executives like the fact that they have access to our faculty brain trust, so they can hear about the latest marketing trends or consider another solution to a challenging problem.
How do student projects benefit all parties?
Swartz: Class projects give business students the chance to augment their classroom studies through experiential education, so they hit the ground running when it’s time to enter the job market. At the same time, the Business Opportunity Program gives the university the chance to partner with local businesses, share faculty expertise and give back to the community.
Meyer: Companies have limited time and resources, so it can be difficult to source the right interns or freelancers and shepherd them through a complex project. But the program office does the legwork by evaluating your needs and connecting you with a faculty adviser who has the right experience and knowledge to manage your project.
Are some projects more appropriate for students than others?
Swartz: The students work on pricing and positioning projects, product launches, opportunity analyses and marketing communications plans and they even find solutions to human resources or supply chain issues. Projects typically last from two to nine weeks and are often divided into phases, so client partners can monitor the team’s progress. For example, our students have developed recruiting strategies for the FBI and helped Lawrence Livermore Labs develop a plan to commercialize one of its licensed technologies.
Meyer: Many projects involve the development of new revenue streams for companies in both the non-profit and for-profit sectors, and through our entrepreneurial studies program, we often help small businesses find innovative ways to expand. For example, we are currently helping a small detergent manufacturer reposition its product for the Latino market by designing new packaging, creating a new message and developing a comprehensive marketing campaign. We can help companies use social media to reach new customers, develop a marketing database or lower costs by utilizing cutting edge technology. In fact, our students can even lower the cost of using a major consulting firm for marketing projects by conducting some of the background research or designing a portion of the program.
How can companies work with B-schools to develop talent pipelines?
Meyer: Client partners have numerous opportunities to interact with the students during a project, which gives them a chance to assess their capabilities and gauge their interest in future employment. For example, a company representative usually addresses the class before each project in order to provide background on the company and articulate its objectives. In turn, students prepare a proposal, map out the specific milestones and timeline and state the need for client support and involvement during the project.
Swartz: The professors align students with projects that match their interests and talents, which increases the chance that the parties will end up working together in the future.
What’s the best way to initiate a mutually beneficial relationship?
Meyer: At CSU, businesses can simply contact the Business Opportunity Program office to initiate a dialogue and assess whether we can meet each other’s needs. We typically need a few weeks’ lead time to scope out a project and get it on the schedule before the start of the quarter.
Swartz: We ask our client partners to cover nominal expenses like office supplies or occasional meals and transportation costs for the students, and we certainly appreciate reasonable donations. But all in all, student projects are a great value when you consider that you’re gaining access to our faculty brain trust and discovering a future star performer during the process.
Dr. Terri Swartz is the dean and professor of Marketing for the College of Business and Economics at California State University, East Bay. Reach her at (510) 885-3291 or email@example.com. Luanne Meyer is director of the Business Opportunity Program at California State University, East Bay, www.csueastbay.edu/businessopportunityprogram. Reach her at (510) 885-7135 or firstname.lastname@example.org.
The latest data from the Federal Deposit Insurance Corp. shows that a permanent shift has occurred in the lending environment. Although overall commercial and industrial lending by banks has increased for five straight quarters, loans to small businesses with $1 million or less in annual revenue have been shrinking since June 2008.
Unless business owners make a concerted effort to understand underwriting requirements and adapt their approach, they will have a hard time securing capital at fair prices.
“Owners can no longer submit a loan package and wait for approval,” says Betty Rengifo Uribe, executive vice president of the Business and Personal Banking Division at California Bank & Trust. “They have to be engaged in the process and breathe life into their numbers, so bankers have enough information to approve their loan.”
Smart Business spoke with Uribe about the changing lending climate and why executives must adapt their strategy to secure a business loan.
How has the lending climate changed?
Bankers have to comply with a host of new regulations and stringent underwriting standards that have permanently shifted the way we consider and grant business loans. We do not rubber stamp applications — we want to hear the story behind the numbers, get to know applicants personally and even tour their facilities. For example, it’s not enough to understand the business and its customers’ needs; bankers need to understand the customers’ customers to validate the revenue projections and ensure the ability to service debt. We want to know how the economy has impacted the industry, how the business has adapted its strategy and why the company will be successful in the future. Of course, having an inside look at the business not only provides loan officers with the confidence to recommend the loan package, but they’re more likely to lobby on the borrower’s behalf when the loan comes up for approval.
What’s the best way to research the market and identify a prospective lender?
Start by researching prospective lenders on the Internet before requesting an appointment with a loan officer. Ask about the banker’s background and experience to ensure that the lender or branch manager has the knowledge, interest and enthusiasm to earnestly evaluate your business request. Move on if a banker seems lackadaisical. Make sure they have the expertise in your industry and can add value to your business. If they have the business expertise, they will be poised to help your business grow.
What should executives bring to the initial meeting?
Provide a framework to support your loan request by bringing an introductory memo or business plan that describes the history of your company, the profiles of your management team, a summary of your capital needs and the purpose for the funds. Also, bring copies of your tax returns covering the last two to three years and perhaps provide the contact information for your CPA or CFO so he or she can answer the loan officer’s questions and validate the efficacy of your financial assumptions.
How do lenders evaluate a borrower’s credit worthiness utilizing the 5 Cs?
Bankers consider these five characteristics to evaluate the creditworthiness of potential borrowers.
? Character: Reviews the owner’s and the company’s reputation as well as the thoroughness of the loan package.
? Capacity: Measures the borrower’s ability to service debt from current cash flow by reviewing a summary of monthly non-discretionary payments. Normally, lenders look for combined personal and business cash outflow to be no more than 40 percent of the cash inflow.
? Capital: Considers the borrower’s equity along with his or her initial investment. Remember, a banker will be more willing to invest alongside borrowers who invest in their own company.
? Collateral: Contemplates secondary sources of repayment should the business struggle financially, such as the ability to liquidate receivables or inventory, stocks and bonds or other assets like real estate.
? Conditions: Examines the industry’s stability, trends, competitive environment as well as other external factors that influence business success, including the overall economy.
What should owners include in their business plan?
It’s fine to use a template as long as your business plan covers the history of your company and provides an in-depth trend analysis covering the last three years. A brief bio of all key management members is always a good idea to include. This shows the lender that you have a solid management team with the expertise to grow your business. Loan officers want to hear about the obstacles you’ve faced and how you’ve overcome them, since resilient and resourceful executives will probably succeed in the future. Finally, provide a financial forecast and describe your plans for the next two years.
Are there other tips that can help owners navigate the lending process and secure a business loan?
Get to know the loan officer, underwriter and branch manager because each one plays an important role in approving your loan. Request a list of required forms and documents and submit everything at once. Don’t raise red flags by omitting answers in the loan application; just insert N/A if the question doesn’t apply. Finally, follow up at every stage of the process to make sure your request is being considered.
Betty Rengifo Uribe is executive vice president for the Business and Personal Banking Division at California Bank & Trust. Call (800) 400-6080 to reach the branch nearest you or visit www.calbanktrust.com to learn more about California Bank & Trust.