Chelan David

Tuesday, 26 August 2008 20:00

Getting good advice

For many general legal services, such as residential real estate transactions, simple wills and other day-today legal issues, general practice lawyers are likely to provide you with the best service at the most reasonable price. If the matter is more complex, however, you should seek the counsel of a lawyer who acts as a specialist and focuses on a certain area of law.

“If you have a more complex issue, like a patent matter, a business to pass on to your loved ones or a complex commercial transaction, then you’re likely to need someone who works primarily in that specific area of the law,” says William P. Hampton, co-chairman of the Executive Committee at Secrest Wardle.

Smart Business spoke with Hampton, a former Oakland County Circuit Court judge, who is frequently asked for recommendations of the names of attorneys for businesses and individuals who are in need of potential legal representation, how to understand costs and fees and what types of results can be expected.

How should one go about determining if he or she needs legal representation?

A good way to determine whether you have a legal problem or need legal assistance is to ask a lawyer. Without speaking with a lawyer, you may not know if you need help. To make this important step easier, many lawyers will initially discuss and determine whether you have a legal problem without charging a fee. Once you have decided which lawyer to call, you should ask the lawyer whether he or she charges a fee for the initial consultation and, if so, how much. This meeting is very important to understanding whether you need legal representation.

What information should be obtained when meeting with a prospective lawyer?

Ask the lawyer how much time will be needed for the initial consultation and set aside an appropriate amount of time in your schedule. Familiarize yourself with all of the facts available about your legal matter before the meeting. For instance, if you want your will drafted, put together a general inventory of your assets and specific items that you wish to leave to your beneficiaries as well as a list of the full names and addresses of those beneficiaries. Ask the lawyer in advance what documents you should bring with you and gather any other relevant documents that you think may be helpful.

What questions should be asked?

It is important to discuss with your lawyer how much experience he or she has in dealing with cases similar to yours. If your lawyer doubts his or her competence to handle the matter then be sure to ask for a referral to other lawyers who are familiar with cases such as yours. Also, ask about the outcome of the other cases that the lawyer has handled.

Be perfectly candid during the meeting about all aspects of your matter and avoid withholding any information regardless of whether or not you believe it will help or hurt your matter. Make sure your lawyer covers both practical solutions to the problems as well as all of your options under the law. Do not try to convince the lawyer of the merits of your position by exaggerating the facts. If you know, make sure you tell the lawyer the position taken by a potential adverse party.

How are legal fees typically calculated?

You should understand from the first meeting how much your lawyer will charge to handle your case. Costs are different from fees. Note that you are usually responsible for court costs, filing fees, etc.

An important step to more accurately estimate the cost of legal representation is to make sure your lawyer fully identifies and explains the legal problems you face. Your lawyer should then give you some idea of the amount of legal fees as well as expenses for the action that he or she is going to handle for you. Whether you are charged on an hourly basis or a contingent fee basis, the reason for the fee should be fully explained to you in writing.

How can one get a sense of how long the matter will take?

Ask your lawyer how long it has taken him or her to bring cases similar to yours to a conclusion in the past. You should inquire if your case involves issues more complex than his or her previous cases and whether or not that will affect the expected time to bring this case to a conclusion. Also, ask your lawyer what he or she believes to be the best-case as opposed to the worst-case scenario with regard to the amount of time that he or she expects the case will take.

WILLIAM P. HAMPTON is co-chairman of the Executive Committee at Secrest Wardle. Reach him at or (248) 539-2826 .

Saturday, 26 July 2008 20:00

The green commitment

Corporate sustainability is a business approach aimed at creating long-term value for stakeholders by implementing strategies and practices that protect and support the natural resources that will be needed in the future. Companies that have sustainability programs in place embrace opportunities and manage risks that arise from economic, environmental and social developments.

In a rapidly changing world, now is the time to implement a corporate sustainability strategy, says Richard Plewa, senior vice president and director of corporate sustainability for Comerica Bank. “Global drivers, including water scarcity, resource and food scarcity, energy security issues and climate change, are going to transform the way that economies work.”

Smart Business spoke with Plewa about corporate sustainability, why a growing number of companies are embracing this new business model and how a company can benefit from sustainability.

What are the primary principles, or pillars, of corporate sustainability?

The basic concept of sustainability is to meet the needs of people today in ways that do not compromise the ability of future generations to meet their needs. When you take the concept — which comes from a 1987 United Nations commission that looked at the trade-offs between economic development and environmental quality — and translate it into today’s business setting, it is clear that business is more than just about profits. In fact, a business’s total performance needs to be viewed as its financial performance plus its social performance plus its environmental performance.

Why are more and more companies embracing corporate sustainability?

The world is changing quickly. As we look around us, we see that there are concerns about energy, national security, climate change and water and food security. More and more people are waking up to the reality that we have to live on the planet in a way that is different from how we have in the past. By the middle of this century, we will have 10 billion people on this planet — right now we have 6.7 billion people — and there is only one earth’s worth of resources to meet the needs of all of these people. The resources will not go very far unless we learn to use them very differently. We can’t afford the wastefulness; we can’t afford to continue pumping greenhouse gases into the atmosphere. Recent advances in science have enabled us to see that ecosystems all over the planet are already in decline. As people wake up to this reality, businesses are waking up to the reality that people and businesses have new needs, and we need to offer new products, services and solutions to help people live in this world of resource constraints and accelerating climate change.

How should a company go about formulating a sustainability strategy?

You need to take a good look at your stakeholders — customers, employees, host communities, suppliers and those who provide capital to your business — and you need to understand how your business model and the products and services that you provide are going to be impacted by the global changes we are facing. Having figured that out, you need to think about how the organization should respond to those challenges. What will shake out of the analysis is a list of priorities for action that is going to enable you to manage the risks of operating in this new world and drive the way you decide to pursue opportunities.

How can a business benefit from sustainability?

Businesses that take sustainability seriously are going to be better managers long-term of both risk and opportunity. This means that they will be able to create value for their shareholders and other stakeholders by reducing costs, reducing risks, growing revenues and improving their brand and company reputation. Having a sustainability program in place also helps to both attract and retain high-quality employees who care about which companies they work for and want to do more than just generate wealth — they also want to make the world a better place while they do it. A company with a sustainability program tends to attract young creatives and set loose a wave of innovation.

Why is it so important to emphasize actions rather than words when it comes to corporate sustainability?

It is important to walk the talk because a good many people are justifiably skeptical about claims that aren’t matched with deeds. In fact, the term ‘greenwashing’ refers to companies jumping on the bandwagon of the green movement without doing the deep work of changing the kind of company they are and making a substantive commitment.

RICHARD PLEWA is senior vice president and director of corporate sustainability for Comerica Bank. Reach him at (734) 930-2401 or

Wednesday, 25 June 2008 20:00

What’s your worth?

Enterprise value is an amount that represents the entire economic value of a company. In essence, it is a measure of the takeover price that an investor would need to pay in order to acquire a firm. Calculated by adding a corporation’s market capitalization, preferred stock and outstanding debt together and then subtracting cash and cash equivalents, enterprise value is a more accurate reflection of a company’s takeover cost than market capitalization alone.

In order to increase enterprise value, says Lou Savett, managing principal of the strategic transaction services group for Gumbiner Savett Inc., it is important to position your company for future earnings growth. “The way to increase earnings is by taking a hard look at your marketplace and seeing to what extent you can expand it,” he explains.

Smart Business spoke with Savett about enterprise value, the importance of having a strong management team in place and how to best preserve the value of a business when in the selling process.

What steps can a company take to increase its enterprise value?

First of all, a company has to make a determination about where they fit in the marketplace. There are wholesalers, retailers, manufacturers and service companies, each of which has a separate group of component ingredients that makes it more or less valuable. Underlying all of that is the fact that the enterprise value of a company is almost always determined by some version of discounted future cash flow. If you are able to diversify your market, get into areas where there is less price resistance and get into rapidly expanding marketplaces, then you are increasing enterprise value because the future cash flows will be greater than they are now.

We also know that pricing multiples change with regard to the future components of the company’s vision. If you are not growing then you are unlikely to get a high multiple. If you are growing very rapidly, in a way that people believe will continue, you might get a multiple that is two or three times higher.

What is the main driver that affects the enterprise value of a business?

The main driver will always be earnings and the question will always be: What sort of future earnings will a prospective buyer be convinced can be attained? The higher this number is the better off you will be. Philosophically speaking, there are only two ways to increase business. One way is to sell the same product to more people. The other, is to sell the same people more products. You need to do both of those things. Wells Fargo Bank, for example, recently bought an investment banking group and a national insurance brokerage company, expanding the services that it can sell to its clients.

How can a strong management team increase enterprise value?

A company needs to take a hard and sincere look at its management. Generally speaking, when we walk into a company there is usually one key person. If you ask that person, he will quickly tell you that the company is what it is because of his efforts. If you tell that to a prospective buyer the pricing multiple will be reduced — nobody wants to take a chance on the genius being there forever. On the other hand, if you can say we have a management team that through thick and thin can run this company for its highest and best purposes then the amount of enterprise value goes up.

What role does enterprise value play in succession planning?

Enterprise value comes to the fore with any type of exit strategy because it accurately predicts what the person or group who is exiting will get in the way of benefits. When you do your succession planning, you want to build your enterprise value up to a certain point. For example, let’s say that your succession planning involves putting together an Employee Stock Ownership Plan. Your contributions to the plan are in percentages of your capital stock, so if the enterprise value keeps going up, you put less shares in the plan and keep more for yourself. You will get a bigger bang for your buck tax wise if you continue to increase enterprise value while you’re in the midst of succession planning.

How can business owners best preserve the value of their business when in the selling process?

We advise our clients to bring together their core management group and get them involved in the selling process. If you don’t do that people will get scared that their job doesn’t have a future and either leave to a competitor or make other plans that aren’t in your best interest as a seller. As you move forward in the selling process it is important to determine what to tell your customers and vendors and when to tell them. All of this has to be handled very delicately. If you don’t, and something goes wrong in the selling process, you’re going to lose a lot of value.

Monday, 26 May 2008 20:00

Streamlined billing

Electronic bill payment solutions allow businesses to trim costs while improving efficiencies. By eliminating the need for customers to deliver or mail paper items, payments enter the collection stream quicker and with less effort than through traditional methods.

Electronic payment alternatives enable bill payers to make payments at their convenience 24 hours a day, seven days a week through a variety of convenient electronic options including debit cards, major credit cards and electronic check. Companies using an electronic bill payment solution can improve their record keeping while saving time and costs.

“Electronic bill payment allows a company to automate the payment collection and posting processes,” says Joy Gilmer, senior vice president of treasury management for Comerica Bank’s Western Market. “It reduces or eliminates exception items, therefore saving time in internal costs.”

Smart Business spoke with Gilmer about electronic bill payment, how the concept works and how companies can benefit from the solution.

In what ways have banking solutions advanced during the past several years?

In the past, accounts were settled with cash and checks either on-site or by mail. Banking solutions have advanced to mobile solutions — transactions can be conducted electronically, over the Web or over the telephone line. With checks now being intercepted and converted into electronic form, the process and exchange can be conducted electronically.

How does the concept of electronic bill payment work?

Electronic bill payment allows companies to offer their bill payers an electronic payment alternative without making a large investment in infrastructure and staff. Payment options include making payment via the Internet, interactive voice response or a human contact center representative.

A company should first try to understand what its customers are asking for based on customer comments, typically through its existing sales and customer service teams. It then sits down with its bank respresentative and begins to form a customized electronic bill payment solution, which can include payment delivery channels, settlement choices, payment parameters and security controls.

What benefits does an electronic bill payment solution provide to business customers?

The electronic bill payment solution is a value proposition for companies and enables them to better serve their customers by providing additional payment options, flexibility and convenience. Customers are able to make their payments when and where it is convenient for them to do so. A company is now empowered to collect payment 24-7, which accelerates the accounts receivable timeline and results in quicker deposits of funds. It also automates the updating of the accounts receivable system, reduces fraud, eliminates audit concerns related to the storage of private financial data of customers, eases account reconciliation tasks and provides new customer service tools for internal staff.

What kind of fraud protection and security measures are incorporated into an electronic bill payment solution?

There are multiple fraud protection security measures, which include the number of days a payment can be made, number of payments made in a day or specified time frame and ZIP code validations. Companies can restrict their customers and only allow them to pay via a particular settlement option, such as a credit card, particularly if the company has already experienced returns for non-sufficient funds in electronic checks. Also, card verification values can be set up, which are similar to a security code on the back of a credit card. In some cases, a company may elect not to accept an electronic payment by using a negative file, also known as a stop file. You see this feature used a lot with mortgage companies because in some cases accepting a payment could cause legal issues down the line.

How can electronic bill payment be branded with a company’s own identity?

At Comerica, with our Easy Pay option, we brand the solution with the client’s own logo, look and feel. If the company chooses the Internet-only solution, our client needs to provide us with its current Internet site address and a file containing its logo so that our site will look like the client’s. If the client cannot provide us with those items, we will work with the company to build a site.

JOY GILMER is senior vice president of treasury management for Comerica Bank’s Western Market. Reach her at (714) 435-3931 or

Friday, 25 April 2008 20:00

Before and after

In the current economic environment, obtaining a business loan can prove to be a challenging task. In order to improve your chances, it is important to understand what criteria banks are looking at when making their decisions.

It is also important to understand that the relationship established between a bank and a borrower does not conclude once a loan has been disbursed.

“A commercial banking relationship is not just about providing loans and banking products to a customer,” says David Song, first vice president of Comerica Bank’s Western Market. “A bank needs to make the utmost effort in understanding the dynamics of its customer’s business to be able to provide optimal banking solutions to the customer in a proactive manner.”

Smart Business spoke with Song about the hurdles that businesses must overcome in order to obtain a loan, how banks analyze risk and under what circumstances yield requirements may be waived.

What basic hurdles must be surmounted in order to obtain a business loan?

In general, there are six hurdles that businesses are subject to when obtaining loans:


  • Credit policy: Every bank has a set of credit or loan policies. These policies generally determine the types of lending transactions acceptable to the bank.



  • Credit analysis: This hurdle focuses on the risk of the proposed loan transaction.



  • Loan structure: This determines whether the repayment terms and conditions sufficiently match the repayment capabilities of the borrower.



  • Loan and account profitability: A loan request may pass the first three hurdles with no problems but fail miserably if it provides little profit to the bank from the transaction.



  • Loan documentation: A loan cannot get funded until it is properly documented and in compliance with guidelines and policies.



  • Loan management: The final hurdle focuses on how the fully disbursed loan is managed by the bank. It mostly involves the bank’s internal procedures but requires the borrower’s compliance with the terms and conditions of the loan.


How does the bank analyze the risk of a proposed loan transaction?

The credit analysis hurdle is ultimately a test of management’s skills and capacities. It is management’s policies, decisions, investments and actions that determine whether the bank gets repaid. Credit analysis involves historical analysis and projected analysis. While historical analysis focuses on past financial performance and the borrower’s track record in repayment of debt, the projected analysis focuses on the borrower’s prospect of generating sufficient cash in future periods to service the debt.

There are five possible sources of cash to pay interest and amortize debt: cash from operations, additional equity, sale of nonoperating assets, additional borrowing and liquidation of business. A bank analyzes and assesses the prospect of generating cash from all of these sources with primary emphasis on the first one. The better the prospect of the first source, the more likely the loan will get approved.

Why do banks establish minimum yields?

Just like the businesses receiving the loans, banks must ensure that their cash returns exceed their expenses. Most banks have established minimum yields on loan transactions, depending on the loan size and risk levels. Thus, a loan proposal is subjected to a set of minimum yield requirements, which consider the cost of the transaction in terms of the cost of funds and overhead expenses as well as projected revenue from the interest income, fees and deposit balances.

Under some circumstances, yield requirements may be waived. Sometimes, a bank may do certain transactions that do not meet the minimum yield requirements if there are other relationships with the same borrower or related entities that provide sufficient yield from the overall relationship. In the current difficult banking environment, this has become extremely important to all banks.

What type of documentation is required for funding to be released to the borrower?

Full documentation of all of the agreed-upon terms and conditions, including the loan amount, interest rate, fees, repayment schedule, collateral, UCC (Universal Commercial Code) filings where appropriate, loan covenants, reporting requirements and so on, must be documented before funds can be released to the borrower. Required documents include a promissory note, loan agreement, security agreement, guaranty (most cases), resolution to borrow and agreement to furnish insurance. Depending on the case, additional documentation may be required. For example, when there is a shareholder loan or loan from an affiliate, banks may require a subordination agreement.

How important is the banking relationship after a loan has been disbursed?

The relationship between the bank and the borrower does not end with the disbursement of the loan but actually begins with the funding, as the bank and the business continue to develop a long-term mutually beneficial partnership. These days, everyone talks about relationship banking, but it is much easier said than done. Ongoing communication based on trust and sincerity usually forms the basis of an enduring relationship between a bank and its customer.

DAVID SONG is first vice president of Comerica Bank’s Western Market. Reach him at (562) 463-6502 or

Tuesday, 29 January 2008 19:00

A two-way street

Forging a relationship with your banker can pay huge dividends. By openly and frequently communicating your business needs, you allow your banker to become more proactive and less reactive. A collaborative banking relationship benefits all parties involved: Companies receive the support they need and bankers have the opportunity to offer targeted banking solutions.

In order to fully take advantage of your bank’s products and services, it is important to meet with your banker on a consistent basis and provide as much information as possible.

“I’ve never heard of a situation where we had too much information — the more the better,” says Melissa Pollard, senior vice president and group manager of Comerica Bank’s North Orange County Middle Market Group.

Smart Business spoke with Pollard about establishing a personal relationship with one’s banker, how to prepare for banker meetings and what type of service and performance standards should be expected.

Why is it so important for business owners to establish a relationship with their bank?

Establishing a relationship with one’s bank is very important because it adds color to the business owner’s situation. We have the benefit of financial statements and quantifiable information, but it’s the qualitative information that we gain by getting to know the business owners and senior management. In fact, when we make credit decisions, one-fourth of our assessment is based on management. From a banker’s perspective, it is important to have a relationship with a company’s key individuals so we can effectively rate management and make proper evaluations.

How often should business owners meet with their banker?

It really depends on the business. As bankers, we try to tailor our approach based upon the client’s preferences. There are some clients that love to meet monthly or, during the throes of a transaction, even weekly. Other clients prefer a quarterly approach. We strive to be proactive and upfront in asking what type of schedule best meets our clients’ needs.

How should a business owner prepare in advance for a meeting?

A meeting with your banker provides the opportunity to showcase your accomplishments over the past quarter or however many months it has been since the previous meeting. In order to make the most out of a meeting, it is important to have specific objectives in mind. This can range from helping your banker get his or her arms around a new business opportunity to discussing your recent projections.

Bankers don’t like surprises, so the more information the better. Being proactive and sharing as much information as possible helps us to anticipate future needs. It is so much easier if we know in advance that a client may miss one of the bank requirements because then we have the opportunity to modify or alter the requirements to keep that client within compliance.

What type of information should be brought along?

If it is a brand-new company that we’re still trying to get to know, it is important to provide historical information and the background on key managers, including resumes or business biographies. This allows us to have an understanding on how the company has evolved over the years and possibly over different generations.

If it is an existing client, we already have the benefit of this historical information, so we need the updated financial performance relative to the client’s business plan. Also, it is important to provide qualitative information that rounds out the numbers and enables us to see what is behind the obvious mathematics. A business might think it is bringing in too much information and will bore their banker, but there can never be too much information.

Who should be present at banker meetings?

It depends on the size of the company. With some companies, we deal with the business owner and/or CEO, which can be the same person. But sometimes it is the CFO that we are working with on a regular basis. If the CFO makes the final call in regards to financial decisions, then developing a strong relationship with that person is just as critical as it is with a business owner or CEO.

What type of service and performance standards should owners expect from their banker?

They should expect the same standards that we enjoy from our clients, which include being able to undercommit and overdeliver and being a business partner through thick and thin. It is easy to provide banking products and services when factors are very favorable, but our most loyal of relationships have been solidified during situations where there have been bumps in the road.

Bankers should stand behind their client and give candid feedback in terms of what they can and cannot do. If it is something that truly does not fit their area of expertise, they should do their very best to refer outside resources. And the relationship works both ways. By providing candid information and being forthcoming about their business challenges, clients will make it easy for their banker to service their needs.

MELISSA POLLARD is senior vice president and group manager of Comerica Bank’s North Orange County Middle Market Group. Reach her at (714) 940-6751 or

Tuesday, 29 January 2008 19:00

A strategic exit

The failure to properly prepare for the sale of your business can put family members and others connected to your venture at serious risk. A well-thought-out strategy, however, can ensure that others will benefit from the wealth you have created.

“Planning for your eventual departure is the best thing that you can do for your family, the nonprofit organizations that you support and other enterprises that you care about,” says Mike Silva, senior vice president and group manager of Comerica Bank.

Smart Business spoke with Silva about exit planning, the importance of clear financial reporting and how to preserve value during the selling process.

How should business owners go about preparing for the sale of their business?

Buyers of businesses today, more than ever, are focused on purchasing a stream of cash flows. Whatever you can do to enhance and grow that stream will directly accrue value to you as the seller. Consistently working to maximize EBITDA (earnings before interest, taxes, depreciation and amortization) is important in order to show a positive growth trend.

One seemingly simple way to boost cash flows and maximize EBITDA is to increase the price of your goods or services. Oftentimes, business owners are reluctant to increase prices because they are worried that such a move will drive away customers. However, we’ve found that the market today is more open to price increases from businesses that are leaders in their field because of the perceived value that is associated with doing business with these companies. We are in an environment now where we’ve seen substantial increases in the cost of commodities and people are used to paying more.

How far in advance of an anticipated departure should exit planning occur?

I don’t know if you can start too early. A couple of years in advance of an anticipated departure would be the minimum. You should start by talking to a mergers and acquisitions attorney, your CPA and your banker. Also, it might be helpful to speak with some investment bankers about ways to enhance the value of your business.

Why is it so important for a company’s financial reporting to be clear and accurate?

When you start the process of selling your business, it is important to think about the quality of information that prospective buyers will be looking at because you will want them to write a check for five to eight (or more) times the EBITDA of your business. We see a lot of deals where valuations are substantially decreased during the due diligence process because the quality of information is subpar. Having good, clean, consistent financial reporting is crucial.

What are some common techniques for exiting a business?

There is a wide gambit of techniques available ranging from handing or selling the business to a son or a daughter to hiring an investment bank and conducting an auction. Questions to consider in identifying the appropriate method for your situation include: Do you have potential successors involved with the business? Do you have a management team to whom you would like to sell the business? Would you be OK with selling the business to an outsider?

Also, a lot depends on the size of your business. If it is a smaller business you might be able to sell it to your management team and take a payout from future cash flows over a period of time as your payment. If you have a larger business this strategy won’t work and your options would be to sell to a financial or strategic buyer.

How should owners go about determining the value of their business?

It is important to keep track of multiples of cash flow paid for businesses in your industry. This information can come from talking to competitors, others in your industry, M&A lawyers, CPAs and investment bankers. Ultimately, however, the value of your business is what the market will pay when you decide to sell it. Ideally, you would like two or more potential acquirers to fall in love with your business and then you can bid them against each other.

During the selling process, how can owners best preserve the value of their business?

Losing focus on day-to-day operations during the selling process is a common problem, especially for entrepreneurial businesses where the owner is the primary operator. The due diligence, negotiations and sales process can be all-consuming. If you’re the person responsible for making sure everything runs smoothly, it can be very hard to concentrate on both selling and running a business. It is important to have a good internal finance person to keep you on track.

Also, in order to preserve value, it is important to be extremely selective to whom you market your business. If, and when, your competitors get wind of the fact that your business is up for sale, they are certainly going to try and exploit this and try to take away your customers.

MIKE SILVA is senior vice president and group manager of Comerica Bank’s San Francisco and North Bay Middle Market Group. Reach him at (415) 477-3274 or

Tuesday, 29 January 2008 19:00

Audit expectations

The Sarbanes-Oxley Act, introduced in 2002, has had a significant impact on the auditing process. Over the past several years, heightened regulation has increased the amount of audit evidence that must be obtained and led to more stringent documentation requirements. Against this landscape, it is more important than ever to employ the services of a quality independent auditor.

Exceptional client service is the hallmark of an effective auditor, says Sheldon Ausman, principal and managing director of client services for Gumbiner Savett Inc.

“Independent auditors should be evaluated on the quality of the service they provide their clients,” he explains. “A company has the right to expect exceptional quality of service as described in the accounting firm’s engagement letter.”

Smart Business spoke with Ausman about finding the right independent auditor and issues that audit committees are currently facing.

How can companies locate an independent auditor that recognizes their needs?

If I had a company with 25 to 35 employees, I would try to find an accounting firm that was organized in a manner to accommodate and understand the needs of a company our size. The chemistry between the independent accountant and the company is related to the size of both institutions. There will be a difference in approach between one of the major accounting firms compared to a smaller accounting firm in recognizing what your needs are. For example, when I was with Arthur Andersen, because of our size, scope of practice and the organization of our firm, we found that many companies were too small for us to provide the equivalent service of a smaller firm. Not only because of size but because we were structured to provide service focused on larger entities.

Why is it important for companies to hire auditors and accountants with experience in their industry?

The bottom line is the ability to communicate. There are terms and procedures that are unique to one industry that aren’t typical of another. For example, if you are a health care institution, you wouldn’t want to hire a company that focuses its practice on the gaming industry. It is easier and more effective to communicate when you are speaking the same language. Also, there are certain accounting rules that apply to certain industries that differ from the typical manufacturing company.

In what ways has the Sarbanes-Oxley Act affected the auditing process?

Because of the limited amount of time that large publicly traded companies had to comply with the Sarbanes-Oxley Act, the cost the first year was horrendous. Much of it was inexperience by the government, accounting firms and the private sector in understanding the legislation and its implications. There is no question of my support for the intent of the bill, but I also understand and sympathize with those who incurred the high cost. How can one argue against quality of reporting? I recently read in the Wall Street Journal that the chairman of the SEC is asking for a postponement for the implementation of Sarbanes-Oxley for smaller companies. This indicates a recognition that there is a difference between large companies and mid-cap companies and the procedures necessary to achieve the objectives intended in the passage of Sarbanes-Oxley. Cost needs to be judged in relationship to objectives.

What are some other issues that board members/audit committees are currently facing?

In addition to the Sarbanes-Oxley Act, another change that is costing a significant amount of money is the implementation of FIN 48, an initiative that focuses on income taxes. Auditors and clients alike have spent a considerable amount of time in understanding the rule’s applications and principles. Both sides are learning, but it is becoming a very costly learning experience.

Another issue is stock options. This doesn’t affect as many companies as the Sarbanes-Oxley Act, but it is unfortunate that the matter is being applied to too many companies without considering materiality and intent. In many cases, stock option pricing was innocently applied retroactively.

What type of discussions should a company expect from its independent auditor?

I believe that when communicating with your clients it is best to err in providing too much information rather than too little. Management likes to know what is happening on a timely basis and, where appropriate, well in advance of the issue, so that the client can minimize the cost of correction or adjustment by using internal personnel and skills. It is important for the auditor and accountants to have regularly scheduled meetings with appropriate levels of management personnel. Certainly where audit committees are involved, the same effort applies if only with the chairman of the audit committee.

SHELDON AUSMAN is principal and managing director of client services for Gumbiner Savett Inc. Reach him at (310) 828-9798 or

Wednesday, 26 December 2007 19:00

Currency risk management

Improved technologies coupled with the liberalization of trade policies have led to an explosion of global business opportunities. In order to fully maximize the benefits of conducting business in this surging international market, it is imperative to implement appropriate risk management tools.

“There are several tools available in the foreign exchange hedging portfolio toolbox to manage exchange rate risks,” says Hilary Love, vice president in the Foreign Exchange Group of PNC Bank, National Association.

Smart Business spoke with Love about currency risk management and how to shield against exchange rate risks.

Why is currency risk management so critical in today’s global economy?

We are so interrelated now; what happens in one country affects what goes on in other parts of the world. Financial flows are global in nature. Investment decisions made in one country can affect the currency of another country and can lead to disruptions in a domestic economy, based on the decisions fund managers or central bankers make in other parts of the globe.

For instance, because the United States is a large importer, U.S. companies paying overseas entities in U.S. dollars is resulting in an accumulation of large reserves of U.S. dollars overseas. Ultimately, overseas investors must decide if they want to keep the reserves in U.S. dollars or diversify into other currencies. By diversifying into other currencies, overseas investors sell U.S. dollars in exchange for the desired foreign currency, putting downward pressure on the U.S. dollar, a trend that has been accelerating over the past year or so. As global funds become more liquid, there is an increased volatility in the U.S. dollar, which affects every entity doing business in the U.S. — through exchange rate movements and also domestic interest rates.

What steps can be taken to manage exchange rate risks?

For currencies that are freely traded on the international exchanges — like the euro, British pound, Japanese yen, Canadian dollar — many companies use a hedging technique called a forward contract to manage exchange rate risk. A forward contract is an agreement that a company enters into with a bank that obligates the company to buy or sell a certain amount of foreign currency in exchange for a certain amount of U.S. dollars at a pre-agreed date, or range of dates, in the future. Another technique to manage exchange rate risk is called a foreign currency option, which gives the buyer the right, but not the obligation, to buy or sell currency at a pre-agreed rate.

For government-controlled, or restricted currencies, which are usually in the emerging parts of the world, a hedging technique called a non-deliverable forward contract has been developed. This is an agreement similar to a forward contract, but where no currency changes hands. This is increasingly being utilized in the Chinese market. The fear of U.S. companies that import from China is that the yuan could rise and cause their cost of goods sold to escalate rapidly. To hedge against this risk, companies enter into a non-deliverable forward where they lock in a value of the yuan for a certain period of time. A non-deliverable forward essentially provides a way of settling up in U.S. dollars for fluctuations in the currencies.

How can a company effectively balance risk and return when investing in global markets?

While there are some higher investment rates of return available in non-U.S. markets, right now it is important to take into consideration the potential negative impact of currency moves. To effectively manage this risk, U.S. companies should consider having a baseline hedged amount. Companies should also consider implementing foreign exchange risk management polices in written form that describe what risk the company will tolerate in terms of the impact rate fluctuations may have on both business and investment decisions.

How can foreign currency loans benefit companies with a subsidiary in another country?

In the past, many companies believed they had to establish a borrowing relationship with a local foreign bank if their non-U.S. subsidiary had funding needs. Increasingly, there are alternatives that allow a parent company to use its U.S. bank. The first option is to borrow directly in a foreign currency to fund the subsidiary, with the assumption that the subsidiary will generate sufficient revenue in the applicable currency to repay the debt. Another alternative is a cross-currency interest rate swap, where the company, either in the name of the parent company or the subsidiary, can borrow in U.S. dollars from its U.S. bank and swap it into a foreign currency. This method removes the risk of foreign currency movements and the interest rate risk.

This article was prepared for general information purposes only. The information set forth herein does not constitute legal, tax or accounting advice. You should obtain such advice from your own counsel or accountant. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Opinions expressed herein are subject to change without notice. © 2007 The PNC Financial Services Group, Inc. All rights reserved.

HILARY LOVE is vice president in the Foreign Exchange Group at PNC Bank, National Association, Member FDIC and a subsidiary of The PNC Financial Services Group, Inc. Reach her at (888) 627-8703 or To learn more about currency risk management, check out PNC's Middle Market Advisory Series at

Wednesday, 26 December 2007 19:00

Do what you love

There are many rewards associated with turning a hobby or passion into a business. One of the biggest is being able to fully leverage one’s strengths and interests on an everyday basis.

Ron Greene, executive vice president of Gumbiner Savett Inc., has successfully incorporated his passion for food and wine into the accounting sector. By establishing relationships with those in the food and wine industry, he’s developed a number of business relationships. Networking, he explains, plays an important role in the process of converting a passion into a profit.

“Networking provides me with opportunities to expand my knowledge and experience base and demonstrate it to others,” he says.

Smart Business spoke with Greene about turning a passion into a business, potential hurdles that must be overcome and the advantages of having a true passion for one’s work.

How should a person go about converting a passion into a business?

Businesses already exist with respect to most people’s passions. For example, if you have a passion for sports, music, theater, travel, shopping or reading — any kind of activity that you are passionate about — all of these are already businesses. It’s a matter of seeking out the right types of people, making them aware of you and your passion and becoming aware of what they can do for you.

What I have found is that establishing relationships outside of the business context is valuable. Relationships established by letting people get to know about you, your skills and passions, and your interest in their field of endeavor are important. When an opportunity arises, they know you’re passionate about their fields of endeavor, and they believe you can bring help, guidance or skills to the table.

What factors should be considered when determining if one’s hobby or passion has potential as a business?

Not all passions have business potential. Many business areas are already saturated with wannabes as well as with skillful businesspeople. If you have a passion for something you have to consider what stage of life you’re at and whether it’s appropriate at this point in time to try and enter the arena of your passion. Some of the factors that should be considered include current family and other commitments and obligations that you might have, and whether you have the financial resources and staying power to get involved with something where you may have to pay your dues before you can succeed.

What are some potential hurdles that might be faced when attempting to turn a passion into a business?

Just because you are passionate about something doesn’t mean that you have the right skill sets to play in the ballpark of your passions. The big hurdle might be learning what you need to know. If you love food and wine like I do, you might say, ‘Hey, I want to be a winemaker.’ But what do you know about the chemistry of making wine? You have to obtain that knowledge, get those skills and learn from others. Gaining acceptance can be very difficult because in most areas of commerce people already know who the experts are and who they want to do business with. You’re the outsider looking in, and it may take quite a while to establish yourself and get people to accept and trust you.

What are the advantages of having a true passion for one’s work?

If you have a true passion for your work, almost nothing is going to get in the way. You can overcome the obstacles you’re going to face because you know that this is what you want to do and you’re going to stay on the chosen path. Having a passion for your work keeps you focused and helps you become successful because you love what you are doing. Defeats become opportunities.

What types of opportunities are available?

The world is your oyster if you want it. Especially if you have succeeded at earlier endeavors, you just have to be willing to take a step back, take a step down and apprentice yourself to the industry or business that embodies your passion. As long as you keep learning and growing you will be fine. The opportunities are there for people willing to think outside the box. If you take a concept that builds on your passion and are able to grow it into something new, you have the opportunity to be successful. I know many people who have successfully pursued their passions. As we say in the wine world, ‘Cheers.’

RON GREENE is executive vice president of Gumbiner Savett Inc. Reach him at (310) 828-9798 or