Interest rates are at historic lows. Market values of many assets are lower than they were a few years ago. This juxtaposition creates potentially significant wealth transfer opportunities.
“The interest rates for loans to family members and related party transactions are lower than they have been in several decades,” says Brian J. Jereb, a member with McDonald Hopkins LLC. “These rates set the valuation rate used to determine the value of property transferred in certain types of gift strategies.”
In the valuation process, this is the assumed rate for valuing the taxable gift component. This rate is often referred to as the “hurdle-rate” in terms of the rate of return required for the strategy to perform as well as the valuation projection for tax purposes.
“While relative investment rates of return are low, the assumed rate is fixed at the time of the transfer, so when rates of return increase to more normal levels and market values increase as a result, the chance for success of these strategies should be greater than under normal circumstances,” Jereb says.
This juxtaposition also occurs at a time when the lifetime gift tax exemption is at an all time high of $5 million, which allows for larger taxable gifts while still having enough left to cover estate taxes or gift tax.
There are recent rumors that the so-called “Super Committee” could include in its plan a decrease in the gift tax exemption from $5 million to $1 million. “These rumors appear to be based on sheer speculation by various commentators about what the Super Committee may include in its plan if its members are ever able to reach an agreement,” Jereb adds. “By the time this article is published, we may have some indication concerning the possible future of the gift exemption should the committee agree to a plan.”
Smart Business asked Jereb how business professionals can take advantage of these opportunities now, as pending tax reform discussions loom on the horizon.
What is the simplest approach to capture this ‘double-barreled’ opportunity?
The simplest approach is a low interest loan to a family member. The borrower is not burdened by high interest charges and could use the loaned money for his or her desired purposes. If the lender dies, the loan is an asset, but will not disappear. If the borrower is a beneficiary of the lender’s estate plan, the loan balance can be distributed to the borrower or be offset against the inheritance.
What about trusts?
The Installment Sale to a Grantor Trust, sometimes referred to as an ‘Intentionally Defective Grantor Trust,’ or ‘IDGT,’ allows a senior generation member to sell an asset to a trust for the benefit of family members. An IDGT is designed so that the assets therein are treated as being owned by the trust’s creator for income tax purposes under the applicable federal income tax laws. While the assets are treated as owned by the trust’s creator for federal income tax purposes, they are owned by the IDGT and not the creator for federal estate tax purposes. The creator can sell assets to the IDGT without generating income tax; assets sold to the IDGT and appreciation are excluded from the creator’s taxable estate for estate tax purposes.
The IDGT generally benefits the creator’s family members. When the creator sells assets to the IDGT, the trust pays most of the purchase price with a promissory note at the current low interest rates. Because the creator and the IDGT are treated as the same taxpayer for federal income tax purposes, the interest paid on the note is not taxable to the trust’s creator. However, because the creator is deemed to own the assets in the IDGT for income tax purposes, he or she continues to be taxed on the ordinary income and capital gains realized by the IDGT’s assets. The payment of the income tax allows the assets in the IDGT to appreciate without reduction for income tax, and the payment of income tax is not a gift to the beneficiaries because the trust’s creator is merely paying his or her legal income tax liability.
With the low current market valuations, it is more likely than normal that the assets sold to the IDGT will increase in value from their depressed current values, and the current low interest rates make such a sale an efficient planning technique.
Another strategy is the Grantor Retained Annuity Trust (GRAT). Here, the senior generation contributes property to a trust in return for an annuity payment during the term of the trust. The term and the annuity rate determine the amount of the gift to the trust’s remainder beneficiaries. There are two limitations: (1) if the creator of the trust dies during the term, some or all of the trust assets will be part of the creator’s taxable estate and (2) the property transferred could be used up by the annuity payments, leaving no value for the remainder beneficiaries.
How can family-owned businesses benefit?
In the family business context, the low market valuations and the large gift tax exemption make it a good time to recapitalize C corporations with preferred and common shares and in the process make significant gifts to family members. Both C corporations and S corporations can be recapitalized into voting and non-voting shares. The non-voting shares can then be sold to family members or to an IDGT via a low interest rate note back to the senior generation. The current low tax and interest rates also currently provide an ideal opportunity for the business to borrow money to either pay a dividend or redeem shares owned by the senior generation.
How can charitable giving best be structured?
A related strategy with a charitable advantage is a Charitable Lead Annuity Trust (CLAT). In this strategy, the trust pays an annuity to selected charities over a term of years. At the end of the term, if the investment rate of return exceeds the valuation rate, the remainder that is available to the family beneficiaries will be greater than the amount projected using the IRS valuation rate. A CLAT is often used as a vehicle to fund ongoing annual gifts or to establish and fund an endowment gift through the annuity payments.
BRIAN J. JEREB is a member with McDonald Hopkins LLC. Reach him at (216) 348-5810 or firstname.lastname@example.org.
If your company exports products or provides certain services abroad, you may be able to achieve significant tax savings by establishing an Interest Charge Domestic International Sales Corporation (IC-DISC).
“Despite the name, this tax saving technique is fairly straightforward,” says Mark D. Klimek, chair of the Tax Practice Group at McDonald Hopkins. “It is not aggressive from a tax standpoint or overly complicated from a legal or accounting standpoint. In fact, it’s not very complicated at all. An IC-DISC can be set up for a relatively low cost, which can easily be recovered in the first year of tax savings alone.”
Determining whether an IC-DISC makes sense for your company is as simple as looking at your export sales and profits on them and then comparing the tax savings versus the set-up costs. As for companies that already have an IC-DISC in place, Klimek says there are probably opportunities to achieve even greater tax savings.
Smart Business asked Klimek for more details on this tax saving opportunity.
How is an IC-DISC structured?
An IC-DISC is simply a separate corporation that is formed by the owners of an existing company (the ‘manufacturer’). The new corporation’s shareholders, which can be individuals or other types of business entities, make an election to treat the corporation as an IC-DISC. The IC-DISC is paid a commission on foreign sales by the manufacturer, and the manufacturer can take a deduction for the commission payment. This deduction normally generates a tax benefit of 35 percent to the manufacturer. The IC-DISC itself is a tax exempt entity; tax is paid only by the IC-DISC shareholders on dividends received from the IC-DISC. Currently, these dividends are taxed at the favorable 15 percent rate. Therefore, the tax savings occur because the commission arrangement between the IC-DISC and the manufacturer provides a corporate deduction (usually worth 35 percent) in exchange for the tax cost of a dividend to the IC-DISC shareholders (taxed at only 15 percent), generating a net tax benefit of 20 percent on the allowable commissions paid.
Is the commission limited?
Yes, the commission is limited under the IRS rules to a maximum of the greater of 4 percent of total export sales or 50 percent of profits from export sales. However, this is a very basic analysis and is really the minimum commission. A consultant can study a company’s product lines and gross sales figures and come up with very sophisticated ways to maximize the commission.
What are some of the requirements that must be met in order to qualify as an IC-DISC?
The company has to be a C corporation and can only have one class of stock. There must be an initial capitalization of at least $2,500. There is an election form to be signed by all shareholders and filed with the IRS. The IC-DISC should follow the normal corporate requirements of any other corporation There needs to be a commission agreement between the manufacturer and the IC-DISC. This commission agreement is normally flexible in terms of stating how the commission is to be calculated.
Please provide some estimates of the potential tax savings.
The tax savings depend on the profitability of the company’s export sales. A company taking the 4 percent commission on $5 million in gross export sales would save at least $40,000 of federal income taxes, assuming the tax rates are as discussed earlier. If the same company had $5 million in gross export sales and $1 million in profits and was able to deduct the 50 percent commission, the tax savings would be at least $100,000. Again, these savings are minimums; various techniques exist for increasing the effective commission by, for instance, applying the commission limitation to different product lines.
What types of related planning opportunities are associated with this technique?
You can use the IC-DISC to provide shares to family members or to employees. If it’s a family business, you can give family members shares in the IC-DISC, which will provide them with income every year, but not ownership rights in the primary business. If you’re transitioning a business to the next generation by selling shares to that generation, perhaps you’re wondering how your children will get the money to pay you for the business. You can pay them a higher salary to generate this cash, and the company can take a 35 percent deduction on that payment, but the children have to pay tax on this income at ordinary income rates so there is not much tax efficiency. If you or the children own shares in an IC-DISC, the company still gets to take the 35 percent deduction for the commission, but now your children only have to pay tax on the dividends at 15 percent (versus having to pay the ordinary income rates). You can also use an IC-DISC to provide an equity type of incentive to employees, which can serve as a motivation tool to improve productivity and increase export sales.
Does a company have to be making a certain level of sales for the IC-DISC to make sense?
Again, this depends on a company’s profitability. A company doing $1 million in export sales could save at least $8,000 per year under the 4 percent commission scenario. However, if this same company has $200,000 in profits, the tax savings would be $20,000 — still making the IC-DISC an attractive option. Anything less than $100,000 in profits on $1 million in sales would require a closer look at some of the commission-maximizing strategies to see if the IC-DISC makes sense.
MARK D. KLIMEK is chair of McDonald Hopkins’ Tax Practice Group and is a member of the firm’s mergers and acquisitions practice group. Reach him at (216) 348-5453 or email@example.com.
Rhonda Anderson, Dean and COO of the University College division of Northwood University, cites one of her favorite quotes by David D. Brown: “When strawberries are inexpensive and available, the creative chef delights with strawberry-based recipes. Likewise, this is the era of technology, increasingly inexpensive and available; technology is in season. Our students/employees expect us to use it.”
Smart Business asked Anderson how corporations can take advantage of today’s technology to facilitate communication among employees and enhance their opportunities for ongoing education.
How can Web-based technology systems improve the workplace?
In the past, we spent a lot more time together face-to-face. Today, we have more employees working from home, traveling globally, and located at satellite locations. Web-based technology can help us keep these people more productive. E-mail is often ineffective and conference calls are difficult to coordinate. Web-based technology offers alternatives such as thread-based discussions, which employees and managers can partake in at their convenience.
Web-based technology also makes training and education much more available to the masses. Individuals or groups of people who might otherwise be detained together on business or projects can access the system according to their own schedules, rather than have to be at a certain place on a certain day and time for a class.
What is the first step to setting up a technology-based communication and learning program?
The first step is to develop a technology strategy. This cannot be delegated. A common mistake companies make is to delegate this function to the IT department. While IT is primarily responsible for the implementation, critical decisions regarding a technology strategy must be made by top management with input from all stakeholders. Technology choices have the potential to change the way a company does business. That is why it is vital that management recognize they are creating a technology strategy, not purchasing software or hardware.
How can a company determine what types of benefits it stands to achieve?
Before making any decisions regarding new technologies for the company, management needs to understand what the technology will do for the company, its employees, and customers. How will the technology help the organization do things better or more efficiently? What benchmarks will be used? If implementing a new system isn’t going to save or make the company money, or create efficiencies, why proceed? Any changes you implement into your organization must affect change. Merely ‘adding value’ is not good enough.
Benchmarks are different for each company. If a company decides to implement a technology-based learning management system, how will they measure its success? Examples might be by analyzing employee retention, company growth, customer satisfaction, or the quality of products manufactured. In today’s competitive global environment, companies are implementing learning management systems so they can support all of their employees, no matter where they are.
How can management support its initiatives?
By involving all stakeholders in creating a system that supports a learning culture. Leaders recognize that technology is critical to survival in almost any industry today. Top management may not be responsible for implementing the system and day to day details, but they need to understand, communicate, and be committed to the process long-term.
It’s important to roll out any new technology program in phases so everyone learns together. For example: first to a core group of people who are heavily invested in the initiative; then to internal employees; and finally, to external customers. Before you can roll it out externally, you need all your internal people to understand, speak to, and support the program. Not everybody in the company will be ready.
Can Web-based learning really change the way organizations train their people?
Certainly. It doesn’t have to replace on-site and classroom training, but it can definitely complement those initiatives.
Overall, a Web-based learning system can assist you in developing more competent and proficient employees, locally and globally, as long as you respect it and use it knowing its strengths and weaknesses.
The more established technology becomes in the lives of people, the more comfortable they are using technology for learning and communicating. To satisfy their group-belonging needs, many employees are joining Web-based learning groups, participating in threaded discussions, keeping blogs, etc. Technology will never completely replace human interaction, nor should it, but it is certainly enabling us to do things much differently than we have in the past.
RHONDA ANDERSON is dean and COO of the University College division of Northwood University. Reach her at (989) 837-4455 or firstname.lastname@example.org.
Wage-and-hour violations, including misclassification of employees for overtime purposes, continue to present a challenge for California employers. How can employers avoid some of the more common pitfalls under California law?
“Employment laws place complicated and often overlapping obligations on employers,” says Thomas H. Reilly, a partner in the Newport Beach office of Newmeyer & Dillon LLP. “The wage and hour laws in California are more expansive than in other states. Employers must be vigilant. Class actions for unpaid overtime have resulted in astonishingly large verdicts against, and settlements with, California employers.”
Smart Business spoke with Reilly about some common wage-and-hour mistakes made by California employers and how they can be avoided.
How can a company avoid misclassifying employees as exempt or nonexempt from overtime pay?
Employees are presumed to be nonexempt and entitled to overtime unless they meet the requirements of an exemption. There are three primary exemptions:
Executive: The employee must spend more than 50 percent of his or her time managing a recognized department and supervise at least two subordinates. Positions that normally qualify for the exemption include line supervisor and department manager.
Administrative: The employee must spend more than 50percent of his or her time performing nonmanual work directly related to operating the business (as opposed to producing the goods or services of the business) and work under only general supervision. Positions that would normally qualify for the administrative exemption include controller and human resource manager.
Professional: The employee must be licensed or certified by the state and primarily engaged in the practice of law, medicine, dentistry, optometry, architecture, engineering, teaching or accounting. Certain other “learned” professions, such as chemists, may also qualify if the duties of the position require a degree more advanced than a bachelor’s degree. Certain “artistic” professions such as actors and musicians also qualify for exemption.
All three exemptions also require that the employee exercise discretion and independent judgment and receive a salary that is not less than two times the state minimum wage.
California also recognizes exemptions for certain commissioned sales personnel and highly skilled computer software employees.
The requirements of the exemptions cannot be waived. To avoid misclassifications, employers must have staff members who are knowledgeable of the exemptions, or seek guidance from their employment attorneys or consultants.
Does paying salaries guarantee that an employer will not have to pay an employee for overtime?
This is a common misunderstanding. To qualify for an exemption, an employee must meet the “duties” test discussed above and receive a salary that is at least two times the state minimum wage. If the “duties” test is not met, paying the employee a salary will not avoid overtime obligations.
Are there special requirements for accrual and payment of vacation pay in California?
Yes. Under California law, vacation time accrues day by day throughout the work year and, once accrued, cannot be forfeited. However, California employers are permitted to cap vacation accrual and reach the same objective as “use-it-or-lose-it” policies, that is, avoiding massive vacation pay obligations. Any such cap on accrual must allow employees reasonable time to use their vacation days before reaching the maximum. Many employers cap vacation accrual at approximately 150 percent of the annual accrual rate.
What are the requirements for providing rest and meal periods to employees?
Under California law, employees must receive a 15-minute paid rest period for every four hours of work or major fraction thereof (more than two hours). Employees who work at least five hours in a workday must also receive a 30-minute, unpaid meal period. This meal period may be waived by mutual consent if the employee does not work more than six hours. Employees who work 10 hours in a workday must receive an additional 30-minute unpaid meal period. The second meal period may be waived by mutual consent if the employee does not work more than 12 hours. All rest and meal periods must be duty-free (for example, employees cannot answer telephones while on their breaks). Employers who fail to provide required meal periods and rest periods are liable for one hour of pay at the employee’s regular rate for each workday that a meal period and/or rest period was not provided.
How can a company avoid wage-and-hour disputes?
Maintain accurate and detailed time records for all nonexempt personnel.
Avoid easy fixes, such as putting lower level employees “on salary” to avoid paying overtime, or copying another company’s employee handbook without first checking its content for compliance.
Conduct self-audits on an annual basis to determine whether changes in job duties or reporting relationships have affected exempt designations.
Know the legal requirements and seek professional advice on unusual or borderline cases.
THOMAS H. REILLY is a partner in the Newport Beach, Calif., office of Newmeyer & Dillon LLP. Reach him at (949) 854-7000 or email@example.com.
The role of ethics in business is twofold, according to Jozef D. Zalot, Ph.D., an assistant professor in the Department of Religious and Pastoral Studies at College of Mount St. Joseph.
“First there are the legal issues. We’re seeing developments such as the Sarbanes-Oxley Act of 2002 which attempt to codify in some way the legal repercussions for corporations when employees break the law,” says Dr. Zalot.
“Second are the moral issues,” he adds. “Many people are realizing that the actions of corporations can and do harm people. As a result they’re demanding both change and accountability.”
Smart Business spoke with Dr. Zalot about business ethics from the theological perspective and the benefits of having a formal code of ethics in place.
What are the benefits of having a strong ethical code firmly established and upheld in a company?
A code of ethics gives employees, shareholders and stakeholders guidance for what will and will not be tolerated. It also gives managers criteria for disciplining, firing or even promoting employees. In some cases it may even help shield a company from liability.
A code of ethics can also help corporations avoid unfavorable media coverage, a tarnished reputation, lost profits and other negative consequences that can result from unethical behaviors.
How does a CEO go about establishing a code of ethics?
A code of ethics needs to be clearly defined, supported, practiced and applied from the top down. It needs to be developed with the input of as many people as possible, at all levels of the company.
Additionally, it has to be an adaptable, living document. The company has to examine it at least once a year to make sure it still applies. They need to ask questions such as, What’s right? What’s not? What do we need to add? Remove?
Communication and feedback are key.
What is the role of religious beliefs or faith in the business world?
Faith is a very important and influential piece of many peoples’ lives and should be a part of how they do business. Many Christian churches hold that through our work we are cooperating with God’s creative activity. The whole attitude of it’s just business just doesn’t cut it anymore.
We spend so much time at work that our work lives define who we are as people. Pope John Paul II addressed this when he discussed the subjective nature of work.
Vatican II and U.S. Conference of Catholic Bishops documents indicate that this attempt at separation this idea that we can separate our private lives from our business lives is one of the biggest errors of our time.
How can corporations apply specific theological principles to their business activities to hopefully make them more ethical?
We can’t tell corporations what to do, but we can give them a framework moral principles on which they can evaluate themselves while doing business.
The first principle of Catholic Social Teaching is human dignity. While profit is important, people have to come first. Under this principle, the business needs to ask: What is our purpose? Profit? Power? Something else? What are we doing? What are we producing? Are we upholding human dignity in what we do?
In looking at other principles such as community, common good and solidarity, the corporation must consider the common good of all stakeholders. If, for example, the company does business globally, is it acting ethically so as not to exploit workers in foreign countries?
In regard to the principle of stewardship, the corporation must ask, How are we acting as stewards of the created order? Are we using resources wisely? Overconsuming? Hurting the environment?
As for the preferential option for the poor, the corporation must explore whether it is providing opportunities for the less advantaged: Do we provide employment opportunities? Locate in areas where people need jobs? Help people by giving them the means to succeed through their own work?
How can businesspeople live their faith in daily business dealings?
They can act in such a way at work that they would at home, with friends, family members, at church. They can respect and treat people as they want to be respected and treated.
When you look at it from these perspectives, it just doesn’t make sense to lie, cheat or steal in the workplace.
Jozef D. Zalot, Ph.D., is an assistant professor in the Department of Religious and Pastoral Studies at College of Mount St. Joseph. Reach him at (513) 244-4212 or firstname.lastname@example.org.
Having exhausted their options for reducing health care premiums, many companies are turning to wellness programs to encourage their employees to live healthier lifestyles. The reasoning is that healthy employees are more productive and cost the company less in terms of health care premiums. But how far can employers go?
“This is an evolving area of the law,” says Ann Carr Mackey, shareholder and director with Sommer Barnard PC, Indianapolis. “Many of the answers are not crystal clear. Within the next six months, the government is expected to provide more guidance in this area when it issues final regulations on bona fide wellness programs.”
The decision to implement a wellness program often is made around the time of a health plan renewal. Mackey cautions that companies tread carefully. “Because several laws apply in different ways to different wellness tools,” she says, “employers would be wise to work with benefits counsel/specialists.”
Smart Business asked Mackey what employers can and cannot require in terms of employee wellness programs.
What is a wellness program?
Wellness benefits are programs employers adopt to encourage employees to seek appropriate medical care and lead a healthy lifestyle. A company that has a wellness program asks employees to complete Health Risk Assessment (HRA) questionnaires regarding their health and lifestyle; asks them to undergo health screenings e.g., medical testing for cholesterol, blood pressure, and sugar levels; encourages exercise, weight loss and smoking cessation, and generally offers some type of financial incentive, such as a reduced health care premium, to do so.
What laws regulate wellness benefits?
The Health Insurance Portability and Accountability Act (HIPAA), the Americans with Disabilities Act (ADA), and smokers’ statutes. Under HIPAA, an employer cannot discriminate based on a health status factor and nicotine addiction is a health status factor unless it has a bona fide wellness program. HIPAA limits the total incentive an employer can give to 20 percent of an employee’s health care premium. It also allows employees an opportunity to earn their reward every year by requiring the employer to provide an annual opportunity to meet certain criteria (for instance, to quit smoking).
HIPAA also requires that all materials relating to a wellness program must state that the employer will provide an alternative if an employee cannot meet certain criteria. For instance, the employer must provide an alternative if it has been shown that it would be medically inadvisable or unreasonably difficult for a smoker to quit smoking. The alternative could be to offer the financial incentive to the smoker if he/she completes a smoking cessation class paid for at the employer’s expense whether or not the employee quits smoking.
Also under HIPAA, the employer does not have to have a bona fide wellness program in place in order to ask employees to fill out HRAs and undergo screenings as long as it is doesn’t ask employees to attain a certain status (e.g., a certain weight or body mass index rating). What restrictions does the ADA impose on wellness benefits?
Under the ADA, an employer cannot require a medical exam or make a disability related inquiry unless they are voluntary. If the employer attaches any type of financial incentive, then the exam or inquiry may not be voluntary. An employer should not tell an employee that they are not eligible for health insurance unless they fill out an HRA or undergo a medical screening.
Also under the ADA, an employer cannot discriminate against the disabled. So if the employer offers an incentive to employees who walk 10 miles a week, it has to offer an alternative for someone who can’t walk.
Can employers refuse to hire smokers?
At least half the states have statutes that protect the right of employees to smoke off duty. In Indiana, an employer cannot discriminate if someone smokes. Up until July 2006, no benefit or penalty could be imposed in Indiana on smokers. However, an amendment to the smokers’ statute passed in July says that an employer can impose financial incentives in conjunction with smoking and health benefits (e.g., a reduced premium for nonsmokers).
Illinois protects smokers from discrimination by employers unless the employer can show that smoking interferes with the individual’s job performance, or the employer is a nonprofit entity and its primary purpose is to discourage smoking (like the American Lung Association). In Kentucky, statutes prohibit discrimination by employers against smokers. However, Ohio and Michigan provide no protections to persons who smoke employers can refuse to hire and can fire persons who smoke off duty. More states may begin to follow course.
ANN CARR MACKEY is a shareholder and director with Sommer Barnard PC, Indianapolis. Reach her at (317) 713-3467 or email@example.com.
“Companies considering outsourcing should have a specific direction in mind for where they want to take their business,” says Carl Albright, president and CEO of InfoCision Management Corp., the world’s third-largest privately held telemarketing company, serving nonprofits and Fortune 100 companies. “What type of business do they want to attract? Do they need to increase sales? Enhance customer service? The first step is to establish a direction. That involves bringing together all your top managers to discuss the goals and objectives.”
Albright recommends that companies that already use an outside call center keep focused on their return on investment. One of the most important keys to a good ROI will be the quality of the call center’s staff.
Smart Business asked Albright how a personal touch can be fostered among a call center’s employees, so that they sound and feel as if they work directly for the client.
How important is the ‘personal touch,’ and how is it best fostered?
Any company that uses an outside call center to handle its telemarketing programs and answer its incoming calls wants the call center’s employees to act as professionally as their own employees would. These people should be helpful, informed, friendly and skilled communicators.
People who choose to become professional communicators for a living want to work for a quality company. They want their boss to know who they are, and also to respect and care about them. They want to be employed by a company that trains them properly and recognizes them for their achievements.
Giving customers the personal touch means that a professional communicator is trained on, knows and understands the programs and services of the company it is representing. Furthermore, they understand the company’s goals and long-term objectives what they are trying to achieve and why.
To what degree should a corporation be involved with training employees who work on their program in a new call center?
During the initial phases of working with a call center partner, it’s always a good idea to send out your own corporate trainers to meet with the call center’s trainers as well as the staff of communicators. Spending some time up front will help tremendously as the vendor puts together the complete training guidelines for your program, especially if it’s a complex program where communicators will be answering calls regarding products, billing and other similar areas. Additionally, meeting with the call center’s staff is good for their morale. Feeling as if they are part of your team will go a long way as they learn about your products, services, and long-term goals.
In addition to the quality of the staff, what other factors should a company consider before awarding its business to an outside call center?
The ability of your call center partner to be flexible and adapt to your company’s needs. Depending on the project, certain clients may want older, more mature people on the phones. Some programs may require more technical people on the phones. The call center vendor should have a variety of different talents to choose from, and should be able to adapt to changing needs very quickly.
Additionally, a company should consider its ROI. What is it going to get back for every dollar it spends $1.50 or $2? How will it be measured? How accurate will the reporting be?
Next, there is the quality of the data that the vendor collects. What is the vendor learning about the wants, needs and spending habits of the client’s customers?
Another consideration is response time. How long does a person have to wait on hold 20 to 30 seconds or less? How long is the time on hold? Are calls being abandoned? What are the customer service satisfaction rates and how are they measured?
Finally, for companies that want to shift their call center costs from fixed to variable, outside call centers provide a valuable solution, since you only pay for the time you use.
How has the national Do Not Call Registry changed the telemarketing landscape?
It has prompted many corporations to outsource their call center operations. The costs would be phenomenal for most corporations to purchase the necessary hardware, software and human resources to comply with all the regulations. And heavy fines have been levied against companies that do not comply properly. The new regulations have made it difficult for some call center vendors to survive. However, those that continue to thrive have most likely made the necessary investments to comply with regulations, thereby eliminating the costs for doing so for their clients.
CARL ALBRIGHT is president and CEO of InfoCision Management Corp. Reach him at (330) 668-1400 or CarlA@infocision.com.
Buy or lease? That’s an important question that many businesses must consider when the time comes to acquire new equipment, furniture and other business essentials. While equipment and other assets with a projected long, useful life may be better off purchased, leasing makes sense for many other items, including technology, material-handling or medical equipment that may need continuous updating.
Many companies consider leasing as a type of insurance, according to Bob Metzen, president of LaSalle Systems Leasing Inc., a wholly owned subsidiary of MB Financial Bank NA.
“Leasing equipment and other major business assets provides a business with protection from obsolescence, and a hedge against a long-term commitment to assets that a user is not certain he may need indefinitely,” Metzen says. “Leasing eliminates the need for a long-term financial commitment to equipment that will need upgrading, replacement or removal within a time frame that is shorter than an asset’s projected useful life.”
Leasing also helps businesses conserve cash flow, senior borrowing capacity and may even provide some tax benefits.
According to Metzen, it’s important for a business to consider how to effectively use lease financing. Securing a lease line of credit to pay for equipment and other business assets is a smart way to finance such acquisitions, especially when a company will have ongoing equipment upgrade or acquisition needs. A lease line of credit is a convenient alternative vehicle for acquiring and financing equipment.
Smart Business spoke with Metzen about the benefits and process of securing a line of credit to purchase equipment.
Why should a business consider securing a line of credit for leasing equipment?
A lease line of credit provides businesses with flexibility and convenience. Once a lease line has been established, a business can tap into the line and acquire the equipment they need whenever necessary, with no need to continually reapply for credit or renegotiate terms or documents. It eases much of the administrative burden associated with acquiring equipment.
How can a business secure a line of credit for leasing equipment?
The process is pretty quick and painless. Once the company has determined that a line of credit is necessary, they simply need to contact a customer service representative at a lending agency that offers this service. We typically require a business to provide two years’ worth of financial statements as well as a current interim financial statement to help us determine the company’s creditworthiness.
They’ll also need to have a general idea of what type of equipment will be leased and how it will be used. Oftentimes the credit application is processed within one or two business days.
What should a business know or do before attempting to secure a line of credit for leasing equipment?
As I mentioned, the company should have a pretty good idea of what kind of equipment they will be leasing and why they need to acquire it. They’ll also want to know the general terms of the lease and of course, how much money they need to borrow.
What types of equipment can a business obtain through a lease line of credit?
Virtually anything can be obtained through a lease line of credit. (Often) businesses use lines of credit for leasing information technology, furniture, material handling and sometimes even production equipment. Generally, leasing is a great option for anything that a company needs, but doesn’t want to make a long-term financial commitment to.
What payment options or terms are available for leasing equipment with a line of credit?
The nice things about lease lines of credit are the tremendous flexibility and varied options available. Structures with varying lease periods and payments (monthly, quarterly, etc.), upgrade or technology refresh provisions, and purchase, release and return options are available.
Lease terms are generally very flexible and cater to each customer’s individual needs. Other term options to consider include the length of time the line of credit will be used and whether or not a business is interested in a lease-to-own option.
Bob Metzen is president of LaSalle Systems Leasing Inc., a wholly owned subsidiary of MB Financial Bank NA. He has more than 15 years of experience in the technology and leasing industries. Prior to joining LaSalle, Metzen, a Certified Public Accountant, held public accounting and leasing positions with Price Waterhouse and Harbor Capital Corp. Reach him at (847) 823-9600 or firstname.lastname@example.org.
On Aug. 27, 2008, the Securities and Exchange Commission (SEC) agreed to a roadmap that will take U.S. issuers one step closer to using the International Financial Reporting System (IFRS) by 2014.
“Within five or six years, it is likely IFRS will become accepted as financial reporting standards alongside Generally Accepted Accounting Principles (GAAP) in the U.S.,” says Harry Cendrowski, CPA/ABV, CFE, CVA, CFD, CFFA, managing member, Cendrowski Corporate Advisors LLC.
“In 2005, the EU mandated the use of IFRS. In 2011, several countries, including China, India, Japan, and Canada, will adopt IFRS. Previously, foreign issuers reporting in the U.S. were required to convert to GAAP, but the SEC stated they will no longer have to do so. The same goes for private issuers.”
Smart Business asked Cendrowski what the changes will mean for boards.
How does GAAP differ from IFRS reporting?
Transitioning from GAAP to IFRS presents a business risk that should be addressed in the same manner used in the organization’s normal risk management process to mitigate risk. Boards must continue to gather information about potential pitfalls with the transition and take action to address those concerns. For example, a board may require new or different skill sets than those currently required to be able to question management’s decisions under the IFRS framework. Some examples include:
- IFRS utilizes several criteria for revenue recognition including the transfer of
risks, rewards and control, and reliable
measurement. While GAAP utilizes similar
principles in theory, the big difference is the
inclusion of substantial detailed guidance
regarding specific transactions that can
lead to departures from the general theory.
- GAAP allows for the inclusion of
extraordinary items (events that are both
infrequent and unusual) in the financial
statements, whereas extraordinary items
are prohibited within IFRS.
- Both GAAP and IFRS stipulate that
inventory is presented at the lower of cost
or net realizable value using FIFO (first in,
first out) or the weighted average method,
however, GAAP also permits the use of
LIFO (last in, first out). Furthermore, GAAP
prohibits reversals of inventory write-downs, whereas IFRS requires reversals in
the event of subsequent increases in value.
Is the change to IFRS being embraced in the U.S.?
On one hand, yes. Brokers and stock dealers favor IFRS because it is a consistent reporting method when comparing the financial results of a British company against one in the U.S. Also, IFRS makes it easier for foreign companies to report in the U.S. However, it is change, and there are many people whose livelihood is based on their knowledge of GAAP. It will cost money to learn and implement the new standards. For companies, it will require board and staff education, potential restatements and conversions. For CPAs, the impact is tremendous in terms of the accounting standards they will need to know.
How will changing from GAAP to IFRS impact boards?
IFRS will require board members to be more conceptually focused. The current detailed, rules-based system will be replaced by the concept of ‘do the right thing.’ Currently, board members are required to have an understanding of GAAP; under IFRS, they will be required to exercise greater judgment regarding the accounting treatment of transactions. Management will have to be more involved to provide detailed guidance. Effective board members will have the ability to understand what really goes on in the business and question management about how and why they treat transactions as they do. Boards will also have to perform scenario planning by considering alternatives in light of the new accounting standards and their effect on recording transactions. The changes also will impact the audit committee’s choice of a financial expert. Currently, SOX Section 408 requires this person to understand financial statements and GAAP. The understanding of GAAP requirement could change to an understanding of IFRS. The board will have to track the SEC’s specific requirements to ensure it remains in compliance.
What steps should boards take now to prepare for the future?
Be aware and informed. Analyze the latest board assessment to understand its strengths and weaknesses. Assess the corporation’s risk and impact from a change in accounting standards in a similar, systemic manner as other risks. Understand that the impending changes may require the board to seek out new members with different skill sets. Keep an ear to the ground for issues affecting the industry in regard to IFRS changes. Identify educational opportunities for IFRS both internally and externally. Finally, institute an IFRS implementation plan and set goals that will ensure a smooth IFRS transition.
HARRY CENDROWSKI, CPA/ABV, CFE, CVA, CFD, CFFA, is managing member of Cendrowski Corporate Advisors LLC. Reach him at (866) 717-1607 or email@example.com or visit the company’s Web site at www.cca-advisors.com.
As the cost of medical care, including pharmaceutical drugs, continues to escalate, many businesses are looking for ways to save money on health care costs. One way businesses can help keep premiums down is by encouraging the use of generic prescriptions.
“In 2005, consumers spent over $229 billion on brand-name drugs,” says Shawn F. Barger, Pharm.D., director of Clinical Pharmacy Management for Gainesville-based AvMed Health Plans. “Billions of dollars of brand-name patents will expire in the next five years, which means that many more generic drugs will become available. These generics are virtually identical to the more expensive brand name, but cost 20 to 80 percent less.”
Smart Business spoke with Barger about the benefits of encouraging health plan members to use generic prescription drugs when they are available to help reduce premiums.
How does encouraging the use of generic prescription drugs help save money on premiums?
When more members of a health plan use generic drugs instead of expensive brand-name drugs, it helps decrease the overall spending for pharmaceutical costs, which translates into decreased premiums for the employer or employees when renewal time comes around. It also saves out-of-pocket money for the employee since co-pays are usually significantly less with generic prescription drugs; sometimes the co-pay is even waived with generic drugs.
How much can an employer or its employees save in premiums using generic prescription drugs instead of brand-name drugs?
It varies, depending on the plan. Research shows that for every 1 percent increase in generic fill rate there is a decrease of 1 percent in overall pharmaceutical costs. According to nationwide study, there is a $20 billion missed savings potential because of underutilization of generics within the commercially insured market.
The savings opportunity from increased use of generic drugs increases every year. In the next five years, more than $50 billion worth of branded drugs will lose patent exclusivity; this year alone, generic alternatives will become available for over a dozen branded drugs.
What are some of the more popular brand-name drugs that have significantly lower generic equivalent costs?
Prozac, for example, was the No. 1 anti-depressant on the market. When its generic equivalent, fluoxetine HCL, hit the market, it provided enormous cost savings. A month’s supply of Prozac costs about $218; the generic costs about $25 today for the same month’s supply. On average, however, a generic drug costs approximately 60 percent less than a brand-name drug. Consumers also pay a lower co-payment for generic medications, saving $15 or more per prescription on average compared to branded medications.
Are generics the same quality as brand names?
There are stil misconceptions about generics that may have to do with some earlier experiences with generic drugs.
Generics have come a long way over the past several years and often are chemically identical to the brand names. In fact, many generics are now being manufactured by the original brand-name pharmaceutical and repackaged as a generic. Today, there are generics available to treat every common condition, including stomach ulcers, inflammation, depression, high blood pressure and high cholesterol.
Doctors are the ones, ultimately, who determine if a generic drug meets the need of a patient. The goal is for doctors to use brand drugs only if there is a clinical value that is not available with other drugs that are generic.
What can an employer do to encourage the use of generics among employees on a company health plan?
When reviewing a health plan for employees, select brand tiers with high co-pays and keep the generic co-pay low. Also, consider choosing benefit options that charge a fee if a member chooses the brand manufacturer of a drug when a generic is available. Employers can also encourage the use of generic prescription drugs by keeping their workers informed about the cost benefits of using generic drugs. This kind of information is often readily available from your health plan to distribute to employees. Many health plans also have helpful Web sites available that allow members to compare brand-name and generic prices right online.
And, remember that pharmacies themselves often encourage generics; in Florida, for example, a pharmacy will fill a brand prescription automatically with a generic unless the doctor writes ‘brand only’ on the prescription.