Inbound is replacing outbound as the more effective lead generator

The effectiveness of traditional outbound marketing is beginning to ebb as the inbound model proves it can bring curious customers to a business’s website with far less effort and expense.

“For customers and companies alike, the role of the sales person is changing,” says Jonathan Ebenstein, partner, Skoda Minotti Strategic Marketing. “They are relied upon less and less to be their company’s first impression and primary informational resource. That role is now being handled by the Internet and more specifically, a company’s website.”

Most consumers start the purchasing process by performing their own research. Websites, blogs and online reviews all provide decision-influencing information, insights and recommendations.

“By the time consumers speak with a sales person, they are extremely well educated and ready to buy,” he says. “Businesses that want to compete today must have the ability to educate prospective customers during their due diligence process.”

Smart Business spoke with Ebenstein about how companies can generate and convert leads through their websites.

What is inbound marketing?

Inbound marketing is a strategy that turns strangers into people who want to, and should, do business with you. It focuses on creating content that earns the attention of prospective customers and attracts them to your website. It enhances your company’s ability to be found and converts website visitors into customers via thought leadership in a measurable manner.

What are its advantages?

Inbound marketing creates credibility by leveraging informative and objective content on a company’s website, making it more trustworthy. Ads, by comparison, tend to generate skepticism because there is a clear, transparent profit motive.

With inbound marketing, prospects find you through search engines, social media and referrals. As content is shared and spread through the Internet, its reach grows virally, allowing companies to have an audience with prospects and customers that traditional outbound marketing tactics can’t find or reach. Inbound marketing also levels the playing field for companies with modest budgets that struggle to keep up with larger competitors who out spend them on the more traditional outbound tactics such as media advertising.

What does the process entail?

The inbound marketing process starts by attracting visitors to your website by creating targeted content that your prospects and customers will find useful.

When creating content, be sure to search engine optimize what you write by using keywords that are most relevant to what your audience would be searching for. After successfully bringing search traffic to your website, the next step is to convert that traffic into leads. This is done by creating permission based content such as e-books, white papers, tip sheets, or any other form of information they would find interesting or of value, and exchanging it for their contact information. Once they submit their information, they receive your ‘premium content’ and you receive the name, company and email address of an individual who has a demonstrated interest in your company, product or service, as well as permission to contact them. These leads should then be funneled into your company’s CRM database and followed up upon by the sales team as appropriate.

How does content translate to conversion?

While content attracts visitors to a website, the use of tools such as call-to-action buttons, Web forms and landing pages allow a company’s website to collect the names, titles, email addresses and phone numbers of those that visit the website. Companies can also acquire additional information about the prospect, which can be used to determine each leads’ interest level as well as where they are in the buying cycle.

How long does it take to build an effective inbound marketing campaign?

Inbound marketing is a long-term marketing strategy that requires the consistent publishing of highly relevant content on a frequent basis — ideally once per week. When executed properly, companies can start to see meaningful results in approximately six to nine months.

Insights Accounting & Consulting is brought to you by Skoda Minotti

What you need to know to be ACA compliant with IRS filing requirements

Under the Affordable Care Act (ACA), large employers — those with 50 or more full-time equivalent employees — must submit informational reports to the IRS that summarize details about the health care benefits they provided in 2015.

These forms need to be distributed to employees by Jan. 31, 2016. The challenge is collecting data, such as dependent Social Security numbers, health coverage statistics and related plan information, and providing it in order to complete the new forms.

“Clients are asking what reports they need to file in 2016 for 2015 coverage under the ACA,” says Kimberly Flett, CPA, QPA, QKA, senior director of Compensation and Benefits
at BDO. “Many of the clients we are hearing from now have an effective plan and handle on this, but are reaching out to professionals for guidance. It is the ones that we’re not hearing from that we should be concerned about.”

Smart Business spoke with Flett about these new filing requirements, including how to gather the data and prepare the forms.

What new reports need to be filed?

In 2014, the IRS relied on good faith when individual taxpayers verified that they had minimum essential health care coverage. This changes for the 2015 tax year.
Large employers must distribute Form 1095-C to employees in January, whether they are fully insured or self-funded. It lists the employee, spouse and dependents covered under the policy, as well as what months they were covered or not covered. Taxpayers will retain this information to demonstrate whether or not they compiled with the individual mandate.

The forms’ completion is straightforward but it can get complicated if there is a lot of turnover or employees who have a change of status, such as getting married, divorced or adding dependents.

Form 1094-C is the transmittal form that employers need to submit to the IRS by Feb. 28, 2016, or March 31 if you have more than 250 forms that are filed electronically.

Form 1095-B is issued by the insurance carrier and reports fully insured coverage for both small and large employers as well as small employers that are self-funded. Some employees may end up with two forms, but they both must be provided because each serves a different penalty with the IRS.

Additionally, Form 1095-A goes to the employees who purchased health care on the exchange. These forms were issued in 2014.

What’s the penalty for noncompliance?

The IRS is looking at charging at least $100 per form, if not issued.

How can companies compile the data that needs to be reported?

This is challenging, because employers may need to recapture information. But it’s important to realize that there are two pieces to these ACA filing requirements — data gathering and form preparation — and employers need a plan for each.

You’ll want to find out if your payroll company is handling any of these forms. Payroll companies already have a lot of employee data on hand, although they don’t have beneficiary names and Social Security numbers; it may make sense to outsource this information to them in advance.

Some software companies, accountants or other service professionals are providing solutions to help prepare the forms, but they may not be able to extract the data. In that case, you’ll need to determine how to get the information into the right format. For example, you can ask if your health carrier can prepare reports that could be interfaced with another vendor to bring over ancillary data like beneficiary information.

You also can turn to the vendor that sold you the health insurance for guidance. They may not be offering solutions themselves, but they can help bring parties together.

What else do employers need to know?

Large companies with multiple payrolls across various divisions and small employers who don’t work with a payroll company could run into bigger challenges getting these forms out to employees on time.

In addition, everybody’s system is so different at this point the solutions are very customized and pricing can be at a premium.

Don’t wait until the end of the year to do trial runs on producing these forms. And if you outsource the work, keep in mind that vendors are going to be bottlenecked close to the deadline. This could be a real headache, if you don’t form a plan now.

Insights Accounting & Consulting is brought to you by BDO USA LLP

The best protection against trouble with the IRS is to play by the rules

The number of IRS audits will be reduced to 1 million in 2015, down from 1.3 million audits in 2014, according to IRS Commissioner John Koskinen.

This is a direct result of budget cuts that have left the agency at a level which is 17 percent lower than where it was five years ago.

So what are your chances of being audited?

Of the 189 million returns filed in 2014, 1.3 million or approximately 0.7 percent were audited. However, don’t be fooled by the 0.7 percent overall rate. Your chances of being audited increase as your income goes up. For taxpayers with over $200,000 in income, the audit rate was 2.2 percent and for incomes over $1 million, the audit rate was 7.5 percent.

Smart Business spoke with Richard J. Nelson, CPA, Director, Tax Strategies at Kreischer Miller, about what you should know about the IRS auditing process.

What should you do if you are audited?
First of all, don’t panic. If it is a correspondence audit, respond timely and mail in your supporting documentation. If it is a field audit, cooperate with the agent and meet your agreed upon deadlines.

Most agents and taxpayers want the same thing, for the audit to progress quickly and to end as soon as possible. If you and the agent cannot agree on an issue, there is an appeals process.

If you are uncomfortable handling your own audit, retain a tax professional to handle it for you. All that is required is a power of attorney signed by both you and the tax professional.

How are returns picked for audit?
There are many reasons a return might be selected for audit. However, many of the returns are selected through the Discriminate Function or DIF system. The DIF system is a mathematical technique used to score income tax returns according to their examination potential.

The mathematical formulas used in the DIF system are a closely guarded secret. The higher the DIF score, the greater the audit potential.

Your return may also be selected if it contains items that generally result in audit adjustments and additional tax.

What are some of these items that might get your return selected?
If you are an individual, it’s things like taking a home office deduction; having unusually high charitable contributions; deducting business meals, and travel and entertainment expenses; and taking higher-than average deductions.

You will also increase your chances of an audit if you file a Schedule C, Profit or Loss from a Business which shows a large loss, especially if you have W-2 wages.

If you are a business, filing for a change in method of accounting; research credit claims; cost segregation studies; taking the domestic production deduction; issuing gift cards; a high volume of business meals, travel and entertainment expenses; and owning airplanes, yachts and hunting lodges can lead to an audit.

How can you protect yourself from an audit?
You can’t really protect yourself from getting audited.

You can be selected for audit even though you did everything right. The best thing you can do is to be prepared. Make sure you have the documentation to support all the items of income and deduction you have reported on your return.

One area agents spend a lot of time reviewing is business meals, travel and entertainment. Besides looking for nondeductible personal expenses, they are looking to see if you have the proper documentation.

For example, to support a business dinner expense, you should be able to produce a receipt with the name of the restaurant and documentation of the names of the individuals and their companies who were there, and a description of the business discussion that occurred at dinner. Without this documentation you run the risk of losing the deduction.

It cannot be stressed enough the need to keep good records. Even though the number of audits is low, it is not a good idea to take positions or deductions that cannot be supported. If audited, the penalties and interest can be steep.

You don’t have to worry about the IRS if you have the proper documentation and support for the items reported on your tax return. ●

Insights Accounting & Consulting is brought to you by Kreischer Miller

How business owners can mitigate the risk of customer concentration

When a company’s customer base is too concentrated on a handful of large clients, it can make the owner and its management team nervous.

They may fear the bank will limit the amount they’ll advance from any customer accounts receivable that exceed a certain dollar amount or predetermined percentage of sales.

There can also be a significant business impact if a large customer switches to another vendor. And if you consider selling the business, a buyer may discount the purchase price since there is a perceived risk that a customer concentration may negatively impact the company’s future cash flows.

“Business owners often feel that they should be rewarded with greater profitability from large accounts or customer segments due to their higher risk,” says David E. Shaffer, director of Audit & Accounting for Kreischer Miller. “Unfortunately, the opposite is often the case. A large account that represents 15 percent of your total sales may only account for 5 percent of gross profit because of the fixed costs you assume, regardless of customer size.”

Smart Business spoke with Shaffer about managing the risks that come into play when your company is reliant on a small cluster of larger customers.

What is a customer concentration?

The common definition of a customer concentration is a customer or group of customers that account for 8 percent or more of a company’s total sales.

Customers that have similar characteristics or common ownership may also be considered a concentration. For instance, if you sell heating and ventilation equipment and one of your niche markets is pharmaceutical companies that require customized knowledge or equipment, you have a customer concentration.

There is increased risk for your banker, your owners and any potential buyer since a slowdown in the pharmaceutical industry could dramatically impact your business.

What can business owners do to mitigate the risk of a customer concentration?

There are a number of steps your business can take:
■  Dilute the percentage of the concentration by increasing sales to other customers or entering new markets.
■   Consider an acquisition.
■   Make sure your customer relationships are not tied to just one person in your company. Have multiple points of contact who will advocate for you if needed.
■   Reduce or limit the amount of sales to the customer concentration. If you find that you need to increase infrastructure or make significant investments to maintain a large customer, you risk losing some or all of the customer’s business if you can’t meet their demands.
■   Enhance your relationship with the customer so that you are viewed as a key vendor that cannot be replaced. Keep in mind that this can be very difficult, though, since your customer may not be comfortable becoming so dependent on one vendor.
■   Consider a partnering arrangement with the customer. I worked with a company whose largest customer paid 90 percent of the company’s equipment costs, with the only stipulation being that the customer had top priority when placing an order.
■   Consider purchasing credit insurance on the customer. This will often alleviate your bank’s concerns and increase the amount available for these accounts receivable. Credit insurance may also give an owner more peace of mind.

Taking steps to manage the risks associated with large customers will help ensure the rewards outweigh the risks. ●

Insights Accounting & Consulting is brought to you by Kreischer Miller

How to achieve positive ROI from your human resources

Employee turnover is expensive, but it’s hard to quantify. It depends on whom you lose and the circumstances surrounding it, such as how long it takes to fill the vacant position; lost productivity before the employee leaves and how much others must step in; and productivity lost from orientation and training a new employee.

Regardless of the actual cost, it’s better to retain the employees you have by recruiting the right people from the start and keeping those employees engaged long term.

“You put a lot of time and money into making sure you find that right fit. You want to make sure that you are maximizing the ROI in terms of your results,” says Melissa White, PHR, manager of Outsourced Recruiting Services at BDO USA LLP. “Recruitment and retention are two human resources functions that require a lot of strategic thought and planning.”

Smart Business spoke with White about developing a strategy to set your company apart by providing what employees want.

Why is it so critical to recruit right?

The job market is widening as the labor force shrinks. Not only do you want to make sure new employees fit with you, you also want to ensure you’re the best fit for them.

Your organization puts time, and part of people’s salaries, into courting job candidates during recruitment and on-boarding. The entire process needs to be strategically planned to make it efficient and effective, in order to maximize your investment.

What do candidates and employees want?

There needs to be mutual respect and understanding between employees and employers. This leads to engagement — employees fully absorbed and enthusiastic about their work. Some trends are:

  • Career pathing. People want to be challenged and know what it’s going to take to get to that next step. You need to map out these steps, so your employees can see how they can achieve them.
  • Incentive compensation or pay for performance. Organizations need to communicate objectives directly and design a plan to align the interests of employees with company needs. And then if employees exceed those expectations, they want to be rewarded.
  • Engagement. Set up a two-way relationship; ask for employee opinions and take action with that information. A lot of firms do exit interviews. Try implementing ‘stay interviews.’ ‘What’s it going to take to make you stay? What makes you happy?’ Be sure to coach managers to take an active role in employee performance and development.

Why didn’t you mention work/life balance?

Just like with paid time off plans, work/life balance has become standard, almost like it’s expected.

The Society of Human Resource Management asked employees: Why would you look elsewhere for work? More than 50 percent said they were looking for better compensation and benefits, but 35 percent admitted they were dissatisfied with their current career path and another 32 percent wanted new experiences and challenges.

How can employers use these desires to gain a competitive advantage?

Employees want to make a difference and serve a higher purpose. They want autonomy, recognition, attention and the freedom to innovate and be creative. You can build these into your strategic plan for recruiting new candidates — and retaining current employees.

With recruitment, it starts with the job posting, which is partly a marketing campaign to express your company’s culture, expectations, etc. Not only does it need to be placed in front of the right people, it has to catch their attention.

You also want the right players to meet and court job candidates. If the interviewer is more introverted, have someone else available to get the message across of what your firm is really like.

It’s all about communication. Surprises don’t do any good for the candidate or the employer. It needs to be their decision as well as yours, so you’re not just filling the slot with a warm body.

And then once you have the right people in place, you have to keep them engaged by training management to take an active role in building goals and plans with the employees.

Insights Accounting & Consulting is brought to you by BDO USA LLP

The importance of a business valuation for owners nearing retirement

Baby boomers, a generation that is said to own more than half of all U.S. businesses operating today, are reaching retirement age in waves. Most of these aging business owners have the majority of their wealth tied up in their business. And most of those who own privately held businesses don’t know what they are worth.

“Effectively planning for retirement is difficult, if not impossible, without understanding the true value of a business as an asset,” says Sean R. Saari, a partner at Skoda Minotti. “Without a solid understanding of the value of their business, owners may be making a life-altering decision about how and when to retire without having all the necessary information. The most important number may be missing in that analysis if the value of the business is not known.”

Smart Business spoke with Saari about the importance of a business valuation in the retirement equation.

Why is a valuation important for business owners nearing retirement?

Having a business valuation sets the stage for effective retirement planning. It’s difficult to know if owners have sufficient assets to retire if they don’t know the value of their company.

It’s not uncommon for owners to have a perspective of their company’s value that’s higher than what it actually may be. Having insight into a company’s value helps owners devise strategies to increase the value of their companies in order to hit the target they need to retire.

Additionally, knowing the value of a business is good from a management standpoint, as it helps owners understand the strengths and weaknesses of their companies and how the performance of their businesses are trending.

How often should a valuation be performed when planning for retirement?

Business values change regularly because of many factors — the economy, the industry, a company’s individual performance. Best practice would be to perform a valuation annually. Failing that, it should at least be done at some point during an owner’s retirement planning process to provide the owner and his or her retirement planning team with a complete snapshot of the owner’s wealth.

There can be a difference between the sale price and the determined value. What a company sells for depends on the market and the buyers who bid on it. The value may be established, but the market will dictate the sale price based on the conditions at the time. An outside valuation can help set appropriate expectations for the potential sale price of the business to allow for more accurate long-term financial planning.

What should a business owner look for when selecting a valuation expert?

The first step should be to make sure that the valuation expert is credentialed. There are a handful of different valuation credentials in practice — Certified Valuation Analyst (CVA), Accredited in Business Valuation (ABV), Accredited Senior Appraiser (ASA), Chartered Financial Analyst (CFA) and others. Being a CPA doesn’t make someone qualified to do valuation work. Even those with valuation credentials may not devote a significant portion of their practices to valuation work. Make sure the valuation expert you select doesn’t just do this work on a periodic basis — it opens the door for errors and mismanaged expectations.

What should business owners know about executing a valuation?

It’s best to get a valuation at the outset of the planning process, or at minimum, when in-depth planning starts.

The time spent on getting a valuation done will hinge on how long it takes to gather all the information needed to perform the valuation — financial statements, tax returns, legal documents, etc. Once those have been gathered and handed over to the valuation expert, it typically takes a few weeks to put the valuation together.

As business owners near retirement, they should give consideration to the fact that their business may be the most valuable asset they own. In order to effectively plan for retirement, business owners need to know what that asset is worth. Owners shouldn’t allow the biggest number in their financial equation for retirement to be an unknown.

Insights Accounting & Consulting is brought to you by Skoda Minotti.

How to improve your board with the viewpoints of outsider advisers

Organizations with more than a couple million dollars in revenue should have outside board advisers. And this has become even more important for business owners as the business environment has grown more complex.

“We get blinded to doing things one way or the other,” says Floyd Trouten, a tax partner at BDO USA LLP, who serves on several for profit and not-for-profit boards. “Maybe we get a little myopic in our view. We’ve always done it this way. We’re going to continue to do it this way. That’s probably the wrong approach.”

Outside board advisers provide a different viewpoint, even though at times the conversation may become difficult.

“I’ve been on a board where an owner said, ‘Why am I having this board meeting? I don’t like what you are saying. You’re trying to tell me how to run my business,’” Trouten says. “But we’re not trying to tell you how to run your business. We’re trying to share some insights into your business that you’re not listening to.”

Smart Business spoke with Trouten about the benefits of having outside advisers on your board.

Why are outside board members a good resource?

It’s very helpful from a business perspective to get multiple approaches and viewpoints from outsiders who can help you make decisions. Some people look at things in a way that others just don’t see, and a board allows you to have access to advisers you wouldn’t normally have.

Also, sometimes a board member can say something to an employee or work to resolve something because it’s hard for the owner to be a prophet in his or her own land. Or, perhaps management needs to reach out to board members to report something that the owner isn’t sharing.

The more complex your business, and the more growth it’s undergoing, the more help you may potentially need.

What’s the ideal make-up of a board?

If you don’t want a board for the image only, you want more outside than inside advisers. You have enough of an inside view already. If you have a five-person board, you would have two from the inside and three from the outside. If you have a seven-person board, the board should be three from the inside and four from the outside.

Who should serve on it?

You want to find board members who can work in groups and are willing to share ideas, success and failures — people who sweat over issues, roll up their sleeves and try to help make the business better. A ‘yes’ person is not a good trait in the long run.

It can be helpful to look for subject matter experts. For example, if you are in sales/distribution, consider someone from a different industry who knows a lot about sales and distribution. This adviser could provide good ideas. Or if your company is poor at branding, consider someone who has had a long career in communications.

In some cases, people ask someone who has name recognition because he or she can open doors. But that may not be the best move if it doesn’t improve your company.

Retired CEOs also serve on a lot of boards, but their effectiveness depends on how far they are removed from the business world.

You want people with experience who have insights and some gray hair, no hair or colored hair, as the case may be.

How do you find the right people?

You can ask your attorneys, accountants, bankers, people in industry, etc. You can do a board search. You can ask colleagues or other business leaders at networking events. You want someone who can help make decisions with you, so search carefully.

What else would you advise?

The board is not there to run the day-to-day business. It’s there to help set direction, help make decisions and help strategically plan.

You need to have board meetings at least three times a year. The company and management should provide board education about the nature of the business, so the board can be more helpful.

You don’t want a board that never gets into your factory or warehouse. A board that sees it up close can get a lot of different insights into what’s going on.

Insights Accounting & Consulting is brought to you by BDO USA LLP

New cyberthreats make network testing more important than ever

There are many threats that can compromise a company’s computer network. Many businesses, however, don’t fully understand what can happen when networks aren’t configured properly, or are outdated.

“Prudent business owners invest in services to provide better assurance to their customers that they’re taking steps to protect stakeholder data,” says Gregory J. Skoda, Jr., CISA, principal at Skoda Minotti. “Without certain preventative and detective systems in place, someone can easily gain access to your network. It will only get more important to take steps to protect your business as attacks become more prevalent.”

Smart Business spoke with Skoda about protecting company computer networks.

What tests can be conducted to measure the strength of a network’s security?

There are two common tests: a vulnerability assessment and a penetration test.

Vulnerability assessments use software to scan computer networks to identify system issues. Examples of this could be old systems, unpatched software, default manufacturer credentials or passwords that could allow an outsider easy access to a network.

A penetration test is a controlled attempt to exploit the weaknesses found in the vulnerability assessment. These tests could be attempts to crack passwords and use default login credentials to compromise a network. This can help discover how severe a vulnerability issue could be. There are also times when a vulnerability assessment shows there are potential problems, but the penetration test shows it’s actually a false positive.

How often should tests be conducted?

Depending on the type of organization and nature of the business, vulnerability tests could be conducted multiple times per day. Businesses that host websites are running assessments constantly, but most businesses would be fine running quarterly checks. Penetration tests are usually done annually.

It’s advisable for companies that have made technology infrastructure or network changes to perform these scans during, or immediately after, such an event to ensure there are no holes in the security protocols.

Why should companies conduct these tests?

One of the important reasons to conduct these tests is to identify what systems are connected to a network. With wireless capability and myriad device connections that can be tied to a company’s network, it’s important to know who or what is requesting access to your systems.

Companies lose an element of control when mobile devices or laptops connect to their network, and that could lead to a catastrophe. Testing ensures all systems are up to date and reaffirms that security measures are actually in place and functioning. They can also validate that the procedures your internal IT department or external IT consultant has performed are working. Companies may also need to show that their security measures are in compliance with applicable regulatory standards and customer requirements.

Conducting regular network assessments can provide assurance to customers or other stakeholders that your systems are secure. That sentiment can mean more if those tests are conducted by an independent third party. It can help put customers at ease if they know that proper steps are being taken to protect their information.

What should companies look for in a provider?

Hire a provider with the right experience, skills and tools to properly perform the testing. Look for an independent, third-party IT auditing expert that will work in partnership with your team.

You will also want to find a provider that is a Certified Information Systems Auditor, Global Information Assurance Certification Certified Penetration Tester, Certified Information Systems Security Professional or is comparably certified, and ask which tools and methodologies are being used. Review the provider’s references and case studies.

New exploits and hacks appear daily that can be used to gain access to a company’s network. It’s important to regularly inspect the strength of your systems to ensure your network is secure against new threats.

Insights Accounting & Consulting is brought to you by Skoda Minotti.

Why enterprise risk management is key to an effective growth strategy

For many owners the value of their business is the largest asset on their personal balance sheet.  As such, it is critically important to manage risk factors that could reduce opportunities and diminish value.

“Evaluating and addressing risk through an effective enterprise risk management process is fundamental to achieving a company’s goals”, says Stephen Christian, Managing Director of Kreischer Miller.

A growth strategy without addressing attendant risks may result in unexpected consequences which limit the chance of success.

Smart Business spoke with Christian regarding the importance of an enterprise risk management system for growing, privately held companies.

What is enterprise risk management?

Enterprise risk management (ERM) is most often defined as methods and processes used by organizations to manage risks related to the achievement of objectives. Risks come in many forms—geopolitical, financial, customer, supply chain, regulatory, litigation, rising costs and so on. Properly managing these risks will help to achieve desired goals.

What does risk management have to do with growth?

All companies that pursue growth take on risk—increasing headcount, adding equipment, entering into new markets, investing in new technology, dealing with new suppliers – all have attendant risks that should be anticipated, planned for and managed. If you omit risk factors from strategic planning, you will be more vulnerable to interruptions and road blocks to growth.

Isn’t this a public company issue?

Absolutely not. Public companies are often larger and more geographically dispersed, thus dependent on systems and processes to drive success. They generally have significant resources invested in evaluating and planning for risk factors that may impede success. Private companies, although perhaps not as large or sophisticated, operate in a fast-paced, complex and, more often than not, global marketplace.

We live in a new era of growing and diverse threats and obstacles to our businesses. All companies must protect their strategy and growth desires by effectively managing risk.

Who should be responsible?

Assuming you do not have a risk management department headed by a chief risk officer, most often this initiative is led by the COO or CFO.

Such a person is often in the best position to look across the organization and focus on the big picture.

This person in turn communicates with the CEO and/or board of directors. The leader of the initiative will have strategic interactions with key people throughout the organization to discuss potential risk factors and their possible impact on desired strategies.

How do you implement an effective ERM system?

First you need to understand the importance of such a system in achieving your goals and be committed to setting a tone at the top. Then assign leadership responsibility to the right person and clearly set forth the expectations for the initiative. The group or person charged with developing the ERM system will identify risks that could impact the business, assess their likelihood and magnitude and determine appropriate responses.

This process often involves scenario planning—what happens if costs go up, access to inventory from another country is interrupted or employment markets tighten. An often overlooked aspect of a successful ERM system is the need to periodically update your findings.  We live in a constantly changing world and these changes often impact the risk factors that can affect a successful business.

Companies need to be resilient and anticipate obstacles to growth and success. Don’t wait until it is too late to plan and make adjustments. The earlier you anticipate potential problems, the more alternatives you will have to navigate changes necessary to ensure you accomplish your goals. So as you plan your future growth strategies, you will be well served to make ERM an integral part of the plan. ●

Insights Accounting & Consulting is brought to you by Kreischer Miller

Three things you need to know about your lender

Now that the economy is showing some traction and the business environment is continuing to improve, business owners are looking at opportunities to expand their businesses, including hiring additional team members, purchasing new equipment and making acquisitions.

Such plans often require outside capital, and commercial banks can provide an affordable source of funds.

“The more that you know about your lender, the better your chances will be in securing business credit at favorable terms,” says Mark G. Metzler, CPA, CGMA, Director of Audit & Accounting at Kreischer Miller.

Smart Business spoke with Metzler on the three issues you need to know about lenders.

What are the key factors that lenders use in their decisions?

Lenders assess credit risk based upon factors including credit/payment history, income and overall financial situation. These are commonly referred to as the ‘5 C’s':

1. Character. What kind of borrower will you be for the bank? Character is the general impression you make on the potential lender. It is a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan. Companies don’t repay loans, people do. Your educational background, experience in business and in your industry, the quality of your references, and the background and experience of your management team will all be considered in making this assessment.

2. Credit history. Qualifying for different types of credit hinges largely on your credit history. Many lenders use credit scores to help them in their lending decisions, and each lender has its own criteria, depending on the level of risk it finds acceptable for a given credit product.

3. Capacity. This is the monthly or annual revenues question. No lender is interested in providing a loan to someone who has no means to repay it. Lenders will consider cash flow available to service debt (EBITDA) and the company’s debt service coverage ratio.

4. Collateral. Lenders may make both secured and unsecured loans. Lenders may require you to pledge assets like real estate or capital equipment as collateral. Alternative lenders might consider your accounts receivable, inventory or monthly credit card receipts as collateral.

5. Capital. Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. To your lender, capital represents your ‘skin in the game.’ Remember that bankers are highly risk-averse and want to ensure borrowers have some skin in the game. From their perspective, borrower’s capital will make it harder to walk away.

How have regulations impacted banks and their willingness to lend?

Historically, commercial lenders were not burdened by the same degree of regulations as consumer and mortgage lenders. It was not uncommon that a few notes on a napkin, or a handshake over drinks, were all that a lender needed to initiate a commercial loan request.

That changed with the enactment of the Dodd-Frank Act which has had a significant impact on the manner in which banks conduct business. Dodd-Frank increased the compliance stakes in the commercial application process through new data collection requirements.

Consequently, the timeline from initiation of a loan request to settlement has expanded. New regulations make it more advantageous for a borrower who may need to restructure a loan to find another bank rather than to stay with the current lender.

A loan restructured with an extended amortization with a current lender may be considered a troubled loan, whereas with a new lender it may not be.

Are there intangible factors that a business owner should consider?
Similar looking banks may have a different appetite for providing loans to certain industries. One lender may be interested in technology companies, while another may avoid them.

Additionally, depending upon the size of the bank, the bank may be near its lending capacity for a certain industry.

Business owners should speak with their financial advisers who can assist in matching the company with the right lender. It’s all about relationships, and working together to achieve a common goal. ●

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