Tax programs that offset the cost of innovation for manufacturers in Ohio

The outlook for Ohio manufacturers is steady with some growth potential, which is expected to vary by sector. Capital expansion has been minimal, though companies have stronger balance sheets and go-to-market strategies. Still, regardless of sector, challenges seem to overshadow opportunities.

“The main challenge is finding talent,” says Jonathan J. Shoop, CPA, a principal at Skoda Minotti.

He says the trend of re-shoring — bringing overseas jobs back to the U.S. — comes with a paradox: “Manufacturers need qualified candidates, but few are available,” Shoop says. “The market is attempting to address the shortfall by forging job pathways through community colleges.”

Talent shortfalls contribute to innovation impediments — a lack of qualified people or funds make it difficult to run an effective R&D department. Fortunately there are ways to mitigate the costs of the solutions.

Smart Business spoke with Shoop about ways manufacturers can offset expenditures as they pursue innovation.

What can tax incentives do for companies that lack the resources to innovate?

For those companies that lack the people or cash flow needed to innovate, the R&D tax credit can help.

For example, trial fees from partnering with Ohio’s Manufacturing Advocacy & Growth Network (MAGNET) for new product development qualify for R&D credit. Fees related to product innovation, or the exploration or implementation of a new manufacturing philosophy in partnership with an outsource engineer can be applied to an R&D tax credit.

Manufacturers can also shift some of the burden of the talent problem to InvestOhio, which has programs tailored to address that issue while offsetting the cost of hiring.

There’s also the Work Opportunity tax credit that provides incentives for hiring from certain target groups, like veterans and felons. It helps defray the costs for training and development.

How can organizations such as MAGNET and WIRE-Net serve as resources for manufacturers?

MAGNET and WIRE-Net can connect manufacturers with outsource engineers that can help tackle large projects. The tax credit would be applicable to both public and private companies and can apply even if both internal and external teams are handling the project.

What can the InvestOhio credit do for Ohio manufacturers?

It’s essentially a 10 percent tax credit — dollar for dollar — that was established to facilitate job creation and investment in the state. It can help offset capital improvements, the purchase of real estate and hiring that is done in Ohio. Manufacturers will inevitably invest in their business; InvestOhio allows a company to take advantage of a 10 percent discount while doing it.

How can manufacturer’s improve their administration and office processes?

There are new ways of handling tasks that are performed off the shop floor. While ‘management by walking around’ had been a common method of oversight, multi-location production makes that not as effective, so it’s necessary to manage by reports. Process improvements are increasingly streamlining reporting, with throughput and indirect cost reports helping manufacturers make decisions quicker.

There is also constructive disruption. This method entails looking across office and administrative processes and finding novel improvements. A multi-disciplined team that’s unfamiliar with those processes is assembled to ask questions and suggest improvements.

It’s been said that each manufacturing job creates six jobs up or down stream. The industry is projected to grow 22 percent in the region in the next 10 years, so contrary to what might be considered the common narrative, manufacturing isn’t going away.

For those working in the industry, there are resources available for investment, innovation, talent and even compliance to encourage growth. There are tax incentives, talent and engineering solutions for innovation, and plenty of people here to help strengthen an industry that’s vital to the market. Manufacturers just need to know where to look.

Insights Accounting & Consulting is brought to you by Skoda Minotti

How to better manage your compliance risk in today’s regulatory environment

Regulatory risk is a top concern for business owners today. The federal government and other governing bodies have become more active in setting up and determining policies for businesses since the financial crisis. And it’s not just those in the financial sector that are affected.

The sheer volume and complexity of some of these rules is daunting. Plus, they can change quickly.

Laurence Talley, CPA, CIA, senior director of Risk Advisory Services at BDO USA, LLP, says that these regulations to enforce risk management and mandate controls are an effort to better protect consumers.

“But there’s a constant battle between being efficient and complying with what’s required,” Talley says.

Smart Business spoke with Talley about compliance risk and how to manage it with internal controls and other tools.

What exactly is compliance risk?

There are four basic types of risk — financial, operational, compliance and strategic — all of which are mitigated by internal controls. Compliance risk is an organization’s ability to adhere to rules, regulations, policies, procedures, laws and mandates. Some industries are more highly regulated, and as a result face greater external compliance risk. All companies also face internal compliance risk, which means complying with their own internal policies and procedures. The key to managing these risks is installing controls that confirm the organization is complying with its internal and external requirements on a consistent and regular basis.

What are some best practices for managing internal compliance risk?

You want to have well defined and well-documented policies and procedures. Then ongoing training from the top down is key. Make sure everybody knows what he or she is required to adhere to from a policy and procedure standpoint.

On the back end, you need to monitor — do periodic check-ins on certain activities to confirm that people are following the rules, while looking for trends. Are there trends and activities that demonstrate a lack of compliance? If so, challenge the root cause behind that. Do people need more training? Are people circumventing the rules, regulations, policies and procedures, and what is the intent when they deviate? Or, is there a breakdown in the way the process is being managed?

How do you recommend organizations adhere to what’s mandated externally?

There’s a general understanding of why certain rules are in place — to protect consumers or to protect other organizations. But a lot of organizations struggle because they don’t have the money and/or enough resources to do the compliance work that’s necessary to manage this type of risk. They wrestle with concerns like the cost versus the benefit and how long they can sustain it.

Some business leaders understand that it’s the cost of doing business, and they execute on it and look for ways to do it efficiently. Others take more aggressive steps like protesting to government leaders in an attempt to make the requirements, laws and regulations less impactful.

One efficient approach to managing this risk is leveraging experienced third-party organizations. You can bring people in on a short-term basis, leveraging a variable cost instead of a fix cost model, to help navigate through the compliance requirements.

This also is an instance where technology has been very helpful at driving efficiencies. Compliance tools can extract data from your systems, run that data through a series of tests, and tell you whether or not something is deviating from what’s required, per the law or your policies and procedures. So, don’t be afraid to explore the cost-benefit of leveraging technology.

Also, don’t be intimated by your perception of the cost, because if you don’t manage the risk and leverage the availability of outside resources and technology, what’s the impact of the risk coming to fruition? Ignoring risk is a big mistake — that it-won’t-happen-to-me mentality.

You need to identify and understand your risk, and then proactively and deliberately mitigate that risk through internal controls. But this is something a lot of smaller organizations don’t do — and they should, because it’s those smaller organizations that really aren’t in a position to absorb the risk if something significant does go wrong.

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

Trust and employee fraud

Many privately-owned businesses continue to experience losses from fraudulent activity. Typically, these crimes are committed by employees who are in a position of trust, usually within the accounting department. Individuals that are trusted by business owners often have the greatest opportunity to commit fraud.

“Trust, combined with a poor internal control environment and a lack of segregation of duties, can be a recipe for employee fraud,” says John J. Helmuth, Jr., CPA, CGMA, director of Audit & Accounting at Kreischer Miller. “This is not to say that all trusted employees are fraudsters. It just means that the existence of trust is the first ingredient in an employee fraud scheme.”

Smart Business spoke with John Helmuth about the occurrence of fraud by trusted employees in private companies.

What are the elements that contribute to the risk of employee fraud?
There are three elements that contribute to the risk of employee fraud (also known as the “fraud triangle”):

Pressure or incentive – the employee may be experiencing personal financial distress, substance abuse, or gambling addiction.

Opportunity – the employee has access to assets that allow the individual to believe the fraud can be committed and successfully concealed

Rationalization – the perpetrator justifies the fraud due to a perceived injustice (i.e. “I deserve this because I did not get a bonus”).

What are some common myths about fraud?
The first common myth is that, ‘Fraud won’t happen in my company because there are no criminals that work here.’ However, most employees that commit fraud have never been convicted of any crimes or punished by a previous employer.

It’s also easy to think that most fraud is committed by new or short-term employees. However, most fraud is committed by long-term employees that have been with the company for over 10 years and have an established comfort level with the owners or senior management.

The third myth is, ‘My controller would never steal because he or she is a good person, hardworking and trustworthy.’ Actually, fraudsters are typically those who are in a position of trust who have access to assets susceptible to a risk of fraud.

What are some signs that a trusted employee may be committing fraud?
Some red flags include employees living well above their financial means (expensive new cars, luxurious vacations, etc.), individuals with financial distress or pressure in their personal lives, a disgruntled employee that complains about his or her compensation and worth to the organization, an employee that refuses to take time off or vacation, sloppy accounting records, vague explanations for large or unusual expenditures, and unexplained decreases in company cash flow or profitability.

What are the costs to a company and business owner of employee fraud?
Obviously, there are financial losses if assets are misappropriated. Statistics show that incidents of employee fraud could cost thousands of dollars and that typical annual losses could average almost 5 percent of revenues. Many companies are unsuccessful recovering the financial losses.

Besides financial losses, fraud can also damage a company’s reputation, relationships with customers and other business partners, and have a negative impact on employee morale.

How do companies reduce the risk of employee fraud?
A comprehensive fraud risk assessment should be conducted to protect the company from losses due to fraud. Identify potential risk areas, assess the likelihood and significance of fraud occurrences, and develop a response to identified risks.

You also need to assess the internal control environment, including preventive controls (designed to prevent fraud from occurring) and detective controls (designed to enable timely detective of fraud).

The culture of the organization and “tone at the top” by the owners, senior management, and a board of directors responsible for corporate governance should play an important role through the establishment of policies against fraudulent behavior.

Lastly, safeguarding of company assets and tightening of internal controls with proper segregation of duties would also be a deterrent against fraudulent activity. ●

Insights Accounting & Consulting is brought to you by Kreischer Miller

Give enough time for exit planning or risk leaving money on the table

There are many misconceptions business owners have when it comes to exit planning. Some think they have an appropriate exit plan if they have a will or if their son or daughter is in line to take over. In truth, an exit plan is far more comprehensive.

“Many business owners wait too long to begin planning,” says Michael Ella, CPA, a manager at Skoda Minotti. “They think that when they’re ready to leave their business they can just sell it the next day. If they carry that mindset and wait too long to exit, they limit their options and reduce the selling price they could otherwise command had they started earlier.”

Smart Business spoke with Ella about exit planning, and how holding to common misconceptions can drastically reduce the value of a business.

What’s involved in exit planning?

There are several aspects to a full exit plan. There’s the legal aspect, which includes wills, the buy/sell agreement and other documents that need to be put in order. There’s insurance, such as life and key man; and financial records that should be in order and processes that should be properly documented. It’s also important to analyze the risks of the business and mitigate them before exiting.

Personal financial planning should be part of an exit strategy to determine what income or savings an owner needs to retire. In that vein, estate planning should also get wrapped up into an exit plan because it can affect trusts and how assets are allocated.

What are the more popular exit options?

There are typically two types of exits. There’s a succession, which is typical for family run businesses, and there is a third-party sale.

Succession planning typically involves the business owner transferring the business to children. There are two types of third-party sales but the most common are a full sale of the company or a partial sale, otherwise known as recapitalization. A partial sale generally involves the sale to a private equity group where the business owner will retain 20 to 30 percent of the company.

How is exit planning unique for manufacturers?

For manufacturers, it’s important to talk with key vendors about their exit plans. If a vendor that is essential to the business doesn’t have an exit plan, it could jeopardize the manufacturer’s business because vital materials or services may not be easily acquired elsewhere in the market if a key vendor were to go out of business. This would be a problem for the manufacturing company’s new ownership, and could drive the value of the business down.

When should business owners begin constructing their exit plan?

From the time planning begins through the time the owner is completely out of the business is usually three to five years. Abbreviating this timeline often means compromising the value of the business.

For at least half of business owners, their exit of the business is unplanned because of death, disability or divorce, most commonly. That’s why it’s important for all business owners to have a contingency plan in place.

How can business owners maximize the value of their company prior to a sale?

With the eyes of a buyer, business owners should undertake a full risk assessment of their company. Analyze revenues, customers, assets and the management team, looking for possible weakness that could drive down company value, and remove them.

Document business processes and have accurate financial data available for potential buyers. It’s the same for a successor situation. Business owners shouldn’t want to transfer their business issues to a family member. Get them resolved before an exit.

What common regrets do owners have after a sale is completed?

It’s tough to maximize a business’s value if an exit is rushed, and that can leave owners feeling as if they left money on the table. That’s why completing an exit plan is an exercise in understanding value and where improvements can be made to increase that value. It’s a good exercise for owners to see the business through the eyes of a buyer and can improve the profitability of the company while you’re still in it.

Insights Accounting & Consulting is brought to you by Skoda Minotti

How to attract and retain talent in manufacturing and distribution

When it comes to attracting and retaining talent in the manufacturing and distribution space, most people look outward.

We’ve all heard it: There is a war on talent. The baby boomer workforce is retiring. Manufacturing is dying. The available workforce doesn’t have the necessary skill sets that employers need. (Learn more about these and other risk factors in BDO’s report: http://bit.ly/BDO_2015ManufacturingRisk.)

But before you point fingers at the external hurdles to your labor woes, Stacy Feiner, Psy.D., management consulting director at BDO USA, LLP, believes you need to tackle your internal issues.

There is validity to the external challenges like a scarcity of ready talent, but Feiner recommends that companies first look at developing their hiring and recruiting practices, methods of on-boarding new talent and training capabilities.

“I think the issues stem internally,” Feiner says. “There is a lot of great talent out there if businesses were better at presenting the value of working at their company.”

Smart Business spoke with Feiner about developing a talent management system.

Where do businesses fall short with their talent management?

It takes skill to recruit and attract top talent, but many manufacturers and distributors employ antiquated processes and methods that don’t reach ready candidates and aren’t truly connected to the company’s culture.

Another problem is that poor hiring practices can unwittingly turn top talent away. Top talent might be coming to the door, but the company doesn’t impress that talent as a great place to work. Or, maybe the organization can find great talent, but once that talent comes in, there’s not enough training and development to keep them.

How can employers be more proactive in building their talent management system?

Remember that numbers are a lagging indicator. People drive the numbers, so that’s where your focus should be.

Don’t set yourself up for failure by skimping on recruiting and seeing it as an expense. Instead invest in talent — establish an annual budget, use new tools and follow a disciplined hiring process. The value that people bring is what sets your company up for success, so you need to be engaged.

You also need a plan; rather than see talent problems in isolation, see them as part of a system. If something is broken in recruiting, it negatively impacts succession planning. If performance management isn’t working, your employee engagement will decline. When you see these components of talent management in a system, you can build a program that increases your bench strength.

Engaged leaders ensure that their people have clear goals, while having the tools to achieve those goals; that their people see opportunities for career development; and that their people feel a sense of belonging.

What are some examples of this?

One manufacturer went through 10 years of growth, but when it attracted sophisticated customers with bigger orders it was under staffed and under prepared. So, it set out to build its infrastructure by adding a middle-tier executive team of high performers from large companies who were frustrated by the bureaucracy. Their entrepreneurial spirit and potential was unleashed in the smaller company, which is poised to double in size.

Another company determined it had to redesign its business model, going from brick and mortar to e-commerce. Rather than replacing the workforce, the leadership team developed its current employees for new roles through assessment and training, and a high-touch change management process. They compared the investment costs of each option and decided it was riskier to try to integrate a new workforce. Plus, by getting buy-in for the change, the employees united around the mission and took on an ownership mentality.

What else would you like to share?

Business owners can choose to develop and build the right talent management system that solves their people problems. Recognize that the strength of your company is inventing, designing, manufacturing and distributing valuable and essential products to the world — widgets big and small. You don’t have to tackle these people challenges alone. Get someone who understands how it all works together to ensure you have the right solution to optimize talent.

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

Increase employee participation in your company’s 401(k) retirement plan

As individuals struggle to identify how much money they will need to retire, companies that sponsor 401(k) plans have their own challenges.

Many businesses are finding it difficult to design plan provisions that encourage participants to save for retirement at the 15 percent rate (matching included) recommended by most advisors.

Most financial advisors agree that it’s never too early to begin saving for retirement, making these problems with active participation in the retirement planning process troublesome.

Increases in mortality, questions surrounding Social Security and increased health care costs are all issues that factor into this discussion, says Roman Leshak, Jr., director of Audit & Accounting at Kreischer Miller.

“Plan sponsors not only want employees to have the financial ability to retire, but also want to avoid limiting individuals from contributing to the plan due to nondiscrimination testing failures,” Leshak says. “Educating and encouraging the non-highly compensated portion of plan participants has become more of an emphasis of plan sponsors to increase participation rates.”

Smart Business spoke with Leshak about the following strategies that are commonly implemented by plan sponsors to increase employee participation in 401(k) plans.

Auto enrollment
The trend of adding auto enrollment provisions to plans has definitely helped to increase plan participation. Current trends reflect that an increase in the initial new-hire auto enrollment percentages of 6 percent or more has not deterred plan participation.

In addition to auto enrollment, re-enrollment has become more common. This is a mechanism by which both current and inactive participants are required to opt out each year or be re-enrolled at the standard percentage each subsequent year.

Auto escalation
Many plans have enhanced their auto enrollment provisions to include auto escalation provisions that increase participant contributions at a rate of 1 percent a year up to a maximum as described in the plan document.

Many plans are implementing this strategy and capping the increase as high as 10 to 12 percent to help employees save for their retirement by increasing contributions as they receive pay raises.

Stretch match
A more strategic option is to extend the matching contribution limit to encourage participants to contribute more of their compensation.

In place of a dollar-for-dollar match, employers are now matching 25 percent or 50 percent of a higher contribution number in order to drive not only participation, but the level of participation of current employees.

Research has shown that participants will typically contribute up to the matching limits to take advantage of the “free money” provided by the employer in the form of matching contributions.

Increasing matching provisions to 25 percent of up to 12 percent of compensation encourages participants to defer more of their own money to get the same match as the dollar-for-dollar options, yet costing the employer the same amount.

Shortened waiting periods
Enrollment waiting periods continue to be shortened to help increase participation of new hires and the one year of service requirements are becoming more uncommon.

Plan sponsors recognize the importance of providing the opportunity to their younger employees to begin participation so they contribute to the plan over their entire career.

Plan sponsors constantly struggle with increasing plan participation rates and the strategies discussed above are the most common current trends being implemented to bridge the retirement gap. Educating plan participants at all levels of the organization and providing constant information is still of primary importance to increase and maintain plan participation. ●

Insights Accounting & Consulting is brought to you by Kreischer Miller.

Money-saving financial tips for individuals and companies

There are many money-saving opportunities for businesses and individuals — through IRA conversions, Health Savings Accounts (HSA), making a trustee active in the business — but it’s critical to work within the legal constraints when considering these opportunities or hefty fines can eliminate the savings.

“There are a lot of opportunities in the weeds,” says Jim Sacher, CPA, a partner at Skoda Minotti. “If you find the right one, the savings can be significant. Those savings can be lost, however, if you’re not careful to work within the law.”

Smart Business spoke with Sacher about hidden savings for businesses and individuals.

How can individuals use a Roth IRA Conversion to their advantage?

The unique feature of a Roth IRA retirement savings vehicle for individuals is that, unlike a traditional IRA, it allows you to withdraw all of the funds in the account tax-free. But there are important caveats.

If, according to your joint tax return, you earn $193,000 or more, you can’t contribute to a Roth IRA. These taxpayers can, however, make contributions to a nondeductible IRA, which has no income limit. The disadvantage of a nondeductible IRA is that the income accumulated is taxed at ordinary income rates when withdrawn. But there’s a backdoor. You can make contributions to a nondeductible IRA, then convert it to a Roth IRA.

There are a couple of traps, however, that could get you in trouble. For instance, if you convert a nondeductible IRA to a Roth, any IRA you have is considered converted on a pro rata basis, which could create ordinary income. It’s best to talk to a professional before executing this strategy to ensure you’re not losing the benefits of a conversion because of the added tax burden.

How can HSAs add to an IRA contribution limit?

An HSA can work like an IRA; contributions go into the HSA on a tax deductible basis and can then grow tax-free. The catch with an HSA is it can only be used for medical expenses. If, however, you can afford to pay for your health care expenses out of pocket, the money in the HSA builds up tax-free and will accumulate indefinitely. You can use it to fund your health care through retirement or leave it to beneficiaries and they can use it for medical expenses. In this way you can actually increase money saved for retirement or beneficiaries just like an IRA.

Why should companies consider making trustees active in their business?

The enactment of the Affordable Care Act created the net investment income tax, which applies to all unearned income for couples with income greater than $250,000. As income flows through a business, like an limited liability company to an owner, the owner who is active in the business does not pay net investment income tax on this income, but a passive investor does. If the owner moves company ownership into an irrevocable trust for estate planning, the trust is considered inactive and attracts the net investment income tax, even though the owner is active.

There is, however, a provision in the law that implies that a trustee who is active in the business creates an active connection to the trust. The trust then escapes the net investment income tax. The definition of ‘active in the business’ is unclear, but it can be assumed that the activity should be regular and continuous although need not be full time.

What documents do companies need to have in place for their health and welfare plans?

Health and welfare plans are benefit plans businesses provide to employees other than qualified retirement benefits — health insurance, dental, disability, life and other voluntary benefits. The law requires these plans to have a plan document, which describes a plan’s terms and conditions related to the operation and administration of the plan. Most businesses either don’t have plan documents or believe the contract they have with a benefit provider counts as a plan document, which it doesn’t.

If the Department of Labor (DOL) audits and these plan documents aren’t in place, the DOL will levy a $50,000 fine for each plan that’s without a plan document. It’s difficult to get around because the DOL is serious about collecting fines. Simple actions now can prevent very costly penalties because of these plans.

Insights Accounting & Consulting is brought to you by Skoda Minotti

How to prepare for the upcoming tax season

Congress is slow to act with tax legislation until the ninth hour, so it’s hard to know exactly what will change for the upcoming filing. Should you defer income? If you want to buy assets, is it better to do it now or later?

Over the past several years Congress has failed to make drastic changes, but whatever happens, don’t let your taxes wag a sound financial opportunity for your business.

“Yes, we have an unclear picture, but as in years past, Congress is expected to pass a bill to retroactively extend more than 50 expired tax provisions. Companies should do what’s right financially and keep business as usual, whether it’s expanding operations, buying equipment or hiring employees,” says Steve Magovac, CPA, MT, tax senior director at BDO USA, LLP. “Then, as tax legislation is updated, we’ll maximize those benefits.”

There are a lot of incentive programs, however, that business owners aren’t aware of. That’s why it’s so important to reach out to your financial and tax advisers as soon as a concept or project starts to look viable — most of these programs require you to file an application before you take any action.

Smart Business spoke with Magovac about what you need to know about preparing for your taxes.

Although Congress may still make changes, what is clear at this point?

The biggest change, to this point, is the Affordable Care Act reporting requirements, where many corporations are required to prepare 1095-Cs, which are informational forms that are similar to 1099s. The purpose is to allow the IRS to confirm that whether employers are providing minimum essential coverage and that individuals subject to the individual mandate do in fact have coverage.

There are still a lot of unknowns with this, so proactively communicate with your health insurance carriers and payroll department or outsourced payroll company, in order to properly prepare these reports and avoid large penalties. There’s also talk that the IRS might give some reprieve, as long as you try to comply with the rules.

You mentioned Ohio credits and grants. Can you give some examples?

In Ohio, there are numerous grants, loans and tax credits available. A few common programs, if companies meet the eligibility requirements and filing procedures, companies may be eligible for are:

  • The InvestOhio Tax Credit that provides a 10 percent tax credit for employee and capital growth.
  • The Job Creation Tax Credit, a refundable tax credit for companies creating at least 25 new full-time jobs.
  • A job training grant, which reimburses employers for up to 50 percent of the eligible employee training costs, up to $4,000 per employee.

Also, sole proprietors, rental real estate activities and owners of pass-through entities may benefit from the Ohio Small Business Investor Deduction. For 2015, the income deduction amounts to 75 percent of up to $250,000 ($187,500) of Ohio business income from being subject to Ohio income tax.

What are other programs to consider for the upcoming tax season?

If business owners are selling real estate and investing in a different location, or replacing old obsolete assets with similar replacements, they should consider a like kind exchange, also known as a 1031 exchange. This is where organizations expecting to recognize a gain on the disposition of old assets are able to defer the gain into the future.

Another program to consider is Cash Balance Pension Plan, which works well for businesses that are closely held, profitable and have a lot of cash flow. This employer-sponsored defined benefit retirement plan allows owners or a few key people to put additional dollars away, beyond their existing retirement plan.

In 2014 the IRS finalized the new tangible personal property rules. Employers need to, if they haven’t already, review their capitalization policies. If they meet certain provisions of the new regulations, companies can expense some of their fixed assets, rather than capitalizing and depreciating them, which also applies to certain repairs and maintenance expenditures.

These are just a few of the opportunities that can put you and your business into a better position. While you don’t want to let your taxes dictate business decisions, you also want to work with your advisers to take advantage of every tax opportunity.

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

Seven potential wastes that could be keeping your business from profitability

When operating a business, whether you are manufacturing a product or offering a service, there are processes that are developed over time.

These processes either add value or they add waste. The ability to eliminate waste is one of the most effective ways to drive additional profits.

“In eliminating waste, it is important to understand what waste is and where it can be found,” says Steven E. Staugaitis, Director, Audit & Accounting, at Kreischer Miller. “The automobile manufacturer Toyota is credited with identifying the seven prominent wastes that have become the foundation for lean manufacturing.”

Wastes can be identified by walking the business or brainstorming with team members in an organization.

Smart Business spoke with Staugaitis about the seven prominent wastes that could be holding your company back from achieving profitability.

1. Overproduction
Overproduction occurs when more of a product or service is produced than what is needed.
It can also occur when a product or service is produced before it is required. Companies that carry inventory can be guilty of this when they manufacture products to have ‘just in case.’

2. Waiting
Inefficient use of time causes waiting in an organization. This time can be identified as the lead time needed in waiting for the next step in the process. Waiting can be caused by ineffective layouts of shop floors, poor material flow or production runs that are too long.

3. Transporting
Transportation between processes is a non-value cost that can lead to damage or loss. This often occurs because of an inefficient layout of a manufacturing operation or the shuffling of paper in an office environment.

4. Inappropriate processing
Another common waste is when organizations misuse their resources. This waste occurs when a company uses a CNC machine to cut a piece of sheet metal when a pair of shears would do.

In a service oriented organization, this often occurs when a senior partner is preparing information that a first year staff would be capable of preparing.

5. Unnecessary inventory
Unnecessary inventory is a direct result of overproduction and waiting.  By reducing the unnecessary inventory, an organization can get to the root of other underlying problems.

6. Unnecessary motion
This waste is caused by the ergonomic layout of each employee’s workspace. It occurs when there are unnecessary instances of stretching, reaching or bending. These costs are often not apparent until a lawsuit ensues.

7. Defects
Defects can come in a variety of forms. Reworking and scrap incurred during a process along with the time delay that is required to fix a defect is the common source of this waste before the shipment of a deliverable product or service.

After a defect has been detected, the costs to fix it can be great and even detrimental if it costs the business a customer.

Identifying these wastes in your business is only part of the process. Short-term gains can be realized when you begin to eliminate waste.

But organizations really profit when they ingrain waste reduction as part of their culture. Making the long-term commitment can transform a company from good to great.

In order to achieve this objective, both employees and leaders at every level of the organization must be diligent about finding ways to make their own individual contribution to the effort. ●

Insights Accounting & Consulting is brought to you by Kreischer Miller

The window to adopt new, simplified accounting practices is closing

Recent and upcoming changes to Generally Accepted Accounting Principles (GAAP) can be seen as a matter of simplification. Companies should be aware of these beneficial modifications because the window to adopt them may only remain open for a short time.

“Broadly, the Financial Accounting Standards Board (FASB) is trying to make things easier for practitioners to prepare annual financial statements,” says Ryan Siebel, a principal at Skoda Minotti. “It’s removing the non-intuitive parts of GAAP and trying to get rid of margin and corner cases, making it easier to prepare statements — it’s essentially less about reading the fine print and more about getting things right.”

Smart Business spoke with Siebel about the changes and what companies need to know to stay current.

What changes do companies need to know about this year?

The FASB subsidiary, the Private Company Counsel (PCC), issued various standards that are all optional for private companies to choose. They’re essentially shortcuts for annual year-end financial reporting.

The most notable changes effective for this year’s financial reporting would be the three PCC standards issued last year that need to be adopted by the end of this year when companies release their 2015 financial statements. Companies can apply these simplification standards that cut out excess reporting that they’ve complained about.

Among those changes is the amortization of goodwill on a straight-line basis over 10 or fewer years that, in most cases, eliminates the need for the quantitative impairment test. Previously, companies had to go through rigorous scrutiny of goodwill to see if they needed to write it down or charge it off to earnings.

The other change affects companies that have a related party as their lessor. Under previous accounting guidance, companies had to consolidate the financial statements of that entity into the financial statements of the company. By adopting this PCC standard, companies may not have to present the financial statements of that leasing entity, only those of their own operating entity.

A third notable change relates to accounting for derivatives. For companies that have a swap agreement, this standard simplifies the steps needed to qualify for hedge accounting. It takes the effect of a swap out of the gain/loss calculation of current year earnings. It’s a shortcut to getting favorable treatment.

What’s coming in 2016?

Among the coming FASB changes is debt issuance cost. For companies that are issuing debt or are borrowing and have incurred cost to get debt, the new standards allow them to present that not as an asset but as a reduction to debt.

Another PCC standard that will need to be applied next year is for companies that acquired a business. There are certain intangible assets that no longer need to be recorded as part of an acquisition. Previously, if a company acquired a business, it needed to hire an expert to value the associated intangible assets, such as customer relationships and noncompete agreements. The new standard, if adopted, says companies don’t have to separately value those kinds of soft intangibles.

Why should companies consider adopting these accounting changes?

In the accounting world, there is the concept of preferability that makes it harder to change accounting standards and principles on a whim. These PCC standards put an exception in that allows a company, for a limited time, to switch without scrutiny.

It’s undesirable to be in a situation in which a company chooses not to adopt simply because they’re unaware of them, then switches accountants and is told they missed their chance to amortize goodwill. Once that window closes, it’s hard to change.

How can companies keep up with accounting changes?

Talk to an accountant. When there’s a significant or interesting change to any of the accounting practices, they should be ready with an analysis explaining how it will affect the company. Many of the changes aren’t applicable for all companies, so it’s important to have someone who can cut through the noise and figure out which apply.

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