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.

Insights Accounting & Consulting is brought to you by Skoda Minotti

How to know whether an ESOP is the right move for your business

The decision to sell your business to an Employee Stock Ownership Plan (ESOP) requires both time and attention to detail, says Brian J. Sharkey, director of Audit & Accounting at Kreischer Miller.

“If it aligns with your long-term goals for the business and what you want your legacy with the business to be, it can be a very good option,” Sharkey says. “As you navigate the decision process on an ESOP, it is essential to align with the proper advisers to ensure those important goals are achieved.”

An ESOP is a qualified retirement plan that is similar to a profit sharing plan except that instead of investing in a variety of stocks, bonds and mutual funds, it invests primarily in the company’s own stock.

The employer makes tax-deductible contributions to the ESOP, which the entity uses to acquire stock from the company or its owners. Essentially, by establishing this plan, you are creating a buyer for your shares.

Smart Business spoke with Sharkey about what to think about when considering an ESOP for your business.

What are some of the key advantages to forming an ESOP?

The formation of an ESOP can provide benefits to the company, the selling shareholder and the employees. If you’re the owner of a C corporation and you sell your shares to an ESOP, you can defer taxation on the proceeds as long as you reinvest them in certain U.S. securities.

You can then defer paying the taxes until years later, when you sell the underlying securities to fund your retirement. And in certain situations, you can avoid paying taxes altogether.

The company will often need to borrow money to pay for the initial financing to purchase the shares from the selling shareholder. The good news is that companies are able to deduct the principle and interest on ESOP loans, which essentially allows the selling shareholder’s shares to be purchased with pre-tax dollars.

In addition, ESOPs themselves are not subject to federal income tax. So if your company is an S corporation, earnings passed through to the ESOP are not taxed.  For example, if a company is 40 percent ESOP owned, 40 percent of the profits of an ESOP are not subject to federal tax.

Companies that are 100 percent ESOP owned essentially pay no taxes. This provides ESOP-owned companies with a substantial competitive benefit because they can reinvest more earnings back into the company for capital needs or new product development.

As for employees in an ESOP plan, they essentially receive indirect ownership in the company. The ESOP’s shares are owned by a trust and the employees become the beneficiaries. Providing employees with this benefit empowers them with an ownership mentality, and they will have a direct impact on increasing the value of the company.

How do you know whether an ESOP is the right plan for you?

An ESOP is just one of many options to transfer equity. For instance, if you’re a family-owned business that does not have a next generation willing or available to take over the company, you could sell to a third party, private equity or a larger company within your industry.

An ESOP provides you the option to sell all or a portion of the equity of your company to current employees who can continue the legacy of the business you’ve built – as long as you have employees who believe in it and want to do their part to keep it going after you’ve moved on.

Initial ESOP transactions will typically leverage the company, so it’s important that the company has sufficient cash flows to ensure those debt obligations will be met without hampering the long-term sustainability and growth potential of the business.

Finally, the management team will play a key role in running the company and maintaining the ESOP. A strong team will keep the company on the path of success you have created, and ensure that the organization’s culture remains positive.

When considering an ESOP as a transfer option, it’s critical to speak with the right advisers, such as an ESOP council, valuation experts, CPAs or trustees in order to weigh the pros and cons.

If you decide an ESOP is right for you, these same experts will help lead you through the formation process and keep your company on track going forward. ●

Insights Accounting & Consulting is brought to you by Kreischer Miller

How a quality audit can help you meet your fiduciary responsibilities

Many plan administrators view employee benefit plan audits as a necessary evil, as the Department of Labor (DOL) requires those with 100 participants or more, in general, to obtain an independent audit and attach the audit report to their Form 5500 filing.

But beyond avoiding penalties, a quality audit can help protect the assets and financial integrity of your plan, such as finding errors related to participant accounts or internal control deficiencies.

“It’s much less costly and time consuming when the plan administrator corrects these errors through the independent audit, as compared to when the DOL or IRS find those errors themselves,” says Michelle D’Amico, CPA, assurance senior director at BDO USA LLP.

In addition, a good auditor provides ideas on how to better run the plan.

“Clients don’t always adopt these recommendations, but sometimes clients appreciate the suggestions more than the actual audit,” says Valerie Wawrin, CPA, CFE, MSA, assurance senior director at BDO USA LLP.

Smart Business spoke with D’Amico and Wawrin about getting value from your audit, including finding a quality auditor.

What is the plan administrator’s role?

It is the plan administrator’s responsibility to maintain the plan’s financial and other records, either internally or through a third party. Many of these, which may include plan and payroll records, will be requested prior to or during the audit. Be sure to review all of these materials to ensure they are complete and accurate, especially if you delegate this to staff or a third party.

When you are as responsive as possible, it reduces the time both the plan administrator and auditor spend, which ultimately lowers the overall cost.

What should you look for in the audit report to help better manage your plan?

The auditor will issue a report or opinion on the plan’s financial statements and DOL required supplemental schedules. The plan administrator should review the financial statements, financial activity and footnotes to ensure they reflect your understanding of the plan. If the plan design changed, this should be reflected in all documents. Also, one of the biggest errors relates to delinquent participant contributions, which need to be addressed immediately.

The auditor often provides management recommendations, which are not part of the official report. They are meant to improve internal controls and plan operations.

What happens if an audit is not completed according to established standards?

If the audit report is missing or deficient, the Form 5500 may not be accepted by the DOL and plan sponsors could face late filing penalties. (If the plan operates on a calendar year, the Form 5500s are due July 31, which can be extended to Oct. 15.) The DOL may assess penalties of up to $1,100 a day, which is capped at $50,000 per annual report filing.

Plan administrators are held responsible for ensuring the plan financial statements are properly audited in accordance with generally accepted auditing standards. That’s why it is important to not hire an auditor based solely on price. Not only do plan sponsors have a fiduciary responsibility to ensure audit fees are reasonable, they also have a responsibility to hire a quality firm.

How do you find a quality auditor?

Ask questions. ‘How many employee benefit plans do you audit? What’s the staff’s level of experience? Are new or younger staff supervised and is the work reviewed?’

Auditing firms must have a peer review every three years, so ask to see that report. Get peer recommendations and check references. Make sure the firm doesn’t have state board complaints.

Find out if firm members attend national conferences on benefit plans. In addition, The American Institute of CPAs (AICPA) offers specialty memberships through the Employee Benefit Plan Audit Quality Center. If the firm is a voluntary member of this center, it shows dedication to the arena.

The DOL and AICPA both have good information online about how to prepare a request for proposal for auditing firms.

Remember, a quality audit can help protect the assets and financial integrity of your benefit plans, and ensure the necessary funds are available to pay retirement, health and other promised benefits to employees.

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

Changes in the state’s budget bill can help companies that take notice

House Bill 64 became effective July 1 and lays out Ohio’s operating budget for the next two years. With it, and the state’s municipal reform, comes many state and local law changes, a host of which have a direct impact on businesses.

“The government is hoping to continue to create an economic environment in which small business can thrive so that more are started, and stay, in Ohio,” says Mary Jo Dolson, CPA, a partner in the State and Local Taxes department at Skoda Minotti. “It’s working in the sense that these changes have courted quite a few businesses to the state.”

Smart Business spoke with Dolson about how these changes will affect Ohio businesses.

What are the key provisions of the new Ohio budget bill?

One of the most dramatic provisions in the budget is the continuation of the personal income tax rate reduction. Rates will continue to be decreased permanently with the highest rate in Ohio falling to just under 5 percent.

Another key continuation is the InvestOhio program. It helps small business owners invest in their businesses or get new investors. Business owners are given a 10 percent credit on their individual income tax return for such investments.

One item changing is the small business deduction against an owner’s 1040 individual income tax return that’s equal to 75 percent of the first $250,000 in income the business generates in 2015. In 2016, the entire $250,000 in initial income will be untaxed while the remaining income will be taxed at 3 percent.

The definition of a small business for the purposes of this tax is fairly broad. It can be any pass-through entity, such as S corporations, partnerships and limited liability corporations. There are no employee count or revenue cap specifications in this case.

Also worth noting, tourism development districts can now be established within a city or county based on population size and other qualifications. Once developed, the county or municipality can assess a 2 percent levy on all gross receipts. That tax, which business owners in the area must pay, can be passed along to consumers.

What were the key changes of the Ohio Municipal Reform?

Most of the Ohio Municipal Reform changes are in an attempt to make municipal taxes more reasonable. Generally, they seek to offer more consistency with due dates, how to get extensions and net operating loss provisions.

Prior to this reform, some cities didn’t allow net operating losses to be carried forward while others allowed three or five years. Now all must allow a five-year carry forward. The net operating loss provision is getting phased in over the next five years at 50 percent in the first year, which is deductible in 2018.

Another change is how net operating losses are computed on city income tax returns. Any city income tax return takes the income generated and calculates property, payroll and sales in your home city then all other cities in which you operate. Under this reform, net operating losses are deducted before the percentage of activity is applied to the home city, which means you don’t need to account for where losses occurred.

Ohio currently has a provision that if you’re an employee traveling throughout the state you must file a withholding if you’re in a city for 12 or more days in a calendar year. Even if you’re only in that city for five minutes, once you’re there more than 12 times the employer is required to do a withholding. Under reform, the state has changed 12 days to 20 days and specified that you need to be in a city for the preponderance of the day before being required to file a withholding. With this issue, there is still some clarity needed on how it impacts employers that don’t have brick-and-mortar locations, which will hopefully arrive before it takes effect Jan. 1, 2016.

These provisions offer both relief and opportunity for the businesses savvy enough to take advantage of them. Don’t get left behind. Talk with your financial advisers about how to reap the benefits of these changes.

Insights Accounting & Consulting is brought to you by Skoda Minotti

How to prepare yourself and your company for an ownership transition

For the owner of a private company, the transfer of your business is one of the most difficult and complex things you will ever do. In fact, for entrepreneurial people, the transition out of the business is often much harder than the grueling task of building it.

The challenges are many. The process is fraught with business and financial issues, as well as issues related to people and succession and it becomes easy to get very emotional as you start to think about life after owning your business.

“For most owners, the business is part of their life – almost like a child that they have raised and nurtured,” says Mario O. Vicari, CPA, Director at Kreischer Miller. “Many owners have difficulty seeing themselves apart from the business. Also, many feel a sense of responsibility to their employees and the community that they operate in.”

Smart Business spoke with Vicari about how to ease the stress and make a smooth transition from owning your business.

What can be done to make the transition of ownership an easier process?

Many owners do not think ahead and identify all of the transfer strategies available to them. They just believe they will get to a certain point and expect a buyer to show up with a lot of money. In truth, selling to a third party is only one of several transfer strategies. Others include a sale/gift within the family or partner, sale to employees, an ESOP or continuing to operate the business as an investment.

In planning for an ownership transfer, it is important for owners to identify their motives – which rarely involve only money. Most often, owners have more than one transfer motive and those motives need to be explored and understood because they should dictate the transfer strategy. The lack of clarity on motives is usually the biggest mistake in transferring a private business.

Preparedness, or rather lack thereof on the part of the business and the owner, is also a critical issue to a successful business transfer strategy and should be addressed well ahead of time. A healthy, well-performing business provides maximum flexibility to the owner(s) in selecting a transfer strategy. The reality is that many private companies are lifestyle businesses and are not managed to maximize value creation for the owners. Step one of improving the performance of the company is for you to look at your company as an investment – and expect a return on your invested capital. Running the business in a way that maximizes value expands the number of transfer options.

How would you break down the levels of preparedness for owners?
Owner preparedness takes two forms: financial and emotional. One of the biggest holdbacks in the transfer of private companies is when the owner is stuck and cannot make a decision.

A common hurdle is the fear of running out of money. While this is a very real fear, it is probably one of the most manageable things in the entire transfer process. With the help of a competent financial planner, you should be able to get clear on your personal financial picture in order to answer one key question: How much is enough?

Emotional readiness is the most complex issue to manage and plan for in a transfer. The question of what to do after the business is difficult for most owners to conceive. There is no magic pill to solve this issue, but ignoring it only makes it harder. One useful tip is to seek out advice from others who have walked in your shoes and gone through this very personal process. Every owner has to exit the business at some point – why not do it in a planned way?

Private business owners are unique. One of the reasons many are in business is because they want independence to do what they want. They build their businesses on their own terms. Why not plan your business transfer the same way – on your own terms? To do that think about your motives, prepare your business and yourself emotionally and mentally , and find good advisers to help you through it.

Insights Accounting & Consulting is brought to you by Kreischer Miller

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.

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