Mezzanine capital serves a purpose for those who know how to use it

Mezzanine capital is the portion of a company’s capital that sits between the senior debt and common equity and typically is in the form of subordinated debt. Mezzanine debt can provide flexible, longer term capital, which is less expensive and dilutive than equity.

Smart Business spoke with Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank, about mezzanine capital, the situations in which it can be leveraged, as well as what criteria those who borrow mezzanine capital must meet in order to qualify for it.

Mezzanine capital is referred to as subordinated debt. What does this mean, and how does it affect when it is used and who uses it?

The senior debt has priority to all payments and collateral. The subordinated debt has priority before the common equity stakeholders. Mezzanine capital/subordinated debt can be used in order to fund acquisitions and as growth capital. It also has applications in situations such as management buyouts, debt restructuring and succession planning, and can be used to leverage recapitalization.

Mezzanine capital providers are looking for certain criteria when providing this type of debt. For instance, lenders want companies with a solid, proven track record, good cash flow and solid management. Mezzanine capital is not, however, available for startups, companies that have a high exposure risk to commodities, or companies that have narrow customer concentration.

In what ways can mezzanine capital be used to as a tool to help finance an acquisition?

In an acquisition, mezzanine capital can certainly provide a portion of the capital stack. The utilization of mezzanine debt along with senior debt can provide a cost-effective solution for expansion-minded companies and provide the ability to raise less outside equity for the acquisition.

What are the potential risks or the downsides of acquiring mezzanine capital?

Borrowers may see covenants that restrict the ability for additional borrowings and refinancing, and may require quarterly or annual measurements of financial performance. In addition, spending including compensation and dividend payouts may be restricted. The cost of mezzanine capital is higher than that of senior debt.

What misconceptions are there around mezzanine capital that might mean it’s a product that goes unexplored?

The misconception certainly could be that mezzanine capital is not really a well-known product, but is certainly a viable source for companies to access capital for a variety of reasons:.

  • Mezzanine capital can support a company’s long-term growth, increase the value of current shareholders and in some cases allow the owner/shareholder to receive liquidity.
  • Mezzanine capital providers have the ability to continue to invest in a company to support future growth needs or assist in ownership transitions.
  • Mezzanine providers are making a five-year-plus investment and certainly have the ability to provide advice and support in the operation of the business over a longer time period.

Mezzanine financing can be particularly advantageous for companies that are going through ownership transition, recapitalization, internal aggressive growth or an acquisition growth strategy

This type of financing is just another arrow in a borrower’s finance quiver. For those who haven’t heard of mezzanine capital or who aren’t aware of the ways in which it can be used, it’s certainly a product that is worth exploring.

Insights Banking & Finance is brought to you by Huntington Bank

Grow and improve your business in 2022

A new year means setting new business goals and capitalizing on exciting opportunities that could help take a business to the next level.

“Business owners have a chance to evaluate where their business is, how they want to grow it and then put a plan together to achieve their objectives,” says Michael Lamping, Columbus market president, First Federal Lakewood. “But before they can execute, it’s important to establish a plan to attack the market in the coming year and, just as importantly, to re-evaluate and adjust that plan when circumstances inevitably change.”

Business owners who put together a plan, execute that plan and find ways to work successfully with partners should be able to leverage favorable market conditions to grow their business.

Smart Business spoke with Lamping about the steps business leaders can take to get started, as well as the importance of getting the input of key business partners to inform strategic decisions.

What financing opportunities should business owners consider and potentially act on in 2022?

When exploring financing opportunities for this coming year, there are two areas business owners may want to consider: their current cash position and how they utilize debt.

Businesses should look at their cash position and how it sets them up for future growth, and keep in mind that it’s possible to fund growth via loans or lines of credit instead of cash. If a company is cash positive at the moment, it is a good time to talk with a banker about tapping into a working line of credit.

However, depending on the economy and if debt remains inexpensive, it may be a good time to fund a business expansion. That could be done through organic growth or through acquisitions.

When it comes to the latter, inexpensive debt can be used to help fund an acquisition. However, as of 2021, and even into 2022, the high company valuations might mean it will take buyers time to find the right opportunity at the right price.

What unique opportunities or conditions exist in the market, and how could they affect a business?

Many businesses are entering succession planning and ownership transition periods. This is mostly because baby boomers who are in leadership or ownership positions have reached an age where they are looking to transition, either through succession planning or through a sale. For these owners, now is a good time to really evaluate which path is best: a sale of the business or by growing and bringing on other team members to run the business in their place.

What conversations should business owners have with their bankers this year to get the most out of the coming year?

Business owners should talk with their banker about all that is happening, and what they would like to happen, with their business. The conversation should also include what their growth objectives are, what obstacles could stand in the way of their growth and how they might navigate those obstacles to achieve their goals.

It’s common for business owners to get so caught up in running the day-to-day operations of their business that they often struggle to take a bigger-picture look at the organization to better understand where it is and where it should be headed.

Taking some time to talk with a banker can create the opportunity to have an in-depth conversation about the strategic vision. Plus, it’s important to get an outside perspective on how they and their organization are currently set up to achieve that vision and build accountability into the plan. Through these sometimes difficult conversations, they’re more likely to achieve their goals.

Insights Banking is brought to you by First Federal Lakewood

Strategic planning and the importance of proper capitalization

Successful companies go through a variety of business cycles. Unfortunately, many in leadership positions don’t plan for those stages and aren’t properly capitalized when a transition occurs.

“Without a thoughtful five-year plan that’s updated annually to address shifts and changes in business cycles, companies often don’t have enough capital to compete effectively as they grow,” says Jim Altman, middle market Pennsylvania Regional Executive at Huntington Bank.

He says companies may find that in order to compete more effectively, they need to broaden or diversify their capabilities through an acquisition or expansion because they find they either need to create efficiencies or can’t do it alone.

“Companies that don’t do strategic planning and think about their capital needs through the process might find they aren’t properly capitalized for a crucial next step.”

Smart Business spoke with Altman about the importance of matching a financial plan to a company’s strategic plan.

In what areas should capitalization factor in to the discussion as companies go through strategic planning exercises?

Every year, as a company reviews its strategic five-year plan to make updates, it should challenge itself with the question: Do we have enough capital to execute the plan? Consider whether enough capital is available or could be obtained to acquire a business or sell a piece of the company’s existing business, or to invest equipment to be more competitive. If not, how will the company endeavor to get the capital it needs? That might mean more than just bank financing. It could mean equity, subordinated debt or retention of profits.

Put on paper a financial plan that supports the strategic plan. In essence, monetize the strategic plan so the company can be sure it has a plan to obtain the capital to grow or be more competitive. Many companies don’t do this and it can often be too late before they recognize they can’t finance their plan in time to execute.

Who is important to get involved in these strategic planning discussions as the topic of capitalization is brought up?

Many companies don’t leverage the resources of their banker, CPA or lawyer. They all have insight and advice on how to make a plan come to life. But if they’re not involved in the plan, they’re ineffective in providing advice.

All of these advisers, as well as the company CFO or treasurer, should be in same room with leadership brainstorming. Early conversations can touch on strategic priorities and plans to execute them to broaden thinking. This creates a dynamic environment in which ideas come together to provide the right advice to make a strategic plan work.

When strategic planning is through, what should companies know about their capitalization?

Companies should know the options that are available to improve or meet their capitalization requirements. That could mean seeking bank debt, raising capital from different sources, their own profits or subordinated debt. They should have explored their options and the associated risks of each, and know their costs.

Companies don’t want to be in a position to suboptimize because they didn’t plan far enough in advance to execute their capital choices. They could end up having to give up control or choose a costly option because they didn’t plan effectively.

While it’s impossible to plan for every scenario because there’s so much uncertainty, companies should plan for what they can control and update that plan annually to reflect changes in the market. It’s important to know the execution risk, the availability of capital and the timeline necessary to acquire that capital.

Leadership should utilize as much internal and external resources as possible rather than relying solely on their own insights and knowledge, which could be limited. A combination of inside and outside partners is powerful. Plan early, update regularly and get the right people involved in the planning process.

Insights Banking & Finance is brought to you by Huntington Bank

Treasury management tools streamline cash flow, prevent fraud

Treasury management tools are not just for big businesses. Companies of all sizes can use remote deposit capture, ACH origination and more. These tools are easy to use and also to work with the simplest operational setup that a business might have.

That’s important because banks are encouraging businesses to move away from check writing due to mail delays and the increasing risk of check fraud. In its place are tools that give more control over payments and offer robust fraud prevention.

“Identifying and preventing fraud continues to be a focus for financial institutions and customers, especially with check fraud and cybersecurity attacks,” says First Federal Lakewood chief lending officer Kurt Kappa. “For example, sending out checks in the mail can be unsafe, especially to someone who you may not be familiar with. You’re essentially handing over your bank account information.”

Smart Business spoke with Kappa about treasury management tools and how they save time and mitigate fraud.

What treasury management tools help businesses better manage their cash flows?

Treasury management tools are a great way to minimize daily reconciliation tasks, and they help automate cash flow between operating accounts, savings accounts and lines of credit. There are two main tools worth highlighting.

The first tool is called zero balance accounts. Zero balance accounts are fully automated and are especially beneficial when a business has multiple accounts that it uses for operating transactions, payroll and other miscellaneous pay tables. With a zero balance account, there is a primary account that holds all a company’s funds, and subsidiary accounts that carry a zero balance. For payments, funds are transferred from the primary account to a subsidiary account, which then transfers the payment (to a vendor, for instance). And when the business receives funds, they are sent to a subsidiary account and then immediately transferred to the primary account. These transfers are all done automatically, saving time. And concentrating funds in one account means better account insight and management.

The second tool that can help businesses manage their cash flow is called ACH origination. It electronically issues payments to or from an external account as a same-day transaction. It takes away the guesswork of when a transaction is going to post to another account. ACH also keeps a company’s information protected because it travels through an encrypted system.

In what other ways are these tools beneficial?

One of the more important benefits of treasury management tools is the fraud prevention component. Treasury management tools can be set to recognize abnormal transactions and then alert the business of that problem. But it also alerts the associated bank’s treasury team, which enables the bank to take a proactive approach to managing any transactions that should not be hitting the account.

Treasury management tools also have a reporting mechanism that can be incorporated into QuickBooks®. When transactions have cleared the account, or payments have been stopped or voided in QuickBooks, the treasury management system will also register that change. It’s an efficient way to determine which items marked in QuickBooks are clearing or being rejected. That can be a lifesaver for bookkeepers.

How can businesses determine which products fit them?

A bank’s relationship manager or member of the treasury team can help business owners navigate their options. They can do a deep dive into a business to find pain points and offer products that can help resolve them.

Some business owners often don’t have the staff to maintain robust bookkeeping. These tools streamline the process so business owners have more time to manage their business. They make accounting more efficient and they’re simple enough for anyone to use.

Every business is different, so what works for one business might not work for another. A conversation with a member of a bank’s treasury management team can lead to a recommendation for a product that will make a business owner’s life a lot easier.

Insights Banking is brought to you by First Federal Lakewood

How public ESG reporting factors into private deals

ESG, which stands for environmental, social and governance, was once just a reporting methodology designed for socially responsible investing. It’s a form of inclusionary screening, highlighting what investors want to include in their portfolio. This reporting has typically been part of public company disclosures. Now it’s increasingly prevalent in private M&A deals.

“What investors and acquirers are looking for in ESG are companies that embrace environmental, social and governance initiatives — companies that are committed to greater sustainability, greater equity and inclusion and diversity, and better governance,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank.

The exact meaning of each of these ESG categories, however, can differ among buyers and investors, and it’s unclear how these issues distinguish themselves from the typical considerations of M&A due diligence. Still, more private-deal investors and acquirers — both private equity and strategic — are grading companies on their performance in each of these categories, making this something business owners looking sell, exit their business, or take chips off the table must increasingly understand.

Smart Business spoke with Altman about ESG reporting and what private business owners contemplating a transaction should understand.

How did ESG considerations enter the private realm?

The gradual trickle down of ESG reporting from public to private has come in part through greater disclosure at the public-company level. Some of that could be from the recent social movements the U.S. has seen. There’s also greater concern on the part of consumers who increasingly want to do business with companies that are at least moving in the right direction on ESG factors. So disclosures have become a bigger deal, not just in the public but also in the private space as more stakeholders want to align themselves with companies that align with ESG.

How do ESG standards differ from traditional diligence?

It’s not entirely clear how ESG reporting differs from the reporting typically requested during the standard due diligence that occurs when an owner sells his or her business. For many, these are metrics that have been considered for a long time as part of a deal. It’s not often that a buyer is willing to take on a business that is detrimental to the environment, that doesn’t consider a variety of stakeholders in everything it does, or that isn’t well-governed.

There may be deals that could largely be driven by ESG factors, while others may only take ESG into consideration. That means some buyers firms could require a level of ESG standing in order to consider a company within the specific industry niche they target. Others may be looking to acquire businesses that are going to help them improve their overall ESG standing. And still others might look for acquisitions that have quality business fundamentals that fit their portfolio that may incidentally have some great ESG factors associated with it as well.

What should sellers know?

For sellers, it comes down to situational awareness. It means understanding the ESG trend within their industry as well as the industry’s leading ESG companies. In a world where there’s no clear definition of what ESG means, a relative definition is meaningful. Industry standards, then, can be a good gauge — and, for those trying to be a leader in the ESG space, it can help define goals.

Potential sellers will want to look at their business and attempt to gauge their environmental, social and governance standing relative to the industry. But keep in mind that ambiguity means ESG standards will largely be defined by the potential buyers who likely have their own metrics. Research the potential industry factors to be in a better position to address questions from potential acquirers.

Understanding how ESG will impact a sale or liquidity event requires further identification, possibly education, but definitely a conversation. ESG in the private M&A space has yet to be clearly defined. But what is clear is that more and more buyers are concerned about a company’s ESG profile. Sellers, then, need to understand acquirers’ value stream in order to maximize value in a transaction.

Insights Banking & Finance is brought to you by Huntington Bank

Business leaders must stay flexible when redefining their workplace

Change will be the only certainty in the next few years. While there are external challenges companies must contend with, some changes will be driven by employees as they and their employers settle into new work arrangements.

“The work environment is likely to undergo drastic changes,” says Kurt Kappa, chief lending officer at First Federal Lakewood. “That will require an efficient and flexible leadership team that can quickly direct important changes the organization may need to make.”

Smart Business spoke with Kappa about how recent events are beginning to shape a new internal look at many Northeast Ohio offices.

How have area businesses adapted to remote work?

Employees who are headed back to the office are likely going to see a different work environment. Many offices are opting for a hybrid approach — employees will work some days from home and others in the office — so not everyone will have a dedicated desk. Instead, many offices will utilize a hoteling approach, with workspaces available to whoever is in the office at the time.

For some companies, the introduction of a work-from-home option has become a recruitment tool. With this comes the challenge of adapting a new onboarding process that can help smoothly transition new employees. It may not be enough to send a new employee their laptop and expect them to figure it out. The process should be made more personal and welcoming, otherwise new employees may not feel they are a part of the team and could look elsewhere for another opportunity.

Working from home has also introduced tradeoffs. For instance, employee hours aren’t just 9-to-5 anymore. Some are working 12 or more hours, or at least are checking communications well beyond office hours because remote technologies have given employees around-the-clock access. However, those technologies have also helped employees manage their lives during working hours, running errands when they’d otherwise be at their desks and getting back to projects when they’re done. Companies are going to need to determine how to foster a positive work/life balance that doesn’t burn out employees, but also ensures clients are receiving the same level of customer service.

How have leaders adapted to these changes?

Communication technology has enabled leaders to stay connected and engaged with remote employees in myriad ways. Leaders are able to check in with their employees or meet with them virtually at more convenient times, keeping employees engaged and in the know. Managers who are accustomed to in-person interaction with their teams, however, may have to adjust their management style. One way to help this adjustment could be offering education and training on managing virtual teams.

Hybrid work arrangements can open a company’s pool of candidates. Pre-COVID, if a job required five days in the office, the pool of candidates would be limited by travel time. Making a position remote, full-time or even part-time, can open the opportunity to a larger selection of candidates. But managers should be aware other companies may use this option to pull talent away from their organization, which is why they should stay engaged with their teams.

How has planning changed under these circumstances?

The rise of the COVID Delta variant has renewed the uncertainty companies faced in the previous year, which has complicated planning. To get through this, it may be valuable for companies to have an alternative or flexible plan to ensure productivity through any disruption the market may face. Talk through what-if scenarios, strategies to handle rough waters, and what might be needed from a banking partner to get through those challenges.

Companies should continue to expect the unexpected. If there is one thing to take away from the past two years, it’s the need for flexibility and understanding. When something works, share it with everybody so all can be successful. Don’t fight change. Embrace it. This is the ‘new normal.’ Business leaders must be both nimble and flexible as they find the best way to move their organizations forward in these new realities.

Insights Banking is brought to you by First Federal Lakewood

Increase in cyberattacks requires greater diligence in cybersecurity

There’s been a continued increase in cyberthreats since the pandemic began. Not only has the threat volume increased, but the threats are also becoming more sophisticated.

“Executives really need to pay attention to cybersecurity,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “Too many are playing the odds that they’re unlikely to be attacked. But unfortunately, with the increasing threats, those odds are against them.”

Smart Business spoke with Altman about the cyberthreat environment and strategies that can help insulate companies from them.

How have cyberthreats evolved?

Bad actors are now prioritizing scams that enable them to monetize a breach as fast as they can, such as through payment-related scams that lead to money, preferably in the form of cryptocurrency, getting to them as quickly as possible.

But speed isn’t always a characteristic. For instance, these criminals are increasingly stalking targets, monitoring a business after they penetrate the company’s email server, reading emails and searching for the right opportunity to capitalize on their position.

Ransomware threats to businesses big and small have also increased. These threats have evolved from just taking a company’s data hostage and demanding payment to release it, to exfiltrating emails and blackmailing companies with hush money and name-and-shame scams.

While frequency and sophistication are improving, they’re still getting in through the same vulnerabilities. They’re exploiting poor passwords, unpatched systems, and holes in companies’ remote desktop protocol and server message block, both of which can be successfully attacked when not removed or at least configured securely.

How has remote work affected cybersecurity?

Having a remote workforce has broadened companies’ attack surface — all the potential vulnerabilities across a company’s entire public-facing network — to now include the homes of their employees. Those home networks have weak spots, which is why it’s important that companies account for those weaknesses as they plan their cybersecurity.

Much of that is basic: keeping strong passwords and ensuring employees regularly patch their home devices. However, one of the challenges in this area for companies is knowing what they can dictate to employees regarding their home cybersecurity and what they can’t, as well as whether they should or shouldn’t scan their employees’ networks. So many companies are emphasizing user awareness and education to ensure employees are aware of the types of scams that are out there, what they might look like, how they work and how to not fall victim. Employees, whether at home or in the office, are a company’s first line of defense against many of these threats. So, it’s wise to spend time and effort making sure users of the system are aware and educated on the threats and the ways to neutralize or mitigate them.

How can companies learn about their vulnerabilities?

Companies should start off with an assessment of their IT infrastructure to determine their dependency on certain technologies — point-of-sale systems, smartphones, etc. — to discover which of them are business-critical, then put together a plan on how best to secure those. It’s always vitally important to identify and protect sensitive personal information, such as bank account and health information.

Once the systems and information are identified, companies should test their resiliency to attackshrough tabletop exercises that are as real as they can be. Follow that up with an independent security audit that includes a vulnerability scan and attack-surface mapping.

Companies should also look closely at what information is publicly posted about key people within the company, such as on social media or their own website. It can be used by attackers in phishing expeditions.

It also may make sense to consider cyber liability insurance. These policies are not cookie cutter, so work with a professional who can find a plan that offers the needed coverage.

These cyberthreats are a multi-billion-dollar problem. No business is too small to be attacked, so every company needs to protect itself.

Insights Banking & Finance is brought to you by Huntington Bank

What to consider before selling, exiting your company

All business owners eventually face the tough, unavoidable task of deciding how to transition out of their company.

“Exiting a business is a major step that requires years of preparation to execute in a way that leaves owners confident with the future legacy of the company they have built over many years and with enough income to carry them through the next stage of life,” says Jim Altman, middle market Pennsylvania regional executive at Huntington Bank.

He says making the best decision requires seeking advice from those with different points of view on the best strategy, rather than relying on emotions to guide the decision — a fault of many in the position. But the key is to evaluate the objectives that matter most for owners and their families, and to prioritize a plan accordingly.

Smart Business spoke with Altman about exit planning, and options available to owners once a liquidity event occurs and is complete.

What are the more common ways in which business owners exit their companies?

For owners who have family members working in the business who are experienced and qualified to run the company, it’s logical, as one viable option, to transfer the business to them as part of a generational transfer. But sometimes emotions tied to family supersede making the best business decision, and an owner may decide to transfer ownership to a family member who isn’t ready. That decision often puts the company’s future in doubt.

Selling to an independent party offers one attractive option to consider and the most often used for owners to seek a competitive bid and maximize their return. This also allows the seller to receive immediate funds after a sale if no seller note is involved.

Another option is to sell the company to employees under an employee stock ownership program. After tax considerations, it could be one of the most lucrative choices for owners and most favorable to employees. It also creates an opportunity for family to have an ownership stake in the business while the owner can continue to draw money out of the company over time in the form of a seller note or ongoing management fee.

The main thrust for owners is to understand their priorities. It could be important to some owners that family stays attached to the business. Other times, owners could prioritize getting the most money they will use to fund retirement or their next investment. All that matters is that owners consider what is in their best interest and have a plan to achieve it.

Who should be part of the discussion as business owners consider their exit strategy?

There should be at least a trio of people involved: an accountant, legal adviser and banker. All three bring slightly different, but very valuable, perspectives.

Additionally, exiting owners should seek opinions from other people in their network who have sold companies and ask them how they came to their decisions, what happened and whether they’d do anything different. Even if the choice is clear, it’s still a good exercise to understand the pros and cons of each option. This is likely the only time business owners will sell their company, so it’s critical to gather as much information as possible during the process.

What should business owners consider about what happens after the sale event?

Owners should consider their next-stage investment strategy while they put together an exit plan. Too many owners don’t consider that. A full financial plan can help determine the best investment strategy and it will account for the individual’s priorities — whether it’s an immediate return so there’s money to spend on living in the moment, or having money to pass to the next generation.

There will come a time when owners can no longer run their business. Start planning the exit well ahead of that time. Consider the succession of the business and what to do with the proceeds. Revisit the exit plan annually and make adjustments when circumstances change. Seek out the opinions of many people, especially those who have sold their companies, and don’t let emotion trump best judgment for all in the long run.

Insights Banking & Finance is brought to you by Huntington Bank

Customer trends require technology to leverage

Even in a world dominated by digital technologies, some companies still hesitate to adopt tools that could take their business to the next level. That’s often preventing businesses from engaging in developing customer trends, most of which increasingly rely on digital technologies to leverage.

Smart Business spoke with Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank, about some burgeoning digital trends, as well as strategies to take advantage of them.

What digital transformation trends are taking hold?

Companies today are using personalization to differentiate customer experiences. The experiences customers want differ based on who they are and what they need. With greater personalization and customization, companies can segment their approach so that narrower customer segments get catered products, experiences and services.

Unlocking the collected customer data companies hold goes a long way to understanding the uniqueness that a business can provide its customers. Every company collects a great deal of customer data, but many don’t use that data to drive experiences. It’s important that companies learn to analyze the data that they capture, in part so they can drive more personalized experiences.

Another trend has companies creating ecosystems that serve as a platform for broader interaction, either between a company and its customers, or with customers and other companies. Companies are starting to figure out who they need to partner with — often because those partners work outside the company’s first line of expertise — to provide value to their customers, in part by offering multiple services in one place.

Why might businesses hesitate to adopt newer technologies?

Often business leaders, when presented with a new technology, aren’t eager to employ it. They may understand that the tool offers a more efficient way to perform a task, but they resist, instead relying on the way they’ve always done it because, in their mind, it’s easier.

Additionally, as more applications are based in the cloud, some companies avoid using them because they are uncomfortable relying on cloud services. That’s typically out of concern for security, as some companies believe the cloud is not as secure as software hosted on on-premise servers. While this might seem to them like a prudent risk mitigation strategy, it often means the company misses out on opportunities to save costs through increased efficiencies, or to better connect with customers.

Overcoming that requires educating leadership about the pros and cons of cloud-based applications, making communication key. It takes working with someone who is able to explain the applications, how they work, and how to establish procedures that mitigate as much risk as possible.

Once the benefits and risks are clearly communicated, businesses should start small. For instance, use one cloud application to begin with and work into more as the organization gets more comfortable. Companies tend to think they need to move all applications to the cloud at once. But starting small can help the initiative gain credibility at all levels of the business, which instills confidence and helps the organization move to the next stage. The process can begin by creating a transition plan that identifies specific applications to move to the cloud one at a time. Once most people are comfortable, it can really take off from there.

How can companies mitigate technology risks?

A lot of risk can be mitigated by working with external partners. For example, there are a lot of fintechs that have created niche businesses that can help companies in very specific areas. For companies facing a risk that’s outside their comfort zone, partnering with one of these up-and-coming companies that have mastered a specific functionality where that risk is found can help mitigate security concerns while connecting with valuable expertise.

Look for ways to partner with entities that have expertise and have already assumed certain risks. There are so many businesses that specialize in certain areas that companies often don’t need to develop products, software or procedures internally because specialized partners can do it quicker and with less risk.

Insights Banking & Finance is brought to you by Huntington Bank

Is your business ready for the Great Recovery?

This year could be the year of the Great Recovery as industries battle back from a tough 2020. There are big earnings growth expectations in the areas of consumer discretionary spending, energy, financials, industrial, and basic material.

However, while the recovery is in motion, businesses are facing pressures in the areas of supply constraints, elevated input costs and labor shortages. How they deal with this margin pressure will reflect on their 2021 earnings statements, and beyond.

Smart Business spoke with Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank, about the macro-economic factors businesses should be watching as they work through what should be a recovery year.

What’s driving inflation concerns?

The components to inflation are commodities, wages and owners’ equivalent rent. Wages and real estate have been fairly well-behaved, maybe slightly elevated. But the reason for this spike in inflation is because commodity indexes are up 66 percent over the past 12 months.

The Federal Reserve thinks this spike in inflation will be transitory, but that’s not necessarily the consensus view. Companies have pricing power and keep raising prices, and wages are going up at the low end, which also could continue. Together, these factors have the potential of making inflation stickier than the Fed thinks it will be.

The Fed has also expressed that this inflation can be attributed to the reopening of the economy, causing supply chain and labor concerns — labor not being at the right place at the right time. The sense is they think once companies sort out those supply chain issues and labor gets back to where it needs to be, which they expect will be by the fall, inflation will move noticeably lower, back to the 3 percent range from the current 6 percent range.

What’s happening with commodities and labor?

Most businesses are buying additional supplies of the commodities than they use — buying three months’ worth rather than one. That’s a normal reaction to inflation, which at the moment is very broad-based. Many continue to wonder when prices will come down enough that businesses stop hoarding.

Part of the labor shortage can be attributed to a mismatch between the skills needed and the skills workers in the market have. This is especially prevalent in the goods-producing industries where U.S. consumers have continued to spend in robust amounts.

The focus of labor is now in the service industries as they reopen. Many former service-sector employees moved to the goods sector over the past year and may not return. That’s why many companies in the reawakening service industries find themselves in a position in which they need to find machines to replace the shortage of labor.

Something else to watch, the Bureau of Labor Statistics’ June JOLTS found that more than 3.9 million employees voluntarily quit their jobs in April. This is, by far, the largest number for this data series started in 2000. So now not only do companies have to spend resources to recruit, they’ve got to spend resources to retain.

What should businesses discuss with their bankers?

Businesses are keeping a close eye on their revenue versus margin. Revenues generally are increasing now, but margins are tightening because of input costs, supply constraints and labor shortages. Much of the conversation is around whether revenue increases are offsetting the margin increase and how long that can be sustained.

Businesses also want to know if their balance sheet is in the right place now that they’re on the other side of the pandemic. They should look to take advantage of low interest rates and lock them in, then look ahead to ensure they have enough cash flow to cover the potentially increased level of debt.

There is a lot to be optimistic about. But margin pressures are enough of a concern that businesses should talk with their banker about all three financial statements — earnings, cash flow and balance sheet — to ensure they’ve got strategies in place to profitably grow over the coming years.

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