For the young, small, or medium-sized company, it can be inherently difficult to measure the value of the internal audit. As an example, upstream and midstream energy companies often employ fewer people and use less sophisticated administrative processes than similarly sized companies in other industries.
But the unique circumstances faced by these companies highlight the need for risk mitigation, and savvy energy executives have found a way to leverage the internal audit to help define the company’s strategy and manage risk.
“It’s critical to identify and mitigate risk in energy companies,” says Jody Allred, advisory services partner at Weaver. “But auditors also have the ability to offer objective advice, create operating efficiencies and resolve myriad issues, if they’re empowered to execute that charter.”
Smart Business spoke with Allred about the opportunities to create strategic business value by expanding the reach of the internal audit function beyond traditional audits.
Why is risk mitigation a priority in E&P and pipeline companies?
Preventing loss is always important, but it may mean the difference between success and failure in E&P and pipeline companies that require a substantial capital investment and simply can’t afford errors or inefficiencies. A relatively small E&P company requires 10 to 12 times the capital investment of similarly sized manufacturers, and also lacks the resources and streamlined operations when compared to these companies. Plus, survival hinges on its ability to exploit its assets and ensure the success of early projects.
All of this means that risk is higher and there’s a greater need for an internal auditor’s objective assessment.
How can an internal auditor create value by identifying, assessing and responding to risk?
Auditors create value by combining their industry experience, intuition and professional training to conduct assessments, identify risks and quantify the exposures. Savvy auditors know how to boil down massive amounts of data, so the risks can be prioritized and dealt with through a recommended course of action. And since they’ve seen the movie before, experienced auditors know what to look for in E&P companies, so investors are protected in cases where operational processes and procedures are often less sophisticated or mature.
Can an auditor really improve business processes and create new efficiencies?
It isn’t unusual for auditors to spot ways to streamline processes while reviewing the current systems and workflow during the risk assessment phase. But auditors are capable of going beyond risk assessment by finding solutions to recognize and solve business problems across the enterprise.
For example, a client was about to hire a consultant after a department struggled to comply with a set of operating procedures. After listening to the issues, we found that cultural differences were the root cause of the problem. So, we explained the need for the process to the department manager, made some minor adjustments and resolved the issue for a third of the cost of a consultant. Since auditors are detail-oriented, they often spot opportunities to streamline or eliminate bureaucratic processes during an engagement. They may even identify opportunities to negotiate better deals with vendors, garner higher margins or lower costs by utilizing business process outsourcing.
But to be effective in a broader, more strategic role, internal auditors must be empowered to go beyond risk mitigation by the company’s executives and audit committee.
Why is it important for an auditor to provide executives with insight and objective advice?
Executives often take a broad view of the operation, since they rarely have hands-on experience in every functional area. For example, they may need help assessing and understanding the risks in departments that require high levels of control like accounting and finance or IT.
An auditor can help executives determine whether the company’s security systems are adequate, calibrated and functioning effectively. Plus, they can help executives find the right balance between risk and cost, so the organization can achieve its business plan. Auditors can also assess the company’s operational effectiveness by providing benchmarking against peer organizations. Since auditors have the opportunity to work across multiple departments within a company, they have the knowledge that no one else has about the cross-functional interaction of the company.
The bottom line is that an auditor’s vast skills are often underutilized, since they can provide a valuable perspective and potentially play a greater role in adding value across the enterprise.
How can executives support the transformation process so internal auditors create value instead of police reports?
First, the executive-auditor relationship has to be built on trust, which seldom happens when auditors are relegated to creating police reports. Launch a cultural shift by changing the auditor’s marching orders and measuring them on value creation and financial contributions, not just the problems they find.
Second, executives need to understand the audit process, so they can identify opportunities for auditors to make recommendations. Give auditors an opportunity to prove their value-creating capabilities and ability to liaise with executives by giving them a crack at an under-performing business process or an area where costs are accelerating.
Third, view auditors as trusted advisers that are capable of making viable recommendations and be open to hearing them. Finally, maximize your investment in the internal audit function by expanding the reach, because companies can’t afford errors or inefficiencies in today’s competitive business environment.
Jody Allred is an advisory services partner at Weaver. Reach him at email@example.com or (817) 882-7750.
Successful business owners rarely miss an opportunity to consummate a strategic acquisition or sign a marquee customer. But tighter banking regulations, economic uncertainty and a tough credit market have dampened the enthusiasm of high-spirited executives by making it difficult to secure a traditional commercial line of credit.
Even if your balance sheet has taken a hit due to the recession, you may still be able to acquire a working capital line to grow your business by borrowing against the value of your company’s accounts receivable or inventory.
“In today’s environment, an asset-based loan is often the best option, because bankers can underwrite around problematic profit and loss statements or balance sheets by focusing on the value of the collateral,” says Tony Spinogatti, first vice president and portfolio manager for Asset Based Lending at California Bank & Trust.
Smart Business spoke with Spinogatti about using an asset-based loan to meet your company’s needs for working capital.
When should executives consider an asset-based loan?
If your company’s P&L and balance sheet have been negatively impacted by the recession, a traditional commercial line of credit may not be a viable financing option. However, the company may qualify for an asset-based loan, which is secured and underwritten based on the value of the company’s accounts receivable and inventory. It’s not unusual for a small to mid-size company to maintain accounts receivable and inventory levels of $2 million to $10 million that can be used to secure a working capital line to finance working capital and/or expansion.
What are the advantages and disadvantages of an asset-based loan?
Asset-based loan structures can provide greater flexibility as the loan amount is based on prescribed collateral values or advance rates. For example, advance rates on accounts receivable, being closest to cash, typically average 80 to 85 percent. And, depending upon the various components of inventory the advance rate may be 30 to 50 percent of prescribed inventory’s value.
Interest rates for asset-based loans are slightly higher than the rates for traditional lines of credit. However, because the prime rate is currently 3.25 percent borrowing rates are at historical lows. While the reporting requirements for asset-based loans are fairly rigorous borrowers say the process offers some unexpected benefits. For example, borrowers who may be required to process invoice payments through a bank-controlled lock box benefit by collected funds being applied directly to the outstanding loan balance. Instead of reviewing changes in accounts receivable, inventory and loan amounts on a monthly or quarterly basis, management is reviewing those changes in real time. Executives also report a benefit from more accurate cash flow forecasting and some have even discovered a unique way to make a profit. Management can use the line of credit to negotiate payment discounts from vendors. Those payment discounts can add up over the course of a year, offsetting interest expense and to the bottom line.
Is it difficult to qualify for an asset-based loan?
The qualification process is similar to any commercial line of credit, but bankers primarily focus on the quality of the assets in addition to internal controls, financial reporting and the experience of the management team. If the line is secured by accounts receivable, the banker will consider advances based on the value of outstanding invoices less than 90 days past due from invoice date, the credit worthiness and payment ability of the underlying customers and whether employees follow a disciplined collection process. Finished goods and raw material typically have different advance rates and lenders will not normally advance against work in process, so keep that in mind if you’re thinking about securing a loan with inventory. The company’s balance sheet and the owner’s personal financial statements aren’t decisive, but be prepared to substantiate the value of the company and personal assets.
What should executives know about the application and underwriting process?
Plan on submitting financial statements for the last three fiscal years, an interim statement, most current accounts receivable aging and, if applicable, inventory report. If your company has lost money, you’ll need to submit a 12-month forecast as well as back-up documentation so the banker can understand and validate the forecast assumptions. For example, he or she will want to know where you plan to cut expenses if your forecast shows a significant reduction in SG&A, or he may ask to see copies of customer agreements if you’re projecting a hefty increase in revenue. Be ready to explain your logic and methodology but keep in mind that the communication process provides an opportunity to build a long-term relationship with your banker.
How can a business owner identify the right bank for its needs?
The national or ‘big’ banks tend to focus on large and very small companies and often overlook the needs of middle market companies. Community and regional banks specialize in loans of $1 million to $10 million and provide customers access to key decision makers within the bank. Of course, you’ll want to select a banker who understands the nuances of your industry as well as the local marketplace. You not only benefit from an asset-based loan structure, but from your banker’s experience, industry insight and solutions to your company’s financing needs.
Tony Spinogatti is the first vice president and portfolio manager for Asset Based Lending at California Bank & Trust. Reach him at Anthony.Spinogatti@calbt.com or (213) 593-2080.
It’s no wonder executives seemed less than enthusiastic about the new auditing standards and controls for service organizations instituted by the American Institute of CPAs (AICPA). After all, most companies had already suffered through a decade of new internal controls and financial reporting requirements that managed to increase costs while offering nominal benefits.
But, this time, the reports that are part of the AICPA’s new Service Organization Controls (SOC) reporting suite actually benefit outsourced service providers and their customers by providing additional transparency at a time when companies are looking to outsource rudimentary tasks or move data and applications to the cloud.
“Companies previously felt like they had no option but to report under Statement on Auditing Standards 70 (SAS 70) even though it was often misused and did little to assure the performance of service providers,” says Brian Thomas, advisory services partner for Weaver. “But, the new SOC reporting options are better focused on the current needs of outsourced service providers and their customers.”
Smart Business spoke with Thomas about the benefits of the new SOC reporting options for service organizations and their clients.
Why did the AICPA change the reporting options for service organizations?
Some of it was housekeeping. The AICPA is updating certain U.S. audit standards to harmonize them with international standards, resulting in the replacement of SAS 70 with SSAE 16 (also called SOC 1). Secondly, the SAS 70 and SysTrust reports weren’t meeting the broader needs of outsourced service providers or their customers.
SAS 70 (now SSAE 16 or SOC 1) addresses only internal controls over financial reporting and SysTrust (now SOC 3) did not provide enough detail to customers — especially at a time when companies are increasingly contracting with Software as a Service (SaaS) and cloud providers, which is raising a host of different concerns. So, while doing its housekeeping, the AICPA addressed this gap with a new option called SOC 2.
What are the new SOC reporting options?
The new SOC reporting suite features three reports called SOC 1, 2 and 3. Best of all, the reporting formats are customizable, so customers can get information tailored toward their specific needs.
- SOC 1 — This report is intended to fulfill the requirements of SAS 70 (now SSAE 16). It has been updated to match international standards and is focused on internal controls over financial reporting relevant to the service provider’s customers.
- SOC 2 — This report is valuable because it addresses a service provider’s controls as they relate to security, availability, processing integrity, confidentiality and privacy of a system. All of these are important aspects of the non-financial performance of service providers. SOC 2 is more relevant for IT-based services and contains detailed results similar to a SOC 1
- SOC 3 (also SysTrust) — Its scope is the same as SOC 2; however, less information is provided about the results. A seal is issued that the service provider can post on its website. The accompanying report confirms only that a SOC 3 engagement was performed and the overall result without any details.
How do these new reports benefit service providers and their customers?
Alleviating the concerns of prospects and customers is one of the primary benefits for service providers. The reports may also reduce the need to accommodate auditors from client organizations because providers have to meet a fairly high audit threshold instead of self-accrediting and validating their performance using a universal set of standards.
Customers can simply review the reports and may be able to avoid the cost of auditing the service provider themselves. Also, the new reports engender trust by providing greater transparency into a service provider’s day-to-day operations, along with the assurance that a qualified auditor has examined its internal controls, compliance and performance.
How can service providers determine the best reporting format for each customer?
Certainly, the service providers should understand the needs and concerns of each customer and tailor the reports appropriately. They can also confer with the client’s auditor to determine the exact scope of their reporting concerns. The format to choose really comes down to the information and transactions handled by the outsourcer and the concerns of its customers.
For example, a client may be concerned about data confidentiality and privacy if they use any SaaS applications to manage customers and prospects, but they’ll have different concerns if they are hosting their core financial application with a service provider. It makes sense for auditors from both organizations to confer when the parties are ready to negotiate the contract and reporting requirements.
How can customers and prospects use the reports to mitigate risk and select a best-in-class service provider?
Customers must read the reports and should not assume that everything’s OK just because an auditor has ventured onto the service provider’s premises. Customers need to understand the scope of the SOC report and its relevance to the services they purchase from the service provider. Look for trends over time with the issues that are identified in their reports and request additional information from the service provider, as necessary.
Although service providers may not share the SOC reports with prospective customers, procurement specialists can develop screening criteria and RFP questions for service providers regarding the scope and issues identified in the report. Finally, don’t let the pain of implementing the new standards keep you from enjoying the gains. Thanks to the new SOC reports, customers can finally have the assurances they need to outsource with confidence.
Brian Thomas, CISA, CISSP, is an advisory services partner at Weaver. Reach him at (713) 850-8787 or firstname.lastname@example.org.
Between blogs, e-mails, tweets and text messages, experts estimate the average person is bombarded by a staggering 100 kilobytes of textual information each day. The resulting overload can cause employees to ignore vital messages that have a direct impact on their well-being as well as the bottom line. Instead of using read receipts or daily reminders to chide employees into reading critical communications, innovative leaders are finding that a picture is worth a thousand words.
“Cartoons are effective because they evoke emotions and people remember them,” says Denise Reynolds, senior communications consultant. “It’s a simple, cost-effective way to grab someone’s attention in a crowded digital world.”
Smart Business spoke with Reynolds about the benefits of using cartoons to convey critical messages.
Why are cartoons an effective way to communicate key messages?
Cartoons not only stand out from traditional communications — they’re concise. It can take hundreds of words to convey the ideas contained in a single image. For example, getting employees to read wellness and benefits literature was a constant struggle at Jergens. So we suggested that the small manufacturing company create mascots and use cartoons to encourage health screenings and educate employees about preventative care. Within days of e-mailing the cartoons and projecting them on the Jumbotron in the manufacturing plant, everyone in the company was talking about Chip and Scrap. Employees said they were previously unaware of many stress-reducing benefit programs like EAPs (employee assistance programs). The company is even considering using them in an upcoming sales and marketing campaign.
Are some topics better suited to cartoons than others?
Consider using cartoons to simplify complex messages or to lighten up drab, but important topics. Retirement planning, pension vesting and safety are good examples, because it’s easier to understand a complex vesting process if it’s broken down into steps in a cartoon panel. The key to garnering interest is creating characters that will resonate with employees. For instance, Jergens’ employees can relate to Chip and Scrap, because they’re based on real products that are part of the company’s manufacturing process.
What are the best practices for incorporating cartoons into a communications campaign?
- Let the characters do the talking. Let the characters convey your messages and display their unique personalities. For example, Chip is usually on his game while Scrap frequently makes mistakes and could use coaching.
- Inject the characters into various media. Inject your mascots into brochures, training videos and blogs so employees become familiar with them and learn to pay attention to their messages. You can even use them on your Facebook page or ask your employees to follow them on Twitter.
- Be patient and persistent. Tailor your messages toward your employee population and repeat them for several months, because any type of marketing campaign is more effective over time.
- Measure ROI. Compare the cost and effectiveness of brochures, letters and memos to cartoons and, most importantly, measure the impact of various media on employee behaviors and the bottom line.
- Make them interactive. Include pop-up messages and links to external videos, Web sites or brochures in each cartoon so employees can source additional information.
- Have fun. It’s OK to have fun and laugh at ourselves, especially in today’s difficult climate. You may find cartoons lift the mood of the company and even inspire creativity.
How can executives and HR leaders measure the effectiveness of creative campaigns?
Initially, you can judge campaign effectiveness by measuring the growth in hits, click-throughs and the amount of time employees spend viewing each cartoon, but, over time, you should see improvements in tangible measures like adoption rates, lower health care costs and changes in employee behaviors. Campaigns can be built to match each company’s budget and you can test pilot a few cartoons without making a big financial commitment. One company saw an immediate jump in health screenings after sending out just one cartoon. Another saw half of its employee population participated in open enrollment during the first five days of the period. It’s also important to gather feedback through employee surveys and focus groups to make sure they’re getting the message and fine tune your campaign.
For more information, contact Susan Riffle, the marketing manager with Findley Davies. Reach her at email@example.com or at (216) 875-1908.
Bolstered by new legislation that will provide it with valuable information about foreign asset ownership, the IRS has launched a crackdown on international tax evasion that will impact most U.S. taxpayers with foreign financial assets. U.S. tax evaders hiding foreign assets have a much greater risk of detection, but the draconian penalites can also be imposed upon law-abiding U.S. individuals and business that have reported all of their income to the IRS, but failed to file one of the reports disclosing ownership of foreign assets.
“The back tax and interest on unreported income from offshore accounts is often small potatoes compared to the penalties for failing to disclose the foreign account to the government,” says Dr. Gary McBride, professor of Accounting and Finance at California State University, East Bay. “Businesses and individuals can be fined up to $100,000 for willfully failing to meet the filing requirements, if the value of foreign financial accounts exceed $10,000 at any time during the year.”
Smart Business spoke with McBride about the IRS crackdown on offshore tax evasion.
How will the legislation impact U.S. taxpayers?
The foreign asset reporting requirements impact every law-abiding business — partnerships, corporations and individuals — with an overseas bank, securities or other financial account, as well as those with substantial ownership interest in a foreign entity. The crackdown was buoyed by new legislation in 2010 called the Foreign Accounts Tax Compliance Act (FATCA), which forces foreign financial institutions to disclose the names of U.S. account holders to the IRS beginning Jan. 1, 2014. If a foreign bank doesn’t comply, then corporations and other U.S. payors that make payments such as dividends, interest, rents or royalties to a foreign financial institution are required to withhold a 30 percent tax. If the tax is not withheld, the IRS will pursue the U.S. payor for the deficiency. The legislation also represents a unique exercise of extra-territorial jurisdiction by the U.S. government.
What are the most notable changes to the tax forms and filing requirements?
U.S. Corporations, partnerships, individuals, estates and trusts must file a Foreign Bank and Financial Accounts Form (FBAR) if they have a financial interest or even signature authority over accounts totaling over $10,000 in a foreign country. That requirement has been in the law for decades, but compliance and IRS enforcement have been lax until recently. Taxpayers must be far more attentive to the question on the income tax return about foreign financial accounts over $10,000. Beginning in 2011, U.S. individuals must also attach to their Form 1040 individual income tax return new IRS Form 8938, if they have foreign financial assets that exceed a specific threshold. The threshold varies depending upon filing status, but the IRS has the authority to set the threshold as low as $50,000. For a U.S. individual who is required, but fails, to file both an FBAR and a new Form 8938, the harsh penalties can be imposed for both omissions, and that is in addition to the income tax and penalties on any unreported income generated by the foreign financial asset.
Why is the risk of getting caught much higher?
The clear IRS commitment to enforce the foreign assets reporting laws and impose the penalties for noncompliance causes the greatest risk. Not all foreign financial institutions will cooperate with the upcoming requirement to disclose the names of U.S. account holders. In many instances, disclosure by a foreign financial institution may be prohibited by the domestic privacy laws. Regardless, the IRS Commissioner made the following statement in testimony before the U.S. Senate Appropriations Committee: ‘We are well on our way to deterring the next generation of taxpayers from using hidden bank accounts to avoid paying taxes.’
The IRS will eventually be able to cross-reference disclosed foreign accounts held by U.S. account holders against the database of returns to identify taxpayers who haven’t filed the proper forms or paid the requisite taxes.
What are the penalties for failing to comply?
Business entities (and even trusts and estates) face a penalty of the greater of 50 percent of the value of the foreign account or $100,000 for willfully failing to file an FBAR. Do the math: willful failure to file an FBAR for an $11,000 account is $100,000. If the account balance were $1 million the penalty would be $500,000, and, if the FBAR is not filed for three years, the penalty is $1.5 million. The nonwillful penalty for failure to file an FBAR is $10,000. For the new Form 8938, the minimum failure to file penalty is $10,000 plus a penalty of up to $50,000 for continued failures after IRS notification. Furthermore, underpayments of income tax attributable to non-disclosed foreign financial assets will be subject to an additional accuracy–related income tax penalty of 40 percent (up from 20 percent for most understatements).
How can taxpayers prepare and take steps to avoid hefty penalties?
First, make sure that all foreign financial accounts are reported on the FBAR as well as the new Form 8938 for individuals. Then, make the proper disclosure on the income tax return acknowledging the existence of any and all foreign financial accounts over $10,000. U.S. taxpayers may be required to report foreign trusts on Forms 3520 and 3520-A, foreign corporations on Form 5471, foreign partnerships on form 8865 and foreign disregarded entities on Form 8858. Failure to file any of these forms results in a $10,000 penalty.
If you don’t have substantial foreign holdings, consider moving them to a domestic bank or a U.S. bank that has a branch in that foreign country, but, even if you choose the second option, you’ll still have to file an FBAR. Remember, the U.S. Treasury has promised proposed regulations on FATCA by the end of December and final regulations by the summer of 2012, so keep your eyes and ears open, because the revisions may usher in new requirements for U.S. taxpayers.
Dr. Gary McBride is a professor of Accounting and Finance at California State University, East Bay. Reach him at (510) 885-2922 or firstname.lastname@example.org.
Surviving an economic downturn often hinges on a business owner’s ability to secure a commercial loan modification or expanded line of credit, but your chances of success dramatically diminish when you present your case to a veritable stranger. History shows that a banker is more likely to decline your request if he’s unfamiliar with the fundamentals or seasonality of your business or is unsure of your management capabilities.
Instead of waiting to share vital information and build trust with their banking partner, savvy executives act proactively so they can rely on established relationships to weather an economic storm.
“Open communication builds trust, which is valuable in good times and bad,” says Peter Koh, senior vice president and deputy chief credit officer for Wilshire State Bank. “Because trust is the foundation for all banking decisions.”
Smart Business spoke with Koh about the benefits of building a mutually beneficial relationship with your bank.
What characterizes a productive banking relationship?
A good relationship is characterized by an open dialogue and frequent communications, so a banker becomes familiar with your business model and needs. For example, unless you offer a detailed explanation, a banker may decline your loan application if he doesn’t understand that a seasonal downturn is impacting your financials. And unless you take the time to provide adequate documentation and a narrative to support your sales forecast, a banker may conclude that your growth assumptions are a bit too optimistic. Conveying the nuances of your industry and its cycles also helps your banker suggest appropriate services and solutions based upon his experience in the broader market. Remember, bankers have interdependent relationships with their clients, so both parties have a vested interest in mutual success.
How does a banking relationship benefit business owners and executives?
A banker is more inclined to entertain your request for a new loan or modification if he has a deeper understanding of your business fundamentals. And if the business owner has historically met his or her financial obligations and documentation requirements on a timely basis, a banker will be inclined to act quickly on any request. Essentially every banking decision is based on a combination of facts and intangible factors, and a solid working relationship can sway a close decision. It may be natural to avoid contact with your banker when times are tough, but you should view adversity as a call to action. Proactively explain your situation and offer an action plan or an alternate view of your company’s performance so both parties can focus on solutions instead of problems.
What criteria should a business owner consider to identify a suitable banking partner?
Certainly service levels and a bank’s offerings are important, but the decision really comes down to your comfort level with the staff and the banker’s knowledge of your industry and the local marketplace. Historically, community banks have catered to local businesses because their smaller size provides business owners and executives with greater access to loan officers all the way up to the CEO. Plus, your loan application doesn’t necessarily have to be approved by an executive in another city who doesn’t understand the nuances of the local marketplace. And smaller banks tend to be more flexible and less regimented than their larger competitors, so they’re willing to tailor a package of products and services around your specific needs. Evaluate your current banking relationship and upcoming needs so you can create a wish list to help you evaluate several contenders, but don’t overlook the intangibles that create a mutually beneficial relationship.
What are the keys to building a productive working relationship?
Follow these best practices to build a productive working relationship with your banker.
- Be transparent. Turn your loan officer into your secret advocate by supplying copious data as well as industry reports and trade group information, so he has the knowledge and confidence to lobby bank executives on your behalf when you submit a loan application or request for a modification.
- Be open. Invite your banker to visit your company, see the property or attend industry trade shows, so they have first hand knowledge of your operation and critical business fundamentals.
- Be resourceful. Turn to your banker when you need ideas to grow your business or overcome adversity, because this person meets with owners and deals with these problems every day. In fact, your banker is an excellent source for vendors or other experts who can help you write a business plan or even streamline operations.
- Be prepared. Anticipate your banker’s requests and come to meetings with a well-thought-out plan that specifically addresses his or her critical questions. Your banker wants to know how you intend to increase rents by 20 percent when the market is falling or how you plan to acquire new tenants when local occupancy rates have been trending down, so anticipate and be prepared to answer how-to questions.
- Be consistent. Provide your banker with quarterly updates that compare your company’s performance to your business plan, an updated forecast and feedback on the bank’s products and services.
- Be honest and proactive. Approach your banker before a problem occurs, because it’s much easier to boost revenue and profits than to rebuild a broken relationship or lost trust.
Peter Koh is a senior vice president and deputy chief credit officer for Wilshire State Bank. Reach him at email@example.com.
The state’s open energy market continues to provide businesses significant savings.
Retail choice has been a tremendous benefit to Pennsylvania businesses, and new products and services continuously provide greater benefit. However, businesses — with assistance from their energy supplier — need to monitor legislative and regulatory policies to ensure they maintain the benefits of energy savings and the promising developments in today’s energy markets.
“This is another critical time in our industry and for Pennsylvania businesses,” says Bob Barkanic, senior director of energy policy at PPL EnergyPlus. “Executives need to be monitoring pending policies and develop energy supply strategies to lock in these low energy prices.”
Smart Business spoke with Barkanic about new federal and state regulations and new energy policy opportunities.
What will happen to electricity prices as a result of new federal and state environmental regulations?
Protecting the environment is important to all of us. The challenge is balancing this objective with today’s current economic climate.
Our goal is to educate policymakers and customers to ensure the best decision possible is being made. For our customers, our objective is to explain the potential impacts and risks so they can procure their energy correctly. The proposed environmental regulations are expected to boost energy generation (production) costs, and these higher costs will eventually be passed along to businesses and households.
Environmental policies that potentially will have an impact on electricity prices are:
- The Cross-State Air Pollution Rule. This EPA regulation takes effect Jan. 1, 2012, and requires 27 states, including Pennsylvania, to improve air quality by reducing power-plant emissions that contribute to ozone and particle pollution in other states.
- Section 316(b) of the Clean Water Act. The EPA is developing regulations that require that the location, design, construction and capacity of cooling water intake structures at power plants reflect the best technology available for minimizing adverse environmental impact.
- The regulation of coal combustion residuals. The EPA has proposed federal regulations to govern the disposal of coal ash and other wastes generated by electric utilities and independent power producers, which would potentially make handling more expensive.
These environmental policies are important to Pennsylvania and to our nation. The goal is to implement them correctly — with transparency and with an effective market structure — and to inform businesses of how to prepare for the changes that will result from the policies.
What effect will renewable energy requirements have on electricity prices?
Renewable energy, like environmental policy, is an important component of an effective long-term energy policy. PPL Corp. believes a balanced approach toward energy policy is vital to the economic health of our state and country. A balanced approach would be a prudent mix of nuclear, clean coal, natural gas and renewable energy resources. In addition to these physical assets, demand response, energy efficiency and energy conservation should be included in the mix.
However, a balanced approach is needed for renewable resources, as currently these resources may cost up to four to five times the cost of conventional generation. Most states, including Pennsylvania, have a Renewable Portfolio Standard (RPS) which requires that a certain portion of electricity production come from renewable resources.
As government has provided grants and tax incentives for these resources, more resources have been added than needed by RPS. Therefore, states are looking to increase renewable energy requirements, thus potentially increasing the costs of electricity for businesses.
What effect will the development of natural gas from Marcellus Shale have on Pennsylvania businesses?
The abundance of natural gas in the Marcellus Shale has the ability to keep Pennsylvania’s energy prices low for a very long time. These low energy prices will benefit everyone, by either lowering costs or by offsetting other cost increases in electricity and natural gas bills. In addition, drilling is boosting the local economy by attracting new companies, creating direct and indirect jobs, and generating lease and royalty checks for property owners.
The benefit of Marcellus Shale is meaningful. To ensure these benefits, policymakers, industry and the people of Pennsylvania must develop a well-defined and a properly regulated market structure. We all benefit from Marcellus Shale if done correctly — safely, continuously improving technologies and regulations, and with open communications.
What can policymakers in Harrisburg do to provide greater benefits from retail markets?
Pennsylvania’s open energy market has created a competitive business advantage, but more can be done. Executives and consumers still need to be educated on why they should shop for energy and how to navigate the retail energy markets. The Public Utility Commission is currently holding hearings on improving retail markets. There are many opportunities to improve the current market — modifying utility default service plans to better align with current market conditions, enhancing technologies to improve and increase product and service offerings, improving utilization of smart meters and continuing the education process. Fortunately, business leaders don’t have to wait; they can shop the market and enjoy lower rates today.
PPL EnergyPlus, LLC is an unregulated subsidiary of PPL Corporation. PPL EnergyPlus is not the same company as PPL Electric Utilities. The prices of PPL EnergyPlus are not regulated by the Pennsylvania Public Utility Commission. You do not have to buy PPL EnergyPlus electricity or other products in order to receive the same quality regulated services from PPL Electric Utilities.
Bob Barkanic is senior director of energy policy at PPL EnergyPlus. Reach him at (610) 774-6722 or RJBarkanic@pplweb.com.
Historically, commercial real estate afforded investors predictable and favorable returns. In fact, many of the richest Americans on Forbes infamous annual list attribute all or a portion of their hard-earned fortunes to a bevy of sound real estate investments.
But commercial real estate prices plunged nationwide by 73 percent at the start of the recession and, though values have started to rebound in some cities and sub-markets, generous returns are no longer guaranteed. Going forward, investors need to anticipate every possible scenario and run numerous pro-forma models in order to forecast a realistic return.
“You can’t make sound investment decisions in commercial real estate by relying on gut instinct,” says Dr. Tammie Simmons Mosley, associate professor of Finance, California State University, East Bay. “You have to factor-in market uncertainly, review data and employ rigorous decision-making to validate your assumptions.”
Smart Business spoke with Simmons Mosley about the due diligence that leads to sound investments in commercial real estate.
How should investors approach decision-making?
Engage a team of professionals from the outset, including a realtor and an investment analyst, so you can tap their expertise through the various stages in the process.
1) Set goals. You won’t be successful if you try to hit a moving target. Establish how much money you’re willing to risk in addition to your desired rate of return and investment timeline before creating an investment profile and searching for a suitable property. This includes knowing the specific property capitalization rate for that locality.
2) Acquire financing. Whether you plan to use equity, debt or a combination of both to consummate a purchase, line up your financing in advance so you know the parameters and can negotiate with confidence.
3) Understand local laws and taxes. Local taxes, fees and even zoning and signage regulations can impact the success of a commercial building, so be sure to research and understand the local laws and regulations before you make a purchase.
4) Evaluate the tenant base. Assess the ability of current and prospective tenants to garner customers, because the efficacy of the local trade area will determine whether tenants can meet current or future rent obligations. Then use that information to create various scenarios and estimate a realistic return during the financial modeling process.
What constitutes a viable investment strategy?
Start by examining the area’s macro trends and assessing the impact on existing commercial properties to determine the best way to spend your time and money. For example, if local incomes are dropping and unemployment is high, it may not be wise to invest in a boutique retail center until the economy improves. While an influx of new office buildings may lure tenants away from mature projects and force landlords to grant temporary rent concessions, especially if available space exceeds demand. Include a demographic analysis of the average household size, age and income, and then look at how the property has fared over the last five years and the pipeline of future projects to realistically estimate the investment’s performance over the entire holding period. Finally, link your strategy to your goals in order to create a profile of your ideal investment so your realtor can suggest properties that match your appetite for risk and desired return.
What should investors review and consider as part of their market analysis?
Consider the purchasing power of the local market area as part of your analysis. How many demographically desirable customers reside within a two-minute or three-minute drive and can they use public transportation to reach the location? Next, consider the specific site and environmental factors. Will you incur heavy environmental clean-up costs or zoning roadblocks if you want to remodel an industrial property for another use? Will property setbacks keep you from expanding a shopping center or parking lot? Review data and human intelligence to conduct a thorough market analysis.
Which pro-forma statement models help investors estimate an accurate return?
First, run a broad pro-forma statement model or financial statement that estimates the property’s annual return over the entire holding period. Then, run a monthly model for the first and second year, because equity and debt investors will want to see a more precise cash-flow estimate during the risky start-up period. Then, repeat the process using a variety of assumptions to see how the investment performs under a variety of scenarios. Run the absolute worst case scenario, the most optimistic scenario and the expected scenario to see how uncertainty impacts your rate of return. Finally, calculate your expected internal rate of return by assigning a probability weight to each model while making sure that the total weight adds up to one.
Do you have any other tips or best practices for prospective investors?
Prevent bad investments by having an in-depth understanding of the commercial real estate market, because you won’t succeed in today’s environment with superficial knowledge. Use realistic assumptions and data from reliable sources to create multiple scenarios and pro-forma statement models, otherwise, its garbage in, garbage out. Be sure to check the math in your software program or financial model, because a bad formula can misconstrue an investment’s risk and estimated return. Finally, understand the current capital tax gains treatment so you can retain every possible dollar after exercising extreme due diligence and rigorous decision-making during the investment process.
Dr. Tammie Simmons Mosley is an associate professor of finance at California State University, East Bay. Reach her at (510) 885-3316 or firstname.lastname@example.org.
There’s been no shortage of threats to business continuity over the past decade; terror attacks, hurricanes and tornadoes are constant reminders of the need for a well-honed disaster recovery plan. But the era has also featured two devastating recessions and a rash of corporate downsizings, leaving executives with fewer resources to guarantee the timely restoration of critical business operations and databases.
“The events of the past decade have taught us that businesses must deal with disaster recovery in a pragmatic way,” says Kerwin Myers, senior director of product management at SunGard Availability Services. “Otherwise, companies may make critical mistakes and may never recover from a disaster. Conversely, overspending on disaster recovery can also pose a threat to your company.”
Smart Business spoke with Myers about how to ensure business continuity by taking a realistic approach to disaster recovery.
How have the events of the last decade impacted disaster recovery?
Executives seldom thought about disaster recovery before Sept. 11. Now, they recognize the need for planning, but restoring a network and recovering data require professionals with specialized skills, and the rigorous process often takes a back seat to day-to-day operations. Additionally, companies must now adhere to governmental regulations and industry mandates designed to ensure organizations develop business continuity plans.
What are the typical pain points that organizations face when recovering from a disaster?
Recovering from a disaster hinges on accurate and current disaster recovery procedures. Many organizations fail to recover or take longer to recover because these procedures are not accurate or not current. Production Information Technology environments are constantly changing. This means that an effective change management practice that includes a process for updating recovery procedures and recovery configurations is a crucial component to successful restoration. Changes in the production environment happen daily, impacting recovery. As a result, the recovery plan must be kept up to date with day-to-day production changes.
In many cases, organizations depend on the same staff for production and disaster recovery. This requires production to be redeployed to restore critical applications and data during a disaster. But the event may prevent workers from reaching the facility or inflict personal hardships or injuries that keep them from working.
Last, IT professionals spend most of the time maintaining and updating applications, so restoration efforts may be hampered by a lack of knowledge of restoration practices.
What are the key planning elements to help ensure a seamless recovery?
Recovery plans should be customized to individual businesses but should include these critical steps to ensure effective recovery.
* Create specific and sequential recovery processes and procedures. Employees need clear procedures to restore critical IT services.
*Establish priorities. Some mission-critical applications and technical functions must be restored immediately to minimize financial loss. Consider cost/performance trade-offs, estimated recovery times and business needs when establishing post-event priorities.
* Close skill gaps. Staff members must take on specific roles and duties during recovery, but there’s no time for training once disaster strikes. Inventory the required skills to execute the plan and close gaps through training or by contracting with external providers.
* IT organizations must ensure production changes are being replicated in recovery configurations and procedures.
What mistakes may impede or prevent a complete recovery?
An outdated recovery plan can stymie recovery. Companies need to reconcile the plan with the changing technical configuration and update procedures and priorities to align with the business requirements on a quarterly or semi-annual basis, as recovery may fail if the plan elements aren’t tested and refined.
Should all data be recovered in the same way?
Most data centers are a collection of new and legacy systems and applications from multiple vendors, which means all data can’t be recovered in the same way. For example, data from critical tier-one applications may be replicated on servers in other locations, which is expensive, but the investment practically eliminates down time after a disaster.
Applications that run in the cloud can be accessed from any location and the provider assumes responsibility for disaster planning and recovery. Tier-two apps could run on separate servers and are restored from tape backups or a virtualized environment.
How are virtualization and cloud-based solutions impacting backup and recovery processes?
The emergence of the cloud and virtualization has created new rapid recovery options at a better price point. Applications that run on Web-based platforms can be supported by third-party providers with hundreds of servers, so recovery can be as simple as switching to another site. The best providers take a holistic approach by considering the interdependency between legacy and Web-based applications and offer a comprehensive solution.
What should an IT manager look for in an outsourced disaster recovery service provider?
Beyond price and equipment, an IT manager should evaluate the following criteria.
* Experience and expertise in processes and procedures.
* Commitment and conviction backed by guarantees and SLAs.
* Track record. Has the firm been tested by a real disaster? Was the recovery successful?
* Testing and audits. A provider should conduct hundreds of tests and audits each year, so ask to review its documentation before committing.
Kerwin Myers is a senior director of product management for SunGard Availability Services. Reach him at email@example.com.
Competitive energy markets give business leaders an opportunity to choose a supplier, negotiate rates for electricity and natural gas, and customize a suite of innovative products and services to meet their needs. But nearly 38 percent of industrial and 67 percent of commercial companies still haven’t cashed in on the state’s open energy market because they’re still relying on old buying habits, says Robert D. Gabbard, president of PPL EnergyPlus.
“I firmly believe that an open marketplace creates efficiencies and is superior to a vertically integrated monopoly, because prices have been trending lower since 2008 and the early adopters have been able to reduce their company’s overall energy costs by 5 percent to 10 percent and, in some cases, even more,” says Gabbard.
Smart Business spoke with Gabbard about how businesses can capitalize on Pennsylvania’s open energy market by forming new buying habits.
What major changes have taken place in the Pennsylvania energy market in the last five years?
The creation of an open, competitive energy market in Pennsylvania has spawned industry consolidation and several mergers in recent years. On the one hand, consolidation is advantageous because only the most efficient and financially sound suppliers survive and savvy executives have seized the opportunity to garner additional savings by leveraging their purchasing power.
On the other hand, executives must use due diligence to select a financially sound supplier and choose products and services that support their business model. For example, if your company has implemented a green initiative, select a supplier that offers energy from renewable sources.
Or, if your goal is to drive revenue by signing new customers to long-term agreements, it makes sense to reduce price volatility by negotiating a long-term energy contract.
The bottom line is that there’s no need to settle, as business leaders have the opportunity to select a supplier and a suite of products and services that fit their company’s needs.
What is the most important thing businesses in Pennsylvania should know about the competitive energy market?
Pennsylvania is no longer operating under a monopolistic structure, but you don’t have to take a lot of risk or sign a long-term contract to garner lower rates and better service. Start by making small changes that create new buying habits, such as researching suppliers, requesting quotes and then signing a simple, short-term contract. Once you’re comfortable with your supplier and the bidding process, you’re ready to source additional savings by utilizing demand-side management programs or shifting daily production schedules to capitalize on lower energy rates throughout the day.
You don’t have to predict your future energy needs to receive a low rate, because there are programs for businesses that can’t forecast or that expect a change from their historical usage, and there is even a program that offers price certainty while allowing customers to take advantage of a reduction in wholesale energy prices. Your supplier should offer to conduct an analysis and help you identify ways to lower your total energy costs that exceed a reduction in your basic energy rates.
What trends should businesses be paying attention to in the energy sector?
Unlike the old days, executives need to monitor the underlying commodity prices monthly or quarterly so they can spot opportunities to extend and renew their energy rates and contract terms. If you don’t have time to monitor the wholesale market, select a supplier that will do it for you and contact you when an opportunity arises.
Energy companies competing for business in a competitive, open marketplace foster innovation and technology developments, so be on the lookout for products and services that will help you monitor and control your daily usage and forecast your future needs. Don’t hesitate to suggest a new product from your supplier.
The key is selecting a trusted supplier that is compatible with your company’s culture and business objectives, because Pennsylvania business executives no longer have to settle for the status quo.
What makes PPL EnergyPlus different from other energy suppliers?
We’ve been in Pennsylvania for more 90 years so we understand our customers’ needs and the nuances of each city. At the same time, we offer the security of a multinational Fortune 500 company with a strong balance sheet. Our in-state network of power generation plants creates operating efficiencies by allowing us to deliver energy across very short distances.
But our greatest differentiator is our business model and our commitment to customized service instead of taking a one-size-fits-all approach. We consult with business managers and recommend specific ways to use power more efficiently before suggesting a customized slate of products and services
PPL EnergyPlus, LLC is an unregulated subsidiary of PPL Corporation. PPL EnergyPlus is not the same company as PPL Electric Utilities. The prices of PPL EnergyPlus are not regulated by the Pennsylvania Public Utility Commission. You do not have to buy PPL EnergyPlus electricity or other products in order to receive the same quality regulated services from PPL Electric Utilities.
Robert D. Gabbard is the president of PPL EnergyPlus. Reach him at RDGabbard@pplweb.com or (610) 774-4168.