It is a buyers’ market right now for real estate, and the same holds true for middle market companies.
“At most banks, the middle market portfolio is the heart of what drives the commercial banking earnings,” says Steve Cobain, senior vice president and middle market manager at First Commonwealth Bank.
As part of such a crucial economic sector, middle market businesses have the power to choose a bank that suits their needs.
“Some banks differentiate by being very easy to deal with, making their credit terms very loose and their pricing extremely inexpensive,” Cobain says. “Other banks accentuate the fact that they are a full-service provider, are very consultative, work with clients, understand the business from the owner’s perspective and are going to be a very dependable financial partner for the client, rather than just compete on price alone.”
Smart Business spoke with Cobain about the general market conditions in middle market lending and how businesses can take full advantage of them.
What is the definition of a middle market company?
There are multiple definitions, but the most prevalent is that a middle market company has sales that range in annual revenue from $20 million to $500 million. They are usually privately owned — a large number of them are family owned — and have rapid growth. There are a high number of companies that fit that category; in Pennsylvania, there are probably 6,000 companies fitting that definition.
What are the typical financial needs of middle market companies?
The middle market is one of the more complicated sectors, where companies need a full array of banking products. There’s a need for credit, treasury management services and other products, such as manufacturing companies that need trade letters of credit for both the sale of their goods and the import of raw materials.
There is no segment of the economy that the middle market doesn’t touch, but there are different underwriting standards, credit structures and treasury management products depending upon the business. For example, a service business might not have many assets for collateral, so banks take a harder look at the cash flow that a company can generate, while a manufacturing company uses inventory, receivables, equipment and real estate to secure credit.
In addition, there are a number of factors that come into play for middle market companies trying to secure a loan agreement, such as whether the owner needs to personally guarantee the company’s debt, the number of times a company has to cover its debt service, how much leverage the bank will allow a company and the types of advance rates available for lines of credit based upon inventories and receivables
What is the current situation for middle market lending, and what does this mean for businesses?
From a small community bank all the way through to the largest banks in the country, there are dedicated business practices for the middle market. From a bank’s perspective, it is one of the most profitable of the corporate sectors. Because businesses are reliant on their primary bank for the bulk of their services, there are a lot of cross-sell opportunities, and middle market companies are typically loyal.
On the whole, there’s still a perception that banks are not actively lending money, but that’s not the case for the middle market. If you’re a strong middle market company that is profitable and financially stable, you are going to find that virtually every bank in your geographic area will be trying to attract you as a client. Other middle market companies might be going through working capital challenges because growth is rapid and you haven’t fully demonstrated your profitability yet, so you should find a bank that can be a true financial partner.
What should middle market companies look for in a banking partner?
Look for a bank that will invest the time and effort to understand your business and support you through your working capital cycle. Your banker needs to be able to see your business from your perspective, as an owner. Many middle market companies are privately held with little regulation, so look for a bank that can help you find a balance between distributing excess capital back to yourself and keeping the company’s balance sheet strong and stable for the foreseeable future.
Middle market employers should expect a high level of service from their banking partner. Typically, the bank designs a portfolio of products, assigns a relationship officer who meets with the company at least four or five times a year and makes sure the company is aware of all the products available. In addition, the employers themselves are put into a private banking group for personal banking needs.
How can businesses determine the right time to switch to a different middle market lender?
In the early stages of a middle market company, with sales of $20 million to $30 million, the business can be with a smaller community bank. However, as revenue grows, you might need a bank with a higher hold limit.
It’s important for a middle market employer to know how much credit any one bank can provide and work with banks to ensure there is enough financial backing to accommodate anticipated growth. Therefore, in a period of rapid growth, it might be necessary to change or add banks to your portfolio.
Also consider switching if you’re not getting some combination of a high level of service, a good understanding of the business, solid consultative advice, and fair and competitive pricing.
Insights Banking & Finance is brought to you by First Commonwealth Bank.
When the iconic “Got milk?” campaign was translated into Spanish, Hispanics wanted to know why asking someone if they were lactating was so funny. Language and cultural misunderstandings in the business world could cost you a contract or block your entry into a new market unless you take the time and have the foresight to do your homework.
While a language barrier isn’t easy to fix overnight, even learning a culture or just knowing there are cultural differences can make an impact.
“A language is a lot of investment, not just for the employer but for the employee as well. However, people are more forgiving about a language barrier than if you’re perceived as rude,” says Victoria Berry, program manager of Business and Performance Development with Corporate College.
Smart Business spoke with Berry about some of the pitfalls business owners face when working with those from another culture.
What is the value of learning a new language or culture in the business world?
It has tremendous value in a global marketplace. Even as a U.S.-based company, you have employees who are dealing with overseas customers, clients and partners. There also are more than 3,000 foreign-owned companies in Ohio, 275 of which are in Northeast Ohio and employ more than 30,000 workers. Even within your own company, you can have people from different cultures working together on high-functioning and cross-functional teams. The U.S. is an anomaly when compared to the rest of the world in that having more than one language under your belt isn’t part of our culture.
On top of the more visible language barrier, cultural misunderstandings can be just as dangerous. For example, in the U.S., a high-quality brochure typically has high-gloss or thick-stock paper, but in China, that comes across as cheap; you should use a thinner paper with a no-gloss shine to it.
People tend to overlook the fact that other cultures have different expectations, especially regarding business etiquette or meetings. For instance, in China, it’s considered discourteous to take someone’s business card and not look at it, or at least pretend to read the title. As another example, you wouldn’t want to call a Mexican company between noon and 3 p.m. when businesses are closed, or discuss business during lunchtime. Following these kinds of protocols will impress people from another culture and show you at least did some background work.
What is crucial to know when dealing with foreign businesses?
It’s crucial to know the greeting and how to approach a business situation. In the U.S., we tend to be demanding and quick, assuming people are in a hurry, and therefore, we sidestep some of the formalities. In most other cultures, the friendly bonds that business executives build with others weigh heavily on whether or not they decide to do business you. This is true especially in China and many Latin American countries, where personality and whether or not they feel like they can trust you are essential factors.
Another consideration to remember is that in American culture, we’ll work through breakfast, lunch and dinner. We often have the expectation that you’re going to work until this project gets done. In many other cultures, they work from 9 a.m. to 5 p.m. and then the lights go off. Family and personal time is coveted. In the U.S., we might say, ‘Family comes first,’ but how many of us miss a Little League game to be at work?
How do you know when learning new languages and cultures is worth the resources?
Any time you can foresee that you may be doing business either out of the country or in the country where you know there’s a large population of a specific culture, you probably want to get the employees you know will be in contact with these individuals acclimated.
Which employees might benefit the most from learning a new language or culture?
Depending on the situation and business, it could be your customer service, sales personnel, human resources and/or marketing professionals. Managers and executives who are making the decisions might not need to speak the language but definitely will need to know the culture.
What should employers be looking for to help employees understand other languages, cultures, customs and etiquette?
Some have a tendency to go for the free programs that you find online, but those programs are not always worth your time. A free program, for example, might leave you without the natural fluency and dialect you need. You get what you pay for; this program might cost $200 less but you’re just getting a PDF that someone copied.
Instead, focus on programs with quality instructors and a good reputation in the education/training field. The instructors should be fluent in the language and have teaching experience. Research the organization to find a program that has a history of providing good service.
Remember, even a little knowledge will keep you from inadvertently offending someone from another culture, which brings stress and tension among team members — whether it’s a long-term team or if you’re just trying to get the contract signed so you can do business together.
Victoria Berry is program manager of Business and Performance Development with Corporate College. Reach her at (216) 987-2906 or firstname.lastname@example.org.
Insights Executive Education is brought to you by Corporate College
When there’s a strong, open partnership between an employer and its temporary staffing agency, both parties can realize profits and cost savings. The goal for both sides is to determine the right value and form a relationship that makes it more cost effective to hire a staffing firm than it would be for the employer to perform those duties, says George Thomas, senior vice president of Everstaff.
“It is our job to make sure that the client understands all of the costs, liabilities and exposure that they defer when using a staffing agency for temporary and temporary-to-permanent placement,” he says.
Smart Business spoke with Thomas about how to maximize your savings by partnering with a staffing firm.
How does the cost relationship between a business and a staffing agency work?
There’s a common misperception that a company isn’t realizing savings when paying for the services of a staffing firm. Two significant costs are along the lines of direct and indirect liabilities. These are the insurances that the staffing company covers as part of payroll, including workers’ compensation and unemployment. There are also additional liabilities and sometimes very significant costs associated with workers’ compensation and unemployment claims, which are passed directly to the staffing firm.
The employer also gains significant savings through the indirect costs of marketing and recruiting. Businesses will ultimately spend more time, money and resources when recruiting seasonal and permanent staff due to the fact that most HR departments are smaller and too busy dealing with day-to-day employee issues to focus efforts on sourcing and recruiting candidates. This is where the staffing agency can use its expertise in recruiting and placement to sort through resumes, bring people in for interviews and ensure the employer gets an employee for the job who has both the hard and soft skills necessary to be successful. In addition, recruitment is becoming more costly today, with many employers requiring background checks and drug screenings, even for low-wage jobs.
How can using a staffing agency help with employee retention?
A lot of temporary staff turnover occurs in the first two to three weeks, especially in manufacturing. When a business doesn’t use a staffing firm, it incurs the front-end costs of recruiting — bringing people on board and training them — only to end up losing many of them in the first few weeks or months. When using a staffing agency, though you will lose productivity when there is turnover, you will not lose the up front costs associated with sourcing, screening and placement.
As far as retention, a good staffing firm will know the client and be involved in proper orientation, pre-employment screening and ‘after-placement’ coaching to reduce turnover. When the staffing firm plays a key role in the coaching of the temporary work force, retention always improves.
How can employers maximize cost savings through a staffing firm?
You and your staffing firm need to have a clear understanding about what resources you require for your type of business, where your gaps are in productivity and what your short- and long-term visions are to build a strong strategic partnership.
Next, you will want to make sure that the value proposition for you and the staffing service is such that both parties are happy and that the service can provide the resources you expect to be successful. Many times a company will go with the lowest price it can possibly get and then realize after a few months that the agency has moved its resources to more profitable accounts. Make sure the price is not only fair to you and your company, but also for the staffing firm.
Once you’re in a relationship with the staffing agency, you need to continue to work with it on developing the relationship. For example, in manufacturing, a staffing company may get feedback from temporary employees that a certain line has a potential danger or it may learn that there is turnover on a certain shift because of training issues, a particular supervisor, leadership style or operation tempo. Working together to minimize potential workers’ compensation and unemployment claims will help the staffing agency with its costs and minimize your productivity loss.
How should companies set pricing when using a staffing firm?
Don’t be afraid to ask the staffing company what the insurance burdens are for a particular state, realizing that those costs vary year to year. Understand that, depending on the department and the job the temporary employee will be filling, those burdens can differ even within a facility.
It’s up to the staffing company to inform you of the direct costs and insurance burdens, as well as the costs for payroll, recruiting, recruiting support and corporate overhead. Many times a company will assume that if the state and federal insurance burdens come out to 24 percent and the staffing agency markup is 41 percent than the difference is all profit for the firm, which is never the case. When everything is completely transparent, everyone knows where they stand and can find a fair price for each party.
You should always ask for the detailed breakout of burden from the staffing company so you can see exactly what the cost savings will be for you to use temporary staffing or temporary-to-permanent staff instead of expending the resources to do it yourself.
George Thomas is a senior vice president with Everstaff. Reach him at (216) 369-2566, ext. 104, or email@example.com.
Insights Recruiting & Staffing is brought to you by Everstaff
What you paid for your assets and how the Internal Revenue Service values them are not the same considerations, but taxpayers often don’t know the difference.
“This is not the kind of thing you run into every day,” says Thomas H. Ahlbeck, CPA, managing director at SS&G’s Des Plaines, Ill., office. “Some people might only run into this complexity a couple of times in their lifetime.”
However, the wrong basis can add thousands of dollars to your taxes, so it’s important to understand how this can happen, especially as your net worth grows and affairs become more complicated.
Smart Business spoke with Ahlbeck about how to get a handle on this important, but nebulous, accounting concept.
What is basis?
Basis is what the IRS uses as your asset value for determining your gain/loss or taxability of a transaction. For example, if you bought a common stock but don’t know or cannot prove your purchase price, you might have to enter the basis as zero even though you paid significantly more. You’ll pay more taxes on the proceeds you receive — or not be able to write off a loss if the security is worthless.
What is the biggest problem area for figuring basis and how can it be detrimental for your taxes?
Taxpayers are losing a small fortune with nondeductible individual retirement accounts. IRAs can be problematic because you pay thousands of dollars into an IRA and the basis is not easy to track. When people put in after-tax contributions to their IRAs, they might not be keeping track or telling their accountant as it doesn’t have anything to do with their current taxes. Later, unless you can prove those were after-tax contributions, you’ll have to pay taxes on the money again when you take it out.
Once you’re making withdrawals from the IRA, the nondeductible contributions are taken as a percentage of every withdrawal. So, if you put in $100,000 of after-tax dollars originally and the account grows to $150,000, then only two-thirds of that is not taxable and a third of each withdrawal will be taxed.
How is real estate another area where basis is often wrong?
Real estate is another neglected area for basis — particularly primary and secondary residences where accountants aren’t completing a depreciation schedule. Today, many homeowners look at the current market and assume their home will never appreciate. Therefore, they don’t keep records of improvements, which should be added to the basis to narrow any gains when it comes time to sell in 10 or 20 years. This is even more critical for a vacation home because you don’t get the $500,000 exclusion of taxable gain that you might get on your primary home.
Real estate transactions, by their very nature, are held for a sizeable length of time, making it difficult to keep all the records. Your basis can be further complicated because the land and building are held as separate values and the land’s original value is often forgotten when configuring basis for a sale years later. If a property goes through a bankruptcy or debt forgiveness, those also will change the value of the basis.
Another problem is when inheriting or gifting occurs because, again, records can be lost. If someone inherits real estate, the basis value is stepped up to the current market value, which is why an appraisal needs to be done at the time of death. The idea of the increased value, which can happen for no other reason than inflation, is to counteract estate taxes.
However, if a property is gifted, the value of the basis is what the original owner paid for it. Therefore, if a couple jointly own property and one spouse dies, half of the basis will stay at the original purchase price, while the other half will be stepped up to the date-of-death value.
What can you do to prevent some of these difficulties?
The simple rule of thumb is to know the basis of all your assets at all times, meaning what you can use as value against the selling price in the eyes of the IRS. Know what will change the character of an asset, such as when a personal residence becomes rental property. There’s a lot of logic to basis, but with fair market value of property, the contract cost, debt involved, after-tax dollars, inheritance and gifting, the original basis can be confusing and even change without you realizing it.
You also might not recognize the tax consequences of your actions. For example, if you bought a stock for $10,000, you also need to keep track of the reinvestment because it becomes part of the cost to give you a higher basis.
Don’t assume your financial adviser or accountant is tracking basis. If they are, keep an eye on it to ensure they are doing so correctly. Many financial advisers now are tracking basis for stocks and mutual funds, especially with new rules from the IRS, but there can also be basis issues and related loss limitations with a closely held corporation or a partnership.
Know what records you need to have and how long to keep them. When someone gifts you a vacation home, you might not think that you’ll need the paperwork stating what the home originally cost. A lot of people think they only need to save three years of tax records before they throw them out. But as long as the transaction hasn’t been completed, it needs to be tracked.
Thomas H. Ahlbeck, CPA, is a managing director of SS&G’s Des Plaines, Ill., office. Reach him at (800) 869-1834 or TAhlbeck@SSandG.com.
Insights Accounting & Consulting is brought to you by SS&G
In today’s world, commercial businesses are gaining efficiency and lowering costs by moving computer servers to a data center. As the industry morphs in new directions with cloud computing technology, outsourcing data is taking on a more important role in the effort to cut costs.
“The data center industry allows other companies to focus on their core competencies, and lets the data center provider take care of the technical infrastructure that supports the business,” says Pervez Delawalla, president and CEO of Net2EZ.
Smart Business spoke with Delawalla about how employers can use data centers to increase efficiency and allow employees to focus on growing the business.
How does the data center industry work?
A data center has specialized infrastructure to support thousands of computer servers. The industry itself has become more commercialized, as the Internet infrastructure demand has increased.
A data center provides power, cooling and fiber optics for the servers with efficiencies and redundancies not readily available in commercial buildings. Redundancies such as an uninterrupted power source and generators with on-site fuel can sustain power for days or weeks to support all critical infrastructure including commercial cooling, fiber optics systems and servers.
What’s the advantage to businesses when using data centers to outsource data?
Building your own data center for your servers can cost between $1,000 and $1,500 per square foot. In addition, commercial buildings are not designed to house redundancies such as generators and additional cooling systems that are needed to sustain data centers.
In addition, with the recent economic downturn, CFOs are asking their IT heads why they should invest in building or expanding their internal data footprint when there are other options. When servers are outsourced to a commercial data center, you can take advantage of the economies of scale to derive financial, security and redundancy benefits.
What services are provided when businesses outsource data?
The core of a data center is the redundancy — power, cooling and network backbone. In addition, there’s a high speed of connectivity, from the network to the servers. A data center may have a minimum of 440 gigabits of capacity to the Internet backbone. One gigabit is a 1,000-megabit connection, and a typical T1 line, which would be used in many commercial office buildings, is 1.5 megabits. So, if servers are tasked with downloading or performing analytical work by scanning data on the Internet, that high speed enables the data to be acquired at a faster rate.
Ancillary services also are available through commercial data centers, such as 24/7 onsite support, complete network design implementation and management, and network security such as distributed denial of service (DDoS) protection or network firewalls. A data center can deploy operating systems and manage them with continuous monitoring. Typically, these additional services are often already provided through a company’s IT department. If a company outsources these functions, then an onsite IT department becomes less critical.
How has outsourcing data changed with technology advancement?
As connectively technology has improved, the price of that connectivity has dropped dramatically. Ten years ago, if you had multiple offices and wanted to connect them, you might spend hundreds of thousands of dollars; now, you are able to connect remote offices at a fraction of that investment.
The same goes for a data center. When you outsource data, you can have multiple offices connected to that data center, and if you close or move an office, you just need a new connection, rather than mobilizing technology gear at a high expense or risk.
Cloud computing is another way businesses are using data centers these days. Cloud computing works through a data center and, in many ways, can lead a company to outsource not only its servers but its IT functions. It brings efficiency by using every ounce of your server capacity. In many cases, a business might have one server for email and another for file storage, but there are resources within each of those servers that are being underutilized.
How is security greater at a data center than infrastructure that is housed at a business?
The data center industry looks at both network and physical. With network security, data centers employ DDOS and firewall protections to protect data. Physical security is equally important, as physical access to servers is more than half the battle for hackers. Data centers are monitored 24/7 by closed-circuit video cameras, with every entry point only accessible via secured access, such as biometrics.
As technology advances, the way that companies outsource their data and utilize a data center will evolve, but data centers still increase productivity through commercial-grade redundancy and security, and as leaders in the industry strive to deliver greater efficiencies and value to their customers.
In addition, efficiencies that data centers are creating will drive lower carbon footprint for companies.
Pervez Delawalla is president and CEO at Net2EZ. Reach him at (310) 426-6700 or firstname.lastname@example.org.
Insights Technology is brought to you by Net2EZ
Without the protection of a non-competition agreement, most courts are reluctant to prevent a former employee from working for a competitor. However, even when a company has a non-compete agreement with an employee, it may be unenforceable if it is not drafted in accordance with the laws of the state in which the company seeks to enforce it, says Stephen C. Goldblum, a member at Semanoff Ormsby Greenberg & Torchia, LLC.
“There’s a perception that Pennsylvania courts do not enforce non-compete agreements, but that’s incorrect,” says Goldblum. “Covenants not to compete are routinely enforced by Pennsylvania courts to the extent they are reasonably necessary to protect the legitimate business interests of the employer.”
Smart Business spoke with Goldblum about the importance of having properly drafted non-compete agreements in order to best ensure that they will be enforced by a court.
Why are non-compete agreements important?
In conjunction with other restrictive covenants such as a non-solicitation of customers and employees, confidentiality and inventions clauses, non-compete agreements are the best way a company can protect itself from the harm it can potentially suffer in the event an employee leaves the company and then solicits the company’s customers on behalf of a competitor. Although non-compete agreements are fairly common for executives and managers, they are not utilized as frequently as they should be for salespeople and other employees that regularly communicate with a company’s customers.
How does Pennsylvania law differ from other states regarding non-compete agreements?
Many states are less inclined to enforce non-compete agreements than Pennsylvania. For example, California has a statute that prohibits non-compete agreements except in very limited circumstances. Generally, Pennsylvania courts will enforce a non-compete agreement as long as the agreement is narrowly drawn and the company seeking to enforce the non-compete agreement can meet the threshold requirement of having a legitimate, protectable business interest such as customers and customer goodwill, confidential information, specialized training or trade secrets. Pennsylvania courts will not enforce covenants aimed at repressing or eliminating competition to gain an unfair economic advantage.
What should employers know when entering into non-compete agreements with employees?
In Pennsylvania, the offer of employment is sufficient consideration for a non-compete agreement entered into between a company and an employee at the outset of employment. In Pennsylvania, there are four requirements for an enforceable non-compete agreement. The non-compete agreement must be:
- Ancillary to an employment relationship.
- Supported by adequate consideration.
- Reasonably necessary to protect a legitimate business interest of the employer.
- Reasonably limited in duration and geographic scope.
There is no precise formula for what makes a covenant not to compete reasonable. A court will evaluate the circumstances and make a factual determination as to whether it will enforce a non-compete agreement on a case-by-case basis.
If an employer has employees in multiple states, it can include a provision that ensures Pennsylvania law will govern the interpretation and enforcement of the non-compete agreement.
What common mistakes do employers make when entering into non-compete agreements with existing employees?
The most common mistake is to fail to give additional consideration and simply demand the employee sign the noncompete agreement. Continued employment alone is insufficient consideration for a non-compete agreement entered into subsequent to the commencement of the employment relationship.
If the company seeks to enter into a non-compete agreement with an existing employee, it must give additional consideration, which could include many different items such as a promotion, an increase in salary or benefits or a monetary payment.
How can employers determine when and how to enforce non-compete agreements?
When an employee resigns or is terminated, the company should remind the employee of his or her non-competition obligations and provide the employee with a copy of the signed non-compete agreement. If it is subsequently determined a former employee is in violation of the agreement, the company has the right to proceed against the employee in court. The company may seek preliminary injunctive relief to prevent employment in violation of the non-compete and file a breach of contract action against the former employee and seek permanent injunctive relief and monetary damages. Typically, a case against a former employee also includes the new employer for interfering with the company’s contractual relationship with its former employee.
When hiring, a company should always inquire whether potential employees are bound by agreements that could restrict them from accepting employment or limit the performance of their duties. Otherwise, the company could be inviting a lawsuit if it hires an employee who is contractually bound not to compete with a former employer.
How often should an employer review its non-compete agreements?
Noncompete agreements should be reviewed no less frequently than every two years because the laws that govern their interpretation and enforceability change. Legal counsel that is up to date on the ever-changing landscape of employment law in Pennsylvania should review non-compete agreements to determine their compliance with existing law, which will best ensure their enforceability.
Stephen C. Goldblum is a member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-5961 or email@example.com.
Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC
More than 145 million people — or nearly half of all Americans — live with a chronic condition, according to Johns Hopkins University. That number is projected to increase by more than 1 percent each year through 2030, resulting in a chronically ill population of an estimated 171 million.
So what does this mean for employers that are already struggling to control health care costs?
“There are 29 chronic illnesses that make up 80 percent of all health plan costs,” says Mark Haegele, director, sales and account management, with HealthLink. “The problem is that, with a typical health plan, you are only managing five to seven of those diseases, reaching a significantly smaller component of the population.”
Smart Business spoke with Haegele about how to remove barriers to chronic illness compliance and manage health care costs.
How are chronic diseases typically managed?
Chronic disease management may include an evidence-based care treatment plan, with regular monitoring that follows guidelines developed by the American Medical Association, the American Heart Association and others, coordination of care among providers, medication management, and measuring care quality and outcomes.
How do chronic illnesses exponentially affect employee health insurance costs?
Patients with chronic conditions often are required to take one or more medications indefinitely. The combination of dormant symptoms, coupled with long-term treatment, means that patients don’t always follow the recommended daily regime for disease maintenance. If employees don’t manage chronic illness by following treatment protocols, they may end up in the emergency room or hospital, spending more on health care costs than if they had spent money to stay in compliance through testing and medication.
With the way the health care system is structured, a patient does not know the ultimate cost of going to a doctor. Months later, he or she will get a bill in the mail — hopefully with a corresponding explanation of payment from the insurance company — that might be for $50 or $250. This uncertainty can keep patients with chronic diseases from following wellness and disease management.
In addition, failing to manage chronic illness correctly can lead to complications, which increases costs. A University of Chicago study found that three out of five patients with Type 2 diabetes suffer from at least one significant complication, such as heart disease, stroke, eye damage, chronic kidney disease or foot problems. Consequently, the yearly medical expenses of a person with Type 2 diabetes complications are nearly $10,000, with nearly $1,600 paid out of pocket.
What challenges do employers face with chronic illness compliance?
There can be challenges with many fully insured health plans because benefit designs are limited to support chronic illness compliance. Most health benefit plans have an optional disease management program that impacts 5 to 9 percent of chronic diseases, such as asthma, diabetes, cardiovascular disease and chronic obstructive pulmonary disease. The problem is that many more types of chronic illnesses drive up health care costs, and the benefit design doesn’t change to support the highest chronic disease prevalence among your specific employees. In addition, a voluntary program won’t necessarily reach the employees who are increasing costs the most.
It takes time to change employee behavior. Even with the Patient Protection and Affordable Care Act, under which companies have been paying for 100 percent of preventive care such as immunizations and mammograms, there hasn’t been an uptick in services.
How can employers use value-based benefit plans to increase chronic illness compliance?
Traditionally, employers try to save money on health insurance plans by shifting costs to employees and encouraging generic medicine use. Now, some are lowering or eliminating copayments on medications to encourage adherence to regimens through value-based benefit design.
Companies can use a series of incentives and disincentives to shape employee behavior. For example, smokers may have to pay a higher premium than nonsmokers, and employees who undergo a biometric screening each year could qualify for a plan with better benefits.
This is where the flexibility of a self-funded plan can help. If a company has a disproportionate number of diabetics, it can design its health plan to remove barriers to following a health treatment plan by taking steps such as fully paying for diabetic test strips. In addition, an employer can fluctuate employee members between plan levels based on their compliance throughout the year, rewarding good health practices with better benefits.
In a recent study of a 30,000-member business coalition in Clinton, Ill., of 250 diabetics studied, those who followed a value-based benefit plan with aligned incentives had health costs that were half those of other diabetics.
How can employers ensure that adding health care costs by lowering or eliminating copayments saves money?
You can hire professional consultants to evaluate health plan vendors, but effective communication is critical. When looking at programs, those with motivational coaching are the most effective. They get employees on board by motivating them as opposed to informing them of a checklist, then calling to ask why they aren’t following it. In addition, the program should also be communicating both with the member and primary care doctor.
You need to understand your health care population and then monitor progress monthly, quarterly or yearly to see your return on your investment. One self-funded program found that more than 90 percent of the population identified with high cholesterol had gotten cholesterol levels down to normal following a value-based health plan that ultimately lowers overall health care costs.
Mark Haegele is a director, sales and account management, with HealthLink. Reach him at (314) 753-2100 or firstname.lastname@example.org.
Insights Health Care is brought to you by HealthLink®
Businesses cannot overestimate the importance of a well-planned transportation infrastructure. Easy commutes for employees build morale and productivity. Faster response times for mobile service crews produce loyal customers. And gas prices of more than $3 per gallon impact the bottom line.
For Shermco Industries — a thriving company specializing in electrical power system and wind generator repair — proximity to airports, highways, customers, and comfortable and diverse neighborhoods for employees to live in were all keys to its corporate relocation success story.
“Relocating to Irving – Las Colinas provided us with an extensive network of highway systems and transportation options that help us meet and exceed our customers’ expectations for timely arrival, and allow us to attract and keep top talent,” says Lonnie Mullen, vice president of operations for Shermco Industries.
Smart Business spoke with Mullen about how the thoughtfully planned infrastructure of the Greater Irving – Las Colinas area enticed his growing company to relocate its operations from Dallas.
What factors make Irving – Las Colinas a great place to do business?
The cost of doing business in Irving has a respectable value compared to the surrounding cities, and Texas real estate in general has maintained its value despite the recent downturn. Irving is an established, business friendly city, centrally located in the Dallas-Fort Worth Metroplex. More than 10,000 businesses call Irving home, including Fortune 500 companies ExxonMobil, Fluor, Kimberly-Clark, Celanese and Commercial Metals Co.
Irving is regarded highly as one of the top cities for business in the nation and recently was ranked one of the nation’s Top 50 Best Places to Live. Not only is Irving a great place to work and build our company, it’s also one of the best places for our employees to reside and raise their families. Irving had exactly what we were looking for.
We were established in Dallas, a short drive from Irving. In 2000, our success demanded that we move to a bigger facility, and Irving offered the business solution we were looking for with a selection of cost-effective and functional real estate opportunities. We settled on a great building in an ideal location within an industrial complex next door to Frito Lay — one of our customers.
How has the move impacted Shermco’s bottom line growth?
When our customers need us to work on their equipment, they need help right away. Having easy access to Irving’s transportation infrastructure, including several highways, two major airports, commuter rail and the planned light rail service, is a great value to us as well as our customers.
The transportation infrastructure in and around Irving is a very important function for our company. We are an international provider of testing, repair, professional training, maintenance and analysis of rotating apparatus as well as electrical power distribution systems and related equipment for the light, medium and heavy industrial base. A lot of our business is service-oriented, so time truly is money.
Since relocating to the city of Irving, our business has continued to flourish. When we moved to Irving we had 100 employees. Today we have 425 employees, including 280 at our Irving location. We are very proud to be consistently ranked among Dallas’ finest companies by the Dallas Business Journal, which recognized us as a mid-sized company finalist for the publication’s 2010 Best Places to Work. More than 400 companies entered into the survey process, but only 23 mid-sized companies were chosen as finalists.
Another factor driving our growth is Irving’s Economic Development Partnership group. The group is engaged in both the business and governmental sides of our city. It’s extremely helpful in a sense that I’m able to ask the same group of people questions that involve either subject, essentially speeding up the process for our business to make a solid decision. And it gives you a sense of pride to know you have a partner that’s invested and supports your success.
How does the city’s transportation infrastructure help attract top talent?
To be the best you have to attract the best talent. In Irving, we have access to a work force of more than 3.1 million people within a 30-minute commute. Being established in a city like Irving that offers an excellent quality of life, an affordable cost of living and reasonable commutes has allowed us to attract and maintain our valuable employees.
Our employees and their families have access to many culturally diverse activities in and around Irving, including the Irving Arts Center, the Dallas Arts District, Six Flags amusement park, several water parks, and professional sporting venues including the Dallas Cowboys, Mavericks basketball, Stars hockey and Rangers baseball.
What are some of the best-kept secrets of doing business in Irving?
There are none. The city and the Greater Irving – Las Colinas Chamber of Commerce work very hard to make sure there are no secrets. They are truly invested in business and they want all the businesses in Irving to succeed. Come to Irving and you’ll quickly find out the city is very pro-business.
The Greater Irving – Las Colinas Chamber of Commerce comprehensively helps businesses large and small with plans to relocate their headquarters or expand operations to Irving. The Chamber is prepared to guide companies through a comprehensive process including business development strategy, strategic site selection, community demographics, expansion management, location selection, site consulting, corporate real estate management, corporate office relocation, location analysis, corporate site selection, corporate real estate strategy, corporate headquarters relocation, business relocation and corporate relocation management.
Lonnie Mullen is vice president of operations for Shermco Industries. Reach him at (972) 793-5523 or email@example.com.Visit Greater Irving-Las Colinas Chamber of Commerce at www.irvingchamber.com.
Insights Economic Development is brought to you by Greater Irving - Las Colinas Chamber of Commerce
If your business leases equipment, vehicles, office space or other facilities, the proposed lease accounting standards could have a significant impact on your company’s financial statements.
Over the past two years, the business and financial communities have been awaiting finalization of the proposed lease standards that will transform balance sheets. The proposed changes, originally outlined in an exposure draft issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in August 2010, have been delayed due to the large number of comments and questions received during the comment period. Some companies may have been hoping that the scope of standards would be lessened before they were finalized.
However, that doesn’t appear to be happening. In July 2011, the boards agreed to re-expose the revised standards to businesses and financial statement users. While the revised exposure draft isn’t expected until later in 2012, the boards have released some tentative decisions reached in their June 2012 meetings that shed light on how the standards may ultimately look.
“The boards haven’t changed their initial position that long-term leases represent an obligation that should be reported on a business’s balance sheet,” says Mark Lund, assurance services partner for Weaver. “The tentative decisions reached in their last meetings helped clarify some questions raised during the first round of responses from the public. Additionally, the boards appear to have addressed the issue of the acceleration of expenses for lessees in certain circumstances, which was criticized in the initial draft. Beyond that, I don’t see any reduction in scope or administrative relief in the updates.”
Smart Business spoke with Lund about the tentative decisions on the proposed standards and what they mean for businesses.
What are the major components of the proposed lease standards?
The proposed lease standards are a joint effort to help create convergence between U.S. and international accounting standards for leases and to address perceived weaknesses regarding current financial statement presentations of leasing arrangements. Under existing U.S. standards, leases are either classified as capital leases or operating leases. Businesses are not required to include operating lease commitments as liabilities on their balance sheets.
Under the proposed standards, lease commitments — existing and new — are to be recorded on a company’s balance sheet as liabilities with an offsetting asset called a ‘right-of-use asset.’ The lease obligation will be divided between current liability and non-current liability, similar to a note payable, and the existing capital lease presentation. The boards expect to issue a revised draft in the third quarter of 2012 and then take additional comments. The final standard likely will be issued in 2013.
How has the acceleration of expenses over the lease term been tentatively addressed?
In the first draft, capitalization of leased assets and liabilities accelerated the recognition of expenses earlier in the lease term. Companies were required to amortize the asset over the lease term, while the lease obligation was amortized using the effective interest method. That method results in more interest expense being recognized earlier in the lease term. Based on concerns, the boards have tentatively decided leases of property, such as buildings and real estate, can be accounted for using a straight-line approach, meaning the expense recognition will be recorded evenly over the lease term.
However, if your lease term represents the major part of the asset’s economic life, or if the lease payment obligation amount is the equivalent of essentially buying the asset, you won’t be able to utilize the straight-line expense approach. All other leases of assets other than property will continue to be accounted for as outlined in the original exposure draft, including:
- A business will initially recognize a right-of-use asset and the related liability for its lease obligation measured at the present value of the lease payments.
- The right-of-use asset will be amortized, similar to depreciation, on a systematic basis that represents the use or consumption of the asset.
- The amortization expense of the asset and the interest expense related to the liability are shown separately on the income statement.
What are some other key provisions?
The FASB further identified leases that are within the scope of the new standard to include long-term leases of land. Leases of 12 months or less, including the option periods, however, are excluded from the new standard. Proposed financial statement disclosures are lengthy and will add time to comply.
How will the changes impact businesses?
There will be an immediate gross-up of the balance sheet, adding right-to-use assets and related current and noncurrent liabilities to financial statements. The amounts could be significant, depending on lease activity. Bankers, sureties and other users often analyze companies’ liquidity and performance using financial ratios.
Current ratio, debt-to-equity ratio, and other leverage and coverage ratios will be affected with the addition of these new lease liabilities and related interest expenses. Covenant agreements will have to be revised for companies to remain in compliance.
How can employers prepare for the changes?
Prepare a pro-forma of your company’s balance sheet and income statement reflecting the new standard. Then, sit down with the users of your financial statement and discuss how the new standards will impact your company’s financial statements and ratios. This proactive approach will help bankers and creditors plan ahead on what to expect and how to maintain covenant compliance once the standards are finalized.
Mark Lund is an assurance services partner for Weaver. Reach him at (713) 297-6907 or firstname.lastname@example.org.
Insights Accounting is brought to you by Weaver
Good corporate governance is still looming large in the minds of investors as the government has increased regulations and scrutiny as the result of pressure from those who lost retirement savings or homes to predatory lenders and asset advisors. And customers are taking a harder look at businesses' financial information before signing contracts with them.
As a result, audit committees are no longer the committee of last resort but instead are now a significant presence that can strengthen your company's financial credibility and bring in new business.
"An audit committee’s objective is to ensure that there's integrity and reliable financial information based on good internal control systems." says Tullus Miller, Bay Area partner-in-charge at Moss Adams, who works with and serves on audit committees.
Smart Business spoke with Miller about how to create a successful audit committee that is an asset to your company.
What is the role of an audit committee and why should a company establish one?
An audit committee assists the board of directors with its fiduciary responsibilities by providing independent oversight through the integrity of the financial reporting process, which includes internal and external financial information.
For public organizations - whether publicly traded, publicly held or for the public good, such as with a governmental or not-for-profit - audit committees usually are mandated to help ensure the integrity and reliability of their financial information. Those mandates, which dictate the committee's composition and structure, can come from GAGAS standards, Sarbanes-Oxley or the exchange the company is listed on, such as NASDAQ, the New York Stock Exchange or Eurex.
For private organizations, audit committees are not required but can play an important role if a company has shareholders and stakeholders who aren’t involved with the day-to-day governance of the organization. These committees generally take best practices of public companies in a similar industry, adapting items such as creating a fully independent board.
What steps should an organization take when creating an audit committee?
The business risks and needs of the company will dictate the composition, structure and focus of the committee. Then, define the scope and objectives of the audit committee on the charter as mandated by the board of directors. Some decisions, such as hiring an auditor, can be delegated fully to the audit committee, while other boards may prefer that the committee recommend an auditor but retain the right to approve that person. The charter allows the audit committee to know what’s expected of it and how to define success, while also communicating to constituents.Finally, consider what qualities and skills members must have to ensure that a company’s needs and risks are addressed. Do they have experience with the organization’s industry? Are they familiar with financial information and how it is extricated? Do they have the time commitment necessary?
How has the role of audit committees changed with heightened regulations and scrutiny?
Over the past five to seven years, the amount of information available to audit committee members has increased. This is a positive in that it helps audit committee members stay abreast of increased regulation and scrutiny, but it also adds to the time commitment. Being on an audit committee is no longer a matter of just attending meetings. The time commitment could be as much as one day per month, for eight to 10 hours, or for a more complicated company, two to three days per month, excluding the meeting.
In addition, accounting rules have become so sophisticated, with more fair values, estimates and judgment, that committee members must take the time to understand how those items affect the financial statements and decision-making of the company. Risks are higher today, and boards have been sued, and this changes the behavior of committee members.
What are some common challenges of audit committees?
Committees should have succession, continuity and rotation planning. You need to ensure that leadership can step up and take over if an audit committee chair must step away or if a member becomes incapacitated.
Leave enough time to vet real issues, getting information out at least a week in advance of making a decision Also, limit the agenda. Less is better, especially when talking about significant decision-making and judgment in areas of increased risk.
It can present a challenge if the CEO is also chairman of the board. If an audit committee has concerns about estimates that are too aggressive, it can be difficult for a CEO who is also the chair to determine which hat to wear. The audit committee chair needs to understand that, and where necessary challenge, the risk-taking tolerance and tone at the top.
Additionally, define who manages enterprise risk management - the governance committee, audit committee or board of directors, etc. The audit committee is already responsible for managing risk on a financial reporting level, whether internal or external, so, in some cases,this may bog the audit committee down with items that aren't within its purview.
How should the relationship among the audit committee, board of directors and management be approached?
The key is communication on all sides in order to understand risks and decisions that are being recommended and approved, including with board members who are not financially oriented. Don't wait until a meeting to communicate what is happening. The decision-making processes should be transparent, with no surprises. If you encounter dissent, it should be noted and discussed thoroughly at approval time, whether it's from auditors or audit committee members.
Tullus Miller is the partner-in-charge of Bay Area at Moss Adams. Reach him at (415) 956-1500 or email@example.com.
Insights Accounting is brought to you by Moss Adams.