The current economic climate presents significant challenges for manufacturers in the San Francisco Bay Area. Increasing foreign competition, price pressure from weakened demand, tight capital markets and the rising cost of raw materials have combined to create a particularly competitive landscape. However, forward-thinking manufacturers are turning these challenges into opportunities — and using these challenges as a springboard for operational improvement and increased profitability.
“There are many innovative ideas for growing your manufacturing business,” says Karen Burns, assurance partner at Sensiba San Filippo LLP and co-founder of the East Bay Manufacturing Group.
Smart Business spoke with Burns about what manufacturers can do to strengthen their business, such as controlling costs and shoring up financials, best practices for hiring and retaining top talent, and the value of networking effectively.
What are some ways a manufacturer can control rising costs?
Reduce market uncertainty. Consider entering into long-term contracts to stabilize price fluctuation for raw materials. Long-term contracts with customers also can mitigate market swings, albeit negotiated pricing may initially result in reduced margins.
Make safety a priority. Accidents can be costly for your business and your employees. Implementing improvements can decrease downtime and increase your yield.
Encourage innovation by empowering and motivating employees to make product and process improvements throughout the organization. This will lead to your business running smoother and motivating employees to stay longer, which reduces the costs associated with training new hires.
Consider near sourcing. You can gain more control over your manufacturing processes and costs by using suppliers closer to your manufacturing facility. You’ll reduce your shipping costs, too.
Additionally, it’s important to find out what your customers value and focus on delivering what matters to them, then trim costs in those areas that customers do not value. Communicating with your customers is critical. Discussing costs and anticipated cost increases will help strengthen your relationship with them. You can then work together to increase and decrease prices as commodities fluctuate.
Why is it critical now for manufacturers to ‘shore up’ their financials?
Banks and financial institutions are slowly loosening their credit requirements. Venture capitalists and private equity groups also are beginning to invest again. Congress has even established programs that encourage lending to small businesses, such as the Small Business Lending Fund and State Small Business Credit Initiative. Having your financial house in order could make or break your opportunity to secure funding.
Further, merger and acquisition activity is on the rise again. While many business owners do not have a plan in place to sell their company, unsolicited offers are becoming more common. Strategic acquisitions by competitors, vertical integrators and those who have had money sitting on the sidelines for too long create the need to be prepared for this possibility. Ensure your financials are ‘auditable’ and that you have the proper internal controls in place to maximize opportunities such as these.
What advice can you give to business owners for hiring and retaining top talent?
Create a culture that values the whole employee. While pay is important, it is not always the most important motivator. Today’s generation of employees wants it all — good pay, advancement and, most of all, the opportunity to do new and exciting work and have fun doing it. A passionate business leader who treats his or her employees like family and gives back to the community will find employees more willing to follow in his or her footsteps.
Reward innovation at all staff levels and recognize employees for their dedication and achievement. Develop a total rewards strategy that includes compensation, benefits, performance and recognition, and career development opportunities. This will attract the best and brightest, which in turn will help to drive your firm’s brand in the market.
The most competitive edge out there can often be a good network. What strategies can you share with manufacturers on networking?
Networking is necessary, yet can often be a daunting task for many business owners. When an owner starts a business, he or she is usually very good at making his or her product and developing enhancements. While marketing is often not his or her forte, a few simple tools and a little bit of practice can make the most awkward networker into a pro.
Practice your elevator pitch. No one knows your business better than you. Successful networkers practice in advance the answer to, ‘What do you do?’ so that it rolls off the tongue effortlessly. Be brief in your answer to enable others to seamlessly introduce you to others at an event.
Attend interesting events that are a part of your sector. Business events are advertised in newspapers, trade groups, local LinkedIn groups and law firm websites. While the number of potential events may seem overwhelming, business owners who distill their calendar to events with relevant topics will remain motivated to network over time. Attend events that attract a number of prospects. Also keep an eye out for centers of influence — those who can refer business to you or enhance the success of your business.
Create a post-networking communication plan. After an event, successful business owners make the most of their new contacts — and their time — by implementing a pre-set follow-up plan. For business prospects, an email requesting an in-person meeting is appropriate, while many folks you meet will suffice with a reach out on LinkedIn. Inviting centers of influence to lunch or coffee is also an excellent investment in time.
Karen Burns is an assurance partner at Sensiba San Filippo LLP, a regional CPA firm based in the San Francisco Bay Area. Reach her at (925) 271-8700 or firstname.lastname@example.org.
Insights Accounting is brought to you by Sensiba San Filippo
Accurate and up-to-date financial information is a powerful tool for a growing business. With reliable information, business owners can make better strategic decisions, secure resources and increase profitability. But, how can business owners ensure they have this competitive advantage?
“If you want to get powerful financial information in your hands without slowing down your business to put it together, you might have to make a choice,” says Brenda Stelle, a manager of the business services department at Sensiba San Filippo, LLP. “Financial information can be empowering, but managing it can also be a burden on a growing business. Partnering with a CPA firm that specializes in providing business services can provide a spark for many organizations.”
Smart Business spoke with Stelle about tools and tips for business owners as they evaluate their current financial processes and how to determine if they could benefit from working with a business services department.
What are business services and how do they bring value to a growing business?
From pre-revenue startups to thriving companies, more and more businesses are turning to CPAs to provide the additional accounting services needed to transform their business. Having their financials and accounting processes evolve from a tedious and often-overlooked burden to a streamlined solution empowers owners to focus on the growth of their company.
Recognizing the need for accounting solutions for small and mid-sized businesses, some leading accounting firms have assembled business service teams that provide bookkeeping, financial reporting and tax planning services. These business service teams work with companies of all sizes. However, they are particularly useful for growing and startup businesses that need help but may not yet require an internal accounting department.
Business owners often must act as the bookkeeper, the account coordinator, the receptionist and more. But as the business expands, it needs greater expertise in all those areas. Working with a business service provider allows a company to acquire expert services without the risk and investment of a new hire.
Many business service teams also offer services such as project costing and accounting system design and implementation. Sometimes, startup companies just don’t know where to begin or how to properly prepare expense reports or get a loan to finance growth. Business service teams have answers, so owners don’t have to waste time searching for them.
How can business owners know when they should consider outside help?
If a business owner feels like they are making too many decisions without the information they need, or if they feel as if they have to chase down financial information when an opportunity or decision arises, it might be time to look for outside help. Similarly, if business owners are distracted from their core business practices, they run the risk of missing opportunities. In this way, partnering with a CPA that specializes in business services can provide much needed resources and help restore focus. They can help you as your business evolves in the short term, or serve as an outside party to help you see what’s really happening.
What should be expected from an accounting firm’s business service team?
Business service teams can help clients see that their future success depends on acting proactively. They also can work with owners to analyze the critical decisions that may help to avoid a crisis, manage an unforeseen financial problem or take advantage of an opportunity for growth.
Financial information should help business owners make better strategic decisions, recognize opportunities and avoid critical mistakes. With accurate, meaningful and timely information, a business owner can analyze key performance indicators with confidence.
Maybe the biggest thing a business service provider can offer is peace of mind. Business owners can feel overwhelmed on a daily basis just because they don’t have an accounting system in place that tells them, ‘Yes, we can pay our bills.’
How does a business choose the right business services partner?
Work with a business services partner that has experience in your industry and has the resources of a strong CPA firm. Also, be sure to get referrals and check references. Not all business service providers are the same. It’s a good idea to find out if an accounting firm has made these services a priority. Firms that have dedicated business service teams are often more focused on providing services that maximize the value they deliver. These dedicated teams allow for greater responsiveness and timely turnaround.
When choosing a business services partner, it is wise to take the time to communicate expectations to ensure that your new partner can handle your needs. Be clear about what you expect from the relationship, otherwise, you may find yourself with a provider but not a solution.
How can business owners ensure they are receiving value from the services provided?
A properly staffed business services team can work with clients of varying sizes, from startups to those with $20 million in revenue. Some will bundle services together so that the whole is greater than the sum of its parts.
Business owners should seek out a CPA firm that focuses on long-term relationships with its clients, and has high retention rates and client references you can speak with. Sit down with them and let them get to know you, your business and where you want to go. They will identify the critical functions that will provide the information needed to run a strategic business. From there, they will set up a plan of action and move forward.
Brenda Stelle is a manager of business services at Sensiba San Filippo, LLP, a regional CPA firm based in the San Francisco Bay Area. Reach her at (925) 271-8700 or email@example.com.
Insights Accounting is brought to you by Sensiba San Filippo
There are more financial incentives than ever for mid-sized businesses to go green. Mid-sized business owners are taking notice and many are recalculating whether going green could increase their bottom line.
So is 2012 the year your business should go green?
“Being considered a ‘green company’ can increase the marketability of your products or services,” says Gary Price, tax partner for Sensiba San Filippo, LLP.
Smart Business spoke with Price about recent developments in clean technology and why going green could make sense for you.
What is clean technology?
Clean technology refers to energy sources that are renewable, provide a reduced environmental footprint and are not fossil fuel based. Solar and wind are two of the best-known examples of clean tech, as are lesser-known sources such as geothermal and biomass.
Why should a mid-sized business take interest in clean technology?
As well as environmental benefits, clean tech can increase the marketability of your products or services. Many businesses are reaping the benefits of green initiatives through increased opportunity and positive publicity.
Still, for most businesses, economic conditions necessitate that the return on investment of a project dictates viability. Mid-sized businesses can benefit from green incentives that arose from social and economic developments of the last five years. There has historically been a gap between the cost of investing in green initiatives and the financial benefits. However, a few things have come together to close that gap. First, concern about the environment has increased. Second, the increased price of gasoline has made everyone rethink our energy dependence. What has emerged is the incentivizing of clean tech through state and federal incentives.
How can clean technology incentive programs be used to create financial benefit?
Businesses of all sizes can utilize incentives such as grants, tax credits and low-interest rate loans to create positive ROI, clean tech projects. Also, sustainable energy is seen as important enough that many government programs were enacted to subsidize a much-needed green movement in the economy.
The federal government provides a renewable energy credit, which offers a 30 percent credit against tax liability for investments into qualifying projects. Many states passed renewable energy programs as well. Mid-sized businesses looked at combining federal credits with state opportunities and began to say, ‘Wow, this really works.’
State opportunities such as the California Solar Initiative offer a 40 percent up-front cash grant, with up to $400,000 for the purchaser of equipment for qualifying projects. As an example, if a California company spent $1 million on solar equipment, the state would pay up to $400,000 of the bill. On the remaining $600,000, the 30 percent federal renewable energy credit could be taken. This would give a credit of $180,000. Total cost after incentives: $420,000. Add in the energy savings and that’s a very attractive offer.
However, businesses should use some caution regarding incentives. A CPA needs to ensure that requirements are met for incentive and grant programs and that the benefit from those programs is correctly considered in tax, cash flow and ROI calculations.
Where should a business start?
With multiple parts required to ensure a positive project, it is essential to work with the right team. Clean tech often requires many areas of expertise. For example, not all business owners are in the finance, real estate or contracting business — all major parts of the clean tech setup — so business owners who try to go it alone can find the process confusing, frustrating and time-consuming.
Business owners should put together a team that understands the many components of clean tech and work with them closely. An experienced, trust-worthy contracting partner is the most important ingredient for success. Most projects require a bit of construction to install and business owners should find contractors who specialize in renewable energy devices or other energy sustainable retrograding or installations. These contractors are usually general, electrical or roofing contractors and often have an energy department with a really savvy leader.
Also turn to a trusted advisor with previous experience before starting a project. Your attorney or CPA is a great place to start. If they don’t have experience personally, they will almost certainly be able to point you to someone who will. Having a trusted third party providing guidance will help ensure that the result meets expectations.
Is there any way to simplify clean tech projects?
Things are evolving quickly and today clean tech can be a remarkably smooth process. Green developers are putting together turnkey solutions for consumers. In some cases businesses don’t even have to purchase equipment. They simply enter into agreements that allow for equipment to be installed on their property in return for buying energy in the future at a set, reduced rate.
What is the future of clean technology?
With a national election approaching, the future of existing incentive programs is murky. President Obama remains committed to the promotion of a green economy, recently promoting the extension and enhancement of existing federal energy credits, but not all lawmakers are as enthusiastic. In many cases, the best opportunities involve combining federal and state incentives, so the outcome of this election season could have a large impact.
Ultimately, however, the savings are real and they’re available now. As a business owner, you don’t have to be a guru, just find the right advisors to help and you’re well on your way.
Gary Price is a tax partner at Sensiba San Filippo LLP, a regional CPA firm based in the San Francisco Bay area. He also serves as a member of the Silicon Valley branch of the Northern California chapter of the U.S. Green Building Council. Reach him at (408) 286-7780 or firstname.lastname@example.org.
Insights Accounting is brought to you by Sensiba San Filippo
When it comes to estate planning, timing is everything, as variations in tax law make some years more favorable than others for transferring assets.
Ask any estate planner about 2012 and they’re likely to say things haven’t looked this good in a long time. But they will also tell you there’s a catch: Conditions will likely change Jan. 1, 2013.
“The question you should be asking yourself is, ‘Am I in a position to take advantage of the current opportunities in the estate and gift tax code?’” says Wonsun Willey, Tax Partner at Sensiba San Filippo.
If you’re not sure, she says, it’s probably time to talk to an estate planning expert.
Smart Business spoke with Willey about how to take advantage of estate and gift tax code opportunities before they disappear.
What makes the estate and gift tax provisions of 2012 so favorable?
At the close of 2010, the Tax Relief Act of 2010 created a temporary opportunity for tax-advantaged wealth transfer. The act increased the estate and gift tax lifetime exemptions to $5 million for individuals and $10 million for married couples, while the estate and gift tax rate remained at 35 percent.
Coupled with a historically low interest rate and an unprecedented suppressed real estate market, this provides excellent opportunities for gifting.
How much time is left to take advantage of these provisions?
It’s not clear what will happen beyond 2012. We do know, however, that if Congress does not take action, the lifetime exemption will drop to $1 million in 2013 and the tax rate will increase to 55 percent. This means an individual transferring $5 million in assets in 2012 could pay no gift tax, while that same transfer in 2013 could generate a $2.2 million tax liability.
What’s the best way to take advantage of this opportunity?
Get an estimated current value inventory of the asset portfolio in the estate. Determine the assets that are more likely to appreciate in value, giving considerations to those that also carry other intangible values, such as family legacy. By transferring assets now, the estate can utilize an estate freeze, in which the future appreciation of the asset transferred is outside the estate and escapes estate tax at the donor’s event. Another way to achieve this is by giving a fractional interest rather than a whole interest in an asset to take advantage of discounts.
Why might transferring interest in a partnership or a business be advantageous?
There are two types of discounts: lack of marketability discount, which is transferring less than 100 percent interest in an asset, and minority interest discount, or transferring less than 50 percent interest. These discounts might apply when you’re moving a fractional interest of a business or real estate out of an estate.
Say a couple owns a business valued at $20 million. They want to gift a 30 percent interest to each of their two children. Because they’re only giving a fractional, noncontrolling interest to each, the marketability of that interest might be significantly impaired.
A qualified valuation may substantiate a 35 percent discount in the transferred share of the business. By utilizing discounts, the couple only transferred 65 percent of the $6 million, or less than $4 million to each child. The result is that instead of exceeding their combined lifetime exemption and paying significant estate tax, the couple now has flexibility to gift even more out of the estate from a different asset to their children because of the allowed discount applied in the gift valuation. This also creates another opportunity for discount for estate tax purposes at death because the parents now own less than 50 percent of the business.
However, there have been discussions in Washington to disallow the minority interest discount on family gifting to other family members, so this opportunity could go away in the future.
You’ve mentioned ongoing estate planning. What does this mean?
Every individual has life-changing events — marriage, children, divorce, sale of a business, stock option IPO — along with change in their view of who their beneficiaries are. A good estate planner will know both the changing estate tax environment and the individual’s life changes in order to provide the best estate planning.
Where is the best place to start in this process?
If you aren’t working with an estate planner, it is best to get recommendations from a variety of sources. Your CPA, personal financial planner, banker or attorney could give you references. It is important that the team you choose to work with comprises estate and trust specialists.
How can individuals select and ensure that they are working with the right service providers?
Estate planning is a very personal business for both the service provider and the individual client. Look for someone you trust who will bring a personal interest to the relationship. As gifting involves giving up some control and is not something that can easily be reversed, understanding family dynamics and getting family members comfortable in all facets of the gift is important.
Communication and coordination are essential to make sure the overall tax, financial and personal outcomes are the best in the current tax regime. Keep in mind that in this process you’ll need help from multiple advisers. Financial planners can bring significant value in helping to select the best assets to transfer, while attorneys are essential to carrying out the intentions of the estate.
Wonsun Willey is a Tax Partner at Sensiba San Filippo, a regional CPA firm based in the San Francisco Bay area. She specializes in working with high-net-worth taxpayers and their estates and is fluent in Korean. Reach her at (408) 776-8900 or email@example.com.
Insights Accounting is brought to you by Sensiba San Filippo
Many of us have heard the saying, “If you don’t know where you’re going, you probably won’t get there.” When it comes to building value in a company, this couldn’t be more true.
“Building a successful business — one that yields the greatest value to stakeholders — is hardly a random event,” says Jeff Stark, audit partner at Sensiba San Filippo. “It is the result of careful planning by business owners who understand which factors truly create value.”
Smart Business spoke with Stark about five critical factors for successful companies to create value.
Business owners have a clear plan, which they relentlessly pursue.
In order to maximize value, successful businesses must have stakeholders who are ‘one-minded.’ Business is very much a team effort, and a clear goal will help focus everyone’s energies.
Building consensus is very much a top-down process. It is important to determine which strategic track your company is on. For example, building a company for acquisition is a very different process than building a business to hand down to the next generation. Stakeholders need to know where they are headed so they can make smarter, better-informed decisions. Maintaining consensus is not always easy. Businesses can often be crippled by ‘analysis paralysis.’ Without clear, agreed-upon goals, decisions are often second-guessed, and the company must expend time and energy to get everyone back on the same page.
Stakeholders buying into your plan will give you the confidence to succeed in selling your value to customers. Consensus creates value at all levels, from making better hires to collectively working to overcome setbacks.
The business correctly values its products and services.
A second way of increasing value is making sure products and services are sold for their true value. Value is too often defined as how much it costs a company to produce the product or provide the service. Successful companies critically evaluate how much their products and services are actually worth to their customers.
Every company must have someone who can get in front of a customer and explain why a product or service is valuable. Asking for and getting the value of the product or service as it relates to the customer is critical to the process of generating value.
Many companies have a culture that takes a lesser view toward salespeople. Successful companies foster a sales culture and help employees recognize the value of the products and services they provide.
The company is in the business of relationship management.
Relationship management encompasses all of the relationships outside of the employees or customers of the business. These include vendors, bankers, attorneys and others who are essentially on the company’s business team. These relationships add value to the business. These ‘outsiders’ can give you valuable perspectives that you wouldn’t be able to get from people more intimately connected to the business.
Companies should focus on building solid relationships and not be overly concerned with ‘chiseling down the fees.’ The company should consider fees in light of the greater value it receives from key relationships.
Developing key relationships brings value to organizations. Oftentimes, simple acts, such as paying invoices on time or providing reports to lenders as promised, can make their lives easier, ensuring that the relationship will bring value when needed most.
Things must be written down and must be easily retrievable.
Documentation of key business activities can add significant value to a company. This is important for two reasons. In acquisitions, documentation often increases the value of target companies. When key business practices are written down, the acquiring company has more certainty that the institutional knowledge is safe. On the other hand, there are countless cases where lack of documentation has led to the collapse of an acquisition.
Businesses can also create value through operational improvements. Processes are refined and improved, but without documentation, value is often lost. When things are written down, they become real. There is suddenly tangible proof that can be accessed by internal personnel, outside accountants, the IRS, or anyone else who needs it. This becomes invaluable from an operating perspective, not to mention situations of disaster recovery.
The company must have an attractive, well-defined culture.
Culture means different things to different companies, but all companies should take the creation of a responsible business culture very seriously. Building a culture often starts with setting the tone at the top. When you build a culture that is open and honest, you have a better situation than one that is closed and secretive.
While some things need to be kept secret, sharing of information is almost always beneficial for the company. Business leaders should share the firm’s goals, challenges and successes with their teams. When everyone is aware of the target and how to meet it, more team members become involved in helping to reach goals.
Creating an attractive culture can improve performance, foster creativity and lead to greater contributions toward innovation. Companies should develop a culture that can adapt and take advantage of new ways of doing business. If a culture is stagnant, there can be missed opportunities for making the business run smoother and more efficiently.
This leads to a larger point about the nature of high-value businesses: The business may belong to you, but it is dependent on other people helping you achieve your goals.
Jeff Stark is an audit partner at Sensiba San Filippo, a regional CPA firm based in the San Francisco Bay area. Stark specializes in increasing values of venture-backed technology firms. At SSF, he has helped prepare companies for acquisitions upwards of $100 million. Reach him at (408) 286-7780 or firstname.lastname@example.org.
Insights Accounting is brought to you by Sensiba San Filippo
Savvy business owners know the value of internal controls and the critical importance of reviewing those controls on a regular basis. Effective internal control systems must be adapted to changes in business practices and the global economy. So how do today’s top businesses keep up?
Smart Business spoke with industry expert Ernie Rossi on the prevention and detection of internal fraud. For almost 20 years, Rossi has educated clients on maintaining effective internal controls. As an audit partner at Sensiba San Filippo LLP, Rossi teaches clients best practices for establishing internal controls and keeping them in step with the times.
What kinds of businesses need to protect against fraud?
No company is 100 percent immune to fraud. However, certain types of companies are at greater risk. Small companies tend to have limited resources, meaning they have employees who perform multiple duties. This is a problem because small businesses cannot easily separate what a good internal control structure would call ‘conflicting tasks.’ Properly separating tasks forces perpetrators of fraud to conspire in order to steal, and collusion is more difficult than acting alone.
Larger businesses may be more capable of separating tasks, simply due to having more staff, but over time, they can experience increasing risk of fraud if they become lax in pinpointing loopholes in their systems. Given time, people find weaknesses in the system, and can exploit these.
One common denominator among companies is that few believe they are susceptible to internal fraud. But statistics in this area are clear — most often, fraud is perpetrated by a long-term employee or friend. It is best to have well designed and implemented internal controls that reduce, as much as possible, the opportunities to commit fraud in the first place.
Under what conditions does internal fraud occur?
Internal fraud can be compared to a ‘perfect storm’ in which a motivated perpetrator meets poorly designed or poorly implemented internal controls and little or no monitoring of those controls. It is generally a rationalization on the employee’s part that they are entitled to the fraud. For example, the perpetrator might say, ‘The owner makes way too much money,’ or, ‘I work really hard, and the business doesn’t properly reward me for my efforts.’
You can distinguish between businesses that have poorly designed internal controls and those whose controls are poorly monitored. Internal controls may be in place, but sometimes the business’s culture evolves to a point where controls are allowed to be ignored. One common example: An increasingly busy workplace where checks are signed without thorough review of supporting invoices.
How can companies prevent internal fraud?
Companies that are led by a management team who sets the ‘tone at the top,’ by modeling the greatest degree of integrity, may be at less risk for internal fraud. Business owners who play fast and loose with tax laws and company assets can expect employees to feel comfortable doing the same. While some business owners recognize the risk of fraud, they are often unsure about the steps required to prevent it. Companies should start small. The first step is to leverage a third party to review the business and uncover potential problems through an assessment of internal controls. This will help identify the areas of biggest risk — the low-hanging fruit.
The second step is to implement controls, such as separation of duties of employees, to shore up vulnerabilities uncovered in the assessment. Next, periodic reviews by internal managers and external assessors will help to keep controls from slipping out of practice.
It’s also important to educate employees about the purpose of the controls. Increased awareness, along with the knowledge that internal controls are a priority, will serve as a strong deterrent. Communicate that internal controls will ultimately protect employees if and when a fraud is committed by allowing them to quickly be eliminated from suspicion.
Financial audits can be helpful, but audits alone cannot replace internal controls or a thorough risk assessment. Audits only test a sample out of thousands of transactions, which are selected at random. So, the audit may catch an error, but it is no guarantee that the error is going to be a result of the fraud.
What qualifies an individual or a firm to assess risk?
Consider hiring a CPA with audit experience. They need not specialize in fraud, but they should be someone with lengthy experience in public accounting. Generally, CPAs with significant public accounting experience are well suited to evaluate controls that currently exist and assist in developing additional or more effective controls.
Basic assessments can be conducted over a few days or weeks, depending on the size of the business and amount of time needed to document the business’s day-to-day practices. The assessment does not need to be done all at once. The business owner should meet with the selected professionals, perform a general assessment, and then design a plan over time to develop and implement a comprehensive internal control system. After controls are implemented, periodic maintenance should be performed. Over time, even good controls will become less effective. Eventually people find their way around the controls, especially if they know they are not monitored regularly.
How does a service provider help clients protect themselves against fraud?
Any service provider should talk with clients about controls frequently, and not just during an annual audit or financial statement preparation. In every meeting, they should listen for key phrases or changes to the business. For example, the phrase, ‘We’re having cash flow problems,’ may indicate a control issue.
In order to truly reduce the likelihood of fraud, education and communication should be top priorities on both sides of the table.
Ernie Rossi is an audit partner at Sensiba San Filippo LLP, a regional CPA firm based in the San Francisco Bay area. He may be reached at (925) 271-8700 or email@example.com.
Insights Accounting is brought to you by Sensiba San Filippo
With several tax provisions set to expire this year, and tax rates set to increase, business owners need to start planning now for the impact on their businesses.
“Business owners need to be collaborating with their tax advisers on a level they may not be accustomed to in the past,” says Gregory C. Brown, tax partner at Sensiba San Filippo LLP. “Discuss your plans with your tax adviser and look at the tax implications in light of the expected changes. This will require more time, energy and communication than in the past with respect to tax planning for 2012 and beyond.”
Smart Business spoke with Brown about expiring tax provisions and how they could potentially impact businesses and their owners.
What could happen with tax legislation in 2012, in light of it being an election year?
It’s difficult to say. Congress is challenged with many difficult issues and a very limited number of days that they will be in session to address these issues. A few possible Congressional outcomes for tax provisions could be a complete tax reform overhaul or a simple extension of provisions that have expired or are set to expire. Or Congress could let things expire and the set changes take hold. If something does happen this year, it’s probably going to be later in the year, after the election.
What provisions set to expire this year would have the biggest impact on business owners?
For small business owners, cash is vital. A few of the more prominent tax provisions that will impact operating cash flow stem from equipment purchases and the cost recovery through bonus depreciation. Currently, if you purchase certain capital assets, under bonus depreciation, you can expense a large amount of the purchase costs right off the top in the year that asset is placed in service. This means the recovery of the purchase cost is realized sooner than later, saving tax dollars and making more cash available. These provisions are being reduced and eliminated.
Another significant tax provision is IRC (Internal Revenue Code) Section 179, which is expense electing for equipment and other capital purchases. If you purchase certain qualified equipment, you can expense 100 percent of the cost with certain limitations. In 2011, the maximum amount that could be expensed is $500,000, with an overall purchase limitation of $2 million before the expense amount is reduced. In 2012, the expense election is reduced to a maximum of $125,000, with a purchase limitation of $500,000. As these expensing limits are scaled back, and barring a change by Congress, the cost recovery time is increased and may impact the business’s ability to make these purchases.
If you, as a business owner, are considering purchasing capital equipment, these provisions need to be considered.
What will the impact be of expiring tax provisions on business owners personally?
Without Congress acting, several provisions will expire at the end of 2012. Business owners, along with all individual taxpayers, will be subject to increased capital gain, dividend, and ordinary income tax rates. The long term capital gain, for capital assets held at least 12 months, are taxed currently at a max rate of 15 percent. This rate is slated to go up to 20 percent starting in 2013. In addition, dividends are currently taxed at the 15 percent capital gain rate. Starting in 2013, dividend income will be taxed at increased 2013 ordinary income rates, with a top rate of 39.6 percent.
Also in 2013, as part the health care overhaul of 2010, there will be a new Medicare tax of 3.8 percent on unearned income, which includes interest, dividend and capital gains. This will impact taxpayers with income of more than $200,000 for individuals and $250,000 for a married couple. This is a new add-on surtax, on top of all other income taxes.
What should business owners be doing now in respect to the current tax environment?
Look at your business plan and determine what you are planning to do. On the individual side, gain an understanding of what you are doing now and what you are planning to do, and superimpose those plans on top of what is potentially going to happen with tax provisions. That means looking at different scenarios with respect to the plans you have with your business — with hiring, with capital equipment purchases, etc. — to see if there are things you want to do imminently, or if there are things you want to delay. Questions you should ask include, ‘What is the tax impact of what I am thinking, and is this the right time?’
In 2011, everything was relatively static with respect to expiring provisions. 2012 is going to be a real wild card and tax planning is going to be daunting because there is not a lot of clarity about which way business owners should go.
The most critical advice I can give is to not delay in approaching professional advisers. If you are thinking about a significant transaction for 2012, you need to start talking to your business advisers now, versus later. Your CPA, attorney, investment adviser and other professionals can help you get your arms around your situation and things will go much more smoothly if it’s not the 11th hour.
It can be a tough situation when a business owner does not talk to his or her tax adviser to later find out, when it is too late, that there was a more tax efficient route to take. Good tax professionals are experts at boiling down complicated tax code and regulations and working with business owners to get to the right answer. Putting business owners in the best possible tax position is the primary job of the tax adviser.
Gregory C. Brown is a tax partner at Sensiba San Filippo LLP. Reach him at (925) 271-8700 or firstname.lastname@example.org.
Business valuations are a critical tool in any business owners’ arsenal, and should be considered from the day the business concept originates through the life cycle of the business. Many business owners only consider a valuation when they are thinking about selling, and this is a mistake that owners can be deluded into believing.
“Business owners are visionaries — and have in mind from day one an idea of where they want to take the business and their goals for an exit strategy. Having a valuation in place a few years before that goal end date is something every savvy business owner should do,” says Kevin Strain, audit partner at Sensiba San Filippo LLP, a San Francisco Bay area CPA and Business Consulting firm.
Smart Business spoke with Strain about the importance of business valuations as well as best practices and critical decision factors in selecting the right adviser to support your business.
How can doing a valuation not at the time of a sale, but years before, benefit a business?
According to the ASCPA, merger and acquisition activity is expected to rise in 2012. In addition, in Accounting Today’s Top 100 Firms of 2011 issue, more than 75 percent of the firms represented in the survey offering business valuation services reported significant growth within this area, making it the fastest-growing professional service niche.
A business valuation can have many uses and should be considered in the early stages of a business’s lifecycle —not just when you are thinking of selling. Having an accurate and timely valuation of your business three to four years prior to a forecasted exit plan date is one of the many tools a savvy business owner should have in their tool belt. This proactive strategy can benefit a business in many ways, including gaining an evaluation of the strengthens and weaknesses of the business and, in certain scenarios, providing a ‘roadmap’ for increasing the value of the firm.
If you think you can improve the value of the company by driving revenue, that may not always be the case. You may need to look at different aspects of the business to drive that selling price. Having that long-term strategy helps you assess the different roles and aspects of the business and can help define what will add the greatest value, whether that is based on human capital, whether it’s product related, or something else.
How can an adviser help you through the valuation process?
Having a trusted adviser to work with you through the valuation, who can provide guidance on factors that will impact the valuation and the valuation techniques that are used through the process, is priceless. I work with many clients as they are proceeding through a valuation process, and serve as a trusted adviser with whom the business owner can rely on for open and honest guidance.
As business owners are considering having a valuation performed, they should ensure they have a business adviser — that may be their audit firm or an independent adviser — work alongside them through the process.
The role of an independent adviser is to work with clients and clearly explain the valuation process, including the time and the techniques that will be used to determine the value of the business. There are many different circumstances that must be taken into consideration when having a valuation done, and the adviser should help clients to maneuver through what can often be a highly detailed and, at times, technical process.
Once the valuation process has been completed an adviser will review the draft document, and may make edits to the document. Once reviewed, the final draft is sent back to the valuations firm to finalize and present the final document to the business owner.
What questions should a company ask to identify the right valuation firm for its needs?
A part of my role with working with my clients, is to help guide them through this process. This is one of the key differentiators of how both I and Sensiba San Filippo serve our clients. We will guide our clients through this process, provide insight and explanation and also review the valuations reports with the client for accuracy. Because valuations are so subjective, the most important factor is to select someone who is deeply familiar with your industry. When the valuation firm attempts to value a business in an area it is not familiar with, if it isn’t aware of seasonal trends or what impact the economy is having on that industry, it can be a problem, because all of those things are factors that go into how you value a company.
Next, look at credentials. What is their history? How many valuations have they done? That experience can be critical to an accurate valuation.
Asking the right questions and working with experienced professionals will ensure that your valuation is on target and may help you identify areas going forward in which you can improve business value.
Kevin Strain is an audit partner at Sensiba San Filippo LLP. Reach him at email@example.com.
Most business owners don’t start a company thinking about the day they’ll retire and leave the company in someone else’s hands. The business they founded is a large part of their identity and their life. But when they’re ready to retire or reduce their role in the company and welcome new ownership and leadership, it’s a relief to know they’ve left their enterprise in good hands. An excellent way to do that is with an ESOP, an employee stock ownership plan.
An ESOP isn’t just an ideal vehicle to transition ownership and boost the founder’s liquidity; it’s also a superb opportunity for business owners to save on federal income taxes while encouraging employee productivity.
Creating and administering an ESOP is a smart move for many forward-thinking business owners, says Bill Norwalk, a tax partner at Sensiba San Filippo, a CPA and business consulting firm with four offices in the San Francisco Bay Area. He has nearly 30 years of expertise advising company owners on ESOPs and tax-related matters.
Smart Business recently asked Norwalk about vital details of ESOPs that savvy business owners should know.
What is an ESOP and which businesses should consider one?
Simply put, it is an employee retirement plan. It’s a tax-exempt trust that gives workers shares in the company that employs them.
Key factors for a company considering an ESOP are profitability and size. A business needs at least 25 employees and should have an independently appraised value of at least $4 million to make it worth the cost and effort to set up an employee stock ownership plan. There needs to be a significant payroll — I advise at least $1 million — because payroll generates the contribution to the retirement plan that provides funding for the stock sale.
ESOPs are especially beneficial for owners interested in liquidity with a solid history of earnings and the ability to attain financing. The company also needs a capable management team with a clear vision and succession plan for when the owner/stockholder is ready to sell his or her shares and leave the business. The owner’s day-to-day activities as an employee also need to be transitioned prior to his or her departure.
How popular are ESOPs?
There are about 11,400 ESOPs and other profit-sharing plans invested mostly in employer stock with about 13.7 million participants, according to the National Center for Employee Ownership. The value of those assets is an impressive $923 billion. Small businesses are most likely to create ESOPs; 72 percent of the ESOP Association members, a national non-profit membership organization, have less than 250 employees.
But I’ve helped companies of all sizes create ESOPs. One of my clients is a profitable business, which has a stock value of approximately $6 million. After years of hard work, he wanted to retire but remain involved in the business on a limited basis. He agreed to sell 30 percent of his shares to the business. He was able to defer the gain on the significant amount of cash he received because he reinvested the funds into qualified replacement securities, which is stock or long-term debt in U.S. companies. So he gets a steady return from a diversified portfolio, and he has reduced his day-to-day involvement in the business’s daily activities.
His company benefited too. It saved significant income taxes because of the money it contributed to the plan. The value of the shares owned by the plan increased, benefiting the employees, who will, over time, vest in those shares.
How does an ESOP aid a business owner?
An ESOP can help owners in several ways. It provides liquidity while they continue to work in the business overseeing the company’s transition to new ownership. The ESOP provides reliable cash flow for a retired owner, who’s been able to sell the business without paying federal income taxes on the sale. The owner benefits from being able to replace company stock with securities that yield cash, deduct interest and principal on loan repayment and ultimately create a company that pays no federal income taxes. That’s a significant advantage in any marketplace.
A business owner often leaves profits in the business to help it grow. The value tied up in the business is often the owner’s largest asset. Founders feel a sense of personal responsibility to the employees who helped build the business, and they want to see the business flourish long after they leave. At some point, they are ready to reduce their involvement in the business, retire, or preserve value outside of the business for their heirs. In the right circumstances, an ESOP can help achieve each of these goals.
What are some advantages of an ESOP for employees?
It’s free money. In fact, retiring employees can end up with more value allocated to them by the company through an ESOP than through a 401(k). A company can even offer a 401(k), in addition to the ESOP, in certain circumstances.
We serve a 100 percent ESOP-owned company that pays no federal income taxes because it is taxed as an S corporation. Because the income is allocated to the nontaxable trust that owns the shares, it is exempt from paying federal income tax. A portion of the tax savings leads to higher compensation for employees and a larger amount of profits available to distribute to the trust, which enhances the value of each eligible employee’s retirement.
Do you have any final words of advice?
An ESOP can be a tremendous opportunity and one that I recommend to clients for tax savings and as part of a succession plan. However, it’s not right for every business. Working with an accountant who is a trusted adviser who knows a business owner’s long-term goals, both for the business and personal retirement, is crucial to evaluating this opportunity.
Bill Norwalk is a tax partner at Sensiba San Filippo LLP. Reach him at (925) 271-8700 or firstname.lastname@example.org.
Taking a company from start-up to success story is a daunting task for even the most experienced business owner. Having a solid business plan and financial backing may open doors, but once the doors have opened, the hard work has only just begun. In the endurance race to get a business off the ground and keep it thriving — or even just afloat, as the case too often becomes — many business owners neglect some critical steps.
“A business owner’s first line of defense is to be cognizant of the various actions to take from day one to proactively protect the business from failure,” says Steve San Filippo, founding partner at Sensiba San Filippo, a CPA and business consulting firm with four offices in the San Francisco Bay Area. “Understanding and controlling costs followed by implementing systems to keep you on track is key. Another important step is to surround yourself with expert advisers who can help you act on what you learn, anticipate and head off problems before they fully materialize or take advantage of opportunities as they arise.”
Drawing on his more than 30 years of experience as a business owner and working directly with clients from small companies to multinational companies to help them succeed, San Filippo sat down with Smart Business to discuss how owners can avoid the pitfalls that plague even the most promising companies.
What are the most critical success factors for business owners?
The statistics are not pretty — some 80 percent of all businesses fail in the first year, and another 80 percent or so go under in the next five years. Too often, when business owners are starting out they focus on short-term successes and overlook factors that are crucial to long-term success. So how can you beat the odds? The first thing every owner should do is create a plan that outlines goals and objectives, including how to manage financials, meet inventory demand, maintain the records, hire, and find and retain customers.
Also, I always tell my clients that the greatest investment they can make is to surround themselves from the beginning with the best professional advice they can get. I’ve had standing relationships with friends and business contacts in professional services industries for 30 years now in which we just call on one another once a year to touch base and find out how we can help one another.
Business owners are often unaware that they’re naturally a part of a number of different networks with invaluable knowledge. Actively engage with contacts new and old on LinkedIn and other social networking sites.
Make a list of all the professionals you’re likely to need in the course of your business’s lifetime — an accountant, a banker, a lawyer, an insurance agent, etc. Talk to more experienced owners to find out what professionals they wound up needing along the way. Then introduce yourself and begin to get a good idea of who you’d like to work with when the time comes. If business owners don’t do this early on, by the time they decide to find a professional to address a specific issue that has arisen, there’s often little time to find one who is truly a great fit.
What are the most expensive mistakes you see business owners make? And how do you advise clients to dodge them?
Some of the most common and expensive mistakes often stem from owners failing to realize that all business is regulated one way or another. For example, when it comes to the payroll, an owner has to know the difference between an employee and an independent contractor. If they inadvertently treat one like the other on tax submissions and withhold the incorrect amount of income, the result could be a tax violation and a potential unwanted IRS interaction that could take away focus from normal business operations along with extraordinarily high penalties.
A common mistake we see time after time is an owner who doesn’t maintain the books and records properly. It’s pretty typical for someone starting out to enlist a family member to do this as a cost-saving measure. All too often, clients come to me in a panic because they’ve relied on accounting software to be the brains of their bookkeeping without understanding that, while it can be a valuable tool, it is not the whole answer. I encourage owners to work with an accounting firm from the beginning to either manage their books or who, like our firm, provides ‘guardian angel’ services, such as our Business Services Department, which works with our clients and their bookkeeper to provide training on the software they’re using, and to produce timely, meaningful financial statements that help ensure business owners have the most accurate information and reduce the costs of financial statements and tax filings.
Consider the potential consequences of not maintaining the records properly — for one, the inability to secure a loan after the bank discovers the books are not in order. Often the only place a business owner can turn at that point is to personal credit cards, which can take them down a dangerous path because the interest can be prohibitively high.
Is there a specific point at which an owner should transition to a professional accountant?
I always recommend that clients work with a professional from the beginning, even if just to provide general consulting advice. In terms of when an owner should absolutely bring in an expert for the long haul, I’d say when some sort of meaningful transition occurs. Even if a family member has been able to handle the job, once the business reaches the point where there is a significant and sustained increase in some aspect of the business — the number of sales, revenue, the inventory or the orders — it’s time to bring in a professional.
Do you have any other final words of advice?
Being proactive, and not reactive, is key. No business owner is going to be able to control or anticipate everything that comes along in the life of the company. But being well prepared for the things that can be anticipated will allow for the flexibility needed to efficiently tackle the surprises that do pop up.
Steve San Filippo is a founding partner and audit partner at Sensiba San Filippo (www.ssfllp.com), a regional CPA and business consulting firm in the San Francisco Bay Area. Steve can be reached at (650) 358-9000 or email@example.com.