“Planning for an exit can be a very emotional event in a business owner’s life. There are feelings of mortality — not only with one’s health, but also his or her role as the leader of a business. Businesses that achieve long-term success typically do a good job planning for succession,” says Steven E. Staugaitis, a director in Audit & Accounting at Kreischer Miller.
“It makes sense that companies that effectively plan leadership transitions will do better because they can sustain positive momentum when a leader is properly groomed and allowed to rise within the organization,” he says.
However, many business owners and executives don’t properly plan for an orderly exit. Less than 20 percent of organizations are well prepared for the departure of a key individual, according to the American Management Association.
“We see that particularly with first-generation business owners. One day they realize they’re 65 and ready to retire. They expect to be able to turn a key and exit the business. In those cases, it is rarely a successful exit,” Staugaitis says.
Smart Business spoke with Staugaitis about planning for succession and what business owners should be considering to increase their chances for success.
What steps should owners consider?
The succession process involves evaluating several steps. These steps include, but are not exclusive to:
- Identifying potential candidates.
- Training those qualified candidates.
- Publicly affirming the decision.
These action items are necessary to set the right tone and expectations for the organization and those around them.
When should owners start thinking about exit planning?
Successful transitions occur where sufficient planning takes place — five to 10 years from a planned exit is best. This time frame allows for potential ‘false starts’ as circumstances change. These changes can be a shift in the operations of the business, the unplanned departure of candidates or candidates simply not demonstrating the necessary qualifications to take over. It is important to start the process early in order to keep your options open.
Who should be involved in the selection process?
Certainly the current owner or owners should be involved as well as any identifiable candidates. These candidates need to confirm their intention of really wanting to take over.
Also, having an outside, independent entity such as a board of directors or advisory board can be helpful. The board can help balance decisions by removing the emotion, since they don’t work as intimately with the candidates on a daily basis. Board members are able to provide outside perspective and new, innovative ways for evaluating candidates.
What about contingency plans?
It’s always a good idea to have what is sometimes referred to as a ‘disaster plan’ in place. These plans are a set of key instructions for a spouse or the management team of a business to act upon in the event something happens to the owner. Unfortunately, there are situations where a key owner of a business passes away suddenly. If there is no clear direction left to anyone either in the family or in the company, the company may go out of business as a result.
Are there any other things an owner should be thinking about?
A leader who is planning to leave the organization should think about what he or she is going to do once he or she actually leaves. The most successful transitions occur when the owners take up an active hobby or they participate on advisory boards of other companies. Showing up at the business every day can undermine the whole process and give the perception that a succession has never really occurred.
The succession process needs to be mapped out like you would any other aspect of the business. Even if you’re not planning on exiting the business in the near future, being prepared ahead of an actual event sends a positive message to employees and customers that you’ve built a strong company that is focused on long-term success. ●
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Owners of privately held midsize companies are increasingly using performance-based bonuses as a key way of compensating executives.
“Companies will pay for performance, but they want to see value,” says Tyler A. Ridgeway, director of Human Capital Resources at Kreischer Miller.
“Whether it’s a CEO, CFO, COO, vice president of sales or vice president of marketing, it’s about how they can create value for owners in an organization. If it’s a CFO, for instance, it’s not just about crunching numbers; it’s about being a strategic business partner,” Ridgeway says.
Smart Business spoke with Ridgeway about performance-based bonuses and other trends in executive compensation.
Why has there been a trend toward performance-based pay?
A lot of companies have been through tough times, but they’ve also learned to better operate their businesses. Many have available cash right now and are wondering whether to incentivize the current team, pursue an acquisition, launch a new product or upgrade their talent.
For some who’ve decided to incentivize the current team, one option has been to reward their top performers by creating phantom stock or stock appreciation rights plans. These plans can motivate key executives to stay, and also reward them as the company grows.
If they’re hiring an executive, the interview process is now much longer than it was five years ago because they can’t afford to make a mistake. When they upgrade talent or bring in a new CEO, companies want the entire management team involved in the decision. As a result, the chosen executive candidate can build trust and rapport with management before they even start. This allows him or her to hit the ground running.
Companies want to make new executives happy from a compensation perspective, but they don’t want to give away everything. So, they’re designing packages that provide long-term rewards. They’ll negotiate a base salary everyone is happy with, and then determine how to link the bonus to company performance.
How do phantom stock and stock appreciation bonuses work?
Companies are increasingly using these plans that put a percentage of an increase in revenues over a specified period of time into an executive’s retirement plan.
With these plans, the executive doesn’t own equity in the company but shares part of the increase in value. These vehicles reward executives for growth and profits with a focus on specific goals and objectives that need to be accomplished.
Are companies trending away from any particular types of compensation?
Mid-market companies — $20 million to $500 million — realize there is a talent war and know they need to pay for top talent. However, they want to share risk. One way to do this is by offering more in bonus compensation than salary. Executives might be asked to accept less cash upfront in return for the potential upside in bonus compensation and earn-outs.
Some owners might be reluctant to negotiate upfront agreements relating to severance because they may have been burned in the past, such as having to pay severance to a sales professional who was not driving revenue. While many companies do not proactively offer severance, depending upon leverage, executives can have success in gaining some change of control protection.
Most companies are trying to avoid employment contracts as well. Instead, the offer letter now summarizes expectations and includes some measures of protection.
All of this comes back to companies expecting value creation from their new hires. When an executive joins a company, it’s difficult to know upfront exactly where or how he or she will add value. But if the executive helps generate leads that double revenue, for instance, companies are willing to revisit compensation because they want to reward that behavior.
Companies have become more transparent — owners are more willing to allow key team members to know the company’s cash position, and understand why bonuses are down if it’s not a great year. Their philosophy is that everyone is in this together, and, if the business grows, everyone will win. ●
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Many closely held private companies are organized as partnerships or S corporations — pass-through entities with no material tax implications at the organization level. For owners of such businesses, tax planning predominantly focuses on the individual. To properly plan for those taxes, you need to start well before the end of the year, says Michael R. Viens, a director in the Tax Strategies group at Kreischer Miller.
“Although it can be difficult to precisely forecast results for the entire year, a reasonable estimate, along with identification of the material differences that will exist between financial and tax reporting, should be developed,” says Viens.
Smart Business spoke with Viens about key considerations in developing an effective tax planning process.
What is involved in year-end tax planning?
It starts with a solid foundation — just like an unstable foundation can be problematic with a house, tax planning based on inadequate information can lead to a bad outcome.
Some things to consider when developing your forecast are year-end activities that can affect tax reporting, items such as fixed asset additions, the cash basis tax reporting impact of the collection of receivables and seasonal swings in profitability.
It’s also important to take into account tax considerations unrelated to the business. Key components of a business owner’s personal tax obligations are W-2 wages and share of business income listed in a Schedule K-1. But you also need to consider other aspects of the personal tax puzzle. Acceleration of tax deductions is frequently part of tax planning; however, you have to consider what the ultimate tax benefit will be. Too much acceleration of deductions in a particular tax period may result in limiting the related tax benefit to a lower tax bracket than if taken at another time.
So it’s sometimes better to pay taxes earlier rather than defer payment?
Much of tax planning involves a question as to timing when to pay. If there is no material direct or indirect interest charge for deferring payment, that is normally the recommended course. However, a ‘pay as you go’ approach can lead to a better outcome when economic circumstances are not ideal for the accumulation of a significant tax payment deferral.
Another concern with a deferral of tax liabilities is that it can be difficult to monitor future tax payment obligations. Because pass-through entities are not required to identify those liabilities in finance reports, those reports will not help you keep track of when tax obligations may come due.
How does wealth transfer impact tax planning?
Effective estate tax planning may run counter to income tax strategy. You may be able to defer payment of tax due on business profits, but you might not want to do that from an estate tax standpoint. When it’s time to transfer ownership to children, they might not be aware of the need to handle payment of deferred tax obligations. An owner may want to pay the tax, thereby reducing his or her taxable estate and leading to a higher amount of wealth passing along to his or her children.
Should your tax strategy change every year?
An effective tax planning process generally includes some constant elements, such as deferral of revenue recognition and acceleration of deductions. But you need to be flexible to address new challenges.
For example, the new Medicare tax on net investment income will adversely affect owners who do not materially participate in a business, as well as rental arrangements in which commercial property is owned under separate entities. An effective tax plan will consider such changes and adapt to the extent possible. ●
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Companies spend more than $2 trillion on acquisitions every year, according to an article in Harvard Business Review. Yet studies frequently cite failure rates of mergers and acquisitions (M&A) between 70 and 90 percent.
David E. Shaffer, a director in the Audit & Accounting practice at Kreischer Miller, says problems are often the result of poor planning. Companies are enticed by the opportunity to create synergies or boost performance and fail to consider all ramifications of an acquisition.
Smart Business spoke with Shaffer about ways to mitigate the risk and ensure a successful transaction.
Why is the M&A failure rate so high?
Many companies don’t establish a clear business strategy for mergers and acquisitions. Some questions that need to be answered include:
- What are the goals of the merger or acquisition?
- Do you want to leverage existing resources or create a new business unit?
- What is the maximum price you are willing to pay?
- Must the seller agree to some holdback of the price?
- What happens to administrative functions and management of the target company?
- Must key employees sign agreements to stay?
- Will you negotiate between an asset purchase and a stock purchase?
- Is culture important?
You should be proactive in identifying candidates for acquisition. Companies that have done many acquisitions tend to ignore requests for proposals because the sellers in such situations usually go with the highest price. They reason that the law of averages is against them and at least one competitor will overpay.
Instead, companies involved in many acquisitions prefer to target entities and establish a relationship before that stage in order to avoid a bidding war.
How should the due diligence process be conducted?
It’s important that you don’t take shortcuts in your due diligence. Hire professionals who are knowledgeable about the industry; they can negotiate better deals for you because they are not emotionally attached and can push harder for seller concessions.
Due diligence should address internal and external factors that create risk in the acquisition and focus on key factors driving profitability — employees, processes, patents, etc.
The more risk present, the more you should ask for holdback in the selling price. For instance, if much of the profit is derived from a few contracts, require that the contracts be renewed under similar terms if the seller is to receive the full purchase price.
M&A failures often result because buyers concentrate too much on cost synergies and lose focus on retaining and/or creating revenue. Client retention at service organizations is at significant risk following a merger or acquisition, according to a 2008 article from McKinsey & Company. Clients will receive misinformation, so it’s important that the acquiring firm step in quickly to assure clients that service levels will equal or exceed what they have been accustomed to expect.
What needs to be done post-acquisition?
It’s important to have a clear post-acquisition plan, including financial goals, with as much detail as possible. The quicker value is created by the acquisition, the better the result for the buyer.
Key post-acquisition steps to ensure a successful integration include:
- Developing the organizational structure.
- Developing sales expectations.
- Identifying what processes and systems will change, and when.
- Developing performance measures.
Finally, you also need to hold key management responsible for producing results.
David E. Shaffer is a director, Audit & Accounting, at Kreischer Miller. Reach him at (215) 441-4600 or firstname.lastname@example.org.
Social Media: To keep in touch with Kreischer Miller, find us on Twitter: @KreischerMiller.
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Growing a business in today’s environment is as challenging as ever — especially with relatively stagnant overall economic growth. That’s why it’s more important than ever to hold onto existing customers.
According to Christopher F. Meshginpoosh, a director in the Audit & Accounting practice at Kreischer Miller, companies frequently spend too much time trying to win new customers and not enough trying to hang onto existing customers.
Smart Business spoke with Meshginpoosh about techniques that companies can use to create an organization where every employee is driven to meet the needs of its customers.
Why do some companies struggle with customer service?
It’s often a function of a lack of processes that ingrain and reinforce the importance of customer service. When an entrepreneur starts a new business, he or she understands the value of customer relationships because he or she worked hard for those relationships and can’t afford to lose them.
However, as the company grows, employees are added who lack that same perspective. Without formal processes — training, documented expectations, reward systems, etc. — the focus on customer service can gradually erode.
Additionally, all too often, companies treat customer service like a department. For the record, I didn’t come up with that — it’s on the website of Zappos, a company with an almost legendary commitment to customer service. Every employee has the ability to strengthen or damage a customer relationship, so it’s important for companies to make sure they hire people who have demonstrated an ability to put customers first.
What steps can management take to improve customer service?
That’s an easy one: Look in the mirror. If management wants every person in the organization to demonstrate the importance of customer service, then the first step is to make sure that they demonstrate it. And that doesn’t just mean managers of the sales or customer service functions. If you want happy employees who thrive on meeting or exceeding the needs of customers, then managers in charge of production, human resources, administration and other functions also must walk the walk.
How can companies reinforce the importance of customer service?
One easy way is to publicly recognize those who demonstrate an outstanding commitment to customer service. Do you have an employee who went out of his or her way to solve a problem for a customer? Don’t just tell that person, tell everyone.
Additionally, make sure reward systems and incentive programs include explicit customer service goals. While some people seem to have an innate ability to want to make customers happy, others may need a little additional motivation. As a result, it’s important to ensure that annual reviews and compensation programs include explicit customer service objectives. If your reward systems simply focus on metrics like profitability or efficiency, then you run the risk of driving short-term profits at the risk of long-term customer losses.
How do you know if your efforts are moving the needle?
While there are many formal methods such as customer service surveys or monitoring customer service metrics, one easy way is to routinely have your employees ask a simple question: What did I do to add value to the customer relationship?
Everyone gets bogged down in the details once in a while, but they should still be able to step back and determine whether their actions strengthened or damaged a customer relationship. If they can’t routinely point to actions that strengthened a relationship, then there’s room for improvement. If they can, then they’re well on their way to creating strong, lasting customer relationships.
Christopher F. Meshginpoosh is a director, Audit & Accounting, at Kreischer Miller. Reach him at (215) 441-4600 or email@example.com.
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Effective leadership essentially involves a leader’s ability to influence the behavior of followers in pursuit of goals and objectives. Therefore, those in leadership positions must possess the knowledge, skills and abilities that will allow them to influence the behavior of others.
“Organizational leaders must focus on developing the less experienced members of their organization if they hope to preserve the longevity and sustainability of their organization. Successful organizations typically include employee development as one of their strategic goals and have detailed plans for its execution,” says Mary Ellen Harris, director of Human Resources at Kreischer Miller.
Smart Business spoke with Harris about effective succession planning.
How do you bridge the generational gap?
What constitutes strong leadership characteristics and skills remain constant. In other words, leadership skills are universal and do not differ based on the age of the potential leader. However, in order to bridge the gap between generations, organizations need to be more focused on the communication methods and development vehicles employed in an effort to develop the members of the other generations, as opposed to focusing on the content of the development program itself. Don’t get caught up in the differences that people attribute between generations. Regardless of when a person was born, human beings possess similar core needs/desires such as being treated with respect, feeling valued by peers and having the chance to achieve goals. Bridging the gap is best approached by collaborating with the target group on the design of your leadership development program.
What are the keys to an effective program?
The best approach will include a combination of both formal and informal methods of developing employees. A useful informal approach is as simple as having successful veteran leaders within your organization spend time with aspiring leaders. The veteran leaders model appropriate leadership behavior and the aspiring leaders can observe how a successful leader performs.
You can also expose aspiring leaders to successful veteran leaders from outside of your organization, or provide recommended reading assignments such as books, journal articles and other respected resources to help them take responsibility for developing themselves.
From a more formalized standpoint, the inclusion of training classes and mentoring programs are effective techniques for developing leadership skills. In addition, incorporating leadership skills in your performance appraisal system and ensuring that employees are given specific leadership development targets, feedback and assessments is essential. Shadowing programs and short-term ‘leadership’ role assignments, such as leading a project team, are also effective.
Finally, formal education through college courses and internal training classes are effective leadership development strategies.
What role does context or environment play in the creation of an effective leadership development program for the next generation?
Context is a very important factor that influences the approach to developing your next generation of leaders. A not-for-profit organization will likely approach things differently than a for-profit organization, and similarly a large organization will likely approach development efforts differently than a small organization. The type of industry will also have an impact on the approach and options available for the development of aspiring leaders. For example, some contexts may not be conducive to the use of mentoring programs, but they may be extremely effective elsewhere. Similarly, shadowing programs work in some environments but might not be productive or feasible in other environments.
There is no one specific formula for preparing your next generation of leaders. It is imperative that organizations customize their approach and include such factors as the context, industry, size of the organization, and people involved in order to design a unique combination of methods and techniques that are best suited for the organization’s specific needs, goals and objectives.
Mary Ellen Harris is the director, Human Resources at Kreischer Miller. Reach her at (215) 441-4600 or firstname.lastname@example.org.
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Not all executives have a financial or legal background. However, most would acknowledge a need to have a basic understanding of those areas to facilitate better communication with the company’s finance and law departments. Yet when it comes to information technology, executives often would rather leave all decisions to the “techies.”
“IT is a newer field that started as a separate entity — a black box that we didn’t understand,” says Sassan S. Hejazi, Ph.D., director of Kreischer Miller’s Technology Solutions Group.
He says executives have been comfortable delegating IT responsibilities to specialists, but there is a growing population who have taken the initiative to become more tech-savvy.
Smart Business spoke with Hejazi about the separation between executives and IT departments and the technology fundamentals all business leaders need to know.
Why do executives tend to take a hands-off approach when it comes to technology issues?
They understand the concepts, but think technology people should handle technology issues. They want to delegate these business improvements rather than get very involved themselves because they might not be familiar with the technology or are intimidated by the jargon.
What fundamentals do executives need to understand regarding technology?
Executives need a basic understanding of the:
- Right IT systems for the business; the wrong ones will not enable the company to achieve its business goals.
- Latest changes in technology. For example, IT systems are moving toward the cloud. Executives need to know what is happening with cloud technology and how it addresses the overall needs of their business.
- Impact of social media. They need to know how social media changes the ways customers interact with companies.
- Quality of data. If the right data is not being captured, decisions are not made properly. Executives need to be adamant about ensuring a high level of data quality in the system and that they’re capturing the right analytics.
Executives need to understand technology projects in order to take ownership of them and leverage specialized IT resources for those projects. If they want to gain a competitive advantage from IT investments they have to think of those projects as business improvements or business transformation initiatives rather than just technology initiatives.
When you have an IT professional in charge of an IT project, the tendency is to think of it as just a technology project. Implementing a new accounting system, client/customer management system, management dashboards or social media marketing program are very technology-intensive, but at the core they’re business projects.
How might leaving decisions to IT managers put the focus on technology instead of cost or business needs?
Even if they have an appreciation of business results, IT personnel are not impacted directly and are not involved in pricing and delivery of the company’s products and services. As a result, their decisions are focused on technological efficiencies rather than business realities. That’s why it’s important to have non-IT managers champion projects and be held accountable for their success from a business standpoint. Make sure they’re working closely with their IT counterparts, but leverage IT personnel as a resource rather than having them lead projects.
IT departments are viewed as a means to execute plans instead of participants in the planning process, and it’s often assumed that they don’t understand the business. If executive management makes decisions in collaboration with proper IT resources, it sets the tone for the organization and ensures IT managers are integrated within overall management decision-making. As non-IT managers become more tech-savvy, IT managers need to be more business-savvy. IT employees are also there to achieve business goals and involving them in the process makes them more engaged and productive team members.
Sassan S. Hejazi, Ph.D., is a director at Kreischer Miller. Reach him at (215) 734-0803 or email@example.com.
Book: Get Sassan’s new book, “Tech-Savvy Manager: Harnessing the Power of Information Technologies for Organizational Performance” at Amazon.
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External financing is typically the lifeline of a company, enabling it access to capital to purchase property and equipment, hire employees, and ultimately expand the business.
Commercial lending institutions provide the most common source of such financing.
“In order to get the most out of your lender relationship, the business owner or manager needs to understand what’s important to the commercial banker,” says Mark G. Metzler, CPA, director of Audit & Accounting at Kreischer Miller.
Smart Business spoke with Metzler about establishing a relationship with a commercial lender that will benefit your business.
What does a commercial lender look for in a banking relationship?
First and foremost, like most companies, the commercial lender is in business to generate a profit. Consequently, it’s imperative that the lender has confidence in the borrower’s ability to repay its loan. Therefore, in addition to evaluating the integrity of management, the commercial lender will look for a strong balance sheet and positive cash flow as indicators of the company’s ability to repay its obligations.
What else is important to the lender?
Lenders look at the experience and strength of management. In particular, they evaluate management’s ability to guide the company and execute its strategy. How has management been able to navigate through the recent turbulent economic environment? What are the backgrounds of the CFO and senior management? The lender will look at the company’s other business advisers, including its outside CPAs and attorneys, to help assess the company’s credentials. Does management surround itself with the right professionals? Lastly, the lender is interested in timely, open communication with management, sharing both good and bad news. The lender understands that projections and forecasts may change, but they don’t want to be surprised. The lender wants to know: What is management’s business plan, how has it historically performed and what are the key assumptions in the plan?
What should the business owner look for?
There are many options available to companies, and the business owner needs to evaluate a number of factors. First, who will be the company’s relationship manager and what is his or her experience? Remember, the relationship manager will be the one who presents the company’s case for extending the loan to the bank’s credit committee and monitors the company’s performance. The relationship manager plays a critical part and he or she should understand your business, its opportunities and threats, and potential capital requirements. Second, what type of financing is most appropriate? Options include traditional term debt, lines of credit, asset-based arrangements and SBA loans, among others. The size of the requested credit facility may help dictate the type of loan and banks that are suitable. Third, are there other services that you may need from the bank? For instance, if you have a global business, the bank’s foreign exchange capabilities may be important. Another business may be interested in cash management. Finally, because the company is often the business owner’s greatest asset, what private banking services are available to the owner individually?
What role do interest rates play?
Terms and conditions are always important, but we’ve found that commercial banks will be competitive for the right credit. Depending on the size and type of loan, the lender may be interested in collateral or personal guarantees. Obviously, companies with the strongest balance sheets and cash flows will generally obtain the best terms. While the lowest interest rate may appear to be most desirable, the experience of the relationship manager, the depth of service offerings and the commitment of the bank to your business are intangible factors that should not be ignored.
Do you have any recommendations?
Because your CPA works with a number of companies and has access to credit arrangements offered by various lending institutions, he or she is ideally positioned to guide you through the process and assist you in negotiating an optimal lending relationship for your company.
Mark G. Metzler, CPA, is a director, Audit & Accounting, at Kreischer Miller. Reach him at (215) 441-4600 or firstname.lastname@example.org.
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Businesses are continuously challenged to deliver products or services faster, at higher quality, and to bring new items or issues to the forefront. Finding the time to address all of the issues businesses face daily is often a challenge in today’s fast-paced environment.
However, planning for continuous improvement is critical, says Robert S. Olszewski, a director in the Audit & Accounting group at Kreischer Miller, located in Horsham, Pa.
“Nothing can be achieved without hard work,” says Olszewski. “However, a successful company has the ability to balance between managing today’s challenges and planning for the future. A structured business improvement process, discipline and accountability lead to the development of systems and strategies that leverage the future and foster the true value of a business. Improvement involves assessing the now, where and how.”
Smart Business spoke with Olszewski about the business improvement process.
Are there stages in the business improvement process?
Most people are aware the first step in a business improvement process is to get the structure right. The right structure means the right customers, products, cost to manufacture and people. They don’t realize that once the structure is mostly in place, they should move to the next stage, which is to get the waste out of the structure.
There are seven primary areas of waste: defects, waiting, motion, storage, overproduction, transportation and processing. The identification of waste can be achieved by interviewing personnel, utilizing intellect and flow-charting a process. Identification of waste is the easy part. Businesses must implement a strategy to reduce waste and continuously monitor results.
The time frame for addressing structure and waste is normally a two-year period. However, the final stage of the business improvement process -— changing the belief system of people — can span over a time period of up to five years. One of the significant factors limiting the attainment of change is the degree to which people believe that they are in control of their own destiny.
What is the most difficult part of the business improvement process?
Most companies can respond quickly when asked where they currently stand in the business environment. The difficulty is revealed when a business is asked where it wants to be and how it plans to get there.
The key to addressing the where and the how is defining your sustainable competitive advantage (SCA). The clear definition of SCA is the baseline for developing specific strategies in marketing, operations, innovation, human resources and finance that will generate results in the business improvement process.
What issues do you see in making improvements and implementing change?
One of the greatest obstacles is the acceptance of the status quo or the historical norm. However, being successful in the past is not a sound indicator for predicting future success.
Most successful process improvements involve a vision, a plan and surprisingly, dissatisfaction. Providing insight into the positive elements of change will create dissatisfaction with the status quo and motivate others to adopt the change. Companies that can clearly demonstrate why and how the change will have a positive impact, leading to dissatisfaction, have a higher probability of effective change.
How can you tell if changes are actually improvements?
Key performance indicators must be established from the inception of the business improvement process. Although some things are difficult to measure, specific items need to be quantified and supported by data. Keep it simple, visible and meaningful to everyone involved in the change process. Sharing the goals and making the results readily available to those involved is often a key element to success. Visibility of the common goal and success to date will enhance the efforts of the team.
Something NEW has arrived for private companies! Introducing the Center for Private Company Excellence, a community created by Kreischer Miller. Learn more at www.privatecompanyexcellence.com.
Robert S. Olszewski is a director, Audit & Accounting, at Kreischer Miller. Reach him at (215) 441-4600 or email@example.com.
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It’s common for businesses to attain some measure of success and reach a point where they need to take strategic action in order to continue to grow.
“Basically, you’ve run the business to a certain point. What do you do next with a successful company? You could sell it, just keep the status quo — which I don’t think is a good idea — or you could grow it,” says Mario O. Vicari, director at Kreischer Miller.
Vicari says there are four options owners can consider to keep growing: Acquire a similar company; diversify by acquiring a company in a different industry; leverage what you have by figuring out how to cut costs or increase efficiency; or leverage your position by expanding into new markets.
“There could be a lot of different strategies under these four areas, but that covers the basics,” says Vicari. “Another option is selling the business. Maybe there is a point where the market is right to sell, but that has a lot to do with the personal goals of the owners.”
Smart Business spoke with Vicari about the different growth strategies and how they are implemented to build companies.
How do you leverage assets or market position to grow?
You can figure out how to do things better or more efficiently; that’s leveraging intangible capital. Every business also has tangible assets such as machines and buildings, and you can look at whether you can use those assets in different ways. Those might be line extensions or new products that you make with your existing technologies and hard assets.
Instead of focusing on assets, you can look at market position and ways to take share from competitors, assuming, for example, that it’s a billion-dollar market and you have a 10 percent share of a pie that isn’t getting bigger. You could take market share by expanding the sales force or distribution channels. For instance, if you’re only distributing in the northeast, you could open a distribution site in Indianapolis.
Another way to leverage your position is to look at existing customers and see if there are products they buy that you’re not presently selling but are close enough to your product line that you could. For instance, if you distribute HVAC equipment, you might want to expand your line and start selling water heaters.
What are the different acquisition strategies?
When you grow by acquiring a similar firm, it’s because they have different characteristics, such as geography or products, which complement the position you have. Maybe they give you a footprint in another three states. Or maybe they do commercial HVAC rather than residential.
You can also diversify through acquisition — for example, an HVAC company gets involved in home alarm systems, which is an entirely different business. Some businesses like diversification as a risk management strategy because you’re not concentrated in one industry. But the reality is it’s often very risky because it takes you outside of your core competency and it’s not easy to operate a business without experience in the industry.
Is it ever OK to stop growing your business?
It’s OK to maintain your position as long as you maintain your margins. The problem is that a lot of companies fall into doing nothing, not because they intentionally decided to do so, but because they become complacent.
Ninety percent of the time, companies in the status quo category tend to be there because they’re comfortable and not putting pressure on themselves to grow. That’s a dangerous place to be because when you have no goals or plans to improve your business you could wind up diminishing its value.
Mario O. Vicari is director at Kreischer Miller. Reach him at (215) 441-4600 or firstname.lastname@example.org.
Something NEW has arrived for private companies! Introducing the Center for Private Company Excellence, a community created by Kreischer Miller. Learn more at www.privatecompanyexcellence.com.
In May 2012, the Financial Accounting Foundation (FAF) of the Financial Accounting Standards Board (FASB) announced the formation of the Private Company Council (PCC). The PCC was created to work with the FASB to determine whether and when to modify U.S. generally accepted accounting principles (GAAP) for private companies. The PCC will replace the Private Company Financial Reporting Committee (PCFRC).
According to the FAF’s final report, Establishment of the Private Company Council, the PCC has two principal responsibilities. The first is to determine whether exceptions or modifications to existing nongovernmental GAAP are required to address the needs of users of private company financial statements and the second is to serve as the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.
Smart Business spoke with Laurie A. Murphy, director, risk management, at Kreischer Miller about these changes.
Could you give us a brief history of differential accounting standards?
The question as to whether and how to establish differential accounting standards for public versus private companies, which is referred to as Big GAAP versus Little GAAP, has been going on for decades. The movement abroad to address the needs of private companies has already taken place. The International Accounting Standards Board (IASB) issued GAAP requirements for small and medium-sized entities in July 2009. These standards are significantly smaller and less complex than the International Financial Reporting Standards (IFRS) or U.S. GAAP. The IASB recognized that small, privately held companies usually don’t need the complex reporting standards and disclosures of public companies. Under IFRS, small, privately held companies can utilize and choose reporting standards that make the most sense for their particular size.
In 2006, the FASB created the PCFRC to provide recommendations to the FASB on issues related to standard setting for private companies in the U.S. In 2009, the FAF undertook a nationwide ‘Listening Tour,’ and one of its results was the formation of the blue ribbon panel (BRP) on private company accounting by the FAF, the AICPA and the National Association of State Boards of Accountancy (NASBA). The BRP was established to address how accounting standards could best meet the needs of users of U.S. private company financial statements and was charged with providing recommendations on the future of standard setting for private companies to the FAF.
The BRP submitted its report to the FAF in January 2011, in which it included recommendations for how GAAP could best meet the needs of private company financial statement users. Among them was a recommendation for a new board, to be overseen by the FAF, which would focus on developing the exceptions and modifications to GAAP for private companies to better respond to the needs of financial statement users. Importantly, the BRP did not believe that the system of accounting setting had done a sufficient job of understanding the information that users of private company, as opposed to public company, financial statements consider useful and weighing the costs and benefits of GAAP for use by private companies.
Is the PCC the solution that the BRP expected?
The BRP recommended the establishment of a separate private company standards board that would work closely with the FASB but also would have final authority over exceptions and modifications. The BRP also recommended the creation of a differential framework to facilitate standard setters’ ability to make appropriate, justifiable exceptions and modifications. However, the authority to approve exceptions and modifications to GAAP was not granted to the PCC. While PCC is charged with determining whether exceptions or modifications to existing GAAP are required to address the needs of users of private company financial statements, approval by the FASB is required before those exceptions will be incorporated into U.S. GAAP. Since recommendations of the PCC must go through the FASB’s lengthy approval process, it may be a slow process to make changes that will benefit private companies. It is also unclear whether these changes, which will be incorporated into existing GAAP, will result in a differential standard.
What is the FRF for SMEs?
It appears that the AICPA was tired of waiting on the FASB or it lacked confidence that the FASB would accomplish its original charge of simplified standards for private companies. Therefore, in November 2012, the AICPA released an exposure draft on its proposed Financial Reporting Framework for Small-and-Medium-Sized Entities (FRF for SMEs). The FRF for SMEs, otherwise known as a special purpose framework, is intended to be an optional, simpler framework for the millions of small and medium-sized entities in the U.S. that are not required to prepare financial statements in accordance with U.S. GAAP. The FRF for SMEs is based on a simpler historical cost and accrual tax basis framework and, if adopted, would be a standardized alternative to GAAP if permitted by financial statement users. The FRF for SMEs is considered nonauthoritative and would be an optional method of financial reporting for internal use and for external use when external users have direct access to management. While this is not a replacement for differential standards, it may fill the gap for a subset of privately held companies.
Laurie A. Murphy is the director of risk management at Kreischer Miller. Reach her at (215) 441-4600 or email@example.com.
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With year-end tax season in full swing, a cloud of uncertainty hovers over businesses. Forecasting what 2013 will bring in terms of tax rates and legislation is difficult because of the impending presidential election and the unknowns about whether the Bush-era tax cuts will be extended.
What will happen to tax rates in 2013? How could estate planning be affected? Is now the time for your business to buy equipment?
“This year, the traditional planning techniques of deferring income and accelerating deductions may not be appropriate, depending on what happens with tax rates,” says Michael R. Viens, director, Tax Strategies, at Kreischer Miller, Horsham, Pa.
Viens recommends businesses plan early but hold off on executing any specific plan until the post-election dust settles and Congress gives some indication of its direction concerning late 2012 or early 2013 tax legislation.
Smart Business spoke with Viens about how businesses can best prepare and position their organizations to be flexible in light of the uncertain political and economic climate.
How is this year different in terms of tax planning?
A key concern is tax rates and whether they will increase in 2013. If nothing happens legislatively by year-end, tax rates are scheduled to increase, impacting a number of events. Traditional business tax strategy focuses on deferring income and accelerating deductions, keeping as much cash in the business as possible. But such a strategy, if employed this year, may create higher taxable income in 2013, with the potential for a higher tax bite that could more than offset 2012 tax savings. Once the election is over, we should have clearer indications as to the likely tax regime in 2013 and beyond and will be in a better position to make decisions regarding implementation of specific tax planning initiatives.
Start planning now. Work through the what-ifs with your advisers, but wait before pulling the trigger until after the election.
Is now a good time to purchase equipment?
The purchase of appropriate qualifying equipment is a common year-end activity for businesses that wish to take advantage of the value of bonus-depreciation opportunities that allow an immediate 50 percent write-off, and a Section 179 expense deduction that allows deduction of the full amount of the purchase price of the equipment, up to $139,000, in the year in which it was purchased and placed in service. Bonus-depreciation provisions expire Dec. 31, 2012, and the Section 179 deduction is scheduled to revert to $25,000 for tax years beginning in 2013, unless extended.
With equipment purchases, economics should drive the decision, with tax impact being secondary. If the equipment is important and acquiring it today means the business will be in a better position than it would be buying it in January, purchasing now likely should win the day. But all things being equal, a purchase in December versus January may be worth considering once it is understood what tax deductions and rates will apply in 2013.
How might an equipment purchase in 2012 be more beneficial than in 2013 if the current tax structure is not continued?
Say a business purchases qualifying equipment for $1 million and places it in service in December 2012. It immediately gets a $500,000 tax deduction in 2012 per the 50 percent bonus depreciation rule and may also receive normal first-year depreciation for another $100,000. That equals a $600,000 deduction in 2012. And with a 35 percent tax rate, the tax savings is $210,000, resulting in a net short-term cash outlay for the equipment at $790,000.
If this purchase is deferred until January 2013 with no bonus depreciation and a new 40 percent tax rate, the business may save in the short term only $80,000 in cash rather than $210,000. However, due to subsequent depreciation, the business would realize a total of $240,000 in tax savings on the same $600,000 deduction that would be otherwise accelerated into 2012.
The business should weigh the longer-term $30,000 tax savings from deferring the equipment purchase into 2013 against an earlier short-term tax savings. The choice involves tradeoffs — short-term cash flow versus the present value of longer-term higher tax savings. Without knowing what 2013 will bring, planning for both scenarios is key.
How should businesses proceed with succession planning given tax law uncertainty?
Estate taxes are of importance to business owners in transferring ownership to the next generation, and there is uncertainty regarding those provisions. There are currently opportunities to transfer significant family wealth without incurring gift tax due to historically high lifetime gift exemption levels. But this could go away if the estate/gift tax structure is not extended. Businesses transferring ownership should discuss opportunities now with an attorney and their tax adviser.
What traditional year-end tax planning techniques still apply, regardless of what the tax law brings?
Address safe harbors to avoid underpayment penalties. Because many businesses are seeing 2012 earnings that are more robust than in 2011, a prior year-based 100 or 110 percent (applicable for higher income taxpayers) safe harbor comprised of withholding and/or estimated tax payments may be an easy answer. A business with a tax liability of $100,000 in 2011 could use a $110,000 safe harbor and make up a shortfall when tax returns are due next April.
What planning strategy can business owners adopt to prepare for unknown 2013 outcomes?
Develop a Plan A and Plan B, working out how your business will react if tax law continues as is, and what decisions will be implemented if the current tax opportunities and tax rates change. Depending on the position of the business and owner circumstances, this year may require a more robust planning process than in the past, which is a good reason to enlist an experienced accountant and begin the tax-planning dialogue early.
Michael R. Viens is director, Tax Strategies, at Kreischer Miller, Horsham, Pa. Reach him at (215) 441-4600 or firstname.lastname@example.org.
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In the current economic environment, many businesses are finding financing difficult to come by. But with the proper preparation, gaining funding for your business is not impossible, says David Shaffer, director, Audit & Accounting, Government Contracting Industry group leader at Kreischer Miller.
“Getting your business in order and presenting a strong case to your banker can improve your chances of getting financing,” says Shaffer. “It’s not as easy as it once was, but even in difficult economic times, banks and other organizations are still providing financing to businesses.”
Smart Business spoke with Shaffer about how to position your business to succeed when seeking financing.
What does a business need to have ready prior to looking for financing?
Whether you are a new business or have 50 years of history, anyone looking to provide financing is going to want to see the plan of how the business is going to repay the loan. Most lenders do not want to have to liquidate the collateral to collect the loan; they want to set up reasonable terms and conditions so the business can repay the loan, over time, and the lender can make a reasonable profit.
In most cases, this means providing the lender with a monthly budget of the business’s income, balance sheet and sometimes cash flow for 12 months, and an annual budget for at least two years from that point. The lender will use these statements to create financial covenants, so management must be comfortable that they can meet, or preferably exceed, the budgets.
Lenders are also going to review management’s history and the business’s history of repaying debt. If there have been any issues with historical debt, this should be discussed with the lender up front, prior to the bank discovering it on its own.
If you are an existing business, three years of historical financial information should also be provided. Audited financials are best, but in most cases, reviewed financials will be sufficient. If the company does not have audited or reviewed financial statements, compiled or internal financial statements should be provided, but if this is the case, be prepared for more due diligence from the lender. If there have been historical losses or other items that might give a lender concern, discuss the issues with the proposed lender prior to sending.
If this is the first time through the process, owners should consider having their CFO/controller involved, or involve their CPA or legal counsel who is familiar with typical terms and conditions of business loans. But even if you have done this before, no matter how experienced you are, make sure that you have an experienced attorney who has knowledge of these loans review all documents prior to signing.
How long does the process typically take from start to finish?
Most banks need 45 to 60 days from the initial meeting to the time of funding a loan. If the loan is more complex, it may take longer.
What collateral will a lender typically request?
Most banks will request that all business assets collateralize their loan (assuming they are the only lender) and, in most cases, will require the business owners to personally guarantee the loan. If the loan is very risky, they might also request liens on specific owner assets such as stock portfolios, personal home, and/or cash surrender value of life insurance.
What interest rate can businesses expect in the current environment?
Banks and other lenders determine their interest rates based upon the perceived risk of the loan. Most business loans that are not high risk have variable interest rates ranging from prime minus .5 percent to prime plus 1 percent. Fixed rate loans will vary depending on the length of the loan and the collateral.
Other than banks and personal savings/assets, where else can a business seek funding?
President Obama recently signed the Jumpstart Our Business Startups Act, and one aspect of that, called crowdfunding, provides up to $1 million of loans for businesses. Transactions must be administered by a broker or a funding portal that is registered and complies with the Securities and Exchange Commission requirements.
The Small Business Administration and other government-guaranteed loans also provide funding alternatives to businesses. The SBA can provide loans up to $5.5 million. Such loans require a lot of documentation from a business, but their rates are very competitive. In most cases, a bank will still need to be involved to underwrite the loan, and many banks have specific lenders specializing is SBA loans.
Some companies also consider joint ventures. However, this is quite risky because it requires a strong leader to bring together a group of businesses so that each member of the group understands the risks and responsibilities involved. It also requires the involvement of an experienced attorney who can write a joint venture agreement that everyone understands and is willing to sign. Joint ventures are often used to complete a specific project for a customer when one company does not have all the skill sets to complete the contract on its own, so will go out and find a ‘partner’ with those necessary skill sets to propose on the project.
Venture capitalist/private equity is also viable, especially if the business is promising and can grow quickly with the proper funding. Typically, these companies will get an ownership in the business. Some firms have been willing to lend money to a company, but it is typically at a much higher interest rate than a bank may charge. The advantage of venture capital/private equity, however, is that the business now has the network of contacts of the venture capitalist or private equity provider at its disposal.
David Shaffer is director, Audit & Accounting, Government Contracting Industry Group leader, at Kreischer Miller. Reach him at (215) 441-4600 or email@example.com.
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Many entrepreneurs devote the vast majority of their time to building their businesses — creating new products or services, building a team and developing new client relationships — often at the expense of ensuring that there is a viable way to monetize that value at some point in the future.
Unfortunately, this often leads to surprises down the line in the form of a delayed exit or a loss of value upon exiting the business, says Christopher F. Meshginpoosh, director, Audit & Accounting, at Kreischer Miller, Horsham, Pa.
Smart Business spoke with Meshginpoosh about the exit planning process and how to begin.
How soon should an entrepreneur start planning an exit strategy?
The reality is that it is never too soon to begin planning. Oftentimes, some of the early decisions, such as the form of the entity or the nature of the equity issued to the owners, end up having a significant impact on the timing or value of an exit.
Sitting down and spending some time early on thinking about long-term personal goals and exit options can help minimize problems down the road.
What are some of the exit options that an entrepreneur should consider?
There are a wide range of potential options that an entrepreneur can consider depending on his or her objectives. For example, there are strategies that an entrepreneur can use to transfer ownership to other owners, to nonowner employees, to family members or to outside investors.
What should an owner think about when contemplating a sale to another owner?
If this is a potential outcome for the business, owners should formalize their agreement about the mechanics and value of the transfer. If owners wait until an exit is imminent, it is often very difficult to get the parties to agree on these types of matters.
By entering into a buy-sell agreement that defines how the transfer will occur, owners can avoid many problems and distractions down the road.
What if the owner would like to keep the business in the family?
We see that quite a bit in our client base, and the good news is that there are several options available, including negotiating buy-sell agreements, transferring through gifts to other family members, establishing grantor retained annuity trusts, or establishing family limited partnerships. However, these options are all dependent upon identifying and grooming specific family members who can lead the business upon the departure of the existing owners.
Can you describe some of the strategies that can be used to transfer the business to existing employees?
First, there is one prerequisite: existing ownership members have to make sure that they have a plan to hire and develop managers who are capable of running the business. Assuming those managers are already in place, owners can provide senior management with equity incentives that reward management for increases in the value of the business.
This not only aligns management interests with those of ownership but also provides a way to gradually transfer ownership interest in the business. Once an owner is ready to transfer the remaining interest, it is often possible for management to obtain sufficient debt financing to purchase the owner’s remaining interest in the business. Other options include the formation of an employee stock ownership plan, or ESOP, to gradually or immediately redeem existing ownership interests and transfer those interests to employees.
What are the options if there are no other owners or employees capable of buying the business?
In those situations, either a partial or complete sale to a third party is necessary. Determining the right party is often a function of the owner’s goals, as well as of the willingness of market participants to purchase the business.
For example, if the owner is willing to continue to work in the business for a period of time, options such as a sale to a private equity firm or a roll up might be good alternatives. The sale of a partial interest to a private equity firm might also provide the owner with some upside potential if the business continues to increase in value.
If the owner plans to cease involvement at the time of a transaction, then other options such as the sale of the entire business to a strategic buyer might be the best alternative. Regardless of the strategy, owners really need to prepare for a transaction well before the planned exit.
In light of the time it takes to prepare, how do you recommend that an owner start the exit planning process?
There are many potential alternatives, and each one has its own unique complexities. Consulting with experienced advisers — including accounting, legal and wealth management professionals — is essential to avoiding obstacles and maximizing value upon an exit.
Christopher F. Meshginpoosh is a director in the Audit & Accounting group at Kreischer Miller, Horsham, Pa. Reach him at (215) 441-4600 or firstname.lastname@example.org.
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There is some good news about the economy — the recently issued “Fiscal Survey of States” reports that revenue collections are up in many states throughout the nation and fiscal conditions are continuing to improve into fiscal year 2013, although many state budgets are not fully back to prerecession levels.
“However, despite the increase, that is not enough to let down your guard when it comes to examining state tax nexus for your business enterprise,” says Timothy A. Dudek, director in the Tax Strategies Group at Kreischer Miller.
The term “nexus” as used in this article refers to what constitutes “doing business” in a state that requires the filing of tax returns.
“A large amount of revenue generated by the states in the past few years has come from aggressive enforcement measures with regard to their out-of-state nexus groups,” says Dudek.
Smart Business spoke with Dudek about why it continues to be important to address state tax nexus, even in years of improved revenue and cost-cutting actions by states.
If states have improved tax collections and are taking action on cost-cutting measures for the future, why do the aggressive enforcement measures continue with regard to state tax nexus?
Future revenue shortfalls are projected. Both the National Governors Association and the National Association of State Budget Officers warn that despite improvements in tax collections, states are now being squeezed in two different directions. First, the budget assistance provided to states via the federal American Recovery and Reinvestment Act is gone. The loss of that money alone wipes away state increases in tax collections.
Second, local governments are experiencing revenue declines due to lower housing values — a situation that will put pressure on state leaders to boost funding for cities, counties and schools.
What other factors prompt a state government to continue tax collection programs?
We tend not to think of the cost of state Medicaid programs, which continue to rise each year. The health insurance program now accounts for nearly one of every four dollars spent by states. Over the next 10 years, total Medicaid spending is projected to increase annually by 8.3 percent.
What is state tax nexus, and how do states reap the benefits of this type of program?
Nexus, under the Commerce Clause of the U.S. Constitution, requires that a business must satisfy certain standards before a state can exercise its power to tax the business. Nexus must have a definite link — some minimum connection between the state and the business it seeks to tax.
It embodies the spirit that a state cannot impose a tax on persons unless there is a certain level of presence or activity by a business within the state seeking to impose the tax. The trick is to understand that different taxes, such as income, net worth, sales taxes, may have different standards for establishing nexus in each state.
Many businesses may unknowingly have satisfied nexus requirements long ago but have never filed the required tax returns with the individual states. State enforcement measures in the nexus arena are designed to discover and ferret out taxpayers that are not in compliance with existing state tax laws. Once a state identifies a business through nexus discovery, the business usually must file tax returns and pay the tax, interest and penalties retroactive to when nexus was initially established in the state.
Depending on the term, that can be a very expensive proposition for a business if, for example, it has to file and pay for 15 years of back returns.
What action can a business take to address these types of state tax programs?
Businesses are well advised to become proactive and to have all of their state tax activities evaluated by a competent state tax consultant, especially knowing that increased nexus audit activity is being conducted by numerous states.
If the consultant determines that nexus exists and tax returns have not been filed, the best action to take on the taxpayer’s behalf is to minimize the exposure for prior years’ taxes, interest and penalties through use of a voluntary disclosure agreement. These agreements can be a valuable tool in resolving prior years’ outstanding state tax liabilities for unregistered businesses that have sufficient presence but have not filed state tax returns.
The benefits of voluntary disclosure agreements to the business include:
- Years open to statute because of unfiled tax returns are generally reduced from an unlimited period to a three- to four-year look-back period.
- Penalties for failure to file tax returns and failure to pay taxes are typically fully abated and waived, although interest continues to accrue.
Generally, the voluntary disclosure program is available to taxpayers who have not been in compliance with the state’s tax laws and who have not been previously contacted by the state department of revenue. Once the state has identified a taxpayer on its own, it is generally too late for the taxpayer to participate in this type of program.
Virtually all states are willing to work with most taxpayers in resolving their prior years’ tax liabilities in a settlement fair to both parties. Voluntary disclosure agreements are offered as a positive, money-saving option to resolve the taxpayer’s outstanding liabilities.
Timothy A. Dudek is a director of tax strategies at Kreischer Miller in Horsham, Pa., and chair of the firm’s State and Local Tax group. Reach him at (215) 441-4600 or email@example.com.
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A fundamental investing concept is that investors need to be compensated for taking on additional risk. However, investors often do not anticipate operational risks, and as a result, are often not compensated for them, says Todd E. Crouthamel, director, Audit & Accounting, at Kreischer Miller, Horsham, Pa.
“Operational risk can be difficult to price into the risk premium because human error is unpredictable,” says Crouthamel. “Therefore, many investors are left to assume that human errors will be prevented by the managers’ systems and controls, in order to rationalize hiring that manager. However, this is not always the case.”
Smart Business spoke with Crouthamel about how to differentiate between investment risk and operational risk.
What is investment risk?
Investment risk can be defined simply as the risk that the actual return on an investment will be lower than the investor’s expectations. Many investors are able to assess investment track records and investment models to decide if the potential rewards are worth the perceived risks in an investment. This type of risk is also readily measurable using various statistical measures, including:
- Alpha, the excess return of an investment relative to the return of the benchmark
- Beta, the measure of a volatility relative to the overall market
- R-squared, the measure that represents the percentage of an asset’s movement that can be explained by movements in the benchmark
- Standard deviation, the measure of the dispersion of data from its mean
- Sharpe ratio, which describes how much excess return is generated for extra volatility of holding an asset
What is operational risk?
The ratios described above are all built on certain assumptions, including that volatility equals risk. These ratios all derive risk measures based on quantitative factors; however, they do not consider qualitative factors, including the investment manager’s internal controls, design and implementation of its systems, and oversight of its employees. This is operational risk.
Human error makes operational risk unpredictable. Many investors may assume that human errors are prevented by the managers’ systems and controls, but that is not always the case. Consider the following situations:
- You hire Manager A to manage a large cap equity portfolio, and instead, Manager A finds better opportunities in the small caps and rationalizes investing your portfolio in small caps in the interest of earning you a better return. This guideline violation results in your portfolio being overweighted in small caps and minimizes your exposure to large caps.
- Manager B was recently examined by the Securities and Exchange Commission (SEC) and the SEC concluded that Manager B’s compliance program was wholly inadequate.
- Manager C has a trader with inappropriate access rights to override controls in the compliance system. The trader executes trades that are in violation of the investment guidelines and conceals these through the inappropriate access rights so these securities are not identified as investment guideline violations.
These examples are real. While some of these risks may be identified in the risk measures described previously, many go undetected until disaster strikes and losses pile up.
How can investors protect themselves from operational risk?
Elimination of operational risk is virtually impossible; however, it can be mitigated with some additional due diligence. Consider the following best practices:
- Review the Form ADV. If your investment manager is registered with the SEC, go to www.adviserinfo.sec.gov and read the adviser’s Form ADV, which consists of two parts. Part I provides details on the business, ownership, client base, employees, affiliations and disciplinary actions. Part II is a narrative that describes the services offered, fees, conflicts of interest and the backgrounds of management. Make sure that this information is consistent with what you already know about the adviser. If you are uncomfortable with any of the disclosures, make additional inquiries of the investment manager. If you are still not satisfied, consider another manager.
- Read the investment manager’s most recent SEC examination letter. The SEC conducts routine examinations of investment managers’ compliance systems and issues a letter detailing violations and enhancements that the investment manager should make. If your investment adviser is reluctant to share this letter with you, consider another manager who is more transparent.
- Make inquiries of the investment manager regarding its systems and internal controls surrounding compliance with investment guidelines. The compliance system should be automated, and overrides of transactions outside of the investment guidelines should require more than one sign off, preferably by someone who is independent of the trading and investment management process.
- Make inquiries of the investment manager regarding the financial strength of the company. An investment manager that is having financial difficulties may be more likely to take bigger risks.
- Read the investment manager’s report on internal controls. Many investment managers have a report that is prepared by an independent third party that tests various internal controls surrounding establishing new accounts, trading, reconciliation and accounting. This report generally details the testing performed and the results.
- If you are not confident in your ability to conduct operational due diligence, consider hiring a third party to conduct it on your behalf.
While these best practices may reduce your exposure to operational risks, there is no substitute for a healthy dose of skepticism. If an investment manager’s returns look too good to be true, they probably are.
TODD CROUTHAMEL is a director, Audit & Accounting, and a member of the Investment Industry group at Kreischer Miller. Reach him at (215) 441-4600 or firstname.lastname@example.org.
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When is the last time you reviewed your company’s buy-sell agreement? If you’re like the owners of many private companies, that document is sitting in a file collecting dust. The stagnant legal document is often viewed as something that you create and then put away, only looking at if a business partner dies, retires, gets sick or decides to leave.
But that is a big mistake, says Mario O. Vicari, director at Kreischer Miller in Horsham, Pa.
“The buy-sell agreement is a critical roadmap that outlines the economic terms and conditions of transactions between a company and its shareholders in case of a triggering event in a private company’s stock,” says Vicari. ”It essentially determines the market for the company’s stock among shareholders.”
The buy-sell agreement is a highly customized document that a company’s shareholders should intimately understand and should play an active role in crafting so that it reflects their collective intent.
Smart Business spoke with Vicari about how to execute an effective buy-sell agreement.
What is the purpose of a buy-sell agreement?
First, when structured properly, a buy-sell agreement reflects the intent and the bargain of shareholders relative to transactions in a private company’s stock. For this to occur, shareholders should participate in the crafting of the document and its provisions, and review it at least annually.
Second, the agreement protects the company by ensuring that its provisions do not present a set of economic circumstances that could jeopardize the company’s liquidity by requiring it to fund a transaction that was not planned for or properly structured. Important elements to consider are reasonable valuation and payment provisions.
Third, it protects the shareholders and their families by providing funding mechanisms through proper insurance coverage in the event of an untimely death of a shareholder. Finally, a properly structured and monitored agreement helps avoid shareholder disputes and litigation because the economic provisions are well understood and agreed to by all parties in advance of any triggering events, and the valuation is monitored annually.
What are the important triggering events that should be addressed in a buy-sell agreement?
There are five major triggering events that are normally addressed in a buy-sell agreement: death, disability, separation from employment, retirement and sale. It is important to note that each trigger could cause different terms and conditions in the agreement, such as length of payout or discount on valuation. For instance, a company can protect itself from an unanticipated liquidity event caused by an unplanned separation from the company by placing a discount on the valuation and/or longer payment terms on that transaction trigger.
There are two other common triggers — divorce and bankruptcy of a shareholder. In each of these cases, company stock could become part of a divorce or credit estate and the holder of those shares would have the same rights as the other shareholders. In order to avoid this type of situation, a well-designed agreement can prevent a shareholder from allowing shares to fall into someone else’s hands by requiring the shareholder to ‘put,’ or sell their shares back to the company in exchange for a note before the divorce or credit action is settled.
What are common mistakes that business owners make in these agreements?
The most common mistake is having a provision that the company’s value is to be determined by an outside appraiser in case of a triggering event. This causes problems on several fronts. First, when shareholders don’t understand the value of their shares within the agreement, they are often surprised when a trigger occurs. This sometimes leads to bad feelings, disputes or litigation. It also does not allow shareholders to properly plan their personal affairs.
Second, when an important variable in the agreement such as the value of the shares is not known, it is impossible to know whether other elements of the agreement are properly structured, such as the amount of life insurance to carry or whether the company can afford the payout provisions. A better strategy is for the shareholders, with the help of a valuation adviser, to develop a formula that is contained in the agreement that can be measured and quantified each year after the company’s financial statements are complete.
This allows shareholders to monitor the value for their sake, as well as the company’s, and to make sure that the valuation and payment provisions are reasonable in light of the company’s current financial position and cash flows.
Who should be involved in drafting a buy-sell agreement?
We think that balanced advice is very important. Certainly, all the shareholders should be active participants, as it is their company and their stock. We also think it is a good idea to include the company’s financial officer.
Outside advisers should include the company’s CPA, attorney and insurance counsel. If the company’s CPA does not have valuation expertise or credentials such as a CVA, then a valuation adviser may also be needed.
Mario O. Vicari is a director at Kreischer Miller, Horsham, Pa. Reach him at email@example.com or (215) 441-4600. Follow him on Twitter @mariovicari.
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Here’s a litmus test to determine whether your accounting firm is providing the level of service and expertise your business needs to grow and succeed. Ask yourself: Are you a better company today than you were a year ago?
“The right accounting firm will provide your business with proactive solutions, including tax saving, performance improvement and financing ideas,” says Stephen W. Christian, CPA, managing director, Kreischer Miller, Horsham, Pa. “When you partner with a true adviser, accounting services become an investment in your business’s future success.”
However, all firms are not the same, and you must choose wisely.
Smart Business spoke with Christian about how selecting the right firm can bring tangible results to your organization.
What is the significance of working with the right accounting firm?
The right accounting firm will support your business as a trusted adviser and serve as much more than a provider of tax services and financial statements. All firms can prepare financial statements and tax returns, but what else are you getting for your money?
Your accounting, tax and advisory services should be viewed as an investment rather than the cost of a commodity. The reality is that many organizations that have not utilized a sophisticated accounting firm do not realize what they are missing: business advice and strategy based on company goals. The right accounting firm visits your place of business, gets to know the operation inside and out and can provide you with valuable insight to make your organization stronger.
What should a business consider when looking for an accounting firm?
That depends on what you’re looking for in an accounting firm. If you want to hire a transactional provider focused on preparing tax returns and financial statements, and cost is a key factor in your decision, you’ll find plenty of firms that perform these basic services.
But if you’re looking for more — a relationship with an adviser who gets to know your organization and can advise you on critical business decisions — then you’ll need a high-value firm that focuses on comprehensive client service. You’ll benefit from a firm with a consultative approach.
So first, identify your needs: audit, tax, consulting, low-cost and value-added. Then, interview firms and select one based on your priorities.
How can a business identify potential firms?
Talk to your advisers and professionals who know your business, including lenders, lawyers and colleagues in trade associations. Ask them for referrals. Review accounting firms’ websites to see how the companies are represented. Do their priorities match with yours? Personally interview the team of professionals you are considering and not just the partners.
What type of value can a business realize when partnering with the right firm?
Your business will be stronger and in a better position to succeed by engaging the right firm. A good accounting firm can provide an outside perspective that will sharpen the performance of your organization.
An accounting firm works with many diverse companies, and experiences what works and what doesn’t. Communicating mistakes to avoid can steer your company toward success. And it can share best practices from successful companies and help you execute those ideas at your organization.
Also, a good accounting firm is proactive and solution based, providing an abundance of advice on such matters as financing, compensation and benefits strategies, and risk mitigation. In addition, the firm can provide meaningful benchmarks against other similar companies and share ideas on optimal tax structures, beneficial technology initiatives and succession issues.
What are the keys to selecting the right firm?
Now that you have determined your priorities, be sure the firm’s service offerings are compatible with your needs. The team of accountants should be passionate about serving you — and team is the operative word.
Many businesses are disappointed when they select a firm based on one individual who works there, then later learn that they will be working with other associates that are not comparable. Find out who will service your needs, and make sure you meet the other players serving you. And be sure you can gain access to the firm’s leadership and decision makers. This is a common complaint among businesses that are unhappy with their accounting firm relationships.
You want a firm that recognizes the importance of your time and a firm that is respected in the community and has a philosophy of personal development. The right firm is forward thinking, not just a score keeper. This firm will spend the time to get to know all aspects of your business and your industry.
What if a business is reluctant to cut ties with its current accounting firm?
First, ask yourself why you might be looking to make a change. Do you feel you are not getting the personal service you deserve? Is it difficult to reach the firm’s management? Do you want more from the firm that it is capable of providing?
Next, determine in an unemotional way which firm best fits your needs. Remember, this is an important business decision for your organization. You could consider maintaining your current firm for personal tax work while hiring a new firm for corporate work. And there are other creative ways to maintain the relationship if you must.
A firm that truly has your best interests at heart will partner with you to find a solution.
Stephen W. Christian, CPA, is the managing director of Kreischer Miller. Reach him at (215) 441-4600 or firstname.lastname@example.org.
Insights Accounting & Consulting is brought to you by Kreischer Miller
Proposed lease accounting rules could have a serious impact on businesses that have significant leasing activities.
A draft standard for lease accounting developed by the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) will affect any business that enters into a long-term lease and result in significant accounting changes for both lessees and lessors.
“There is a lot of controversy over this new draft standard for lease accounting,” says John Helmuth, a director in the Audit & Accounting group at Kreischer Miller, located in Horsham, Pa.
The current accounting guidance has been criticized for not requiring all lease commitments to be recorded on a company’s balance sheet, resulting in inconsistency for banks and other third parties that require a business’s financial statements. Under current standards, companies aren’t required to include operating lease commitments as liabilities on their balance sheet unless they meet certain criteria to be treated as capital leases, and some users of financial statements are seeking a more black-and-white approach.
Smart Business spoke with Helmuth about the proposed lease accounting rule changes, what businesses should know and how they can prepare for the impact that it may have on them.
How did the proposed lease changes come about?
Mainly, there has been feedback from users of financial statements, such as banks, that they are not getting a clear financial picture of a company’s leasing activities. Balance sheets don’t show the complete picture in some cases.
For example, companies are required to include capital leases on their balance sheets, but operating lease commitments are only included as a note disclosure to the financial statements. A company could be committed to paying a lease obligation, but that lease might not have been recorded on the balance sheet. Essentially, certain leasing activities could have been left off of the balance sheet, making the financial statements inconsistent with reality.
In reaction to this, the FASB and IASB created an exposure draft of proposed lease accounting changes. The proposed rules affect lessees and lessors, and there are significant changes for both parties. For now, there is still discussion, and a revised exposure draft is expected to be complete in the next several months.
How could the proposed changes impact businesses that lease space?
The new model would result in the elimination of off-balance-sheet lease financing for lessees. The proposed rules require that lessees record leasing arrangements based on a right-of-use model. Under that model, lessees would recognize an asset representing its right to use an underlying asset during the lease term and a liability representing its obligation to make lease payments during the lease term.
Additionally, there will be no distinction between operating and capital leases, and therefore, no ability for a lessee to leave a lease obligation off of the balance sheet. Depending on a company’s lease portfolio, this requirement could have a serious impact on the balance sheet.
For example, consider corporations that lease large facilities across the country. Under the new proposed guidance, these companies will be required to record assets (right-of-use) and liabilities to make lease payments. Interest expense will be recognized on the liability to make lease payments and the right-of-use asset will be amortized over the shorter of its estimated useful life or the lease term. It will change the income statement from a budgeting standpoint, because rent expense will be essentially replaced with interest and amortization expense.
Essentially, the proposed changes will result in assets and liabilities being ‘grossed up’ because all leasing transactions will be recognized on the balance sheet. This could deteriorate key leverage and capital ratios. Also, the proposed rules will require a system for gathering and tracking lease data, which could be extremely cumbersome.
How will lessors be affected by the proposed rules?
There are proposed changes to accounting by lessors also. The FASB and the IASB introduced the receivable and residual approach.
Under this approach, lessors would derecognize the underlying leased asset and initially measure the right to receive lease payments at the present value of the lease payments, along with a residual asset measured at the lease commencement. This model does not apply to short-term leases or leases of investment property.
How can businesses best prepare for these proposed lease accounting changes?
For now, the proposed lease accounting changes are still under debate. But it is prudent to consider how these rules will impact your business if they are put into effect tomorrow. How will this change your balance sheet? How could the rules impact budgeting?
Businesses of all sizes will see a definite difference in their financial statement presentation, so it’s important to get a handle on the lease commitments you currently have. Quantify those and project the potential financial impact on financial statements. And begin tracking and keeping careful lease records that will help you make business decisions about leases down the road. Now is the time to discuss with your banker any debt facilities that require financial covenants that could be revised based on lease accounting changes.
And businesses should consult with a trusted accounting adviser, who will help them implement any processes. An experienced accountant will guide you through these lease accounting changes and make recommendations to ease the process.
John Helmuth is a director in the Audit & Accounting group at Kreischer Miller, located in Horsham, Pa. Reach him at (215) 441-4600 or email@example.com.
Insights Accounting & Consulting is brought to you by Kreischer Miller
Businesses that thrive in today’s competitive marketplace recognize that the data they collect on a daily basis can be a valuable asset.
But just collecting data isn’t enough. It’s critical to organize this business intelligence so that it is accessible and can be analyzed to improve an organization’s performance by driving innovation, spurring fresh ideas and giving managers the tools to make smarter business decisions, says Sassan Hejazi, director of the Technology Solutions Group at Kreischer Miller.
“Having the ability to analyze data and use it as a benchmarking tool internally and against competitors can change the culture and character of an organization,” says Hejazi.
Smart Business spoke with Hejazi about how to centralize business intelligence and how that data can be harvested and used to make key business decisions.
How can data be valued as assets in today’s business environment?
Companies are capturing valuable data in numerous ways — from clients who make online purchases, from sales calls and even through daily business practices.
Consider the volume of electronic documents that your business creates and files away each day. Now, ask yourself, ‘Is this information easily accessible?’ Businesses collect enormous amounts of data that are tucked away, often in disparate locations, during the regular course of business. However, all of this collected data is not effective if it cannot be accessed and analyzed and acted upon.
More businesses are working toward going paperless and storing their data in a centralized repository versus in file folders and boxes. When data is uniformly formatted and accessible on a centralized system, the business intelligence that can be gained is incredibly valuable. Businesses should aim to implement systems that allow them to harvest this data so they can make better decisions.
What are some common missteps that businesses make with collecting and accessing data?
Often, companies need to capture data quickly, so they settle for a quick fix. For example, a salesperson visiting with a potential client transfers information into an Excel document, then presses ‘save’ on his tablet. Another member of the sales team gathers information from a phone call and enters it into a spreadsheet on his desktop computer.
There are countless pieces of disparate data floating around that don’t connect; therefore, the information cannot be linked, harvested and analyzed to make business decisions. The answer to this problem is to centralize all data so that managers in your organization can build reports and analyses of this data, making decisions based on the whole picture.
What are the first steps to centralizing data so they become uniform and accessible?
The first order of business is to design a data collection system and decide how that data will be managed. That is called creating a data map, a system of how data will be merged, uniformly formatted and accessed within an organization.
This requires an understanding of what data currently exist by taking an inventory of an organization’s data assets. Then, a plan is configured to migrate toward an integrated data management system.
This process requires a multidisciplinary approach involving business process owners and technology staff. These players must all work together to ensure that the data map addresses the business and technology objectives of the company.
From there, information systems can be designed to add capabilities for allowing a business to capture data in a more integrated fashion. With this, a company is in a position to maximize its technology investment and use reporting tools to gain a competitive advantage.
What is the best way to present data to managers so they can use them to make key business decisions?
Once a centralized data system is in place, a business can implement dashboards, which are the most effective way to present all of this collected data to managers and other stakeholders. Dashboards are displays that can appear in different user-friendly formats, such as a speedometer or graph.
Dashboards are the new way to report information because they can capture and analyze selected data. They are able to give managers a picture of what’s going on inside and outside of the organization. Dashboards create a link between day-to-day activities in the business and long-term goals, plans and objectives. And, they’re simple to view on a computer screen and understand.
How can companies harvest data for a competitive advantage?
Data can lend insight into opportunities and risks. For example, a sales and marketing team can use collected data to benchmark performance against targeted sales goals. The team members can learn from high performers and track sales trends. Access to sales data can change the culture of sales management in an organization.
The same goes for operations. Operations managers can understand where bottlenecks, as well as efficiencies, exist in their processes and then compare those to industry benchmarks. This gives a business the spirit of continuous improvement.
Having data at your fingertips to analyze and compare how you stack up against the competition can aid in evolving your company’s culture, better managing risks and moving it toward being a more performance-oriented organization.
Sassan Hejazi is director of the Technology Solutions Group at Kreischer Miller. Reach him at (215) 441-4600 or firstname.lastname@example.org.
Businesses today face more competition than ever, driving them to go beyond their own backyards and look globally for ways to capture market share and meet the needs of customers. Whether doing business at home or abroad, many of the challenges businesses face remain the same — turning a profit, delivering value to shareholders and satisfying customers, says Robert Olszewski, a director in the Audit & Accounting Group at Kreischer Miller, located in Horsham, Pa.
“Beyond those basic goals of running a business, customer demands have become more persistent, with heightened expectations from markets that companies can potentially serve,” says Olszewski. “The good news is that significant advances in technology during the last two decades have provided the tools that businesses need to grow their presence internationally. Companies that take advantage of these resources and think beyond geographic borders can capture market opportunities outside the U.S. The business world has become a flat playing field, and companies have developed strategies to adapt to an ever-changing world that may present expansion across the globe.”
Smart Business spoke with Olszewski about the advantages of going global and how a business can prepare to compete in the international marketplace.
What benefits can businesses realize when they go global?
International expansion can provide an opportunity to deliver new products or services to a previously unexplored market. Making this possible are technological advances that have enabled companies to operate efficiently across international boundaries at spending levels that were previously insurmountable.
Global expansion continues to extend beyond sophisticated overseas markets. Companies have benefited from expanding into newly industrializing countries such as Korea, providing an additional stimulus to international business activities. By going global, companies can take advantage of an enhanced supply chain network of facilities and distribution centers that expedite the delivery of goods. There are tightened demands with respect to procurement, manufacturing materials into intermediate and finished products, and product distribution to consumers. Global expansion may give companies geographic leverage by having production facilities, distribution centers and sourcing points that may drive efficiency and promote success.
How can a business prepare to expand its operation for global business?
Before simply jumping into the pool, it’s a good idea to test the waters and determine whether global expansion is truly an option for your company. Companies that have effectively integrated into global markets must have a well-designed strategic plan, which involves market research and analysis of those results. It requires establishing a first-year operating budget and developing a support structure to accommodate anticipated growth.
The plan should also prepare the company for expansion, answering the question of what is next. The creation of a plan will serve as your roadmap, albeit one that is reviewed often and revised as needed. The main goal of your strategic plan for going global is to identify the right mix of domestic and international operations, and the sequence of expansion into varying markets.
Ultimately, success at the international level requires a broad awareness of the local environment. The company and its leadership should be flexible and prepared to adapt to change quickly. By identifying the risks and opportunities of expansion in advance, a company can make smart tactical decisions while implementing its strategic plan.
What are some common mistakes companies make when doing business globally?
The most common mistake is not playing by the rules. Corporate policies must be appropriate and comply with conditions in the countries in which a global expansion occurs. Simply put, a one-size-fits-all approach will not work. Companies involved in international markets must be aware of government regulations and pay careful attention to these when conducting business.
This can be difficult without a well-established management team that possesses an understanding of the requirements. It’s a good idea to enlist the help of a third party who has expertise in international business and who can steer your company in the right direction as the strategic plan is implemented.
It’s also important to recognize that international trade and financing have grown at a rapid pace. Companies are buying, selling and making financing decisions across borders. As a result, businesses must formulate policies for managing cash flow in foreign currencies that must be updated and monitored as relevant information becomes available.
Finally, companies must carefully manage human resources if they want to succeed in the international market. Again, since no two companies operate the same way, how HR issues are handled will depend on the organization.
What advice would you give to companies that are considering entering the global business marketplace?
First and foremost, global expansion is not meant for everyone. The U.S. is blessed with a significant population, high gross domestic product, large median income and a limited language barrier.
For the majority of companies that fail with global expansion, the reason is not a substandard product or service. Instead, they fail because of poor advanced planning, refusing to understand the local environments and investing funds without regard for the anticipated return. That is why careful analysis and planning are critical first steps to expanding business globally.
Consult with trusted advisers as your strategy is developed to ensure that the company stays on course for success.
Robert Olszewski is a director in the Audit & Accounting Group at Kreischer Miller in Horsham, Pa. Reach him at (215) 441-4600 or email@example.com.
Many businesses that put hiring on hold during the recession are now prepared to retool their top talent. Organizations that are prospering in what is the new economy recognize that a sharp, experienced team is critical to success.
“Companies are looking for opportunities to take their businesses to the next level, and that includes upgrading executive talent,” says Tyler Ridgeway, director for the Human Capital Resources Group at Kreischer Miller. “They are evaluating their key players. Who are the executives they can’t afford to lose, and who are the ‘B’ and C’ players that they can upgrade?”
Leading executives have also been affected by persistently high unemployment rates. There are plenty of experienced leaders who are in transition. Some have sold their companies and haven’t yet settled into their next business role. Others left corporations to seek different work cultures.
So the good news for companies positioned to hire executives is that the crop of talent is rich, and those people, too, are looking for the right match.
“They want work that has meaning,” says Ridgeway. “They want to make an impact on a company’s future success.”
Smart Business spoke with Ridgeway about what top executives are seeking in a position, and how companies can implement creative strategies to attract top-notch talent.
What do top executives in transition seek in a new leadership position today?
The game has changed in the last five years, and executives are focused on much more than compensation. They are equally interested in a company’s vision and the ethics of its management team.
They’re looking for inspirational leadership, a strong moral compass. They want to make a difference and they want to make an impact on the company’s growth. We’re also seeing executives potentially take lateral compensation roles if adequate bonuses and incentive compensation are negotiated. Executives for hire are looking closely at companies to be sure they can present a compelling strategy and platform for growth.
How does a company attract interest from experienced top talent?
Companies that have success recruiting the best executive talent use creative strategies to build a strong applicant pool before making their selection. First, reach out to the trusted advisers who know your company best. This includes retained search consultants, bankers, accountants, attorneys and other members of an advisory board.
Talk to these individuals about potential gaps in your business: What expertise is lacking? What functions in the business require more attention or oversight? Essentially, what are those missing pieces? These discussions can help you seriously consider what job functions new talent could fill.
At the same time, tap into social media and utilize resources such as LinkedIn to grow your connections. Social media is not only helpful for finding talent but for getting referrals and accelerating the interview process. Tools such as LinkedIn allow you to develop more trust in candidates and can help you gain a deeper understanding of their experience and their connections.
How has the interview process changed?
The interview process in this market has stretched into a longer course. In some cases, the process slows because of business issues that must first be addressed. However, companies also recognize the ramifications of hiring the wrong person. They want to get it right the first time, so there is greater scrutiny and more screening involved.
For instance, a business might ask a candidate applying for a chief financial officer position to write a business plan for what he or she aims to accomplish in the first six months of employment.
Another option some businesses explore is hiring interim executives to fill roles, often with the potential of transitioning into a salaried, full-time position at the company.
How can hiring an interim executive benefit a business looking to fill gaps?
Interim assignments are a very effective mechanism for companies that want to attract solid talent, and the type of positions that can be filled on a temporary basis extends beyond the accounting functions that were once typical. Now, companies are posting interim assignments in the areas of finance, technology, operations and marketing.
The way these arrangements often work is that a business owner hires an executive to manage a specific project. By bringing the person inside, the owner gains a sense of how the executive performs. Does this person mesh with the company culture? In some cases, a project expands into an open position, and the owner can feel confident hiring an executive who has been tested.
The challenge with this type of employment is that you are limiting your pool of candidates largely to those who are not currently employed. But the benefits of an interim hire include the ability to fully realize what skill gaps the company needs to fill and to potentially reduce the hiring cycle.
The key to attaining top talent in today’s market is to think beyond traditional hiring means and keep your options open. Connect with trusted advisers and use tools such as social media to help validate decisions.
Tyler Ridgeway is director of the Human Capital Resources Group at Kreischer Miller. Reach him at firstname.lastname@example.org or (215) 441-4600.
Nexus is a Latin word for a common tie or a connection, and, in today’s business environment, it is also a key term in determining the tax jurisdiction that applies to state business taxes.
Because of the interconnected nature of our economy today, the discussion of state tax nexus has clear implications for many business owners. They often find themselves operating in multistate environments but may lack the expertise and the means to limit their tax liability and audit risk.
And as a result of that lack of technical expertise, business owners may find themselves stymied by a state tax nexus questionnaire, says Timothy A. Dudek, a director of tax strategies at Kreischer Miller in Horsham, Pa., and chair of the firm’s State and Local Tax group.
“Nexus questionnaires are not to be taken lightly,” says Dudek. “Incorrect responses on the company’s part to what can be very confusing questions — questions that prompt only yes or no answers — may give rise to unsuspecting and irreversible results. This, then, leads to being subject to the multitude of taxes within each jurisdiction.”
Smart Business spoke with Dudek about how to approach a nexus questionnaire and how to proceed should your business receive one.
Why would a business receive a nexus questionnaire?
In the current economic landscape, more and more states are feeling the impact of the budget crunch. In an effort to increase revenue, states are sending nexus questionnaires to out-of-state businesses that they suspect may be underreporting and underpaying taxes in their jurisdiction. Choosing to ignore these questionnaires may be dangerous for a business, as these states may take steps to impose arbitrary assessments and force companies to then defend themselves, ultimately resulting in a lot of professional fee expense for the business.
How do state and local taxing jurisdictions obtain their mailing list of companies to target?
It’s not too difficult to reason how they get the names of companies that may be liable for some type of tax liability within their jurisdiction. State auditors research potential business links such as customs reports, FAA logs, boating registries and realty transfer transactions.
Other revenue officials may roam trade shows and business centers, peruse telephone directories and websites and watch bridge crossings to target companies whose names are not already listed on the state database. Advanced technology allows for interdepartmental inquiries within each given state, with wage tax systems interacting with corporate tax systems.
Lastly, because of state tax compacts (information sharing agreements) signed among a number of neighboring states, the audit of one company leads to information about another company, and so on.
What types of taxes are subject to these inquiries?
While the list of taxes that are subject to these inquiries would be beyond the purview of this article, it’s essentially any tax or fee that can be imposed under that state’s taxing ordinance. This would encompass everything from corporate income and franchise taxes to unclaimed property reporting to sales and use taxes to wage taxes.
What danger do these questionnaires pose to businesses that are not familiar with them?
The answer is twofold. First, a company needs to understand the concept of nexus, which is defined differently for the different types of taxes involved. Companies may or may not be subject to state taxes based on a variety of state tax concepts, such as physical presence, constitutional nexus, economic nexus, affiliate nexus, agency nexus, or Public Law 86-272, which addresses the circumstances under which a multistate business may owe state income taxes.
Second, the questions asked on the nexus questionnaire can be quite broad in nature. A company may think that the response to a particular question should be a simple ‘yes.’ However, a more accurate answer may be, ‘Yes, except for … ’ In other words, if a company answers ‘yes’ to a particular question without providing further explanation of that answer, it becomes easier for the state to conclude that the company has nexus. Being able to provide a further explanation may provide a solid basis for concluding that the company does not have nexus.
Because of that it is a very good idea for companies to review their answers with their state tax professional before returning the questionnaire to the state. Once submitted to the state, it becomes extremely difficult to retract answers that were originally given in good faith but that were incorrectly submitted.
What other factors should companies be aware of regarding nexus questionnaires?
Companies should continuously assess their operations in any state or local jurisdiction where they do business. If you find that you have established state tax nexus, the law requires you to register in those jurisdictions and begin paying taxes.
However, before you register, if there is a possibility that state tax liabilities may have existed for your business in earlier years, first talk to a state tax professional about your options. There may be voluntary disclosure, amnesty or exemption programs that your business can utilize to resolve its tax requirements.
Timothy A. Dudek is a director of tax strategies at Kreischer Miller in Horsham, Pa., and chair of the firm’s State and Local Tax group. Reach him at (215) 441-4600 or email@example.com.
Recovery from the economic recession has been gradual and has changed the banking environment. The financial industry took a major hit, and the result has been increased regulation, stricter lending policies and a number of mergers and acquisitions that have left the banking landscape forever altered.
After riding out the storm, the financial industry today is cautiously optimistic. While lenders continue to be risk-averse, they are also strengthening their balance sheets by building capital, thereby creating available funds to loan to potential borrowers. Business owners are in a position to take advantage of historically low interest rates and develop relationships with the competitive banks that want to earn their business, says John Helmuth, a director in the Audit & Accounting Group at Kreischer Miller, Horsham, Pa.
“Banks are recovering and getting stronger, and that is good news for businesses,” says Helmuth.
Smart Business spoke with Helmuth about the challenges facing the financial industry and how smart business owners can capture opportunity in today’s banking environment.
What key challenges are banks facing?
The economies in the United States and overseas are impacting financial institutions and affecting their ability to grant loans to individuals and businesses of all sizes.
Banks are no different than other businesses that have experienced financial hardship during the last few years. We are witnessing a very slow recovery from the recession, and, while the credit environment is improving, financial institutions are still acting conservatively as they adhere to increased regulation.
In addition, some banks have experienced significant credit losses, particularly in residential and commercial real estate, which contributed to the significant financial collapse that occurred in the recent past. There are also additional credit losses resulting from loans that were perhaps too risky or aggressive.
Meanwhile, banks are dealing with a deterioration of collateral values if they have loans or financing that is tied to the value of an asset, particularly in real estate or in capital expenses such as equipment for companies in manufacturing. Because asset values have decreased, financial institutions are faced with more frequent and independent appraisals of those assets.
Revenue growth for financial institutions has also been a challenge, as many banks have reduced the number of loans that they grant and are taking a stricter approach to lending. That results in reduced income from interest. And because of today’s historically low interest rates, banks are not recovering as much through interest income for those loans outstanding.
What major impact do business owners feel from a challenged banking environment?
While there are opportunities for strong businesses to obtain loans, banking industry regulation has led to stricter credit approval processes. So, borrowers might find it more challenging to obtain financing at the levels needed to run or grow their businesses.
But the good news is, with more aggressive competition among banks, financial institutions are actively looking for good customers — business clients that are poised to grow and that need additional credit to make capital investments. With many banks sporting stronger balance sheets, coupled with low interest rates, now is a great time for businesses to take advantage of the current banking environment and the products that financial institutions have to offer.
Will those low interest rates be increasing soon?
We don’t see any signs of interest rates increasing because recovery from the recession has been very slow. By maintaining these historically low interest rates, the goal is to avoid slipping into another recession.
And so far, it’s working. With rates so low, businesses that are in a position to secure financing can really leverage their credit dollars and get more for their money.
What direction can you provide business owners in light of today’s economy and the state of the financing industry?
Business owners should communicate openly and often with their bankers. Share both the good news and the bad. Tell the story — what challenges the business faced, what the business did to overcome those obstacles and what the plan is for the future.
Now more than ever, banks are looking beyond the numbers. So many businesses in all industries experienced losses over the past few years. There’s more to a credit decision today than the balance sheet and operating results, although these are still of significant importance.
Banks that have developed strong relationships with business owners want to maintain those relationships. And this is especially true as financial institutions continue to merge and organizations work to retain their customers.
John Helmuth is a director in the Audit & Accounting Group at Kreischer Miller, Horsham, Pa. Reach him at (215) 241-4600 or firstname.lastname@example.org.
Nearly every business function can be outsourced, and today more companies are exploring ways to delegate tasks to professionals outside of their organizations as they seek ways to reduce their fixed costs.
“During the most recent recession, companies felt the pain resulting from a lack of focus on cost containment. As in most recessions, the knee-jerk reaction was to aggressively reduce personnel costs,” says Christopher Meshginpoosh, director-in-charge of the Audit & Accounting Group at Kreischer Miller, Horsham, Pa.
Now, with leaner work forces and the pressure to do more with less, businesses need the flexibility to scale their businesses as demand returns, but they don’t necessarily want to increase their payrolls. As a result, many companies are looking to outsource a wide range of business processes.
The good news is that, as a result of maturation of the outsourcing market and vast technological improvements, there are virtually no limits to what a company can outsource. Gone are the days of simply passing off payroll activities to third-party firms. Today, entire departments can be outsourced.
“In the quest to remain competitive, a lot of companies are devoting their time and energy to the processes they can manage most efficiently and effectively in house,” says Meshginpoosh. “And many of the remaining processes can be outsourced.”
Smart Business spoke with Meshginpoosh about opportunities to outsource business processes and how this can benefit companies.
What business functions can companies outsource?
Over the last decade, the breadth of activities that can be outsourced has expanded dramatically. Today, there are very few functions that cannot be outsourced. Rather than just outsourcing payroll, companies might choose to outsource their entire human resource functions. Or, rather than just outsourcing distribution, companies might outsource large portions of their supply chain management to third-party firms with deep supply chain and logistics capabilities.
More recently, the trend is to outsource large pieces of business to a single service provider rather than assigning processes to a large pool of different service providers. By dealing with one provider, companies can minimize the time and energy associated with the management of multiple vendors.
What are the benefits of letting go of some of these tasks?
One of the most significant, tangible economic benefits is the ability to turn a fixed cost into a variable cost. While a company might surrender a portion of profits during peak periods of activity, it can dramatically reduce the negative impact during slower periods.
Perhaps more important is the less tangible benefit that results from allowing the company to focus more closely on the areas that create a competitive advantage for it. For example, if a company’s competitive advantage centers on the unique products it delivers to customers, outsourcing activities such as logistics, warehousing and fulfillment might allow managers to spend more time focusing on product development, preserving the company’s competitive advantage.
What are the first steps a company should take before outsourcing?
First, a company must truly understand where it creates value. What are the key aspects that differentiate it from its competitors? Also, companies must be careful to avoid outsourcing activities in which the risks outweigh the potential benefits.
Another question to ask is how essential the activity is to the business. How does it impact customers and critical employees? Is the function one of the company’s core competencies? Does performing the activity require deep knowledge or expertise that is only held by company employees?
How can a company reduce risk when delegating business tasks to a third party?
First, ensure that the third party is financially strong and that it has the infrastructure, systems and personnel necessary to support the activities that will be outsourced. Additionally, determine whether outsourced activities will be performed on site or at the vendor’s locations, and consider the potential impact on customers, personnel and other business processes. It’s also important to ask for references and find out what other companies have to say about the potential vendor.
Additionally, many outsourcing companies have annual examinations of internal controls formerly referred to as SAS 70 reports, which can provide insight into potential issues related to specific vendors. Obtaining and analyzing these reports during the planning and vendor selection process can help identify processes that the company should retain, as well as help weed out potential vendors.
How can a company find a reputable outsourcing firm?
A good place to start is your accounting firm, because it most likely has had experience with many clients who have had successes and failures with outsourcing initiatives. This experience can be incredibly valuable to management teams and owners as they try to separate critical from noncritical functions and assess risks resulting from outsourcing business processes, as well as analyze the potential economic impact associated with outsourcing.
By ensuring that they leverage this experience in the decision-making process, companies can maximize the probability of success with outsourcing initiatives.
Christopher Meshginpoosh is the director-in-charge of the Audit & Accounting Group at Kreisher Miller, Horsham, Pa. Reach him at email@example.com or (215) 441-4600.
A business’s continued success is most fundamentally determined by its reputation in the marketplace.
And in today’s environment, in which scandals seem to occur on a daily basis, people often think of reputation only in terms of integrity or ethics. But it is much more than that, says John F. Schlechter, director, Auditing & Accounting at Kreischer Miller.
“Certainly being ethical in business practices is critical, but reputation includes such things as leadership and vision, quality of products or services, the workplace environment, financial results and corporate citizenship, to name just a few,” says Schlechter. “The challenge is to balance all of these elements in a way that produces a reputation that leads to a successful business.”
Smart Business spoke with Schlechter about how to build your corporate reputation — and how to protect your good name.
What are some keys to building a company’s corporate reputation?
A company’s reputation is most significantly impacted by its management team, which is responsible for developing and nurturing the company’s vision or mission. The tone is set at the top.
Many companies have well-thought-out and articulated mission statements, codes of conduct and business practices. Employees are indoctrinated in these practices through training sessions, and a company’s hallways are filled with constant reminders of key components of the company’s mission. But the single most important factor in building a company culture is how management models it on a daily basis. Management must walk the talk. When management leads by example, employees get the message that mission, codes of conduct and treatment of the customer are important and they must follow if they want to be successful in the organization. A strong corporate culture develops, which ultimately leads to a positive reputation in the marketplace.
Fundamental to building a corporate reputation is providing quality products and services. Branding and marketing efforts, while they might help to create a corporate image, do not build reputation. You can have the world’s greatest marketing campaign, but if you do not produce quality products and services, you will not create a sustainable business. The focus on quality is paramount to a sustainable customer base. Other shortcomings may be overlooked if people love your product.
How can the work environment contribute to reputation?
The workplace is an important aspect of creating reputation. Organizations known for having a great working environment have no trouble attracting quality people. Quality people, typically, help produce quality products and services. If people are challenged, treated respectfully and properly rewarded for their efforts, they have a positive view of the organization, which affects how they work and how they talk about their employer in the community.
If you have sound leadership, quality products and good people, financial results will typically follow. Solid financial results are, obviously, an important indicator of the success of the business, which enhances the public’s image of the company.
Dealing fairly with suppliers, i.e., paying a fair price for the vendor deliverable, and paying bills on time are also important contributors to corporate reputation. Financial results at the expense of the business’s supply chain can create another kind of reputation.
How else can a company enhance its reputation?
Getting involved in the community by participating on nonprofit boards, sponsoring community events, or making charitable donations is another key element of creating corporate reputation, but these things must be done out of a genuine desire to contribute. Being self promotional in such endeavors can lead to less-than-desired results. Having a keen interest in the project and enjoying the participation is the key to corporate citizenship.
How do you maintain your reputation once you have earned it?
Corporate reputation takes years of cultivation, but it can be destroyed in an instant. A lapse in judgment, an uncontrollable event, a misspoken word, a bad product batch, or even a simple misunderstanding can suddenly impair the best of reputations.
Particularly in this technological age, when information flies around the Internet at unfathomable speed, businesses need to be vigilant about their good name. However, even with the utmost diligence, high-profile events can occur that are outside the business’s control. In these situations, it becomes important to deal with the issues as quickly as possible. Speed can only be a mistake if the response is made before there is a full understanding of what has occurred and what all the implications may be.
How should a business respond to a reputational crisis?
A business does not want to have to make continual responses or modifications to initial responses unless it is a fluid situation and the circumstances warrant a continual dialogue with the marketplace. As with most problems, the quicker a problem can be dealt with, the quicker the healing can begin.
Taking responsibility for a mistake is also an important element in responding to a problem. Most people are more forgiving of businesses that acknowledge their mistakes and fix them than they are of those that either try to cover them up, or make excuses as to why the mistake happened. Taking responsibility and fixing it as fast as possible are measures that go a long way to preserving corporate reputation, or at least minimizing the damage.
A strong reputation is fundamental to successful businesses. Build your reputation with great care, and closely monitor and guard it once it is established.
John Schlechter is a director in the Audit & Accounting Group at Kreischer Miller, Horsham, Pa. Reach him at (215) 441-4600 or firstname.lastname@example.org.
Private companies that create value have five things in common: They have a strong culture, a specific strategy, clarity in their business model, quality people and they meet certain financial markers that indicate whether the organization is successful, says Mario Vicari, director in the Audit & Accounting Group at Kreischer Miller, Horsham, Pa.
“Decisions about who you are as a company, how you compete, your market position, how you organize your business model and the quality of your team are key factors in creating value for private companies,” says Vicari.
Smart Business spoke with Vicari about how these factors drive value and how private firms can position themselves to attract and retain capital.
How does a company’s culture impact its value?
Every company’s view of its culture is different, but ultimately, key leaders should answer these questions: What are you passionate about? What makes you different from other companies that provide similar products or services? What really matters to you at the end of the day? And, how do you make your core beliefs clear to employees? In essence, how do you walk the talk?
Culture and core values set the foundation of the firm and drive high-level decision making. Without knowing who you are and why you exist, a company lacks direction and has a difficult time gaining buy-in from stakeholders, including employees, vendors, clients and end-users. Before you can build a company, you must know what you believe in and who you are.
The highest-performing companies have this written down, and communicate it and live it with their employees. A strong culture is what binds the company together and makes it unique.
Where does a company’s strategy come into play?
A business must know its position in the market and how it can best serve the right customers. How will you compete in the market? What is the definition of a perfect customer for your business? How will you differentiate your company from others in your space? Will you compete based on price or value?
A company’s strategy is often linked to its history and has to do with its core strengths. Identifying what you are really good at and focusing on markets that play to your strengths are critical. Also, the best companies are crystal clear about the definition of an ‘A’ customer and focus like a laser on that target customer. Part of determining positioning is to identify the specific markets and customers you will serve.
It is important to be discriminating in making these choices. The best companies know that they can’t be all things to all people.
Why is the business model important?
The business model represents the way the company organizes itself to fulfill its strategy. Ultimately, a business model answers the question, ‘How will you uniquely fulfill the promise of delivering value to the marketplace?’
It is about how the company organizes itself to execute its strategy. Do you fulfill the promise of what your culture says you should be doing, and how do you fulfill the promise you make to your customers? Once you know who you are and how you will compete, the business model outlines how your people and processes will achieve company objectives.
A business model is the coordination of activities within the business that addresses how you will go to market and deliver value to the customer.
How does a company get its people on board with the culture, strategy and business model?
Behind every strong organization is a group of talented leaders — a team. Often, private companies that don’t grow are hampered because the CEO is the smartest person in the room; they don’t hire people who are better than themselves.
In the best companies, CEOs surround themselves with very high-level skills in critical parts of the company and allow these people to lead. Companies that create value are constantly assessing whether they have the right people in the right positions in the company, and whether each person is delivering his or her maximum potential.
Strong company executives make tough decisions when people aren’t performing. A business cannot execute plans without really strong people, and great companies are not afraid to make a change if key people are not measuring up.
What financial metrics indicate that a private company is creating value?
Ultimately, margins and cash flow drive value. These metrics indicate whether a company has strength in pricing and whether it is managed efficiently. If good margins and returns on sales are produced, the cost structure is solid and the business is likely in a niche where it can compete on a value proposition and not solely on price.
Other metrics that are important reflect efficient allocation of capital — return on equity and return on assets. The best companies can do more with less, and they are careful about allocating capital to get the highest returns on their assets and equity.
Capital is scarce and hard to create in private companies, which is why it is so valuable. The private companies that create the most value are discriminating in their capital allocation decisions.
Mario Vicari is a director in the Audit & Accounting Group at Kreischer Miller, Horsham, Pa. Reach him at (215) 441-4600 or email@example.com.
It has been touted as the most significant financial reform since Franklin D. Roosevelt’s New Deal.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, created in response to the financial crisis of the last few years, was signed into law almost one year ago. While not all of its 387 rules have been adopted, the scope of reform will affect investment advisers, investors, business owners, management and the public for years to come.
According to Todd Crouthamel, a director, Audit & Accounting, and a member of the Investment Industry group at Kreischer Miller, Securities and Exchange Commission chairman Mary Schapiro said, “The purpose of the legislation is to create a more effective regulatory structure, fill regulatory gaps, bring greater public transparency and market accountability to the financial system, and give investors protections and input into corporate governance.”
“By the time it is fully adopted, the Dodd-Frank Act will impact virtually every aspect of our financial lives,” says Crouthamel. “The task is enormous, with 145 rules scheduled for adoption in the third and fourth quarters of 2011, plus 30 that are behind schedule.”
Smart Business spoke with Crouthamel about the impact of this legislation on private fund investors and investment advisers.
How will this legislation impact private fund investors?
The Dodd-Frank Act increases the net worth and investments under management requirements for an individual to qualify to invest in private funds. The rules exclude the value of an investor’s primary residence in determining net worth, and this will likely prohibit more investors from investing in private funds. SEC registration is also a significant issue. Many private fund advisers, who were previously not required to register with the SEC, will likely be required to register. This increased oversight may result in additional protections for the private fund investors; however, these protections will not be free. Private fund advisers are going to incur significantly more administrative costs in complying with the SEC requirements, and some of those costs may be passed along to investors.
What effect does the legislation have on SEC oversight of investment advisers?
The debate continues as to who should have regulatory oversight over registered investment advisers. The SEC is overburdened and the number of exams that it can complete is relatively small in relation to the number of advisers. As such, advisers with assets under management of $100 million or less are required to deregister with the SEC and to register with their state agencies.
The Dodd-Frank Act called for a study on enhancing adviser examinations. In January 2011, the SEC’s Division of Investment Management reported the results of its analysis and recommended that Congress consider one, or a combination of, three approaches to strengthen the SEC investment advisers’ examination program. First, it suggests authorizing the SEC to impose user fees on SEC-registered advisers to fund examinations. Second, it proposes authorizing one or more Self-Regulating Organizations to examine SEC-registered advisers. Finally, it recommends authorizing the Financial Industry Regulatory Authority to examine dual registrants for compliance under the Advisers Act. This could result in a political battle between the rules-based system by which broker/dealers are governed and the principles-based system governing registered advisers.
How does the Dodd-Frank legislation impact public company compensation disclosures?
In January 2011, the SEC adopted rules regarding shareholder approval of executive compensation and golden parachute compensation agreements. New rules also require additional disclosure and voting regarding golden parachute compensation agreements with certain executive officers in connection with merger transactions. All of these required votes under the new rules are nonbinding; differences between investors’ recommendations and actions taken by boards of directors could embarrass a company and lead to directors not being re-elected.
Finally, the proposed rules include provisions that require institutional advisers to report their say on pay votes. This provision has not yet been adopted, but it will certainly increase advisers’ administrative costs.
What widespread financial reform is also included in this legislation?
The Dodd-Frank Act extends to credit rating agencies, which were at the center of the recent financial crisis. As a result, Dodd-Frank includes provisions designed to improve the integrity of these credit ratings, including requiring many of the agencies to submit an annual report regarding their internal controls governing the implementation and adherence to procedures and methodologies for determining credit ratings.
There are also new whistleblower rules that provide increased incentives to individuals who voluntarily provide the SEC with original information about a securities law violation, which leads to successful enforcement by the SEC, with sanctions of greater than $1 million.
What can be expected going forward?
Because so much of the Dodd-Frank Act has not been finalized, it is difficult to determine what all of the final regulations will look like. For investment advisers, the challenge will be to stay current with new regulations and to ensure the firm’s policies and procedures reflect the new regulations. For investors, the challenge will be to decipher additional reporting requirements and follow who will ultimately be responsible for oversight of the investors’ advisers. Keeping a watchful eye over the coming months will be critical for advisers and investors alike to ensure they understand the latest developments and how they will be affected.
Todd Crouthamel is a director, Audit & Accounting, and a member of the Investment Industry group at Kreischer Miller. Reach him at firstname.lastname@example.org or (215) 441-4600.
As the supply chain evolves in today’s demand-driven environment, where end users “want it yesterday,” all players in the chain must collaborate to meet customer expectations. Businesses must foster relationships to thrive by listening to what customers value, understanding common goals and designing mutually agreed-upon expectations.
The lesson that all companies can learn from today’s changing supply chain is that despite technology, nothing beats knowing the customer, says Robert S. Olszewski, director-in-charge of the distribution industry group at Kreischer Miller, a certified public accounting firm located in Horsham, Pa.
“There is an art to supply chain management; painting a picture that connects a network of interrelated businesses to provide products or services required by the customer,” says Olszewski. “Customers need to know that the suppliers of their products or services have their best interests at heart; that’s a tremendous value to end users. A successful business must have personal relationships to garner an understanding of its customers.”
Smart Business spoke with Olszewski about supply chain trends and how these changes will affect manufacturers, suppliers, distributors and end users.
What are the key trends in supply chain management?
Overall, supply chains have become more agile in response to the risks associated with lengthy and slow-moving logistics pipelines. Businesses are forced to continually review how their supply chains are structured and managed. Several factors within the United States have caused companies to seek alternatives as a result of pressures to squeeze additional costs out of operations. Businesses are looking beyond U.S. borders to find more cost-efficient opportunities to manufacture or obtain products.
Second, significant changes in communication are driving change in the supply chain and will continue to do so as technology advances. No one can predict where communications technology will lead the supply chain in the future; we only know that it will continue to make the supply chain operate faster and more efficiently.
Third, there is an emphasis on diversification in the supply chain given recent natural disasters and political turmoil that have had a serious impact on the way products get from a manufacturer to a distributor and, finally, to the end user. Similar to the concept of diversifying investment options, we are seeing an emphasis on ‘source’ diversification.
Finally, collaboration is increasingly important as businesses work to source products from manufacturers and deliver them to customers in the most efficient, cost-effective manner.
How is globalization changing the way products travel from their source to U.S. companies?
Businesses in the supply chain recognize that order fulfillment and delivery times are essential. To that end, businesses that import products are looking beyond traditionally busy international ports, such as those in California, and exploring other alternatives.
Understanding the options may provide some security in unforeseen circumstances and provide more flexibility in accessing imported goods faster. Of course, this can come at a cost, but the ability to get products faster in today’s dynamic supply chain is a priority for some companies.
How are distributors in the supply chain differentiating themselves in a market that is driven by cost-savings and squeezing out the middle-man?
Distributors play a critical role in the supply chain as the coordinator of logistics. They are the ones who comprehend customer demands and ensure that efficiencies are realized, schedules are met and cost savings are gained. In markets where goods are becoming commoditized, distributors recognize that they must do more. They often play a valuable role in our dynamic supply chain as educators, industry experts and consumer advocates.
The concept of providing value and being more than just another link in the supply chain to customers applies to all industries and markets.
Successful businesses realize that it’s not necessarily about the products and services they sell; it’s how they service and partner with their customer base.
What obstacles and opportunities does the supply chain face?
The challenge for distributors in the supply chain comes with customers looking to purchase direct from the manufacturer. Over the years, drop shipments have become more prevalent to meet customers’ expectations for fast delivery. While it would seem that drop shipment cuts out the distributor, this is not the case. In fact, the distributor still serves as the logistics coordinator without having the cost burden of carrying inventory and storing it. Today, distributors are fine-tuning their operations to expedite orders as efficiently as possible to meet demands.
As the supply chain becomes increasingly complex with globalization, technology and customer demands, successful businesses are acutely aware of the need to adapt and evolve with the times to meet customers’ needs in more ways than ever before.
Robert S. Olszewski is director-in-charge of the distribution industry group, at Kreischer Miller in Horsham, Pa. Reach him at (215) 441-4600 or email@example.com.
As businesses continue to evolve, innovation and creating a culture of change are critical to growing a profitable organization. The companies that are succeeding are the ones that are taking a good look at themselves and considering ways to work smarter, improve efficiencies and, as a result, drive profits.
“It certainly is a new world,” says Stephen Christian, managing director at Kreischer Miller, Horsham, Pa. “Customers’ needs and demands have changed, and employees’ needs and demands have changed, as well. Companies must adapt in response to these changes. But that does not mean you disregard all the good things that got you to where you are today. Instead, by innovating and adapting you can strengthen your organization and look at the challenges as an opportunity to move forward. Without change there is no progress.”
Smart Business spoke with Christian about how to implement changes in an organization to create value.
How can innovation and change lead to opportunities?
Businesses cannot keep operating the same way given the impact of changing times. You can define success in many ways, but one way to define it is financially, by selling more or improving efficiencies to drive down costs.
Regardless of your industry, examine your product portfolio for new opportunities. Can you sell your existing products to different customers, or develop new products to provide more value and options to current customers? Can you enhance product differentiation by adding more pre- or post-sales services?
You should consider process changes, additional automation, investing in technology, improving inventory controls and re-evaluating manufacturing processes to increase efficiencies and gain economies of scale. You should also evaluate your compensation system. Is compensation aligned with performance and desired results? Should more of the compensation be variable in nature?
The list goes on — everything is on the table. Your goal is to challenge the status quo. Ask yourself why you do things the way you do. Is there a better way to do them?
How can an organization decide where to focus its time?
The questions most executives ask are, ‘Where do I start? What areas do I focus on, and what changes will make the most positive impact on my bottom line?’
The first step is to determine your critical success factors. What makes your company tick? How can you make more money?
Focus on the controllable. Talk to customers candidly to gain their insight during this period of self-evaluation. Find out why your customers buy so you can anticipate their needs and adapt to meet them.
Remember, your employees are the ones doing the work. Your salespeople, your workers who produce products and your customer service personnel are the people on the front lines and behind the scenes who keep your company running and who will ultimately implement change. So involve them in the discussion and ask them where opportunities lie.
Also, network with other business owners and take advantage of trade organizations to get ideas from peers. You’ll find that identifying opportunities to innovate is the easy part. It’s implementing change that is tough.
What barriers get in the way of change?
Often, inertia — a lack of momentum, or not having any real action plan to move a change strategy forward — is a barrier to change. Another is not listening to customers and employees.
You might think that business is great now, so there is no reason to change. Short-term, immediate successes can get in the way of achieving long-term goals. Fear of the unknown is an obstacle. We all like certainty; it’s comfortable to do things ‘just like always.’ But that attitude will cause a business to become stagnant.
And simply treading water instead of advancing forward is a sure killer in this economy.
How can management put a business in the best position to embrace change?
It’s important to make the case for change. The days of dictating and legislating change are over. Explain why change needs to happen and why you are evaluating something new.
Obtain buy-in from key stakeholders and make it clear that once a path is selected, everyone must be on board. Emphasize that change is a team effort and a team process. It’s not going to happen overnight.
Encourage risk-taking and be willing to make adjustments on the fly as you head down the path of change. Acknowledge when you make mistakes and ask stakeholders for ways to improve. Constantly measure your progress and celebrate successes along the way.
Organizations that embrace innovation and change and are willing to adapt will succeed in rapidly evolving times. Acknowledge that change is difficult, commit to innovate to enhance opportunities and have the courage and confidence to follow a plan to accomplish your goals, and growth and profits will come your way.
Stephen Christian is managing director of Kreischer Miller, Horsham, Pa. Reach him at (215) 441-4600 or SChristian@kmco.com.
Cloud computing can help businesses harness the portability and convenience of Web-based IT services, and if your company hasn’t started investigating this new technology, now is a good time to start.
Cloud computing provides businesses with ease of maintenance, scalability and cost reduction, says Sassan Hejazi, director of the Technology Solutions group at Kreischer Miller, located in Horsham, Pa. Specifically for accounting and financial departments, offsite management of these systems can be particularly valuable from a security and updating standpoint.
Meanwhile, more businesses are looking to the cloud for services instead of purchasing software or overseeing systems in-house that can instead be managed off-site by specialists. Rather than dealing with the limitations of traditional in-house software, companies can simply turn to the cloud and access the programs they need from anywhere.
“Like a utility, when you plug an appliance into an outlet, you get power,” says Hejazi. “You don’t know where that power comes from or who manages the production of that power; all you know is that the power is there when you need it. The IT world is evolving into a utility-based commodity that is very sophisticated and being delivered by specialists. We are now increasingly accessing the technology via ‘the cloud.’”
Smart Business spoke with Hejazi about how businesses can use cloud computing in finance/accounting and other disciplines to streamline their IT portfolios.
What is cloud computing, and how can it work for businesses?
Cloud computing refers to using Web-based applications and services provided by offsite providers. A simple example is e-mail such as Gmail or Hotmail. You can access these services from anywhere with an Internet connection, and you never have to worry about upgrading the program or running out of storage.
Today, most software and hardware providers also offer a ‘cloud strategy,’ so businesses can shift systems they currently manage in house to the cloud and save time, money and resources.
Essentially, cloud computing is the next phase of the Internet evolution. Rather than the Internet serving as a tool for communication, it also can house the systems and services you use to conduct business so you can access these applications anywhere.
What advantages does cloud computing bring to financial and accounting departments?
When finance and accounting departments manage their systems internally, they are responsible for upgrading these systems regularly and keeping up with software changes so they can run them efficiently. The resources required to keep these systems operating at peak performance can be draining, and there’s no reason to expend resources this way now that there are off-site, Internet-based options.
A growing number of applications from leading companies offer cloud-based versions of their accounting and financial systems, which allow businesses to leverage capacity without having to invest in internal resources for basic system maintenance. Cloud-based systems give companies economies of scale because the provider serves many different companies. As a result, resources are highly productive, trained and specialized, giving companies better ROI than if they operated their own system in-house. Essentially, cloud computing allows companies to shift from an internal to an external service provider.
Another advantage is that cloud-based systems are scalable. Companies can easily add more users to increase capabilities, or decrease users to scale back. Also, cloud computing allows companies with multiple locations to access information. Employees can work from home offices or on the road and use the system, as long as there is an Internet connection.
Is cloud computing secure?
There is always some level of risk involved because if a company loses its Internet connection, it cannot access its cloud-based systems. However, this is becoming less of an issue with the newer wireless devices. With a cloud-based system, you also have the ability to access information from anywhere should internal issues such as a system crash occur.
Regarding security, the providers of these offsite systems must earn a SAS 70 certification, which involves rigorous security audits. Generally, they have better backups and disaster recovery than most companies that manage systems internally.
Rest assured, cloud computing has evolved significantly in recent years to become a strong option for companies of all sizes. Of course, to minimize risk, management teams should conduct a thorough study of alternatives and create a cloud computing roadmap.
What should a company consider when evaluating which IT services can be shifted ‘to the cloud’?
First, take an inventory of all hardware and software systems — your portfolio of IT assets. Divide that portfolio into distinct groups, for example, by department and by function, and analyze each section.
How old is the technology? How well supported are the systems? How could operations be improved? Tie this into the bigger picture of business objectives: How does existing software/hardware support your goals for the future? This exercise will help you focus on cloud computing as a business value proposition. As you do this analysis, consider the cost of purchasing systems. It’s not just what you pay today for software/hardware. Figure the total cost of ownership, including periodic upgrades and maintenance.
This is where cloud computing offers a real economic advantage. For scalability, ease of maintenance and lower cost of ownership, cloud computing offers competitive systems that give companies increased flexibility and the ability to access information from anywhere.
Sassan Hejazi is director of the Technology Solutions group at Kreischer Miller, Horsham, Pa. Reach him at (215) 441-4600 or firstname.lastname@example.org.
The 2010 Tax Relief Act has resulted in significant changes to the estate and gift tax rules, providing some clarity — at least for the next two years.
The act provides planning opportunities not only for the living but also for those who died in 2010, as the law is also applied retroactively. However, executors have been provided with a special savings choice and can opt out of the new rules.
The passage of the act also provides a good opportunity to review your will.
Smart Business spoke with Richard J. Nelson, the director of the Tax Strategies Group at Kreischer Miller, about the 2010 Tax Relief Act and what it may mean for you.
What are some of the important provisions of the Tax Relief Act?
For 2011 and 2012, the estate tax exemption will be $5 million and the maximum tax rate will be 35 percent. This is a significant increase in the exemption, which was scheduled to be $1 million in 2011, and a significant decrease in the tax rate, which was scheduled to be 55 percent. The $5 million exemption is per person, so for a married couple, this could mean a $10 million exemption.
The new law also provides a portability feature of the exemption amounts for married couples. Unlike prior law, any exemption that remains unused at the death of a spouse after Dec. 31, 2010, and before Jan. 1, 2013, is available for use by the surviving spouse in addition to his or her own $5 million.
For example, say a husband dies in 2011 with an estate of $2 million. The husband’s estate elects to permit the wife to use her husband’s unused exemption of $3 million. Assuming she has not made any prior taxable gifts, the wife has an available exemption of $8 million upon her death.
Because the new rules are only in effect for two years, both spouses would have to die prior to Jan. 1, 2013, to have this advantage apply. In the event that the wife remarries and the second spouse dies, the exemption would be $5 million plus the unused exemption of the second spouse.
Many wills are written with an allocation to a credit shelter trust, which is formed with the assets of an individual’s estate to take advantage of the exemption amounts. Assets placed in this trust, as well as any appreciation, are generally not subject to estate tax upon the death of the second spouse. During the surviving spouse’s lifetime, he or she is entitled to the income of the trust but is limited in how much of the principal that can be taken out of the trust without the permission of the trustee. For a decedent with an estate value of less than $5 million and a surviving spouse with limited assets of their own, a credit shelter trust may restrict the surviving spouse’s use of these assets.
With the new portability rules, a credit shelter trust may no longer be necessary.
What is the current situation with respect to the estate tax and gift tax exemptions?
The new law reunified the estate and gift tax exemptions at $5 million. Many people have previously taken advantage of the $1 million gift tax exemption. They now have an additional $4 million exemption available to them. Generally, you would consider gifting property that you believe will appreciate in value. Gifting takes the current value of that asset and the future appreciation out of your estate.
The annual gift tax exclusion remains unchanged at $13,000 per donee.
The generation-skipping tax (GST) has also been changed. The GST is an additional tax on gifts and bequests to grandchildren while their parents are alive. The exemption amount has been increased to $5 million and the tax rate reduced to 35 percent.
Do executors have flexibility in applying the rules for 2010 decedents?
Technically, the estate tax expired at the end of 2009, leaving 2010 with no estate tax. The new law revised and retroactively reinstated the estate tax to decedents who died in 2010. This leaves executors of decedents who died in 2010 a choice. The executor can either apply the new rules ($5 million exemption, tax rate of 35 percent on the excess and a step-up in basis to the heirs) or elect out of the new rules (no estate tax and the heirs inherit the property at modified carryover basis).
The new rules provide for a step-up in basis. This means that the basis of the assets the heirs receive will be the fair market value of the assets on the date of death or the alternative valuation date, which is six months later. If the executor elects out of the estate tax, the modified carryover basis rules apply, which generally means that the basis of the assets is the lower of the fair market value on the date of death or the adjusted basis of the property immediately before the death, plus an additional $1.3 million, which is allocated among the assets.
An additional increase of $3 million is allowed for a surviving spouse, for a total of $4.3 million.
The executor should choose whichever method will produce the lowest combined estate and income taxes for the estate and its beneficiaries. Generally speaking, it makes sense to apply the new rules to estates under $5 million.
For estates greater than $5 million, the executor should calculate the estate and income tax consequences under both methods to determine which is more advantageous.
Estate planning is something that everyone should consider. Even if your total estate is less than $5 million, it is important that you have properly drafted wills to take advantage of tax planning opportunities available to you and ensure that your intentions and wishes are carried out.
If you already have a will, now is the perfect opportunity to have it reviewed and updated.
Richard J. Nelson is the director of Kreischer Miller’s Tax Strategies Group. Reach him at (215) 441-4600 or email@example.com.
As we enter the second month of 2011, it’s time to think of some of the resolutions made just a short time ago. For some, it was to lose weight, eat better and exercise more frequently; for others, it was to save more and invest wisely.
As more and more people are increasingly concerned about the viability of our nation’s Social Security system, the focus has continued to shift toward providing for our own retirement, says Mark G. Metzler, director, Audit & Accounting, at Kreischer Miller.
“One mechanism that owners of businesses and their employees often have is their company’s 401(k) retirement plan,” says Metzler. “Because many people are not professional investment managers, an option provided in many plans is ‘target date retirement funds,’ sometimes referred to as ‘target date funds’ or ‘lifecycle funds.’”
Smart Business spoke with Metzler about target date funds and how they can work for you.
What are target date funds?
Target date funds, which have grown in popularity in recent years, are long-term investments, typically mutual funds that hold a mix of stocks, bonds and other investments designed to reduce overall risk. The funds are generally structured as investments for individuals with particular retirement dates in mind. The name of the fund often refers to its target retirement date (e.g., Retirement Fund 2025). As a fund gets closer to its named target date, the investment mix shifts to become more conservative.
This is appropriate because an individual nearing retirement may wish to have his or her investments become more liquid to provide for living expenses, as well as to minimize losses in a volatile market. Ideally, the target date retirement fund concept is a simple way to provide for professional portfolio management. The investment firms sponsoring the funds make the investment allocation decisions for participants based upon the target date.
Are all types of target date funds basically alike?
No. Funds that share the same target date may have significantly different investment strategies and risk profiles. The Department of Labor’s Employee Benefits Security Administration (EBSA) and the Securities and Exchange Commission (SEC) published an investor bulletin stressing that ‘participants should not rely on the fund’s target date as the sole criterion for selecting the investment because funds with the exact same target date may have entirely different risk strategies, risks, returns and fees.’
One of the most significant differences among target date funds is the construction of the ‘glide path.’ The glide path represents the asset allocation philosophy among equities, bonds, cash and other investments at various times throughout the investment life of a participant. Typically, all target date funds have a higher exposure to equities when the participant is furthest from retirement (at the beginning of the glide path) and steadily decrease the exposure to equities as the individual approaches retirement age.
However, different investment managers may have significantly different strategies for a similar target date fund.
The EBSA and SEC provided an example in their bulletin of the extreme differences between target funds with identical target dates. In the example, at its target date, Fund A had an asset allocation of 60 percent stocks and 40 percent bonds, while Fund B maintained an allocation of 25 percent stocks, 65 percent bonds and 10 percent cash investments.
Fund A does not reach its most conservative mix of 30 percent stocks and 70 percent bonds until 25 years after its target date.
How can funds with the same target date have such significantly different investment philosophies?
In the simplest terms, it depends upon whether the fund manager is investing ‘to retirement’ or ‘through retirement.’ When the fund manager invests ‘to retirement,’ it is anticipated that a significant portion of the portfolio will be liquidated at the target date to provide for living expenses, so therefore it would comprise a much smaller percentage of equities. Conversely, when a fund manager invests ‘through retirement,’ it is anticipated that the individual will continue to have a much higher exposure to equities and will continue to invest in the market throughout his or her retirement years.
In the 2008/2009 market downturn, participants close to retirement whose target date funds followed the ‘through retirement’ date philosophy were shocked at the large losses their funds suffered as they mistakenly believed they had been shielded from substantial loss by investing in a target date fund.
What should someone consider when evaluating a target date fund?
First, remember that all investments have some level of risk, and even the same type of investment may have more or less risk than other seemingly identical ones. Participants should read the fund’s prospectus to focus on:
- When does the most conservative mix of investments occur?
- What is the fund’s risk level?
- How has the fund performed in the past, and what is the fund’s Morningstar ranking?
- How does the asset allocation change over the life of the fund?
- What fees apply?
Target date funds provide simplification to the average investor. While there is no magic pill that provides for a guaranteed return or that eliminates the risk of loss, target date funds do provide a level of portfolio management and complexity that is typically out of reach for most investors.
Mark G. Metzler is director, Audit & Accounting, at Kreischer Miller. Reach him at (215) 441-4600 or firstname.lastname@example.org.