Lisa Murton Beets

Friday, 26 October 2007 20:00

Which business entity?

When starting a business, the form of entity should be part of a well-thought-out business plan that considers the needs and desires of both the business and the owner(s). As much as possible, the decision should take into account where the business is headed in the future.

“The LLC has become a very popular option, but it may or may not be the right form for a particular business,” says John T. Alfonsi, CPA/ABV, CVA, CFE, partner, Cendrowski Selecky PC, Bloomfield Hills.

Smart Business spoke with Alfonsi about the various forms of business entities.

What options are available for a business entity?

Primarily, a business can be structured as a C corporation, an S corporation or a Limited Liability company (LLC). With an S corporation or an LLC, there is a single level of tax at the owner level. With a C corporation, there are two levels of tax: one at the entity level and one at the owner level when earnings are distributed. Many times, a particular legal structure or strategy should be considered when forming a business.

What are the major differences between the choices?

From a tax savings perspective, there is an advantage to being an S corporation or an LLC if you experience losses in the first few years, which can ‘flow through’ to the owner. With a C corporation, losses cannot be used by the entity until the company starts achieving a profit.

The LLC is a state law concept. LLCs are formed under state laws, not federal guidelines. For federal tax purposes, when there is one owner, the entity is disregarded and the owner is considered a sole proprietor. If there is more than one owner, the entity is taxed as a partnership. The owners can elect to be taxed as a corporation but most do not.

The S corporation is a convention of federal tax law. An S corporation elects to have only one level of tax. The shareholders elect to pay tax on income whether or not it is distributed.

With both an S corporation and an LLC, if there is a profit, the owners have to pay tax on it whether or not they receive any money. The LLC tends to be the most flexible in terms of how income and cash is distributed.

How do S corporations and LLCs differ?

The biggest difference is that the allocation schemes are limited with an S corporation. With the S corporation, there can only be one class of stock. Everything must be shared pro rata among the owners: the income earned, distributions. Many businesses want flexibility, however, in how to allocate income and cash between the owners so, if that desire exists, the better option may be the LLC. But the disadvantage compared to the S corporation is the self-employment tax. In an LLC, if you’re acting like a general partner, you are subject to the self-employment tax on 100 percent of your share of the earnings whether or not they are distributed.

An S corporation is a separate entity for tax purposes. So the distributed share of income is not subject to the self-employment tax. A portion of the income is taken as a salary, subject to normal payroll taxes. For instance, if $100,000 in revenue is generated and the owner takes a salary of $20,000, the entity and the owner pays payroll taxes on the $20,000. The remaining $80,000 is not subject to self-employment tax, only income tax, and it can be withdrawn generally without any further tax consequences.

What are the advantages of each form of ownership?

The single level of tax is an advantage for both the LLC and the S corporation. The S corporation offers the potential to mitigate the self-employment tax, but you are limited to 100 shareholders. You are also limited with what types of entities or persons can be shareholders. With an LLC or a C corporation, the number and type of owners is unlimited.

If equity-based compensation will be offered, it is advantageous to form as a C corporation, where the compensation will be easier to comprehend. It is also prudent to form as a C corporation if there are future plans to go public. The C corporation is also the only corporate option that allows you to offer preferred stock.

In many cases, the LLC is recommended for a start-up because of its flexibility. If the self-employment tax is a concern, there are ways to mitigate it, such as becoming third-party managed or by having a managing member receive guaranteed payments for his or her services.

JOHN T. ALFONSI, CPA/ABV, CVA, CFE, is a partner at Cendrowksi Selecky PC, Bloomfield Hills, Mich. Reach him at (248) 540-5760 or jta@cendsel.com.

Tuesday, 25 September 2007 20:00

Succession planning

Fewer than one in three family-owned and managed businesses survives into the second generation.

“A major reason for this is the lack of succession planning,” says Steven Y. Patler, JD, CPA, managing director with The Prosperitas Group in Bloomfield Hills.

What will happen to your business when you are no longer around to manage it? Whether your business is family-owned and managed or owned by several partners, having a succession plan will ensure your company will continue without you. A succession plan protects your family’s and employees’ interests in the future, helps preserve the reputation you’ve worked so hard to create and builds customer and supplier confidence that your business will be around for years to come.

“If a founder dies or becomes ill and there is no plan for who will take over, the survival of the business could well be at stake. The effects on the family and employees could be devastating,” adds Patler.

Smart Business asked Patler how owners can develop effective succession plans in order to help avoid such a potentially disastrous result.

Why do owners avoid preparing succession plans?

Ninety percent of family-owned businesses are still in the founder’s control. Many founders have had control over the business as well as the family for many years and may not want to address giving it up. It is part of their identity. Rationally or irrationally, they may fear that if they let go, the business or their financial situation will suffer. Family dynamics also are involved. The founder may want to avoid potential conflicts with family members. Not addressing succession issues is a means of avoidance. Some founders may ‘fear’ retirement and don’t know what they will do with their time once they leave the business. Many owners think they don’t need to address succession planning if the business is young or if they are young. But what if they get sick or die prematurely? Finally, there is the issue of time. It’s easy to put off addressing potentially difficult and time-consuming matters, such as succession planning.

What should a succession plan take into account?

A successful plan is comprehensive and takes into account business, financial and tax aspects; employee and customer needs; and the needs, goals, dynamics and values of the family and partners. What are the values of the company’s key stakeholders? What are their financial needs? Will everyone be treated fairly? Are there possible successors — the owner’s children, key employees? What are their needs and talents? Does a possible successor need mentoring to obtain the skills of a CEO? Is the business changing? Will new skills be needed in the future? Are the children and employees able to handle these changes, or will a third party need to be brought in? What about the impact on customers and suppliers?

How does one go about having a succession plan developed?

There are numerous professionals who should be included in the process. Someone, however, needs to guide the process. It may or may not be the owner, depending on his or her skill set. It could be someone who knows the business and has built trust. Frequently, it is an experienced third party who is viewed as both objective and independent. Whoever it is, this person should have a broad background, ability to collaborate with all the parties and good judgment skills.

The actual process of developing the plan begins with interviews and fact-finding. Next, all the information about the people involved — e.g. goals, needs, skills — and the business itself — e.g. valuation, financial, compensation structure, competition, strategic plan — is analyzed. Strengths and weaknesses are identified. It’s then common to hold a group session with all relevant parties. A recommendation can then be made that identifies potential successors and includes strategies in developing the skills needed by family members/ employees to lead the business. In some instances, the planning process could also result in the determination that the company should be sold and set forth what steps need to be addressed to best position the company for sale.

How often should monitoring and review take place?

At least once every couple of years. External changes, such as the business environment and tax laws, may have a significant impact on a plan. Furthermore, someone expected to take over may no longer be willing or capable of doing so or may no longer be an appropriate or best choice — because of illness, divorce, etc. Regular meetings and adjustments to the plan, when and where necessary, will help ensure that the business will have the right person or persons it needs to survive and prosper in the future.

STEVEN Y. PATLER, JD, CPA, is a managing director of The Prosperitas Group LLC, Bloomfield Hills. Reach him at (877) 540-5777 or spatler@cendsel.com. For more information, go to www.prosperitasgroup.com.

Monday, 25 June 2007 20:00

Outsource IT?

You were just assigned a new IT project. Do you have the resources — in terms of manpower and expertise —to get it done within the required time frame and allotted budget?

If you’re unable to meet any of these requirements, the project may be a prime candidate for outsourcing. Now, will you outsource the entire project or just parts?

“Many decision-makers agonize over whether or not to outsource. But if we view it as one of several options, it makes the process easier,” says Eileen D. Heveron, Ph.D., vice president, information technology, National University, San Diego.

Smart Business asked Heveron, who has successfully outsourced numerous projects of her own, how executives and chief information officers can spend more time focusing on requirements upfront when considering outsourcing arrangements.

How can a company determine whether to outsource part of a project or the entire process?

Analyze your core competencies. Ask yourself why you are considering outsourcing — and then ask again. Get down to the real nuts and bolts of the project, and consider carefully what parts of the project or process that you have the core competencies to handle.

If you have the capabilities within your staff to handle the entire process, within the timeline expected, to provide the deliverables under the budget provided, then don’t outsource.

If you can handle some — but not all — aspects, break the project or process down into discrete segments and ask yourself if another organization could do particular parts or segments cleanly or if you should build that capability internally.

For example, say you have an upcoming technology project. You’ve determined that you don’t have all the right players on board to make it happen and that it would take nearly a year to recruit, hire and get the right people with the right expertise and experience up and running and merged with your staff. You only have six months to finish the project. Outsourcing to an organization that does this type of work for a living makes sense.

What are some perceived negatives about outsourcing? Are they valid?

As with any business partnership, agreement or arrangement, there are pluses and minuses with outsourcing. Some of the negatives include:

  • This is a contract, with contractual obligations for both parties. If the arrangement goes awry, it is sometimes difficult to fix without legal intervention.

  • These are not your employees, so you will interact differently with them than with your own employees.

  • Outsourcing does not necessarily save an organization money.

  • Poor quality is often a perception, but in reality, you can have poor quality with your own staff as well as in an outsourced situation.

All of these can be realities, but they can all be overcome if the CIO and other executives go into outsourcing with the proper partnership attitude.

How should the company monitor the arrangement?

There are several considerations:

  • If you’ve decided to outsource and have selected a vendor, check its references thoroughly with other organizations that have used its services in a similar way or for similar projects.

  • Examine the contract length and understand what the ‘bail out’ language requires, especially in the way of timing.

  • Vendors will provide you a service level agreement (SLA). This agreement indicates what they will do, such as provide you with 99.99 percent up-time of a network or a hosted application arrangement, with agreed upon maintenance windows, etc. If you want five or six ‘9s,’ meaning 99.999 percent or 99.9999 percent up-time, you will probably have to pay more.

  • Vendors should meet with you, in person or by phone, almost daily while the service or project is getting under way — then weekly, then biweekly, then monthly, as everything moves along. Updates should include everything that is in your SLA.

What about end-user/customer satisfaction?

You can internally monitor specific items within the SLA, such as up-time, the time it takes from first report to final solution of a problem and similar metrics. You can also perform spot checks with your end users to gauge their satisfaction. You can take what you learn and provide feedback to the vendor and, together, you can make changes to the arrangement with the staff if necessary.

If the arrangement is no longer working, consider any contractual issues that may be involved with ending it. Always have your own end-of-agreement plan in place before you enter into an arrangement in the first place. This will help prepare you for either bringing the services back in-house or seeking another vendor.

EILEEN D. HEVERON, Ph.D., is vice president, information technology, National University, San Diego, Calif. Reach her at (858) 642-8145 or eheveron@nu.edu.

Monday, 25 June 2007 20:00

Information in business

Technology is a tool to support business, and like any tool, it must be used correctly to get the desired results.

“Businesses see technology as some sort of panacea to solve their problems, but it won’t,” says Michael J. Savoie, Ph.D., director of the Center for Information Technology & Management, The School of Management, The University of Texas at Dallas. “You can’t buy a hammer, place it on a job site and expect it to build a house. Someone has to know how to use the hammer to build the home.

“CEOs frequently lament that if they had better technology, they’d be a better company,” he continues. “But the realities are that 1) people program computers, and 2) you have to know what you want to accomplish before you identify the right technologies to help you get there.”

Smart Business spoke with Savoie to learn how companies that properly integrate technology into their business can gain a competitive advantage.

What are the four levels of information systems?

An information system is any system that is used to organize data, which is then disseminated to the appropriate people within an organization. Data is everything — anything you can see, touch, feel — tangible or intangible. The information system is anything that moves data from one point to another with common reference points.

Data and information are the first two levels of an information system. The second two levels are knowledge and wisdom. Knowledge meaning the information the system collects that is actually used, and wisdom meaning knowing how and when to use the information. Most organizations operate within the first two levels but really need the second two to succeed.

How can companies move from collecting data and information to actually using it effectively?

Five factors must be present. You have to have the right data, in the right place, at the right time, with the right people, in the right format.

The right data involves having the right team determine what information the system needs in the first place in order to help you run your business effectively. The right place means your people can access the information wherever they are, especially while in the field making decisions. The right time means you want real-time data on operations of your business on a daily basis so you can make decisions for the company today, tomorrow, this week. The right people means that those who need the information receive it — and those who don’t, don’t. This is also a security issue — you need to ensure that only the people who are supposed to be seeing the information are indeed the only ones who have access to it. The right format means that the information is organized in a way that is easy to extract knowledge from, rather than, for example, pages of numbers where knowledge is buried like a needle in a haystack.

What can companies do to improve?

Identify the underlying needs you are trying to meet — waves versus trends. Understand how these needs interact. Look for solutions that meet these needs. Look for technology that supports these solutions. To do this, assemble a working group of people who will address the company’s technology needs on a continual basis. The team should be cross-functional, representing the vertical and horizontal layers of the company. Teams should move through a ‘process ladder’ consisting of the following steps: Identify the business’ processes — current and desired; analyze needs and identify the gaps; implement a strategy to address the needs and gaps; identify applications that support the strategy; identify hardware necessary to support the applications.

Before investing in any software or hardware, work the steps. Map out the flow of information in your organization. Then take the map and determine what you want to build, deciding on formats based on what you need. This helps you define what software to buy. Then — and only then — decide on the hardware. Do not let hardware dictate. Don’t buy a system and then try to force fit your company to it.

Finally, appoint someone in the organization responsible for ensuring that the business processes of the company are integrated with the technology, and that the business processes — not the technology — are driving the decisions. In some companies, this is the CEO, the CIO, or the CFO.

MICHAEL J. SAVOIE, Ph.D., is director of the Center for Information Technology & Management, The School of Management, The University of Texas at Dallas. Reach him at (972) 883-4755 or msavoie@utdallas.edu.

Saturday, 26 May 2007 20:00

Tax-favored health coverage

The Health Opportunity Patient Empowerment Act of 2006 provides tax advantages for health care savings. Among its many provisions, it allows consumers with high-deductible health plans (HDHPs) to save pre-tax dollars in Health Savings Accounts (HSAs) for qualified, future medical expenses. The premiums for HDHP/HSAs are less expensive for employers, and employees benefit by building tax-free savings, all while gaining more control over their health care choices.

“When you combine an HDHP with an HSA, you create a triple tax advantage for the employee,” says Javier Mendoza, vice president, Strategic Marketing, Plans & Programs, AvMed Health Plans, Florida. “Employers should not discount these plans because of the words ‘high deductible.’ Instead, the plans should be viewed as tax-favored coverage with attractive ROI.”

Smart Business asked Mendoza how to successfully roll out an HDHP/HSA plan.

Provide an overview of an HDHP/HSA.

A high-deductible health plan is health insurance that meets IRS guidelines that allow it to be combined with an HSA. For 2007, an HDHP must have at least a $1,100 (single) or $2,200 (family) deductible, indexed annually for inflation. Out-of-pocket expenses cannot exceed $5,500 (individual) or $11,000 (family). HDHPs represent a move away from a pre-paid medical plan to one that protects against major financial loss.

HSAs are owned by the individual and are portable, so changing employers is not an issue. HSAs and qualified HDHPs have a triple tax advantage: they provide tax-free contributions, growth and disbursement for qualified medical expenses. If the money is not used, funds roll over from year to year. HDHPs/HSAs are evolving as a way to pay for not only short and mid-term health care costs, but also to save for health care costs during retirement.

Why should employers consider offering HDHP/HSAs?

HDHP/HSAs offer a long-term strategic solution to the continuing high costs of health care coverage and overall costs. HDHP/HSAs 1) reduce health care premium costs, 2) reward responsible employees who undergo preventive care, 3) increase employee awareness of health care costs, 4) motivate employees to change their personal behavior, and 5) give employers another way to contribute to the long-term, well-being of their employees.

Is the employer required to contribute?

No, but the most successful results will occur when both the employer and employee are contributing. There are many ways employers can contribute. They can 1) make flat rate contributions, 2) structure some type of match, 3) contribute based on salary range or tenure, healthy lifestyle choices, etc. All options should be explored with an independent insurance agent and a tax professional.

How can an employer determine whether an HDHP/HSA is a good fit for their organization?

Larger companies are currently testing the waters, introducing HDHP/HSAs as an option. Some larger companies — but more smaller ones — are jumping right in and deciding these are the only plans they are going to offer. It depends on the company’s philosophy as well as how informed and engaged their employees already are. The employer should test for readiness/resistance. Do employees talk ‘wellness,’ or are they still in the ‘$5 copay/$50 doctor visit’ mindset?

How should the employer evaluate potential vendors for a plan?

Partner with an agent that understands and is committed to long-term strategy and that can provide tax-advantage support. In addition to considering all the usual factors such as locality, size of network, cost sharing and client services, consider integration points – factors that will make it easy for individuals to sign-up and self-manage. Is there user-friendly, non-financial-oriented Web support? Are there tools such as hospital and prescription cost estimators online, as well as reliable, personal assistance? Are targeted management programs available to help consumers with specific conditions not only lower their out-of-pocket expenses, but also improve the outcomes of their particular condition?

Once the decision is made to offer a HDHP/HSA how does the employer get buy-in?

Prepare. Prepare. Prepare. Start to build the case for change at least six months ahead of time and communication will be key to gaining acceptance. You are talking about a culture change, and if you spring this on employees, you’ll be met with resistance. Move away from words such as ‘benefits’ and ‘health plan.’ Position HDHP/HSAs as tax-favored health coverage. Know your audience and tailor the message. Target the benefits by knowing the strong points of interest for each group of employees.

JAVIER MENDOZA is vice president, Strategic Marketing, Plans & Programs, AvMed Health Plans, with offices throughout Florida. Reach him at (305) 671-4946 or javier.mendoza@avmed.org.

Monday, 26 March 2007 20:00

Holistic assessment

An operational review is a powerful tool that offers insights into the way your organization really works on a current basis. More importantly, it shows you how well it is prepared to meet future challenges.

“The holistic approach — looking at the function of the system as a whole as a way of determining its impact on the efficiency of the parts — provides the basis for a blueprint to raise your organization’s performance to the next level,” says Harry Cendrowski, CPA/ABV, CFE, CVA, CFD, the president of Cendrowski Corporate Advisors LLC.

“Operational reviews give you a comprehensive assessment of governance — defining expectations, granting power within the organization and giving feedback as to whether the job is being done the right or wrong way,” adds Cendrowski.

Smart Business spoke with Cendrowski about what companies should expect from an operational review.

Of what benefit is an operational review?

The objective of an operational review is to help organizations learn to act, instead of just reacting to the challenges of growth and change.

Because the information provided is practical from both a financial and operational perspective, it leads to very practical recommendations to help a company achieve its goals. The review identifies the extent to which your internal controls actually work and enables you to identify and understand your strengths, weaknesses, opportunities and threats.

How does the process work?

Experienced teams interview and observe. Actually watching how employees carry out their responsibilities is a key part of the process. It also is important that the team gain the employees’ trust and confidence. In this regard, they must be assured that whatever they say will be kept confidential. Therefore, management must guarantee anonymity to anyone who offers critical information. Otherwise, employees will filter their responses and the data will be much less useful.

What are some of the areas of assessment?

Governance and ethical guidelines — Responsibilities, authority and the scope in which an employee has the freedom to act must be clearly defined and documented. Employees must actually have the authority to carry out the general responsibilities and specific tasks they have been assigned.

Strategic planning and tactics — Without clear strategic direction, there likely will be different expectations between ownership and management. The corporate structure must be designed to best leverage business and tax opportunities. Customer service standards must be clearly defined and understood by the employees, who must actually agree with them. You might be surprised to discover how often this is a problem.

Communication and reporting standards — If there is confusion in these areas, there could be lapses in internal controls, putting the company and/or its assets at risk. Reports must be useful, and the flow of information and how it is processed must keep pace with the company’s growth.

Contingency planning, testing and recovery — Contingency plans must not become outmoded. An organization must be really prepared to react to disruptions. This includes establishing a formal process to review transactions processing during both disruption and recovery.

Information technology (IT) and security controls — Every organization must have safeguards to ensure system transactions and information are restricted only to authorized users. Proper IT security policies must be in place, state-of-the-art protection techniques employed, and everything be documented, periodically updated and continually monitored. Management’s objectives for the protection and integrity of the data must be met.

What sort of report is presented?

It defines objectives, describes the current conditions in which those objectives must be met and recommends whatever changes are necessary. The plan has three levels of recommendations: one for executives, another for management and a third for staff.

The executive summary concentrates on strengths, weaknesses, opportunities and threats to the organization as a whole. It contains recommendations for any needed changes in policy or governance.

The management plan is based on employee feedback coupled with our expertise and includes areas of immediate improvement as well as suggestions of potential problem areas.

The staff report deals with nuts and bolts, like charting the hierarchy of the organization, and spelling out specific control objectives that are critical to the mission and to which personnel must pay close attention to if they wish to engender both organizational and personal success.

HARRY CENDROWSKI, CPA/ABV, CFE, CVA, CFD, is president of Cendrowski Corporate Advisors LLC, Bloomfield Hills. Reach him at (248) 540-5760 or hc@cendsel.com or go to the company’s Web site at www.frauddeterrence.com.

Wednesday, 28 February 2007 19:00

Business cash flow

Periodically reviewing your cash flow projections will help you prepare for times when you’ll need additional sources of cash. Having good relationships established with banks, creditors and suppliers beforehand will help when you need a short-term business loan or the ability to access a line of credit.

“Business cash flow is one of the most important factors we look at when making a decision regarding a credit line,” says Alice Chen, senior credit analyst/Credit Team lead for Wells Fargo Bank, Houston.

According to Chen, a company may be profitable on paper but cash flow may still be negative: “The banker can help the company understand how it compares against others in its industry by examining its numbers against Risk Management Association ratios for similar businesses. These are the ratios we work with when determining whether to extend a line of credit, and for how much. Understanding the numbers will help a business determine where it might need to improve, and can help it obtain more favorable terms.”

Smart Business talked with Chen about ways companies can improve their business cash flow.

What is business cash flow?

By definition, business cash flow is the movement of money into and out of a business. It has been used to refer to net cash after operation in Uniform Credit Analysis (UCA), a cash flow model. It has also been referred to as operating cash flow as shown on the FASB 95 cash flow statement.

Bankers use the net cash after operation for their credit review process/analysis. We also watch the trends of net income and cash flow after operations for signals of potential problems. When cash flow after operation begins to lag behind net income, it’s usually a red flag.

Discuss the importance of understanding cash flow.

Here is a good example. Company ABC showed a pattern of consistent profitability and even some periods of income growth. For the last three years, net income for the company grew by 28 percent, from $15 million to $19 million. The company had consistently paid dividends and interests. One year later, the company filed for bankruptcy. Closer examination of the company’s financial statements revealed that it had experienced several years of negative cash flow from its operations, even though it reported profits. Sales reported on the income statement were made on credit, and the company was having trouble collecting the account receivables from its customers, causing cash flow to be less than the net income.

Is it getting easier, or more difficult, for companies to manage cash flow?

Easier, thanks to a wide variety of new technologies designed to help businesses make deposits faster, collect receivables faster, and more efficiently manage their banking operations overall. Combining a depository solution and payments processing solution at a single bank will usually speed up funding of credit/debit card payments. For example, Wells Fargo offers as-soon-as-next-business-day funding with a checking or depository account.

How can bankers help companies manage cash flow?

Managing cash flow means balancing cash inflow with cash outflow. Look for banks that offer a variety of cash management products to help customers in the areas of collections and disbursements and information, including, but not limited to, lockbox, payments processing, processing, cash management accounts, ACH collection, electronic desktop deposit, revolving lines of credit and other credit/treasury management products for business.

For example, a business owner can eliminate the need to go to a branch to deposit checks by using an electronic desktop deposit machine to deposit checks in his/her own office. Every check is imaged and saved. The data is then transmitted directly to the bank. This can help the customer reduce the check floating time and focus more on their core business. Customers can also request a revolving line of credit to help the cash flow during the collection period for accounts receivable.

How can a company finance business cash flow?

A line of credit can help a business during the times it is waiting to collect accounts receivables. When evaluating if a company is eligible for the line of credit, the bank always looks for a reliable measure of the borrower’s repayment ability. Cash flow becomes the bank’s primary focus when analyzing a company’s ability to repay the debt. Operating cash flow can be generated from the conversion of cash to inventory to receivables back to cash, which is also known as the short-term asset conversion cycle. Bankers review the conversion cycle closely to determine the borrower’s ability to generate cash and make a creditworthy decision. In addition, we can also use this information to help the company understand how to improve the cash flow.

ALICE CHEN is senior credit analyst/Credit Team lead, Wells Fargo Bank, Houston. Reach her at (832) 251-5531 or ying.chen@wellsfargo.com.

Wednesday, 31 January 2007 19:00

Steady numbers

Historically, commercial real estate markets follow residential. However, that’s not currently the case in Florida. While there is excess inventory in housing, the commercial market has remained steady.

“The slowdown in the residential market is really just a readjustment to normalcy,” says Tom Bible, vice president of operations at Colliers Arnold, Tampa. “We had an extremely active, investor-driven market that artificially inflated demand. This caused builders to step up the supply side of the equation, resulting in an 11- to 12-month supply of housing. A normal balanced market is a six-month supply. So with demand remaining constant as all true indicators show and new construction on hold for the moment, the market should readjust in six to seven months.”

Bible adds that over the last 18 months, there was very little commercial speculative building that would create an excess in inventory. “Therefore, prices and investor activity are holding ground,” he says.

Smart Business asked Bible why he thinks the outlook for commercial real estate in Florida will remain positive.

Discuss the outlook for Florida’s real estate market over the next decade.

With baby boomers approaching retirement and the appeal of Florida’s climate and lifestyle, we predict the state to continue its growth well into the next decade — with a possible shift in demographics as land scarcity drives prices further north, especially along the coastline.

The current unemployment level in the Tampa Bay area and the state of Florida is 3.1 percent, compared to the national average of 4.1 percent. Our active work force, growing population and increase in technology, medical and professional services should continue to fuel demand.

As people continue to migrate to the Southeast, Florida’s retail and professional services markets will continue to grow to serve them, and the work force that fills that demand will boost Florida’s population further, continuing the demand for housing of all price ranges. Distribution and warehousing naturally follow, and so continues the relationship between commercial and residential real estate. Both markets depend upon one another but do not necessarily follow the same trends when the market is influenced by unnatural demand stimulus, such as it was with the investor-driven boom in residential housing.

Is real estate investment still an attractive alternative to the stock market’s volatility?

Yes. And due to Florida’s inherent land scarcity, values will continue to rise well into the future. We still remain a value as compared to other markets, such as California, New York, D.C. and Atlanta.

Ever since Sept. 11, news developments are constantly affecting the stock market. That’s not the case with real estate. When you look at long-term investments — even with Florida’s insurance and property tax issues — real estate is still a bargain and a good investment.

What are the biggest challenges in Florida’s real estate market?

Property insurance and tax rates are the primary concern in both the residential and commercial markets. Insurance rates have risen dramatically over the last two years, especially in certain areas along the coasts. Simply put, Florida needs more competition in the insurance arena. There are many ideas being explored, such as investor cooperatives and increased equity positions, and some investors are beginning to self-insure. Lee Arnold is very involved in a state council currently addressing the issue.

As for property tax, you experience increases any time there is a spike in the demand curve. There are fixed-income homeowners here who can no longer afford their property tax bill because their home’s value has risen so dramatically. These homeowners may have to sell their homes and leave, as builders convert older properties into higher-value homes to attract the many wealthy baby boomers migrating to Florida. Many options are being explored statewide to mitigate the impact of property tax spikes on Floridians.

How should commercial investors choose a brokerage firm?

When looking for professional guidance in either market, seek out the counsel of a specialist in that business line. The increased number of residential agents practicing commercial brokerage in the last two years also added to the investment frenzy and over-inflated values, particularly in the multi-family and local investor-controlled retail property markets. Many investors over the last year were left holding the bag when their full-service agent in a residential shop decided not to play in that field anymore. Ask for their rsum and check references to ensure you are working with a commercial specialist.

TOM BIBLE is vice president of operations for Colliers Arnold, Tampa. Reach him at tbible@colliersarnold.com or (813) 205-9497.

Wednesday, 31 January 2007 19:00

Supply chain management

The goal of supply chain management is to balance supply and demand, profitably, for products and services.

Supply chain management involves many “rights,” according to Suresh Sethi, Ph.D., director of the Center for Intelligent Supply Networks (C4iSN) at The University of Texas at Dallas School of Management:

“The delivery of the right product at the right price to the right store in the right quantity to the right customer at the right time. Similar rights apply to services.”

Delivery of goods and services to customers in modern economies requires a network of enterprises. “It is not uncommon for a single customer’s request to be fulfilled by an average of 20-plus supply network partners,” says Sethi. “This increases the complexity of managing supply chains. Add other complexities such as demand uncertainties, supply risks, transportation hazards, product governance and environmental regulations, and the task of managing supply chains becomes enormously difficult.”

Smart Business spoke to Sethi about ways to improve supply chain management.

What is an intelligent supply network?

A supply network consists of all parties involved in fulfilling a customer request. An intelligent supply network is one that can adapt efficiently and profitably to unforeseen events. This is accomplished by designing flexibility into the network and the presence of software and hardware agents that enable the network to (1) detect shocks and modify decisions in response, (2) learn in the process, and (3) make better decisions in the future.

What are some of the current drivers for intelligent supply networks?

Global competition, outsourcing and poor visibility — a firm’s ability to collect and analyze distributed data, generate specific recommendations and match insights to strategy — have increased supply-and-demand risks. There is a tremendous need to transform static supply chains into adaptive ones to boost their operational agility.

Other drivers include lack of trust and coordination, and inability to allocate profits fairly. Many supply chain partners have conflicting goals and objectives. Solutions need to be explored in order to align those goals and objectives, perhaps in the form of incentives and contracts for the benefit of all members of the chain.

Why are today’s supply networks inefficient?

Supply chains are not well integrated. This happens when production cannot access real-time purchasing information. Up-to-date parts and component information is not available. Product design collaboration is made difficult because of incomplete CAD standards. Frequent supply shortages occur because of machine breakdowns or transportation hazards. Short product life cycles result in high demand variability and poor forecasting. Complexities are present due to globalization and outsourcing. High levels of inventories result from unforeseen events and poor visibility.

How can corporations improve supply chain performance?

Supply chain partners should treat supply chains as end-to-end entities. Focus not on components, but on the entire chain. Ensure visibility and proper coordination. Explore contracts and incentives that will align the supply chain partners. Ensure proper cash flows to align with the flow of products and services.

What are some of today’s most challenging supply chain problems?

When introducing new products in highly decentralized global supply chains, there is a need to align product life cycles with supply chain activities in order to bring high-quality products faster to market and at low cost. Use of technologies such as Radio Frequency Identification (RFID) and decision support systems may provide better visibility. Thus, methods have to be devised to evaluate investments in these technologies, including models for making optimal decisions when faced with poor information.

Additional challenges include: How to deal with risks faced by supply chains? What are the objectives to be maximized when faced with such risks? How do we coordinate supply chains so that the objectives of the various partners are aligned? Again, this requires the development of proper contracts and incentives, and methods of allocating profits to the partners.

How can schools help?

Schools such as UTD’s School of Management offer supply chain management concentration in its graduate programs and have high-quality doctoral programs devoted to supply chain management research.

Our C4iSN was created to help local industry improve supply chain performance, be the knowledge portal and thought leader for the supply chain community, and to advance scientific and operational knowledge.

SURESH SETHI, Ph.D., is director of the Center for Intelligent Supply Networks and Charles & Nancy Davidson Distinguished Professor of Operations Management at The University of Texas at Dallas School of Management. To learn more about C4iSN’s activities, contact Divakar Rajamani, managing director, at (469) 371-4300. Reach Sethi at (972) 883-6245 or sethi@utdallas.edu.

Sunday, 31 December 2006 19:00

Executive coaching

Executive coaching helps successful people become even more successful, according to Robert Hicks, Ph.D., director of executive and professional coaching at The University of Texas at Dallas School of Management. “Executive coaching helps people change their perspective and behavior patterns to increase effectiveness,” says Hicks. “It’s a formal relationship that begins with the setting of goals and a timetable for reaching them. An executive coach is someone who the person seeking coaching can bounce ideas off to uncover creative solutions — a thinking partner. A good coach asks the tough questions.”

Hicks has been coaching and educating others to become coaches for many years. “It’s a field that will continue to grow and is rapidly becoming an established academic discipline. The value to executives, professionals, entrepreneurs and their organizations is tremendous,” he adds.

Smart Business asked Hicks why an executive would want to seek a coach, what to look for and what to expect.

What areas do executives typically seek coaching for?

Coaching is very individually determined, and coaching goals can change over time. Typical areas include leadership skills; organizational effectiveness; career or professional advancement; work-life balance; personal skills and interpersonal style issues.

There is no greater way for a leader to enhance his or her effectiveness and development than through coaching. Anyone can take classes and obtain a good degree of knowledge, but a coach helps the person apply that knowledge to his or her unique situation.

What is coaching not?

Executive coaching is not designed to deal with poor performers who are on a disciplinary track. The person being coached might need improvement, but he or she is of unique value to the organization because of position or potential.

Executive coaches are not consultants. They don’t give advice on the specific, technical aspects of a business.

Executive coaching is not counseling. In rare cases, an executive’s personal issues may need to be addressed by a therapist before executive coaching begins.

Who makes a good candidate?

Successful executives are life-long learners who value personal and professional development. They are aware of their strengths and potential weaknesses — or are at least interested in finding out about them. They have a strong sense of self and welcome feedback. They see the cost of coaching not as an expense, but as an investment.

What is the time frame?

Executive coaching is not necessarily a brief process. It usually lasts between six months and a year, although it is not unusual for an executive to extend the process because of positive results.

I coach my clients on the average of once or twice a month. We begin by setting goals and a time frame for meeting them. I’ve coached some executives for many years and now see them less frequently, perhaps once every few months when we’re in ‘maintenance’ mode. Sometimes there is a time gap, then the person comes back for coaching in new areas.

What should an executive look for in a coach?

A good executive coach needs to be personally well-grounded and have solid experience dealing with senior-level people and understanding their lifestyles. They deal with successful people who are very confident, so they need the same level of confidence.

They have to be able to think in business terms.

Executive coaching is not a touchy-feely process. The coach needs to be able to draw from a broad repertoire of models, tools and approaches that he can apply to various situations. In this regard, the coach’s education should be scrutinized. The best executive coach educational programs teach these various approaches, rather than a standard one-size-fits-all method.

There are many ways to coach, and the coach needs to be familiar with the options and techniques available. An executive coach needs to understand how organizations work, be politically savvy and understand the behavioral change process.

Are companies developing employees to become executive coaches?

Yes. We are seeing more companies that want to develop a coaching culture. They are providing coaching skills education for internal coaches so that they have on-site resources, and they are educating their managers and leaders in the coaching managerial style.

At UT Dallas, we design programs for companies to meet both of these needs so that people with leadership responsibilities can get the best out of their people, which is a primary goal of coaching — bringing out the highest and best use of the talent that people bring to an organization.

ROBERT HICKS, Ph.D., is director of executive and professional coaching at UT Dallas, which is part of The University of Texas at Dallas School of Management. Reach him at (972) 883-5900 or robert.hicks@utdallas.edu.