If tax season is the only time you think about your records, it’s time to establish a system so you can furnish “proof” if your records are under question.
“The typical business owner makes one of two mistakes,” says Harry W. Hunter III, CPA, associate director, SS&G Financial Services, Inc. in Solon. “They don’t keep records at all, or they keep records dating back to 1962. They either keep nothing, or they are pack rats and keep every scrap of paper.”
Smart Business asked Hunter which records to keep and for how long, as well as tips on where to keep records so you can access them should the IRS inquire.
How does a business owner decide what records to keep?
First, decide what your record-retention policy is geared toward: taxes or performance comparison. For taxes, you must follow IRS guidelines for record retention, which include how long you must keep invoices you send out, your bank records, your leases, asset purchases, etc. There are different criteria for each item. However, if you are retaining records to compare how you did this year versus five years ago, this is informal and there are no set policies. The best resource for record-retention guidelines and guidance is your accountant. He or she can provide you with a checklist to review so you can organize your records.
What are some records that business owners will retain?
Everything from invoices to all paid bills. It’s a good idea to keep your appointment calendar, all bank records, fixed-asset depreciation schedules, payroll records, real estate records, trusts and estates, and virtually all financial transactions that take place. The list goes on, and your record-retention system will depend on the complexity of your business. Ultimately, everyone must retain records to prove accuracy of tax filings.
For how long?
This also depends on the business and type of record. Time frames are called statutes of limitations. For a typical business, the time period is three years after the date of filing. If you are suspected of substantial underpayment, that statute extends to six years after filing. For fraud, there is no statute of limitations. Meanwhile, keep in mind that you must retain depreciation records until three years after your schedule expires. So you may hold on to those records for 40 to 50 years.
How should these records be stored?
You are allowed to keep them in any form you want. My clients vary in the way they retain records. I consult solo medical practitioners who keep all of their information in a desk drawer and large practices that store all records electronically. There are others who box their paperwork and store it all off-site. I can’t tell you one way is better than the other because you should design a system that is most practical for you. But here are some tips: If you keep papers stored in a different location, be sure boxes are not on the floor. If your records are damaged by water backup, you might as well not have them. Also, once a year, or at least every other year, go through records and thin them out. There is no need to keep cancelled checks from 18 years ago. You’ll never need those. Again, refer to a checklist or advice from your accountant.
What about electronic records?
As long as scanned records are complete, the IRS will allow electronic versions of any record. It is much easier to keep records electronically these days, but remember, your records are only as good as your backup and your computer. That said, back up at least every day. Also keep a copy of your backup off-site in case of emergency. Finally, you must be able to prove that you follow a backup procedure, and you must evaluate your system for security so unauthorized individuals cannot access electronic back-files.
What circumstances can business owners face if they cannot produce records upon request?
The IRS could potentially disallow all expenses against the income. You are playing with fire if you disregard retention policies and just start deleting information.
HARRY W. HUNTER III, CPA, is associate director of SS&G Financial Services, Inc. in Solon. Reach him at HHunter@SSandG.com or (800) 869-1834.
an accounting professional with taxes and audits? Sure, crunching numbers is the foundation of an accountant’s practice, but even more important is service, experience and specialty. In today’s complex tax environment, accountants focus on areas of concentration, just like doctors do.
“CPAs manage a deep range of financial activities, but our codes of ethics prevent us from denoting this clearly,” says Gary S. Shamis, CPA and managing director of SS&G Financial Services., Inc. “So from an outsider’s perspective, we all look the same.”
The best way to maximize the value of accounting services is to seek out a CPA whose strengths accommodate your needs. You should partner with a professional who understands your industry, can communicate clearly with you about pertinent business issues and serve as a loyal adviser.
Smart Business asked Shamis how to find the best CPA for your business and why you can’t afford to settle for less.
Explain the role of an accountant today.
In a sense, accounting today has become polarized: One focus serves clients in an advisory role, while the other serves assurance services.
First, let’s take a look at the accountant/adviser. In this role, business owners certainly rely on CPAs for a certain degree of compliance services, but mainly, the accountant is a financial resource. Even beyond that, the accountant is a sort of spiritual adviser for entrepreneurs who don’t have business partners. Sometimes, owners look at their accountants as silent partners. They want an accountant who takes an advocacy position and can help them perform better.
On the other hand, accountants who perform assurance services, including audits for the benefit of the general public, can’t serve as an advocate to business owners. It is critical that this focus of accounting is independent not involved in steering the business, offering financial advice or playing that ‘partner’ role. Their role is one of due diligence. Period. This separation between the two services of accounting, as I refer to them, is even more profound today in lieu of Sarbanes-Oxley and the attention dedicated to internal audits.
What qualities should business owners seek in an accountant whom they also want to serve as an adviser?
All CPAs have comparable training, but different professional experience. This is where asking the right questions is important for determining whether the accountant’s specialty matches your business.
First, you should tune into the way the CPA communicates with you. Does he or she make difficult concepts easy to understand? Also, ask about the return-phone-call policy. Can you expect answers the same day? How often does the CPA generally meet with clients and are these discussions face to face? What is the best way to contact the accountant: e-mail or telephone? Is this mode of communication convenient for you? Most importantly, you must partner with an accountant you trust.
How can a business owner determine a CPA’s strengths?
Years ago, CPAs were generalists, but because of the body of knowledge today, CPAs must be specialists. They may focus on international tax, valuation work, audits or small business. You want to find a CPA that has the experience you need for your industry. Ask whether he or she services clients with similar businesses to yours.
What are some traps business owners fall into that prevent them from maximizing the relationship with their accountants?
If you need open-heart surgery, don’t you want the best doctor, even if he or she costs more? Your financial health is one of the most important aspects of your life. You should want the best CPA, regardless of the price. The old adage that you get what you pay for couldn’t be more true. If you want a quality CPA who knows your industry, the return you will realize from the relationship will be your best investment. Settling for the best-price CPA will cost you in terms of not getting the best tax and business advice for you and your business.
How should business owners maximize the value of accounting services?
Arrange year-end planning meetings with your accountant and ask for financial physicals. Ask your CPA to review your progress and share your goals with him or her. It is critical that your CPA understand your long-term goals for your personal life and business. For example, if your goals are to have an estate plan and pass your business to a second generation and your accountant doesn’t know it, the process could end up being inefficient.
GARY S. SHAMIS, CPA, M.Acc., is the managing director of SS&G Financial Services, Inc. Reach him at (440) 248-8787 or GShamis@SSandG.com.
Tired, traditional defined-benefit plans will get even more of an overhaul with reform legislation that reflects a push toward more creative 401(k) plans and other flexible retirement savings vehicles.
The Pension Protection Act of 2006 may put more pressure on managers and business owners. Higher contributions to defined-benefit plans will impact companies’ cash flow and net income.
“The positive is that opportunities exist for employers to provide for their employees’ retirement,” says Mark G. Metzler, CPA and director in the Accounting and Auditing Department of Kreischer Miller.
Smart Business asked Metzler to review what you should know about the act.
What is the Pension Protection Act of 2006?
The Pension Protection Act of 2006 was signed into law by President Bush on Aug. 17, 2006. It is the most comprehensive pension reform legislation since ERISA was enacted in 1974. The act will impact how retirement plans are designed and administered, requiring companies to amend plan documents. It also will increase plan funding and require additional plan disclosures to plan participants and in regulatory filings.
The act reflects the trend away from traditional defined-benefit plans toward 401(k) plans and hybrid designs.
Why was the act necessary?
A number of factors contributed to the need for Congress to take measures to stabilize our retirement plan system. The well-known collapses of WorldCom and Enron resulted in the loss of retirement savings for thousands of employees in their defined-contribution plans. Additionally, the combination of declining stock market values and a low interest rate used for discounting pension obligations created a crisis among sponsors of defined-benefit plans.
Aren’t pension benefits guaranteed?
Yes and no, depending upon the type of plan. With a defined-benefit plan, the Pension Benefit Guaranty Corporation (PBGC) may assume responsibility for payment of certain benefits for terminated plans. However, the large plan terminations in 2002, 2003 and 2004 contributed to the PBGC reporting an excess of $11 billion in claims at the end of 2004. With additional plan terminations after 2004, the PBGC’s ability to pay all of the claims is threatened.
With a defined-contribution plan, there is no such guarantee for the plan participant. The benefit to which an employee is entitled is the amount that can be paid from the employee’s account (based upon both employee and employer contributions and investment earnings).
How does the act help?
The key provisions of the act can be broken down into four areas: reporting and disclosures; participant notices; pension funding; and revenue and other provisions.
With respect to reporting and disclosures, the act requires the plan’s Form 5500 annual reports to be made available electronically on the Department of Labor’s Web site and on the plan sponsor’s intranet Web site. Additionally, multi-employer defined-benefit plans require actuarial certification as to whether the plan is in endangered or critical status.
Participant notification has also been improved. The act requires quarterly benefits statements for participant-directed defined-contribution plans, annual statements for other defined-contribution plans, and statements every three years for defined-benefit pension plans. Also, pension funding has been enhanced by establishing new minimum funding standards for defined-benefit plans and accelerating contribution requirements for at-risk plans.
Other provisions of the act allow companies with up to 500 employees to establish combined defined-benefit and automatic-enrollment 401(k) plans using a single document and trust fund beginning in 2007. Additionally, fiduciary advisers of a plan are permitted to provide investment advice to 401(k) participants or beneficiaries, if certain conditions are met. Also, various tax retirement savings incentives of the 2001 tax law (such as age 50 catch-up contributions) that were set to sunset (expire) in 2010 have been made permanent, unless Congress decides to repeal them at a later date.
How does the act affect the business owner/manager?
CEOs, CFOs and HR directors will want to understand the act. Changes outlined in the act could have dramatic effects on the cash flow, earnings and benefit payments of businesses with benefit plans. Employers and plan sponsors will want to review their existing plans for compliance and may want to consider other plan designs. There appear many opportunities for employers to ensure greater retirement security for their employees.
MARK G. METZLER, CPA is a director at Kreischer Miller in Horsham, Pa. He is also the firm's liaison with the AICPA's Employee Benefit Plan Audit Quality Center. Reach him at (215) 441-4600 or e-mail him at email@example.com.
Whether you need to borrow $1 million to launch a company or $5 million to take your business to the next level, communication is the key to a strong lending relationship with your bank. How will you pay back the loan? What variables in your industry and business affect your balance sheet or income statement and, therefore, your ability to comply with loan covenants?
“Competition among banks is fierce, and that is good for business owners who want to borrow money,” says John Falatok, executive vice president for commercial banking at Sky Bank in Akron.
Still, the current regulatory environment can shut you out of securing a commercial loan if your credit grade slips below a certain level. Without a trusting relationship with a loyal bank, a bad year could significantly reduce your ability of obtaining financing to fund a comeback.
Smart Business asked Falatok to discuss how you can position your business for successful borrowing.
What is the biggest mistake business owners make when applying for a commercial loan?
When launching a business, entrepreneurs tend to underestimate the amount of money it will take to get the company up and running. Think of your business as a boat. Make sure you have enough fuel in the engine to get across the lake, because it’s tough to get gas to the boat if you’re out there drifting.
In business, you need enough capital to make it through the first couple of years so plan ahead. Banks like to look at historical earnings. Even if you have a great business plan and the bank lends you money, if things don’t go well the first 10 months and often they do not the bank probably will not agree to lend you more money.
What qualities should business owners look for in a bank where they are considering applying for a commercial loan?
Look for a bank with a consistent lending philosophy.
One way to know is to ask about historical write-offs. Significant swings in loan charge-offs over a number of years may be an indication of inconsistent lending policies. Another important factor is to look for consistent personnel. Usually, a bank’s lending philosophy will be steady and reliable if there is low manager turn-over. If you discover that a bank lacks these consistencies, you may run into trouble down the road.
What about loan covenants?
In today’s environment, especially with loans of $2 million to more than $50 million, banks generally have loan covenants. This is a promise between the bank and the borrower, whereby the borrower will produce certain operating results. If the borrower’s performance is not in accordance with the covenant, the bank can consider the loan in default and has the right to demand payment or deny future loans.
Covenants are important to banks so they can stay up to date on borrowers’ financial status and assist them if there are activities in the business that could be changed to improve the borrower’s status. But be careful not to enter in an agreement with unrealistic expectations or with severe cost penalties for slipping slightly below covenant requirements. Leeway is important.
Should a borrower disclose the good and bad to your bank? Will a bad year or industry downturn prevent a business owner from securing a loan?
Most veteran bankers have been through up-and-down times, too. They understand that the economy, a cyclical industry and other variables can affect a company’s borrowing power. Don’t be afraid to communicate the good and the bad. If you want to find out if your banker will be loyal to you, ask this hypothetical question: If we posted a small loss, what would be your reaction? You want a bank that won’t overreact when business doesn’t go exactly as planned.
At the same time, you should be willing to share information and discuss situations that negatively affect your ability to make loan payments. Lend insight on why the numbers aren’t as strong as you hoped so your banker understands the market conditions your company faces.
How often should business owners consult with their commercial lenders?
Quarterly meetings are always a good idea or at least twice each year if you are borrowing less than $5 million. Send your lender quarterly financial statements and write a cover letter that updates him or her on the status of your business and initiatives to improve profitability if your numbers are lower than expected. A bank will look positively on a company whose owner reduces salary or distributions to invest all possible cash flow into the business. Always remember, if your business is in a volatile time, the more you communicate, the better.
What’s in a name? If you’re choosing a corporate entity structure, designating your company as an LLC, S-corp or C-corp could change the way you pay taxes, split annual income and divide the profit from a business sale. Deciding which structure fits your company is confusing especially when everyone seems to offer advice on the “best” (and presumably least taxing) option.
“Business owners hear talk out there about the latest fad and figure the best thing for their peers will also work for their businesses,” says Bruce Friedman, a director for SS&G Financial Services Inc. “Setting up an entity without having all the information is a mistake.”
Smart Business asked Friedman for more information to help you make an educated decision.
What are some characteristics of an LLC structure?
LLC stands for limited liability company, and it is the most flexible of all three entities. It has the legal aspects of a corporation but the tax characteristics of a partnership. In other words, LLCs are protected by the corporate veil from a legal perspective, but they are subject to self-employment tax.
LLC owners are called members. There is unlimited ownership an LLC can have members that are single shareholders or corporations. Also, ownership does not have to be consistent with profit sharing. When splitting profits, you have the ability to be extremely creative. You can give preferred investors higher returns. For example, if an LLC includes two members that own the LLC 50/50, they can split annual income 70/30. And if they decide to sell the business, they do not have to split the profits according to this same proportion. They can choose to sell and split it 50/50. The key is, ownership must account for these arrangements in an operating agreement.
What might deter a company from choosing an LLC structure?
LLCs are complex and require an operating agreement that explains how members will share profit, sell the company, etc. This entity can be much more costly to administer than, say, an S-corporation. And because members of an LLC are subject to self-employment taxes, LLCs are generally more taxing than S-corps, as well.
Why might a company choose an S-corp instead of an LLC? What benefits does S-corp entity structure provide?
The S-corp is similar to an LLC, but it’s much less flexible. You are limited in the number of shareholders, and you must share profits based on the ownership distribution. In other words, if two shareholders own equal parts of the company, they must always split the profits 50/50. But S-corps are less taxing than LLCs. Shareholder salaries are subject to Social Security and Medicare tax, but residual profits are not subject to self-employment taxes.
If a company does not need flexibility in profit sharing and does not expect to require this flexibility down the road, I generally recommend a less taxing S-corp structure that is easier and less expensive to administer.
What are examples of typical LLC and S-corp entities?
Rental companies are often LLCs, and sole proprietors can be single-member LLCs. This is a disregarded entity by the federal government, so the sole proprietor does not have to file a separate entity tax return. Tax information is filed on the personal income tax schedule and, basically, the single-member LLC is taxed no differently than before. The advantage is that this sole proprietor gets a corporate veil and can protect personal assets in case of legal action.
However, I find that S-corps are ideal for many companies. I often recommend this entity structure because it fits most companies’ requirements and is a low-maintenance, tax-beneficial option.
What about C-corps? What type of company would adopt this entity structure?
C-corps are dinosaurs, mainly because of double taxation. Any profits in the business are taxed at the corporate level, and shareholders must also pay taxes on the income they take from the business. For example, if a C-corp gains $5 million, it pays the highest tax rate, which is about 42 percent. Then, from that, the shareholder must pay tax again on whatever is left. In our example, after paying the initial business tax, a C-corp is left with $2.9 million. Then, it must take that money out of the business and pay another 20 percent in taxes. The take-home is $2.3 million. If this company were an S-corp, the $2.9 million would be the company’s (and shareholders) to keep.
When is a C-corp appropriate?
All public companies are C-corps. First, C-corps are not limited in number of shareholders. Also, for owners with multiple entities, we might set up one of the businesses as a C-corp to take advantage of lower income tax rates on some income.
BRUCE FRIEDMAN is a director at SS&G Financial Services Inc. Reach him at firstname.lastname@example.org or (330) 668-9696.
With a banker on your side, your business has more leverage to grow, provide new products, expand into different services, reach new customers succeed.
Of course, your banker must know where your business is headed before he or she can provide the resources you need to build a strong company. These honest conversations result in stronger relationships, says Craig Johnson, president and CEO of Franklin Bank in Southfield.
“If you want your banker to be your trusted adviser, you have to trust your banker,” Johnson says. “And by trust, you have to tell him the good, the bad and the ugly. Most bankers are willing to work with a client that tells them the whole story even if it is bad much more than dealing with someone who hides things.”
As trusted advisers, bankers can share critical business information: How might economic trends affect the company? What financial trends shape how the bank makes decisions? What solutions can the banker provide if the institution cannot fulfill your project requirements?
Chances are, you trust an accountant and lawyer to guide you toward sound business strategies. Your banker completes the trifecta of advisers that all business owners need. Smart Business asked Johnson what other information and advice a bank can offer.
Why should you engage your banker in the same conversations you have with an accountant or lawyer?
Often, business owners are so focused on their own industries and individual businesses that they do not view the economy as a whole. A banker has access to various market information. Banks can give you a flavor of what trends we notice in the market, in general. Also, banks interact with lots of different business owners, so we can offer insight on how other professionals weather bad times and take advantage of opportunities.
How does specific financial market knowledge position bankers to advise business owners?
Banks go through cycles like any business. If you have a strong relationship with your banker, he or she will be honest about the bank’s stance on certain financial risks.
For example, say you want to invest in residential land development, which is a loan that is a bit difficult for banks to get their arms around now because of today’s housing market. A banker who is a trusted adviser will be honest with you. Perhaps he or she will explain that the bank is taking a conservative look at these loans. Then, a good banker will offer alternatives maybe grant the loan, but require more equity or greater controls.
The point is, your banker should clue you in about issues the bank is dealing with that affect your ability to fulfill business goals; in this case, obtain a residential land development loan. Of course, this is just one example. In general, your banker can give you a laundry list of alternative products that are more attractive at a given time because of market trends. Just require your banker to always offer options. Your job, then, is to keep an open mind and listen candidly to suggestions that could help your business.
What happens when lawyers, accountants and bankers collaborate?
That doesn’t happen often enough. Business owners usually meet with their bankers, accountants and attorneys several times throughout the year. But most of the time, if not always, those meetings are separate. It’s a good idea to sit down once each year with all three advisers. Have an agenda and talk about your business, where you are, and your goals for the coming year.
Each one will bring its own perspective. If you are discussing a new project, the attorney can give you perspective on legal ramifications. The banker can talk about lending alternatives, and the accountant can address tax benefits. Collectively, you can weigh pros and cons and structure a plan that will mitigate risks to your business. Generally speaking, if all three advisers can reach a consensus on an issue, you will have a better opportunity for success because they were involved early in the planning process.
How can a business owner determine if a banker will truly serve as a trusted adviser?
In most situations, a banker will be a trusted adviser as long as the business owner reciprocates. If you only give your banker the good news and you sugarcoat the bad, your banker will never be your trusted adviser because his or her job is to protect the bank. This is why it is so important to engage in open dialogue.
Over time, if you are honest, you will build a trusting relationship. Your banker will respect your honesty and will work with you through the hard times.
CRAIG JOHNSON is president and CEO of Franklin Bank. Reach him at email@example.com or (248)386-9860.
No business owner wants to pay more tax than necessary or pay earlier than the final deadline. Why drain cash flow and use dollars you could invest in the business? Go ahead and postmark your payment on deadline day. But don’t wait until the end of the year to plan for taxes.
Lack of tax planning can cost a company significant dollars, says Michelle Mahle, tax director at SS&G Financial Services Inc. in Solon. “We want to influence and change what we can before the year closes,” Mahle says. “Then, if a business will have a tax liability, we do what we can to help them reduce it and prepare for it.”
When business owners put off tax planning, it is often too late for them to take advantage of available credits or tax breaks, which can drastically alleviate tax liability. “Looking at taxes before the end of the year allows us to be more proactive and take the initiative to help our clients before it is too late,” Mahle says.
Are you paying more quarterly taxes than necessary? Did your company invest in research and development this year? Are your assets capitalized correctly?
Smart Business asked Mahle why you should take the time to find answers to these questions with your accountant throughout the year.
How can revisiting your tax liability throughout the year help with your cash flow?
Many business owners take the tax estimate their accountants set up earlier in the year as gospel and assume it must be paid in full. This may not be the case. Most businesses take a safe-harbor approach to paying quarterly estimated taxes, and for good reason. This means that their estimates are based on the amount of tax they owed in the prior year to prevent penalties.
However, there are opportunities for businesses to reduce quarterly estimated tax payments if their earnings do not match those of the previous year. If your business is not performing as expected, an estimated tax payment based on last year’s taxes could hurt your cash flow. You should have frequent conversations with your accountant about the financial health and welfare of your business so he or she can adjust the quarterly estimated tax payments accordingly.
How can business owners benefit from capital expenditures?
The Section 179 expense election allows up to $108,000 (2006) in assets to be directly expensed in the same tax year that they are purchased. For example, if you own a machine shop and you purchase equipment that costs $50,000, rather than capitalizing it and depreciating it over a five-year period, Section 179 allows you to expense the entire cost of the equipment in the tax year you purchase it. There are qualifications, one of which is that your business has to be profitable. You’ll want to discuss additional qualifications with your accountant to see if you can take advantage of this provision.
What if a business isn’t buying new equipment, but instead, developing different products? Is it still making an ‘investment’ worthy of a tax credit?
Business owners may not realize that their research-and-development efforts can represent potential tax credits. They often view improvements to products or processes as a necessity, not an opportunity to realize tax breaks. R&D includes changing or modifying a product and/or a process. There are additional factors that determine whether or not you will qualify for an R&D tax credit. You should discuss these efforts with your accountant to find out if your business can take advantage of the credit.
Does a commercial building really have to be depreciated over 39 years?
We frequently conduct cost segregation studies in which we are able to analyze and break down the components of a building and determine the life of each component. Should you need a certain type of ventilation system or special lighting in your facility, you may have an opportunity to depreciate these components over a shorter period of time. This can provide a substantial deduction to a business when you consider changing the depreciable life to five or seven years, as opposed to 39. The timing difference on the depreciation deduction provides tax savings, and most business owners understand the benefit of deducting business expenses sooner rather than later.
Under a special IRS rule, the business can actually take any additional depreciation expense in the tax year the study is performed. Owners can use the timing of these studies to their advantage. These are all issues that business owners should discuss with a trusted accountant.
MICHELLE MAHLE is tax director at SS&G Financial Services Inc. Reach her at firstname.lastname@example.org.
“Driven by a lack of time and a fear of the unknown, many companies rely more on outside consultants than on internal management personnel who have a much better understanding of the true risks impacting the business,” says Chris Meshginpoosh, director of business advisory services for Kreischer Miller. “In many cases, this results in both remaining weaknesses in internal controls as well as excessive compliance costs.”
Outside consultants should serve as coaches during the internal control assessment and testing process, with the ultimate goal of ensuring management’s ability to identify and address future weaknesses in a timely manner. That way, key managers can adjust their systems to accommodate new business risks presented by issues such as acquisitions or entry into different markets.
Smart Business asked Meshginpoosh to address how an effective consultant can teach you how to instill controls that last, and why starting your assessment at the top will set the tone for your organization.
Concerning internal controls, in general, what have been some positive results from the push to comply with Sarbanes-Oxley?
As public companies have addressed the wide range of issues associated with the Sarbanes-Oxley Act, we have seen dramatic improvements in the quality of financial reports as well as a renewed focus on auditor independence. Additionally, the act resulted in more formal communication requirements between auditors and auditing committees that also contribute to more effective audits. Finally, the press surrounding the act has led to a noticeable elevation in the importance of internal controls to all businesses including privately held companies as well as not-for-profits.
The drawback, of course, is the potential cost of compliance. Fortune 500 companies can spend millions trying to comply with the act, and even small companies can spend well into the six figures. Consulting fees can add up when there is an improper balance of management and outside consultant participation. That leads to time spent addressing issues that are not really a concern for their specific organizations.
Outside consultants should act as facilitators, providing management with an understanding of the typical project framework, the risk assessment process, and common assessment techniques. Perhaps most importantly, an outside adviser can help management ensure the sufficiency of its risk assessment efforts, as well as identify potential internal control solutions based on the consultant’s experience with other companies.
What risks do business owners assume when they rely too heavily on outside consultants to assess internal controls?
No matter how qualified third parties are, they can overlook certain risks because they don’t know the business as well as management. Management should be involved and consultants should coach them through the compliance process.
Second, new risks to the company may emerge say, during an acquisition that were not part of a consultant’s initial assessment. Managers should take ownership of the ongoing evaluation process so they can continually evaluate the efficiency of their internal controls.
What is the most effective approach for establishing internal controls?
You should take a top-down approach. Your first concern should be dealing with entity level controls including the tone at the top. Do you have processes in place for anonymous reporting of potentially unethical activities? Do you have a code of conduct that employees understand? Does management set a strong ethical tone? Process level controls are important, but as we learned from cases like Enron, the tone at the top plays an enormous role in the timely prevention and detection of improper activities.
Next, review financial statements and determine the most significant balances and disclosures. Your goal should be to ensure that you focus your efforts on the greatest risks for your company. As part of this process, ensure that you seek the input of an experienced financial statement auditor. Research shows that an alarming proportion of material weaknesses relate to failures to implement effective controls around complex accounting issues.
It’s always a good investment to get constructive feedback from a professional who can train you to develop an assessment process that will work for you. Used properly, consultants can provide valuable advice without breaking the bank.
It’s about finding someone who can share knowledge and observations with management, as well as embed a strong understanding of the assessment process to ensure that management has the tools and skills necessary to maintain cost-effective internal controls on an ongoing basis.
CHRIS MESHGINPOOSH is director of business advisory services at Kreisher Miller. Reach him at email@example.com.
After paying substantial year-end insurance bills and doling out bonuses, they often ring in the new fiscal year cash-poor and strapped with bills from vendors.
“They’ll take the excess cash out of the business and, therefore, have no retained earnings to carry over to the next year,” says Phillip Greening, a treasury management officer at Sky Bank.
A lockbox is a treasury management service that can help medical professionals and other businesses quickly expedite checks to the bank all year long. A familiar service for most business owners, lockboxes provide protection against internal fraud and remove the timely burden of preparing checks for deposits from busy office assistants.
Smart Business asked Greening how lockboxes can help small business owners, including doctors in private practice, efficiently restore cash reserve after depleting end-of-year payouts.
Why do private practices often struggle with cash flow?
Doctors get paid a couple of different ways. Their receivables come in the form of personal payment from patients or compensation from insurance companies or medical providers. The doctor’s office receives checks from lots of different sources, and those are located throughout the country. They are not exactly sure where the check will come from and when they will get it. The lockbox service is designed to get the check into the bank quicker and negate end-of-year cash flow issues.
Who else can benefit from a lockbox?
Any business that wants to quickly turn receivables into usable cash could benefit. The ability to expedite receivables on a daily basis and process them directly from the mail can shave up to a week off the deposit process. An employee gathers the mail, separates checks from invoices, compiles a deposit slip, and assembles the checks and slip to take to the bank.
Many businesses make a policy of only going to the bank three times per week. If you factor in the salary and benefits you pay this employee to organize deposits, a lockbox could be a big savings for any company, particularly those that accept out-of-state checks.
How can lockboxes make office management more efficient?
Customer service is important to small businesses, but so is answering the phone and billing. A mundane project like compiling a deposit for the day is a function that could be outsourced. I’d rather have someone in the doctor’s office answer the phone than compile a deposit slip, or an owner of a small business selling a product than driving to the bank to deliver checks.
What about security?
Essentially, a lockbox is like hiring another employee to help distribute financial responsibilities. Most small businesses appoint one administrator to manage invoicing, accounts receivables, banking and account reconciliation. This lack of checks-and-balances can result in serious fraud issues. Still, by moving the critical duty of depositing checks to an outside vendor a bank the business owner can rest assured that checks are routed directly to a lockbox, and then expedited immediately to the bank for deposit.
What factors prevent business owners from getting a lockbox service?
Some companies do not capitalize on lockbox services because the owner wants to see remittance information, which appears on the stub. For example, when you pay your cable bill, you detach the stub to send with your check. That stub contains information that business owners maintain in their records.
But actually, all that information is available from the bank either through on-line banking or e-mail notification. The original remittance documents are packaged with a copy of the check and mailed back to the business. The only difference is that business owners get a copy of the check instead of physically handling the check before depositing it.
Are there technologies that will allow business owners to handle the check physically but deposit it immediately?
A new system called ‘remote deposit capture’ is available from some banks. Businesses are given a scanner, which functions much like a credit card scanner. The business owner scans each check he or she wishes to deposit. At the end of the day, the scanner links up electronically with the bank system, deposits are recorded, and checks are automatically deposited into the business account. This option, while not available at all financial institutions, gives business owners the ability to deposit without leaving their office and is also a convenience.
PHILLIP GREENING is a treasury management officer at Sky Bank. For more information, call (330) 258-2366 or visit www.skyfi.com.
“The rules have changed dramatically and, as a result, we are in a far more competitive environment than we’ve ever been in,” says Ed Gallagly, the CEO of floridacentral in Tampa. Gallagly speaks of the credit union landscape in particular, but he notes that companies in other industries deal with similar pressures.
One way to differentiate your business from competition is through an effective branding strategy. Gallagly speaks from experience after rolling out a new branding campaign for floridacentral. Here, he offers advice on ways business owners can reinvent their company in the public’s eyes.
How can a company find a firm that will be an effective partner in developing a branding strategy?
Gather a list of credible agencies by consulting with associates in your industry. Interview several firms we talked to a half-dozen branding/marketing companies before making a decision. All of them gave powerful presentations with excellent supporting material, which is important.
How can a company weed options to find a winning agency?
Ask each agency, ‘What can you see doing for our company?’ Listen carefully to their responses. When we posed this question, I got a strange response from a company that wanted my business. He told me, ‘I haven’t the faintest idea.’ This answer was right on. There is no way an agency can make an appreciable impact on your branding success unless they first conduct several months of research, talking to customers, former customers and the public.
This underlines the importance of research in all facets of business. We are careful about researching the business we know, which is finance. But we never conducted surveys to find out how our customers and the public perceived our image, and whether or not we were effective at communicating our strengths as a company.
How should an owner gather feedback from employees?
Name a committee to review and offer suggestions for branding and marketing efforts. You may not choose to involve each person in the decision-making process, as this could slow down the process. We chose six key employees, who worked with the agency and our executive team. Of course, your branding team will depend on your company’s size.
As you begin devising a branding strategy, you’ll want to pique the curiosity of the public. Consider putting up a few large billboards to spark interest. Ours said, ‘Change is coming.’ Your peers and customers will want to know, ‘What’s this? What change is coming?’ Keep the suspense. Tell them to wait and see.
During this time, share your goals for the new branding campaign with employees and your board of directors. You’ll want to keep everyone in the loop to maintain the energy and excitement that goes along with introducing a new brand.
When introducing a new brand a new attitude is a gradual buildup best?
You’ll want to develop your strategy in a gradual way, but you don’t want to lose momentum. It’s best to have an all-encompassing effort where changes occur within a brief period of time so there is continuity. For example, put up new billboards the week before you plan to release your new logo and tagline. Within the next 90 days, convert all media and communication to your new logo and tagline.
What mistakes do businesses make when launching a branding strategy?
The biggest mistake is spending untold thousands or millions of dollars on a program without research. You have to know what the audience wants. If you simply choose it because it looks good, you have no idea whether it will be effective. You see a lot of money wasted in a sea of competitive advertising, but they are ineffective in differentiating one company from the next.
Then what’s the ticket to standing out from the masses?
Your employees are the brand you are the brand. All the fancy advertising and billboards and signage merely support the image and perception the public has of your company, which is nothing more than the employees.
Establish yourself as an expert. Start by hiring the right people. We also sponsor a variety of education seminars that benefit anyone from credit union members to CEOs.
Part of our branding strategy is that we want to be considered the resource center for financial service advice. This education concept applies to any business. Your people need to be experts, because they are the word behind your brand.
ED GALLAGLY is CEO of floridacentral. Reach him at (813) 879-3333.