How business owners can protect their network from the inside and out

Jalal Nazeri, certified information systems auditor, Sensiba San Filippo LLP

Jalal Nazeri, certified information systems auditor, Sensiba San Filippo LLP

In this day and age, only a small number of businesses can function without a network of computers. Unfortunately, there are inherent risks to computer usage — hackers, viruses, worms, spyware, malware, unethical use of stolen passwords and credentials, unauthorized data removal by employees with USB flash drives, or servers crashing and bringing productivity to a halt. Owners of small to midsize businesses have to be cautious of cyberattackers, and depending on your industry, your business may be an easier target than larger businesses.

With cyberattacks on the rise, Smart Business spoke with Jalal Nazeri, a certified information systems auditor at Sensiba San Filippo LLP to discuss what business owners can do to protect themselves.

What is the first step toward protection?

The first task in creating a secure network is to draft a security policy, which, if carefully managed, can lower the risk of these threats.

When drafting a policy, consider every perceived threat, no matter how unlikely it may seem. Communicating and monitoring these policies regularly will lay the groundwork for compliance in defense of your network.

There are a number of core ideas to consider in implementing a policy. First, you will need to do a risk assessment to identify risks and determine the best methods to prepare for them. Then you will need to classify data by sensitivity level and develop access restrictions. Consider what the security requirements are of an authorized user and assess the possible risk, both logical and physical. In addition, create a plan to back up each user’s data. Finally, ongoing monitoring and maintenance of your risk assessment and the underlying policies and procedures is a must.

How do you manage employees’ usage of company computers?

An acceptable use policy is a common element to include in your security policy. The acceptable use policy restricts users by giving them guidelines on what they can and cannot do on your company’s network. Adding these restrictions can place an inconvenience on the end user, but it’s imperative to have them in place for the protection of your organization. The end user can be an organization’s weakest point.

Once a user reviews the policy and accepts the restrictions in place, it’s important that he or she sign the policy. Users should be made to re-sign the policy whenever it changes, and at regular intervals even when unchanged. Some companies set a six-month timeline, others vary. The value of the policy depends on the communication and monitoring of compliance. Without enforcement, its value is greatly reduced.

What are other tools businesses can use?

A few other key items a business can use are firewalls, content filters, encryption, virus protection, and accounts and passwords. Business owners need to maintain these tools, not just put them in place and forget about them.

Firewalls act as a barrier to the internal network, blocking unwanted traffic, while content filters restrict material delivered on the network and control what content is available to users on the Internet. Encryption is becoming more vital for transferring and storing data, whether it is for regulatory compliance or customer protection from theft.

Anti-virus software is a must on all your servers and workstations. A scheduled virus scan should never be missed, and always have automatic updates turned on.

Never use generic passwords or account names, and restrict users to using only their own login. Passwords should follow a complexity requirement, like the use of a mix of letters, punctuation, symbols and numbers, and should also have a limited lifetime and a rotation.

What is the value of taking these steps?

With small to midsize businesses, budget is always a major consideration in what is plausible in obtaining the most secured environment. With a good policy in place, identification of priority spending can be determined and can reduce the need for excess software and hardware.

Cyberattackers look to gain access to networks that have the least amount of resistance. A good security policy protects data against potential threats. Without one, the company may incur significant remediation costs, lose productivity and even lose clients.

Jalal Nazeri is a certified information systems auditor at Sensiba San Filippo LLP. Reach him at (925) 271-8700 or [email protected]

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How to minimize the risk in M&A transactions

David E. Shaffer, director, Audit & Accounting, Kreischer Miller

David E. Shaffer, director, Audit & Accounting, Kreischer Miller

Companies spend more than $2 trillion on acquisitions every year, according to an article in Harvard Business Review. Yet studies frequently cite failure rates of mergers and acquisitions (M&A) between 70 and 90 percent.

David E. Shaffer, a director in the Audit & Accounting practice at Kreischer Miller, says problems are often the result of poor planning. Companies are enticed by the opportunity to create synergies or boost performance and fail to consider all ramifications of an acquisition.

Smart Business spoke with Shaffer about ways to mitigate the risk and ensure a successful transaction.

Why is the M&A failure rate so high?

Many companies don’t establish a clear business strategy for mergers and acquisitions. Some questions that need to be answered include:

  • What are the goals of the merger or acquisition?
  • Do you want to leverage existing resources or create a new business unit?
  • What is the maximum price you are willing to pay?
  • Must the seller agree to some holdback of the price?
  • What happens to administrative functions and management of the target company?
  • Must key employees sign agreements to stay?
  • Will you negotiate between an asset purchase and a stock purchase?
  • Is culture important?

You should be proactive in identifying candidates for acquisition. Companies that have done many acquisitions tend to ignore requests for proposals because the sellers in such situations usually go with the highest price. They reason that the law of averages is against them and at least one competitor will overpay.

Instead, companies involved in many acquisitions prefer to target entities and establish a relationship before that stage in order to avoid a bidding war.

How should the due diligence process be conducted?

It’s important that you don’t take shortcuts in your due diligence. Hire professionals who are knowledgeable about the industry; they can negotiate better deals for you because they are not emotionally attached and can push harder for seller concessions.

Due diligence should address internal and external factors that create risk in the acquisition and focus on key factors driving profitability — employees, processes, patents, etc.

The more risk present, the more you should ask for holdback in the selling price. For instance, if much of the profit is derived from a few contracts, require that the contracts be renewed under similar terms if the seller is to receive the full purchase price.

M&A failures often result because buyers concentrate too much on cost synergies and lose focus on retaining and/or creating revenue. Client retention at service organizations is at significant risk following a merger or acquisition, according to a 2008 article from McKinsey & Company. Clients will receive misinformation, so it’s important that the acquiring firm step in quickly to assure clients that service levels will equal or exceed what they have been accustomed to expect.

What needs to be done post-acquisition?

It’s important to have a clear post-acquisition plan, including financial goals, with as much detail as possible. The quicker value is created by the acquisition, the better the result for the buyer.

Key post-acquisition steps to ensure a successful integration include:

  • Developing the organizational structure.
  • Developing sales expectations.
  • Identifying what processes and systems will change, and when.
  • Developing performance measures.

Finally, you also need to hold key management responsible for producing results.

David E. Shaffer is a director, Audit & Accounting, at Kreischer Miller. Reach him at (215) 441-4600 or [email protected]

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How to reduce your company’s property tax burden

Jenna R. Kerwood, CMI, principal, Tax Services, Brown Smith Wallace

Jenna R. Kerwood, CMI, principal, Tax Services, Brown Smith Wallace

Computing personal property taxes can be a chore for businesses, particularly if the company’s locations cross various state and local jurisdiction boundary lines. Each state has its own statutes, due dates, assessment ratios and instructions that must be adhered to for a company to be considered “compliant.” These property tax requirements vary greatly and most often have late penalties for missing deadlines. However, digging into these very statutes and instructions can also provide an opportunity to minimize your company’s tax burden.

“Many will run the fixed asset ledger right out of the system and that’s what they’ll report,” says Jenna R. Kerwood, CMI, a principal in Tax Services at Brown Smith Wallace.

However, that usually results in paying more taxes than what is owed because not all assets are taxable. Often, fixed assets are capitalized at a project level, which results in inaccurate reporting for property tax purposes. There may be costs that are not taxable or components of the cost that should be removed. The taxability of these assets can be determined by examining the state and county websites, statutes, assessor manuals and return instructions.

Smart Business spoke to Kerwood about what constitutes personal property and why it’s worth the effort to keep an accurate track of assets.

What is the difference between real estate and personal property?

Real estate refers to land and buildings. Personal property is defined as tangible property that’s movable. It can be difficult to distinguish between the two, especially with manufacturing facilities, and each state has different rules and instructions.

Most states have a three-prong test:

  • Can the item be moved without destroying the real estate?
  • What is the primary purpose the item serves? The more special its use, the more likely that it will be considered personal property.
  • What was the owner’s intent?

The key is whether it would destroy or cause permanent damage to the building if you were to remove the item.

What is the basis of property tax assessments?

The basis of value for real estate and personal property is fair market value — the amount a willing buyer would pay in a market when there’s no duress, such as a bankruptcy or foreclosure. Fair market value is subjective, which gives you an opportunity to analyze all of the capitalized cost to determine how best to reflect the ‘fair market value’ of the asset.

When reporting assets for property tax purposes, you need to understand their physical life, use, maintenance schedules, etc., in order to depreciate correctly. Items with a short life have faster depreciation. Manufacturing equipment might have computerized components that can be placed on a shorter life with a more reasonable depreciation schedule.

How can businesses lower their tax burden?

Start with fixed asset accounting records. When filing personal property tax returns, you report the original cost of the asset by year of acquisition. Companies might have a retirement policy by which they dispose of, melt down or cannibalize an asset, but that’s not reflected on the books.

It’s best to address problems on the front end. Review the asset ledger for listings that don’t look right — focus on the high dollar items or assets with ‘miscellaneous’ as the description. Scrutinize asset invoices and review them with the people who know them; it might be the plant manager for the manufacturing facility, facilities person for the furniture and IT people for the computer asset listing. Another area to consider is depreciation. The county will tell you the rate, but that may not be accurate and is negotiable.

How much can be saved?

Conservatively, businesses can lower personal property taxes by 20 percent. Most state rates are at 2 percent. When you tell a company that cleaning up asset lists can save $30,000 or more, it gets their attention.

Jenna R. Kerwood, CMI, is a principal, Tax Services, at Brown Smith Wallace. Reach her at (314) 983-1360 or [email protected]

For more on this and other tax topics, visit Brown Smith Wallace’s Tax Insights.

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How new standards will change government reporting requirements

Kevin Smith, Partner, Crowe Horwath LLP

Kevin Smith, Partner, Crowe Horwath LLP

Government pensions have received significant scrutiny over the past few years, and several studies indicate that the state and local government pension plans are severely underfunded, with cumulative estimates ranging from $1 trillion to $4 trillion in the U.S. New Governmental Accounting Standards Board (GASB) reporting standards will make the problem more apparent by making the shortfalls prominent on financial statements of the government employer. This transparency likely will drive increased scrutiny by legislatures, taxpayers, rating agencies and other stakeholders.

Instead of recognizing pension costs on balance sheets as annual expenditures based on a funding approach, government entities will need to address net pension liability — the difference between present value of projected benefit payments and investments set aside to cover those obligations.

“In some instances, reporting agencies could be required to show millions of dollars in new liabilities on their balance sheets and make sizeable adjustments to their income and expense statements as well,” says Kevin W. Smith, CPA, partner at Crowe Horwath.

Smart Business spoke with Smith about the new standards and how they will affect state and local governments.

How will the new standards take effect?

GASB Statement No. 67, ‘Financial Reporting for Pension Plans,’ and Statement No. 68, ‘Accounting and Financial Reporting for Pensions,’ take effect in fiscal years starting after June 15, 2013, and June 15, 2014, respectively. They replace requirements in GASB Statements Nos. 25, 27 and 50.

The fundamental change is that the previous standards did not require pension benefits to retired employees to be reported as a liability; employers disclosed an estimated amount of unfunded pension liability only in notes to the financial statements and in required supplementary information, but the net pension liability itself was not reflected on the balance sheet.

New standards require government entities to report the net underfunded pension obligations on financial statements prepared under the accrual basis — a statement of net position, for example.

Government entities also will have to adjust their estimate value of assets set aside to meet pension promises. Governments had been allowed to use an assumed long-term rate of return, with current rates of 7 percent or more as expected return on invested assets. If certain conditions are met, that will change to a blend between long-term rate of return and municipal bond rates, currently about 4 percent, which will have a significant impact on the projected liability.

How will local and state governments be affected by the change?

For many governments this ‘new’ liability will completely offset all of an entity’s net assets — similar to equity in a private entity.

Some cities, counties, school districts or special purpose governments might be affected by both new standards. As local government employers, these institutions must comply with GASB 68. If they administer pension plans for police, firefighters or others, they must adhere to GASB 67 plan administrator requirements.

The new standards spell out requirements for disclosing related information in the notes with the financial statements, which includes descriptions of plan and benefits provided, assumptions used to determine net pension liability and descriptions of benefit changes. Preparing these disclosures will take a significant effort.

What should be done now in anticipation?

The purpose of the new standards is to provide a clearer picture of financial obligations to current and former employees and to treat net pension liability like other long-term obligations. However, the standards might make government entities appear to be financially weaker, even though their financial reality is unchanged. Financial officers should be prepared to explain the situation to taxpayers, employees and other stakeholders. Management should take a proactive approach and begin now to explain anticipated changes to all stakeholders.

Local agencies also need to be ready to take on the extra workload that will be associated with the transition. The GASB is expected to release implementation guidance this summer that will clarify the next steps for state and local governments.

Kevin W. Smith, CPA, is a partner at Crowe Horwath. Reach him at (214) 777-5208 or [email protected]

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How to keep a company successful over the long haul

Roger Weninger, Southern California regional managing partner, Moss Adams LLP

Roger Weninger, Southern California regional managing partner, Moss Adams LLP

It’s not easy to keep a company going for 100 years — there are going to be a lot of challenges to address along the way.

“There has to be a willingness to change and take chances,” says Roger Weninger, Southern California regional managing partner at Moss Adams LLP. “When I think of longevity, I think of growth. Not purely as it relates to size but also ingenuity, the willingness to change and remain relevant. The company that can continue doing the same thing and remain successful is the exception.”

Smart Business spoke with Weninger about common characteristics of companies that stand the test of time.

What are the keys to longevity for companies?

It’s very important to develop leaders, plural. Companies, no matter how successful they are, get to a point where they need to provide opportunities to others. That can be hard for an individual in charge to understand — the concept that he or she can do less and it will result in more. By allowing others to make decisions and feel a part of the success of the organization, you create a strong culture of growth and change. People thrive in these settings, and so will the business.

You also need to have leaders and decision-makers at all levels. To think that leadership takes place only at the highest levels within any organization is a mistake. Instill a culture of risk taking and empowerment where people at all levels feel they can make a difference and aren’t afraid they’ll be punished for making a mistake. You’ll be amazed at the ideas and the level of ownership people will take when they’re asked, and even expected, to contribute to organizational change and success.

Every organization should have strategic plans and goals that have application to every employee. In addition, each employee should know what contribution he or she can make to reach those goals.

How can a company stay relevant in changing times?

It sounds trite, but it goes back to your mission and focus — self-awareness of your strengths and weaknesses, as well as how you fit into the needs of your clients and customers. Creating this awareness within your organization will provide a clear decision-making and prioritization path for your people. If there’s doubt as to what your value proposition is, or what it isn’t, you can waste a lot of time and send confusing messages to your people and to existing and prospective clients. Being the best at something is always a good goal.

What poses the biggest threat to longevity?

Complacency. When things are going well, there’s a tendency to become satisfied and convince yourself that things will never change. The willingness to listen and actually hear what’s being said, rather than simply assuming you already have all the answers, is crucial. Again, you must have multiple decision-makers and leaders, and this highlights the need for ongoing succession analysis. Succession isn’t something that should be dusted off and practiced when the owner is ready to retire.

People want to see the opportunity to grow into leadership positions from the time they walk in the door. That doesn’t mean they want to take over the top spot in the organization within their first year of employment, but it does mean they want to feel relevant, appreciated and impactful. If they have to wait for someone to die or move on, they may not stick around very long. New leaders bring different ideas and knowledge, and not having that will restrict your ability to grow and sustain the organization through good times and bad.

There’s no such thing as staying flat — you’re either on an incline or decline. You have to always be working to get better. If you’re willing to listen, your people and your clients will tell you how.

Roger Weninger is the Southern California regional managing partner at Moss Adams LLP. Reach him at (949) 221-4047 or [email protected]

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How to develop a business recovery and continuity plan

 William M. Goddard, CPCU, principal, Insurance Advisory Services, Brown Smith Wallace

William M. Goddard, CPCU, principal, Insurance Advisory Services, Brown Smith Wallace

Lawrence J. Newell, CISA, CISM, QSA, CBRM, manager, Risk Advisory Services, Brown Smith Wallace

Lawrence J. Newell, CISA, CISM, QSA, CBRM, manager, Risk Advisory Services, Brown Smith Wallace

Recovering from a flood or fire is hard for a business. But dealing with problems caused by a lack of business continuity plans or inadequate insurance can make it worse.

“The better you can plan for how to deal with an incident, the better off you’ll be,” says Lawrence J. Newell, CISA, CBRM, QSA, CBRM, manager of Risk Advisory Services at Brown Smith Wallace. “I say ‘incident’ because it could be something not always thought about in typical disaster terms, such as a breach of credit card information.”

Smart Business spoke with Newell and William M. Goddard, CPCU, a principal in the firm’s Insurance Advisory Services, about developing business recovery plans and the insurance options available to reduce risk.

What goes into a business continuity/recovery plan?

One component is a business impact analysis, placing a value on what the business needs to operate. Layered underneath are the business processes, which include the business continuity plan and its identifying process flows. For example, length of shutdown is part of the business continuity plan, which contains timelines.
Then there is the disaster recovery plan, which covers anything the business depends on that is IT related. Information has more value than just the data because of the intelligence built around it. So you need to identify where that data is processed, stored or transmitted.

There is also a communication plan, making sure an incident is communicated upward, downward and outward — upward to the executive management team, downward to the enterprise and outward to customers and business affiliates. Part of the communication plan is identifying the impact, whether it’s a simple outage or a more widespread incident such as a tornado, flood or hurricane.

What options are available to manage risk?

In the example of a credit card breach, there are risk reduction processes such as applying security standards developed by the credit card industry. There’s also cyber risk insurance, which insures costs to locate the problem, including hiring experts to do that, notification of cardholders, and business interruption loss.

What do businesses need to know about disaster coverage in insurance policies?

Generally, what we think of as disasters — earthquakes, hurricanes — are covered under property insurance. But business insurance policies also contain sublimits. For instance, you can have $100 million insurance coverage, but the sublimit might be $25 million for a flood. Policies carry different sublimits, and a company planning to use insurance to cover these disasters needs to be aware of them.

What is co-insurance, and how does that impact claim payments?

After a loss, the insurance company will judge the value of a building, say it’s $1 million. A co-insurance clause is typically 90 percent, meaning that the building should be insured to 90 percent of its value — so you’ve bought $900,000 insurance coverage on a $1 million building. If it burned to the ground, you would be paid $900,000. But if you only bought $800,000 insurance coverage and were supposed to buy $900,000, all recovery is based on having 88.8 percent of the coverage you should have. If a small warehouse fire causes $100,000 in damages, you wouldn’t be paid $100,000, but $88,800. This concept of co-insurance is frequently in policies and can be punitive for loss recovery.

How can insurance costs be reduced?

Insurance companies will inspect your property and following their recommendations can make you a better risk, reducing premiums. It’s also important to figure out exactly what coverage you need — it’s best to get an independent adviser. There have been many court cases involving inadequate insurance; they’re expensive to bring and hard to win. It’s better to get it right when you buy the policy, so you should have someone other than the person who’s selling you the insurance answer your questions and conduct an analysis of your needs.

William M. Goddard, CPCU, is a principal, Insurance Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1253 or [email protected]

Lawrence J. Newell, CISA, CISM, QSA, CBRM, manager, Risk Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1218 or [email protected]

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How SOC reports provide assurance to stakeholders, customers

Jeff Stark, audit partner, Sensiba San Filippo LLP

Jeff Stark, audit partner, Sensiba San Filippo LLP

Service organizations are trusted with some of their customers’ most sensitive information. In order to thrive, these organizations need their stakeholders’ full faith that their internal controls safeguard both financial and nonfinancial information, and are designed and operating effectively. How can service organizations demonstrate that their control systems are protecting their customers? According to the American Institute of Certified Public Accountants (AICPA), Service Organization Control (SOC) reports are the answer.

Smart Business spoke with Jeff Stark, audit partner at Sensiba San Filippo LLP, about SOC reporting and how it helps service organizations provide the broad spectrum of assurance their stakeholders require.

What are SOC reports?

SOC reports are standards created by the AICPA to allow for reporting on controls at service organizations. There are three types of SOC reports: SOC 1, SOC 2 and SOC 3. Together, they both replace and expand on Statements on Auditing Standards (SAS) 70 reports, giving service organizations the tools they need to provide the assurance their stakeholders require.

Though not widely known, SOC reports are becoming essential to the ongoing growth of the technology service sector as more businesses are outsourcing tasks and functions to outside service providers. Since the risk of the service provider becomes the risk of their stakeholders and customers, SOC reports provide much needed assurance, empowering service organizations to gain trust, while helping to protect their stakeholders from outside risk.

Why was SAS 70 replaced?

Since 1992, SAS 70 has provided service organizations with a vehicle to disclose control objectives and activities related to financial reporting. As the market changed, service organizations had a growing need to report on many nonfinancial control objectives. SAS 70, with its limited intended focus, was too often being used for purposes outside of financial controls.

In order to solve this problem, the AICPA issued Statements on Standards for Attestation Engagements (SSAE) 16, which replaced audit standards with attestation standards for internal controls over financial reporting. SSAE 16 standards became the basis for SOC 1 reporting, replacing SAS 70.

Additionally, the AICPA issued guidance related to attestation on controls relevant to the Trust Service Principles and Criteria including security, availability, processing integrity, confidentiality and privacy. This guidance became the basis for SOC 2 reporting, bridging the gap between market need for broad assurance reporting and the previously narrow financial focus of SAS 70.

How can an organization know whether a SOC 1 or SOC 2 report is right for them?

Whether an organization should obtain a SOC 1 or SOC 2 report depends entirely on the controls in question. Controls relating to information that could affect financial statements are covered by SOC 1 reports. SOC 2 covers controls related to nonfinancial information.

Payroll processors, employee benefit plan managers and banks commonly use SOC 1 reports. Data centers, Software as a Service providers and companies subject to industry-specific regulatory standards frequently benefit from SOC 2 reports.

Why should companies consider SOC reporting?

Service organizations that want to remain competitive need internal control attestation in a variety of areas. Many companies will not even consider working with an organization without assurance that relevant controls are well designed and operating effectively. In a highly risk-averse business climate, organizations can demonstrate effective controls with the appropriate SOC report.

Jeff Stark is an audit partner at Sensiba San Filippo LLP. Reach him at (480) 286-7780 or [email protected]

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How to create a customer-driven culture

Christopher F. Meshginpoosh, Director, Audit & Accounting, Kreischer Miller

Christopher F. Meshginpoosh, Director, Audit & Accounting, Kreischer Miller

Growing a business in today’s environment is as challenging as ever — especially with relatively stagnant overall economic growth. That’s why it’s more important than ever to hold onto existing customers.

According to Christopher F. Meshginpoosh, a director in the Audit & Accounting practice at Kreischer Miller, companies frequently spend too much time trying to win new customers and not enough trying to hang onto existing customers.

Smart Business spoke with Meshginpoosh about techniques that companies can use to create an organization where every employee is driven to meet the needs of its customers.

Why do some companies struggle with customer service?

It’s often a function of a lack of processes that ingrain and reinforce the importance of customer service. When an entrepreneur starts a new business, he or she understands the value of customer relationships because he or she worked hard for those relationships and can’t afford to lose them.

However, as the company grows, employees are added who lack that same perspective. Without formal processes — training, documented expectations, reward systems, etc. — the focus on customer service can gradually erode.

Additionally, all too often, companies treat customer service like a department. For the record, I didn’t come up with that — it’s on the website of Zappos, a company with an almost legendary commitment to customer service. Every employee has the ability to strengthen or damage a customer relationship, so it’s important for companies to make sure they hire people who have demonstrated an ability to put customers first.

What steps can management take to improve customer service?

That’s an easy one: Look in the mirror.  If management wants every person in the organization to demonstrate the importance of customer service, then the first step is to make sure that they demonstrate it. And that doesn’t just mean managers of the sales or customer service functions. If you want happy employees who thrive on meeting or exceeding the needs of customers, then managers in charge of production, human resources, administration and other functions also must walk the walk.

How can companies reinforce the importance of customer service?

One easy way is to publicly recognize those who demonstrate an outstanding commitment to customer service. Do you have an employee who went out of his or her way to solve a problem for a customer? Don’t just tell that person, tell everyone.

Additionally, make sure reward systems and incentive programs include explicit customer service goals. While some people seem to have an innate ability to want to make customers happy, others may need a little additional motivation. As a result, it’s important to ensure that annual reviews and compensation programs include explicit customer service objectives. If your reward systems simply focus on metrics like profitability or efficiency, then you run the risk of driving short-term profits at the risk of long-term customer losses.

How do you know if your efforts are moving the needle?

While there are many formal methods such as customer service surveys or monitoring customer service metrics, one easy way is to routinely have your employees ask a simple question: What did I do to add value to the customer relationship?
Everyone gets bogged down in the details once in a while, but they should still be able to step back and determine whether their actions strengthened or damaged a customer relationship. If they can’t routinely point to actions that strengthened a relationship, then there’s room for improvement. If they can, then they’re well on their way to creating strong, lasting customer relationships.

Christopher F. Meshginpoosh is a director, Audit & Accounting, at Kreischer Miller. Reach him at (215) 441-4600 or [email protected]

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How to manage your 401(k) options when changing jobs

Bob E. Coode, CSA, partner, Skoda Minotti Financial Services

Bob E. Coode, CSA, partner, Skoda Minotti Financial Services

Robert D. Coode, prinicipal, Skoda Minotti Financial Services

Robert D. Coode, prinicipal, Skoda Minotti Financial Services

A job change can be a stressful, busy time, which is why many people forget about 401(k) funds and simply leave them in a former employer’s plan.

“I can’t emphasize enough that people need to properly educate themselves about their options,” says Robert D. Coode, a principal at Skoda Minotti Financial Services. “Most people we encounter are hesitant to rollover old 401(k) funds because they aren’t aware of their options.”

There also is a tendency to think amounts aren’t significant enough to warrant attention. The average person holds 11 jobs between the ages of 18 and 44, according to the Bureau of Labor Statistics, so each 401(k) account might not be substantial.

“But when you start consolidating plans, they become more meaningful,” says Bob E. Coode, CSA, a partner with Skoda Minotti Financial Services.

Smart Business spoke with Robert and Bob Coode about options available for 401(k) plans when you leave a job.

Why shouldn’t you leave 401(k) funds with a former employer’s plan?

Many people wind up with up to seven retirement accounts during the course of their careers. That poses a problem with record keeping. But the bigger problem is not having anyone to help you manage these accounts. It makes sense to consolidate them into one IRA.
Some people think that having multiple plans makes them diverse. But, if there’s significant overlap among the accounts, it actually defeats the purpose.

When leaving a job, what options are available regarding 401(k) plans?

The options are:

  • Leaving funds in the old plan.
  • Transferring funds to the new employer’s plan.
  • Directly rolling over money into an IRA.
  • Taking a taxable distribution.

Taking a distribution is not recommended; too many people see old 401(k) accounts as found money. While some people don’t have a choice, many will regret taking the money early and having less money set aside for retirement. The distribution could drive up a person’s tax bracket, cost more in federal taxes, and impose a 10 percent penalty if the participant is under 59½ and there is no hardship, such as medical expenses or an impending foreclosure.

Usually, the recommended option is a direct rollover into an IRA, which provides freedom of choice. In employer-based plans, the employer or the company managing the plan makes all the decisions about the number and types of investments. Typical 401(k) plans offer 15 to 20 investment choices. An IRA rollover gives access to a much wider array of investments.

Every IRA account should have a combination of equity, bonds and fixed income, and alternative investments to varying degrees, depending on the person’s age and risk appetite.

What are alternative investments?

Examples are long/short mutual funds, managed futures, real estate, commodities and currencies.
People may be wary of the word ‘alternative,’ but these are simply investments that don’t necessarily correlate with the market. Alternative investments are favored primarily because their returns have a low correlation to the three traditional asset types — stocks, bonds and cash.
These investments have been available to large endowments and high net worth investors for a long time and worked so well that fund companies made them available to retail investors.

With a traditional equity mutual fund, all investments are long term. Managers are required to keep 85 to 95 percent invested in equities at all times. If the market is due for a correction or a bear market is anticipated, they can’t short a stock or move into cash to protect the investor. A long/short mutual fund, which can be considered an alternative investment, has the ability to hold stocks for a long time or short the market if a correction is due.

Advisory Services offered through Investment Advisors, a division of ProEquities, Inc., a Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member, FINRA & SIPC. Skoda Minotti is independent of ProEquities, Inc.

Robert D. Coode is a prinicipal at Skoda Minotti Financial Services. Reach him at (440) 605-7119 or [email protected]

Bob E. Coode, CSA, is a partner at Skoda Minotti Financial Services. Reach him at (440) 605-7182 or [email protected]

Insights Accounting & Consulting is brought to you by Skoda Minotti

How to prepare cash flow projections that spark business success

John West, CPA, CGMA, director of finance, SS&G

John West, CPA, CGMA, director of finance, SS&G

Cash flow management is important for business owners who need to know where they stand on a daily, weekly, and monthly basis in order to pay bills and employees on time. If, for example, a business owner unexpectedly discovers he or she cannot purchase inventory, it can shut down his or her operation, says John West, CPA, CGMA, director of finance at SS&G.

Cash flow management is a far different world for larger corporations, he says, as they tend to closely monitor cash flow and run their organizations as lean as possible — something smaller companies could learn from.

“To some degree, you’re just not exposed to it when you are a smaller company — you’re not thinking in that mindset.”

Smart Business spoke with West about how to handle cash flow management.

How does cash flow forecasting act as a warning system?

Many organizations consider cash flow on a weekly basis — looking at payables, accounts receivable, inventory, payroll, etc. By monitoring on a weekly or at least a monthly basis, businesses can foresee and fund potential shortfalls and not go out of business. For example, if they know they’re going to fall short in six months, they can obtain a line of credit or fund fixed assets.

Where do businesses get into trouble with cash flow and cash flow projections?

Fundamentally, it’s misunderstanding how cash flow and cash flow forecasting works in their operation. Problems also come from not realizing how business seasonality impacts cash flow. When receivables and inventory grow, cash is needed to cover them.

It’s important to do projections one to two years out. Many organizations don’t go out that far; they just do it on a quarterly basis. That’s more just looking at the current status as opposed to a projection.

How can companies guard against overly optimistic projections?

Payables and payroll can be fairly predictable, other than inventory fluctuations, so finance can do a great job at monitoring those. Overly optimistic projections usually come down to an overly optimistic sales forecast, so have finance take a hard look at changes, trends and new customers.

How should cash flow and shortfalls be managed?

Organizations should obtain a line of credit, even if they don’t need one. Once they run into trouble, lenders are far less likely to lend. There’s no interest charge to have available credit sitting there.

Another strategy is using a corporate credit card through the payables department. Wait 30 days to make a payment, and then put it on the card to get up to another 30 days.
Financing fixed assets is something a lot of organizations don’t do, but rates are great right now. Banks are very willing to give three- or five-year loans on fixed assets, which can help with a shortfall for the year.

It’s key for businesses to focus on collections by contacting their customer base and sending out reminder letters. Receivables shouldn’t go past their terms. If they are causing delays it could cause a cash shortfall.

Pushing out payables and extending terms is another more recent cash management trend. Some organizations send out vendor letters, stating they are pushing their payment time back X number of days. Otherwise, it’s something that could be considered when entering into a vendor agreement. Also, weigh vendor discounts against payment terms to see if the value is offset by potential shortfalls.

Finally, no one wants to say it, but it might be necessary to eliminate expenses, such as payroll, inventory and even whole product lines.

If business owners aren’t ‘numbers people,’ how should they tackle cash flow?

Businesses should calculate their projections to understand their current position, even if it takes outside accounting help. However, cash flow projections can actually be easier in small and midsize businesses because owners are more involved day to day.

If there’s a shortfall, accept it and move on. It’s hard to face the fact that there’s trouble, but it already exists. Now it’s just a matter of putting it on paper and dealing with it.

John West, CPA, CGMA is director of finance at SS&G. Reach him at (440) 248-8787 or [email protected]

Website: Meet SS&G’s new CEO, Bob Littman, at www.SSandG.com.

Insights Accounting & Consulting is brought to you by SS&G