The importance of an entrepreneurial culture in established companies

“Often when people think of entrepreneurialism, they think of someone who launches and runs an early stage business,” says Bill Schumacher, senior vice president and market leader at Westfield Bank. “But an entrepreneur could be the leader of an established company, or anyone within a company who’s responsible for finding ways to enhance and improve existing products, or to create new products in order to stay ahead of the competition through continuous innovation.”

Entrepreneurialism doesn’t just happen organically in an organization, he says. It’s encouraged by leadership and needs continued support to survive.

“Leadership can empower a group or department to be open minded and share their thoughts and ideas openly without fear of criticism,” he says.

Smart Business spoke with Schumacher about entrepreneurship in business: what it looks like, how it’s nurtured and what role banks play in helping entrepreneurial companies get their financial footing.

Why is entrepreneurship in business important?

Entrepreneurship in business helps, in broad terms, identify new products and services and adapt to a changing world. It’s the strategic practice of creativity. It’s collaborative and is undertaken throughout an organization with the aim of doing things better or doing them in a way that hasn’t been done before.

Companies survive by trying to do things differently. There’s always a competitor lurking, so there are always improvements that can be made to stay competitive not just locally, but nationally and even globally.

Entrepreneurship is a way of being proactive, testing the way a company thinks and behaves in order to gain an edge, rather than be reactive. It helps companies think outside the box.

What does entrepreneurship in business look like in practice?

Entrepreneurship in business is top-down and intentional. It is embedded in a company’s culture.

Clear priorities should be established, and processes should be put in place to get feedback and measure the results to evaluate whether what’s being done to move the needle is effective relative to the goals that have been set. There should be regular meetings and communication to discuss progress. A Strengths, Weaknesses, Opportunities and Threats (SWOT) Analysis is a concise and proven process to evaluate the progress made.

It’s great to think big and shoot for the stars, but too often companies do little to no planning regarding their capital needs and how they’ll finance their ideas. An idea on its own won’t gain traction without financial backing. So many initiatives fail not because the idea was bad, but because it was undercapitalized.

How does entrepreneurship in business relate to banking and lending?

Banks play a key role as companies look to take their entrepreneurial ideas to market. Companies need banks to provide the financing to fund innovations but also need a banking partner that can properly structure that financing.

Bankers also act as advisers to companies and deal with many types of businesses in a variety of industries and of various sizes. That gives bankers a lot of experience, wisdom and knowledge about what businesses do right and what they do wrong.

There is a lot of nonlending advice and counseling that comes from a good banking relationship. Bankers can help identify what investments should be made or when it’s better to pass, whether a company is making the right decision or paying a fair price. Those conversations require trust between a business and its banking partner.

Entrepreneurial companies are innovative in their thinking and bold in their decision making. But to survive, companies also need strong financial oversight and a trusted partner to guide them through their financial decision-making. Boldness is good, but it has to be tempered by wisdom.

Entrepreneurialism is alive in local businesses, but well-thought-out plans are critical to success. Companies should hire entrepreneurially minded employees and work with knowledgeable advisers to enhance the chances that the ideas employees generate will succeed.

Insights Banking & Finance is brought to you by Westfield Bank

Use the right tools to increase available cash flow

Treasury management encompasses all of a company’s working capital programs. There are best practices that create efficiencies in treasury operations and technological solutions that help companies manage payables and receivables. Treasury management can also involve liquidity solutions, making it easy to leverage short-term cash for investments.

Companies that adopt the latest treasury management tools increase their competitiveness and can positively affect their profits, liquidity profile, and customer and employee satisfaction.

Some companies, however, get stuck employing the same processes they’ve used for decades, ignoring alternatives that could greatly improve efficiency.

Smart Business spoke with Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank, about the effect treasury management efficiency has on business operations.

Where do companies tend to make mistakes with treasury management?

Many companies become set in their ways because they’ve got a staff that’s been in the same roles for a long time who are using the same processes that have been in place for decades. They tend not to embrace new technological advancements available in the marketplace, which means they’re missing out on strategic opportunities. Efficiently managing cash inflows and outflows creates excess cash that can be used to reduce interest expense by paying down debt and/or to increase interest earned through timely investment.

Another mistake companies make is not protecting themselves properly from fraud. Companies get comfortable with the people who run the day-to-day operations of a treasury department. Sometimes those people’s lives change, and they do things that are unexpected. There are fraud prevention tools that can protect a business from fraud, which is important because just one incidence of fraud can wipe out a company’s profitability.

Where can improvements be made in the treasury management processes?

A treasury diagnostic review can help companies discern best practices in all areas.

For payables, that could mean adopting electronic payment methods rather than paper, using virtual cards and automated clearing house (ACH) for the electronic transfer of funds.

On the receivables side, companies can receive hundreds of paper payments, which need to be keyed in manually. Improvements in receivables management now include intelligent character recognition in lockbox processing that can capture invoice data at a high quality and reduced expense.

The theme of digitization and electronification can also extend to the back office, employing processes that reduce the area needed for the paper backup of payment histories by storing them in the cloud rather than a storeroom or in rows of filing cabinets.

Companies need to have strong programs in place to protect themselves from fraud. Educating all employees about ways to avoid business email compromise and other common fraud techniques is critical to protecting company assets. Using dual control in all money movement and leveraging fraud management tools like positive pay services are also best practices.

How can a bank help companies improve their treasury management processes?

It’s easy for companies to get caught up in their day-to-day tasks and overlook some of their lost opportunities. They also just might not be aware of all the tools available from banks that could help them become more efficient.

A bank’s goal is to be a trusted, consultative adviser that can talk with business owners to get a clear understanding of their operating environment. Banks work with clients in many industries, which gives them broad knowledge of the treasury management and back office practices being used, which helps them discern best practices and tailor that knowledge into actionable insights for their clients.

Companies should leverage their banker to get another perspective on what’s happening in the market and what resources are available to avoid fraud, and work together to drive business results. By questioning the status quo, companies can drive their business forward.

Insights Banking & Finance is brought to you by Huntington Bank

Why it’s important for your bank to know your succession plans

Succession plans show a bank that a business owner is focused on the company’s future and is taking steps to ensure that if something happens, the business can succeed without him or her at the helm. 

“When an owner is engaged and is thinking ahead, it gives a bank confidence,” says Kurt Kappa, chief lending officer at First Federal Lakewood.

Still, many business owners don’t want to think about the business existing without them. They might know they need a plan, but resist putting one in place. That can create problems in a banking relationship.

Smart Business spoke with Kappa about the importance of a succession plan and why banks want to know about it.

Why does a business’s succession plan matter to a bank? 

When an owner’s exit involves transitioning the business to the next generation or to employees, it’s important for the bank to get to know and build relationships with the next generation of ownership. The relationship between a bank and a business owner is personal, and banks want to know that the people lined up to take over the business know the industry, understand operations and have a vision for the business’s future.

A sale or transfer could also affect existing loan covenants. Companies that are headed toward a sale event are going to put significant emphasis on growth, building up their balance sheet and income statements. That growth could trigger a loan covenant. 

Additionally, in a transition, an owner will likely pull money out of the company ahead of his or her exit. That makes sense for owners because they built the business and have earned their share. A bank can be the source of financing if the newly transitioned business owner needs additional cash flow to maintain the business through the transition. 

How does a business’s succession plan affect the decisions a bank would make regarding that business?

Banks want to know that business owners have a contingency plan in the event that they’re suddenly unable to operate the business — they want to know what happens to the company, who takes over, and if that person or people are capable of taking it over in that event. For example, if the owner’s spouse inherits the business, will they be able to run it, or do they plan to sell? Is there a life insurance policy in place that will be able to cover the company’s debt? If there is no plan in place, a lot could go wrong that would negatively affect the lending relationship. 

When should a business owner talk with his or her lender about the business’ succession plan?

The business’s bank should be made aware of the company’s succession plans very early in the relationship. The relationship began with the current owner, so the bank already knows his or her story and feels comfortable with that lending arrangement. But once a transition plan is in place, the sooner the bank can know the plan and the players in the succession plan, the better. 

Without a succession plan, the business could be put in a tough place if a sudden transition in ownership is made. This situation could disrupt the current lending relationship if the bank doesn’t feel confident in the new owner and his or her ability to run the company. 

When should succession planning begin?

Succession or exit planning should begin as soon as an owner decides whether to transfer the business to an heir or an employee, or to sell it. Either way, the process can’t be done overnight. 

And while it might be tempting to put a plan together and then forget about it, understand that the conditions that exist at the time the plan is created could, and probably will, change before the plan is implemented. It’s a good idea to start assembling a plan at least five years before an exit and revisit the plan if circumstances change that require the plan to be updated.

Insights Banking & Finance is brought to you by First Federal Lakewood

The benefits of banking local with a community bank

For all big banks offer, the trade-off is often access and local knowledge. Business owners want a banker who is a trusted adviser and often that’s not possible in a national bank where decision makers tend to be centralized at the corporate headquarters. Their distance means they may not understand the nuances of doing business in a particular community.

Conversely, local insight and advice, as well as personalized service, are among the mainstays of community banking. They understand where the local market is going and how other local businesses are adjusting to those trends because they are in the market, every day. That’s important when a business owner needs advice about whether or not conditions are right to expand or hold off and it’s not the type of advice local businesses get from a large bank.

Smart Business spoke with Kurt Raicevich, SVP and Chief Retail Officer at First Federal Lakewood, about how services differ between community banks and their national competitors.

What are the banking services most small businesses need?

All businesses need checking and savings accounts — places to house money, a mechanism to send it where it needs to go and a good accounting of those transfers and receipts via a monthly statement. As banks get more technologically advanced and businesses become more sophisticated, online banking services are of increasing value. These easy-to-access services, many available through smartphone applications at the touch of a finger, offer owners the ability to quickly see if a check cleared or a deposit posted.

Remote deposit is a service that enables businesses to make a bank deposit through a device installed at their place of business. It means not taking time out of a busy day to go to the bank or paying employees to make bank runs.

Access to capital is another critical need for companies that are experiencing rapid growth or need to invest in technology or capital improvements. Lines of credit can help cover seasonal issues or fund large orders that require a capital influx. Loans are critical to fund vehicles and equipment, or make facility improvements.

When it comes to accessing loans and lines of credit, speed is essential. Some community banks have responded to this need with programs that eliminate much of the paperwork by creating a digital approval process that business owners can complete at their desks. These simplified programs save owners valuable time while connecting them to the funds that are critical to keep their businesses running at full speed.

But most importantly, small business owners need trusted advisers who are plugged into the issues area businesses deal with. They need a sounding board for ideas and someone who can share best practices gleaned from their exposure to a broad swath of businesses.

What can local community banks offer small businesses that larger banks can’t?

Banks, whether large or small, have a similar menu of offerings for businesses. What can’t be offered by large banks is typically local decision making — a decision-maker with the authority to affect fees, rates, products and more.

At a community bank, a business customer is no more than a few feet away from someone who can provide a definitive yes or no on a decision. That’s because community banks maintain, first and foremost, a commitment to the businesses within a specific geographic area. This gives local banks a high commitment to the community and greater speed and authority when it comes to decision making.

What questions should small business owners ask themselves that will help them determine if they’re in the best banking situation?

Business owners should ask themselves questions about the direction they want to go. Are they looking to grow? How long do they want to continue to operate the business? What might an exit look like? What is standing in the way of the success they want to achieve? With these questions in mind, the next question should be whether or not their current bank can help find any of the answers. If not, it may be time to find a banking partner that can.

Insights Banking & Finance is brought to you by First Federal Lakewood

How to protect margins from cyclical commodity price changes

When it comes to commodities, companies are concerned about price fluctuations and how those fluctuations affect gross margins and budgets. As companies look to protect their cost structure, buyers worry about prices unexpectedly going up and how those price fluctuations will affect margins.

“Margins are affected by an array of exposures that carry the risk of price fluctuations, which in turn creates changes that affect customer prices, which will need to be adjusted to compensate,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank.

Buying commodities brings a consistent exposure and a price risk that can’t always be passed on. Companies, however, can protect their margins and cost structures by hedging their commodity exposures. That’s why it’s critically important for companies to know and understand their exposure.

Smart Business spoke with Altman about working with commodities, the importance of understanding exposures and how companies can protect themselves, and their customers, from risk.

How can businesses protect their margins from cyclical commodity price changes?

Companies can hedge to reduce their risk exposure in commodities. Two common ways of doing that include using a swap or optionality. Which to use depends on the nature of the exposure.

Commodity swaps, which trade a floating price for a fixed price over a period of time, is a strategy that works well with a set budget, and when the company knows what the line-item cost is going to be.

Optionality is a strategy which gives a company the option to buy or sell at a certain price. When the concern is that costs will increase, a company can buy a call option to cap the costs while preserving downside participation.

What mistakes do companies tend to make when it comes to buying commodities?

It’s important that companies understand their exposure with any commodity. It sounds simple, but there are many companies that don’t know their exposure and, equally as important, what it means to their business.

Companies that buy commodities should understand how much of their cost structure is exposed and the volatility of the commodities they buy. Commodity volatility affects pricing, which affects existing contract structures. When commodity prices are high, there’s not a lot a company can do to insulate itself because hedging in a high-price environment isn’t effective.

Some companies may know their exposure, but they don’t have a thorough enough understanding about what that exposure really means for them. That could be because the company has always operated in a steady price environment, so it’s never been an issue and not something that’s a priority to track. That’s not just a problem at middle-market companies, it happens at large companies, too.

Companies that don’t pay attention to their commodity exposures can miss budgets and miss their margins, which unfortunately is all too common. That’s why it’s so important for companies to fully understand their exposure and its implications because there are steps companies can take to mitigate those risks.

Who can help companies better understand their exposure?

Some banks can help companies get a sense of their exposure through a sensitivity analysis, which can give companies a better sense of how their margins are affected by certain price changes. This can help companies determine the range of price changes that they can live with, and when they need to hedge to protect themselves.

Companies that are uncertain about their commodities exposures should have a conversation with their bank as soon as they’re able — before they experience an issue. These conversations can take place any time, but it’s a good idea to have them if something in the cost structure has changed or a pricing mechanism has changed.

Buyers that have constant commodities exposure should always have an eye on the market and regularly keep in touch with their bank so they can act when prices are low. Those with seasonal exposures should have these conversations late in the third or early in the fourth quarter when they’re in their budgeting cycles.

Insights Banking & Finance is brought to you by Huntington Bank

How community banks can help businesses reach the next level

Growing businesses often need an influx of capital to fund various growth activities, which is why loans and lines of credit are popular among small to midsize businesses. To a small business, a $10,000 to $50,000 loan could make a significant difference in the growth plan, but getting that financing is a big decision that should take a lot of thought before a commitment is made.

“Companies may need to act quickly, but they shouldn’t act hastily,” says Kurt Raicevich, SVP and Retail Division Head at First Federal Lakewood.

Through his interactions with business owners, Raicevich understands that there is a lot of work that goes into running their business — the owners are often doing all the hiring, firing, invoicing, as well as running much of the day-to-day themselves. When a business owner applies for financing through conventional methods, they’re asked for significant paperwork, including their tax returns, personal financial statements, accounts receivable, and payables, which takes time many owners just don’t have.

“Business owners need flexibility and speed,” he says. “Community banks understand this and offer products that enable them to apply for a loan by answering just a few questions, all electronically, so they don’t have to leave their desks. It’s good to know that funding can be available with just a few clicks.”

Smart Business spoke with Raicevich about how community banks can help businesses fund projects and what to consider ahead of a financing request.

What are the difficulties businesses face when trying to get a loan for a relatively small amount of money?

For a bank, the amount of work it takes to make a $1 million loan and a $50,000 loan is the same. Since it tends to be more economical for banks to make loans for larger amounts, it can make it difficult for businesses to get loans for relatively smaller amounts.

In addition, smaller businesses can struggle to qualify for some lending products if they lack capital or have insufficient cash flow. Some businesses may not have been in business long enough to qualify for the products some banks offer, and that can really hamstring growth.

While larger banks focus on larger businesses, community banks are committed to helping the community thrive, and that means helping small businesses. They understand that a $50,000 line of credit could be critical for a local business to grow.

What are some common uses of funds in the $10,000 and $50,000 range?

Companies typically use lines of credit that are between $10,000 and $50,000 to purchase inventory in advance of a large order — for example, when a company needs to fund a purchase of materials to manufacture products for a big sale.

A term loan is a product that funds more substantial purchases, such as a truck or a lathe. These capital goods, in turn, can be termed out and depreciated over their useful life, which can offset the interest that accompanies a loan.

What should businesses understand about the process, the terms, etc. to make sure they get the full benefit of this financing?

Businesses should do their due diligence before pursuing financing from a bank. Before committing to a loan, they should understand what goal they are trying to reach through financing. Whether they are working to improve operations or trying to open up additional revenue streams or markets, they should understand the risks and rewards of using financing to meet those goals.

In addition, business owners must understand the financial strain that financing will have on their business. If paying on a loan taken out to help one part of the business makes another part of the business suffer, it could create a damaging situation that will be difficult to recover from.

Business owners have limited time and a lot of responsibility. Community banks understand that. Community banks are constantly communicating with businesses to learn about their financing needs and best practices. Because of their experience working with small businesses, community banks are adept at finding ways to help businesses fund the projects to can help them as they grow.

Insights Banking & Finance is brought to you by First Federal Lakewood

How to better understand, affect your corporate culture

Corporate culture defines the personality of a company. It is the engine that drives employee engagement and employee retention, and leads to improved customer interactions. Customers, through a company’s employees, experience a company’s culture.

“Considering how much time is spent at work, culture is also important because it has a direct impact on an employee’s sense of happiness and fulfillment,” says Nellie Rodman senior vice president, human resources leader at Westfield Bank. “People look forward to going to work with people they enjoy at a place they like.”

Smart Business spoke with Rodman about the role of corporate culture, and how organizations can monitor the impact on their corporate health.

Why is corporate culture important?

A good corporate culture sets the tone for how a company does business, and how its employees interact with each other, with customers and other stakeholders. People want to work for companies where their efforts are valued, recognized and appreciated. If the culture is negative and employees don’t feel valued, they will seek opportunities elsewhere, and that ultimately affects the bottom line.

How can an organization get the best sense of the health of its corporate culture?

The best indicators of corporate culture are employee retention, employee engagement and employee advocacy. These may be affected by factors outside the company’s control, but they still offer an indication of how the company is perceived and how well employees like working there.

Most companies conduct employee engagement surveys, which create a conduit for more direct feedback. It’s also a way for employees to get their message across anonymously, so they can speak more freely and without concern for judgment.

Employee committees offer a means through which employees can raise concerns that are elevated through the ranks, eventually reaching leadership.

Leadership should also take the time to attend company events that put them out in front of employees. That visibility and accessibility can create opportunities for casual conversations and give leadership the opportunity to see how employees engage with each other.

Who at a company has the most influence over its corporate culture?

Corporate culture is leader enabled and employee driven. Leaders need to understand what motivates their employees to work for their company and not another.

Leadership communication and active listening are key to understanding the state of a company’s culture and how it can be adjusted to continue to meet the needs of an ever-changing workforce. Leadership should be accessible and approachable, giving employees opportunities to come to them with ideas. Those ideas might not always be implemented, but it’s important that they’re heard so employees feel their input matters.

How can an organization that doesn’t like the state of its culture improve it?

Culture, in many ways, is shaped by, or at least starts with, hiring. A company’s recruiters and department managers are the front line of a company’s culture.

Companies should look for the right combination of skill set and attitude. Someone might be highly skilled and knowledgeable, but if there’s a strong sense the person won’t fit in with the other employees or with customers, they won’t make a good hire.

Once a hiring decision is made, use onboarding to introduce the new hire to the company’s cultural values. Also, fun, organizational activities facilitate employee engagement, collaboration and a sense of community, and are a good way to help new hires get acclimated, meet their coworkers and feel welcome in their new position.

Improving a culture requires proactive leadership focus and continuous attention through full employment relationships: recruiting, hiring, onboarding, ongoing management and exit. Lack of attention in any of these areas can negatively impact the company’s culture.

Insights Banking & Finance is brought to you by Westfield Bank

A closer look at the factors that affect decision-making for business owners

A business owner’s sense of economic trends is often at the center of his or her decision-making. However, gathering information to make an educated guess about the right next moves — when it’s time to reinvest in the company, expand, acquire another business or make capital improvements — is not an exact science.

“Business owners rely on foot traffic — how many people they see coming through the front door — and their revenue trends to determine when and how much they should reinvest in their business,” says John Augustine, Chief Investment Officer at Huntington Private Bank.

While business owners’ decision-making is largely influenced by revenue trends, they still rely heavily on gut feeling, for better or worse.

Smart Business spoke with Augustine about decision-making and where to get reliable, local information that can be used for strategic planning.

How do business owners typically gauge the state of the economy?

Primarily, owners rely on what they see as an indicator of economic health. Downtown business owners might look up and down main street to get a sense of the foot traffic; those operating in strip malls may watch the traffic and count the cars in the parking lot. They also talk to their peers through different local associations. This informal, cross-industry survey gives them a sense of how a swath of businesses are performing and offers a better picture of the health of the community.

There are also more general economic indicators that can be used. For instance, businesses like to know if people’s incomes in a municipality or region are growing or stagnating. The regional unemployment rate versus the state and national rates also can be informative, as can the performance of the housing market.

Business owners, ideally, will take both a top-down and bottom-up approach, using their own perception of the local economy’s health and combining that with a broader perspective that accounts for regional economic factors, such as unemployment and confidence.

What information should be used when forecasting?

To forecast, business owners should get information that’s as local as possible, such as data from a specific municipality or state agency. Then they should look at historic trends to understand the business’s performance through different conditions, which can give a sense of how it might perform in the future.

Businesses also can connect with peers in their region to find out how they see trends playing out. They also can compare their thoughts and determine where their assessments align and diverge. This exercise should either validate a business owner’s gut feeling, or give him or her a reason to reassess.

It’s difficult to project and estimate forward economic activity because it’s impossible to predict when something might happen to change circumstances. So, make an educated guess, but don’t get so many sources that the information becomes burdensome and confusing. Peer groups are a good way to distill the information into the more useful data points.

What should businesses consider as they look to expand?

Businesses considering an expansion should first be comfortable with the soundness of their business model. There should be a high degree of confidence that the model can be successfully replicated.

In addition to the soundness of a business model, business owners should consider employees — are the right people in place, or available, to be able to make a move? Owners can’t be in all places at once, and a tight labor market might make staffing an expansion difficult.

Also, they should consider how the expansion will be funded. There are many options, including loans, equity or a mix.

Banks can offer companies a different perspective by using anonymous peer comparisons to give a sense of how similar businesses are performing. This helps with benchmarking. They can also offer an informed economic view of the region as well as funding options for upcoming projects. It’s an exercise that may expose companies to opportunities they otherwise might not have recognized.

Insights Banking & Finance is brought to you by Huntington Bank

A financial advisory team can guide your business success

A business owner’s financial team can be seen as an external board of directors — advisers who can be looked to for input and guidance regarding business strategies. 

Whether you are just starting a business or are an established venture, surrounding yourself with a strong, competent financial team is necessary to guide you through everything from setup through acquisition strategies as the company grows. 

“Any financial team should comprise knowledgeable individuals who care more about the business owner and his or her success than getting a paycheck,” says Kurt Kappa, chief lending officer at First Federal Lakewood.

Smart Business spoke with Kappa about the role a financial team plays in a business’ success.

Who should be on the financial team?

Business owners should assemble a team of advisers that he or she trusts and who can work together, such as a banker, a CPA, an attorney and an industry expert. This team should be able to help the business owner establish operations, keep things running smoothly and advise on important issues. It may be beneficial for these advisers to exist outside of an organization, so they can look at everything with a clear eye and bring an outside perspective to business decisions.

Why both a banker and a CPA? 

Professionals in the financial sector often get lumped together into one bucket, but it’s important to distinguish the roles that each of these advisers plays. 

Bankers can provide owners with advice on the structure of the company, taking distributions, liquidity events, when and whether to raise equity, and what to do with the money if the business is sold. 

Accountants, on the other hand, are very important when it comes to the business’s financial plan, creating the most advantageous tax strategy and helping with distributions. Any distributions put in place could negatively impact the company when getting additional financing from a bank. If a company doesn’t show enough income on the bottom line or in its cash flow, the business may not qualify for financing. The accountant can keep an eye on the business’s cash flow in order to ensure its well-positioned for growth.

Having this array of service providers on one team means a single issue can be debated from different perspectives at the same time. When a company is looking to grow, it’s important to be able to create a strategy that ensures it moves forward on strong footing. The number one goal is to have any advisers that you choose be able to work together as a team to lead your business to success. 

What sort of issues should be brought before these advisers?

As business owners consider plans for the future — whether they’re looking to expand, buy a new building or equipment, or bring on a large customer — they should consult with their financial advisory team to devise a strategy. Then, each member of the team can help map out the steps needed to achieve success. 

Outside of meetings to address specific issues, it’s a good idea to bring the advisory team together and talk at regular intervals on the general state of the business. In between those regular meetings, business owners can talk with individual team members to get their perspectives on ideas before a discussion is had with the group. 

How is the financial team assembled?

Before choosing their advisory team, business owners should start by identifying their own strengths and weaknesses to determine what expertise they will need to supplement their skills. Once that’s determined, they should network to find people with the needed expertise. The key, regardless of who is chosen, is trust. Whoever is on the team must have the owner’s best interests in mind. 

Building the team is a process. It’s common, as the business grows and advances through the different stages of its life cycle, to pull one person off to add another as different needs — an acquisition or the sale of the business, for example —arise. An integral part of a company’s growth is having the right advisory team in place. When everyone is moving in same direction, they’re moving the company forward.

Insights Banking & Finance is brought to you by First Federal Lakewood

Life insurance as a risk management vehicle to preserve company value

The role of life insurance as a financial protection policy for families is well understood. Life insurance as a risk management tool designed to protect the value of the business, however, might not be as well known.

A company’s value, especially in small and mid-sized companies, can be tied to the owner or a single executive and their ability to manage the business. That makes protecting the business from their sudden demise or inability to work critical; otherwise the company can’t continue to provide for the people who have come to rely on it.

“Small and mid-sized companies need a mechanism that helps them deal with the death or disability of shareholders and key individuals, both of which are foundational to the company’s ability to perform and maintain company value,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank.

Smart Business spoke with Altman about life insurance, and how it can preserve company value in the event of the unexpected loss of a key individual.

Why is life insurance important for companies?

Business owners and key executives are a wealth of information in their organizations. But the size of their organization typically limits the size and depth of the management team, meaning there are fewer people with whom skills and organizational knowledge can be shared. That compartmentalization creates risk in a company. Life insurance, in this scenario, would serve as a safety net, replacing the monetary value of what that key person brings to the company while giving the company time to adjust and replace the person in the event he or she is unexpectedly lost.

Another common protective application of life insurance is in situations involving multiple shareholders. In the event that one shareholder dies, life insurance becomes a funding mechanism for the remaining ownership to purchase the deceased partner’s shares. Without this protection, the existing shareholders or the company may be forced to buy the shares with their own cash, depleting valuable liquidity unnecessarily.

Life insurance is also useful for risk mitigation. In some instances, a bank may require a company to have an insurance policy in place to cover the value of a loan to ensure it gets repaid if a critical member of the business passes away. That requirement is more common in early stage companies that don’t otherwise have the collateral to cover a loan.

In what ways can a corporate life insurance policy benefit larger companies?

The application of life insurance in a larger company is really more about the creation of an alternate funding mechanism. Businesses are looking for tools to attract, retain and reward key executives. One method is to set up nonqualified deferred compensation plans that trade enhanced retirement benefits for an executive’s commitment to the organization for a set number of years. A life insurance policy can be a method of funding that long-term obligation. This approach is appealing because it’s balance-sheet neutral and also offers a tax benefit.

Corporate-owned life insurance can be bought for a set number of people with no medical underwriting. Corporations also like that it doesn’t have any surrender charges.

What is important for companies to consider as they design people-centered risk management strategies?

Companies should work to identify and understand their most significant risks. It’s important that business owners take time to consider what could diminish the value of the business. To that end, it’s critical to determine who are the people driving operations and what is being done to protect the business should they become unavailable for whatever reason.

Organizations that have multiple shareholders should review the financial obligations that would arise in the event of the death of a shareholder, specifically whether any existing insurance is structured in a way that provides the remaining shareholders or the company with the cash to buy those shares.

It can be a hard discussion to have, but the company’s risk position in this regard should at least be reviewed every three to five years or whenever there is a significant change to the business.

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