Growing through Productivity Increases

Productivity is an economic concept that is discussed in the press quite often.  Growing through productivity increases occurs when the quantity of inputs declines, to produce a measure of output.  The sub-set that is referred to is labor productivity, i.e. the amount of labor required to produce a measure of output.  The importance of the statistic is based on its relationship to growth.  If productivity increases, so does economic growth, to some extent.

When an individual states that they are going to become more productive, it usually relates to a desire to increase their organizational habits and improve their time management.  Essentially they are looking to increase their efficiency (inputs), to do a better job (output).  The result is a benefit associated with time saved.

At the company level, when productivity improves, fewer resources are being used to produce the output.  Fewer resources equates to lower production costs, which translates to excess funds in the form of profits, for reinvestment into the business or distribution to investors.  Following are strategies companies employ to increase productivity.

Automation – For a manufacturer this relates to purchasing a machine to make better widgets faster.  However for a service this improvement relates to the efficient storage of information that can be shared and accessed by any department in the organization.  This information will be used for order fulfillment or reporting.  This approach can be costly and time consuming.  If you wish to utilize this strategy, please review “Tips to Mitigate Technology Implementation Challenges.”

Process Improvement – Most processes work best when there is consistency.  Variations in activities and manual processes create a higher probability of error and expose the organization to unnecessary risks and time wasting.  The task of mapping out processes and documenting policies and procedures makes you critically look at the process and identify how things may be accomplished more efficiently, i.e. understand bottlenecks, remove inefficiencies, remove bureaucracy.  If you wish to utilize this strategy, please review “Process Improvement to Eliminate/Contain Non-Value Added Costs in the Services Industry.”

Business Management – As the business grows, so does the complexity of the business. More decisions require more analysis. There are increasing fixed and variable cost considerations and cash flow becomes more important to understand and manage.  Success begins with Strategy and Planning; and subsequently ongoing measuring and reporting.  When Accounting Management, Financial Management; and Risk Management are all optimized and running efficiently; business development can be performed without reservation.  If you wish to utilize this strategy, please review “The Frequency of Best Practices with Small and Medium-Sized Businesses.

The previously mentioned strategies of Automation, Process Improvement and Business Management have historically been the drivers of productivity increases.  But I predict that in the next five years, two additional strategies will emerge as drivers of productivity increases.

Labor Support and Development – High labor turnover is wasteful to any business.  Filling an open position is costly – posting a job; interviewing candidates; hiring an individual; and training the individual.  Once you obtain the right employee, a business should do as much as possible to keep the employee.  A business should invest in an employee, as long as the value received from the employee exceeds the investment by the company in that employee.  Some ways organizations invest in their employees include – providing financial support for job related training; considering non-standard work arrangements; ensuring compensation is at the market rate; and supporting retirement and health care benefits.  From the time the Great Recession began in December 2007, until it officially ended in June 2009, employees continually lost benefits including training and retirement benefits.  Companies that return to pre-recession benefits will experience a jump in morale, sooner than competitors.    For an example of how to utilize this strategy, please review “The Value Embedded in Tele-Commuting.”

A recent example of the support to labor includes – “Blackstone Group LP said Wednesday that it is extending its maternity leave benefits from 12 weeks at full pay to 16 weeks. The move, announced in a memo to employees, is designed in part to help the company compete for talented Wall Street women.”  Lauren Weber and Ryan Dezember.  “Why Blackstone Is Giving New Moms More Time Off” Wall Street Journal Online.  The Wall Street Journal, 22 April 2015.

Data Management – The ability to read data, i.e. Big Data, to understand how to best allocate company resources efficiently, should be a large driver of productivity in the future.  The firm combines price, product, place and promotion in the hope of finding the appropriate relationship to appeal to the target market.  The degree at which these variables are manipulated is based on available data, i.e. geographic assumptions and customer qualities within the geography.   As reported in Game changers: Five opportunities for US growth and renewal a McKinsey Global Institute study (July 2013), “Amazon has taken cross-selling to a new level with sophisticated predictive algorithms that prompt customers with recommendations for related products, services, bundled promotions, and even dynamic pricing; its recommendation engine reportedly drives 30 percent of sales.  But most retailers are still in the earliest stages of implementing these technologies and have achieved best-in-class performance only in narrow functions, such as merchandising or promotions.” (page 75)

In conclusion, firms focused on improving productivity should consider implementing Automation, Process Improvement and Business Management enhancements, as these are proven strategies; as well as additionally incorporating newer opportunities in the areas of Labor Support and Development and Data Management techniques.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

How Problematic is a Financial Restatement?

“On August 12, 2014, the Board of Directors and the Audit Committee of the Board of Directors of Ocwen Financial Corporation, after consultation with Deloitte & Touche LLP, the Company’s independent registered public accounting firm, determined that the Company’s financial statements for the fiscal year ended December 31, 2013 and the quarter ended March 31, 2014 can no longer be relied upon as being in compliance with generally accepted accounting principles.”  (8/12/2014, Securities and Exchange Commission, Ocwen Financial Form 8-k)

As the auditor for Ocwen, it is the responsibility of Deloitte to identify material misstatements.  As required by Auditing Standard No.12, “The objective of the auditor is to identify and appropriately assess the risks of material misstatement, thereby providing a basis for designing and implementing responses to the risks of material misstatement.”

At this point it is unclear whether the Ocwen material misstatement is due to an error in the application of accounting guidelines; or due to fraud.  The top accounting reasons for financial restatements include  – debt and securities issues; expense recording; reserves and accrual estimates; executive compensation; revenue recognition; and, inventory.  While the most probable fraud committed is the management of earnings to mislead investors.  But neither option is very positive for a company to admit.

Regardless of the accounting reason, a financial restatement shakes the confidence of investors, credit institutions and potentially customers/clients.  Regulatory scrutiny may increase and your ability to grow constrained.  As the actual impact to earnings is directly related to the issue, an average cost to restate cannot easily be projected.

In this situation, in response to the announcement – The Ocwen share price fell 4.5% the day of the announcement, to $25.16; Block & Leviton LLP announced that it was investigating the company and certain officers and directors to determine if anyone profited from the alleged accounting errors; The Rosen Law Firm announced the filing of a “Securities Class Action” against Ocwen Financial Corporation; The SEC subpoenaed records from Ocwen regarding its dealings with sister companies; and, S&P lowered its outlook on Ocwen Financial to negative.

Unfortunately, this situation with Ocwen is not uncommon.    According to research performed by the Center for Audit Quality, from 2003 through 2012, 10,479 entities required restatements, i.e. SEC 8-K filings.  For this 10 year period, restatement counts ranged from a high of 1,784 in 2006 to a low of 711 in 2009; averaging 1,048 per year.

So what can a company due to avoid this situation – Seek guidance from an Accounting professional on the proper application of GAAP, for your situation; Remove the opportunity for fraud to be committedMaintain a strong Internal Control environment including a Segregation of Duty Analysis; Implement conservative policies and procedures and reduce the manual intervention which causes errors; and, Ensure an ethical environment, but maintain a Whistleblower program.

As the SEC continues with the implementation of the JOBS Act, one can only wonder about the frequency of material misstatements, requiring financial restatements with small and medium-sized non-public entities.

SEC Press Release – January 20, 2016 – “The Securities and Exchange Commission today announced that Ocwen Financial Corp. has agreed to settle charges that it misstated financial results by using a flawed, undisclosed methodology to value complex mortgage assets.  Ocwen agreed to pay a $2 million penalty after an SEC investigation found that the company inaccurately disclosed to investors that it independently valued these assets at fair value under U.S. Generally Accepted Accounting Principles (GAAP).”

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The Three Financial Metrics Every Business Should Track

There are 100’s of ratios used to analyze financial statements if you are an investor.  Some of these ratios are specific to industries and business models, i.e. manufacturing vs. service.  Regardless, if you are the owner or a partner in an entity, there are three primary metrics that measure the financial health of your company, that should be reviewed periodically –

Profit – Funds available after total expenses are deducted from total revenues.  The basis from which taxes are calculated.  Pre-tax profits can be calculated monthly, quarterly, annually.  This value is ideal to plan annually.

Return on Investments (ROI) –  Ratio of Income generated over dollars invested in a process or product financed, to stimulate the growth of the company.  ROI is usually tracked for three to five years.  This statistic should be used to ensure that financial resources are being allocated to growth opportunities with the highest returns.

Free Cash Flow (FCF) – Funds available after paying expenses, adjusted for non-cash items, minus capital expenditures to maintain the firm’s current productive capacity, i.e. the amount available for distributions or future growth prospects. FCF is an annual measure.

A company should only allocate cash to the most profitable uses, with the highest return on investment, which will provide potential distributable benefits to its investors, within the shortest amount of time.

The preferable way to present this data is via a Scorecard that highlights Key Performance Indicators (KPI’s) that the company deems appropriate to gauge success at achieving strategic goals.  These reports are metric centric and show results over time.   As a general rule, KPI’s provide information which gives the reader a quick glance of success from a financial, operational, and risk perspective.  A successful scorecard will assist the company drive profitability, reduce costs and provide insight into risk.

What ratio do you use to track your success?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Are Defined Benefit Pension Plans becoming too much of a cash drain?

It is not uncommon to read about very large companies taking non-cash charges associated with their defined benefit plans – UPS $3 billion, Boeing $3.1 billion, Ford $5 billion…

A defined benefit pension program is a retirement plan funded by the employer, which promises a monthly benefit to the employee upon retirement. Contribution amounts are based on a benefit formula which takes into account employee income, age and years of service.   Simply stated, employers set aside an amount today that is expected to grow over years, to be able to satisfy a future commitment.  If you have ever discounted cash flows, you know that low interest rates will slow the projected  growth of the dollars set aside.

It is these low rates that are a primary cause of a trend in under-funded pension liabilities.   “Defined benefit pension assets for S&P 500 Index companies increased by $113 billion, from $1.11 trillion to $1.22 trillion, while liabilities increased $174 billion, from $1.39 trillion to $1.56 trillion. The median corporate funded ratio is 76.9%, which represents a modest decline from 77.7% last year.” (94% of Pension Plans Underfunded: Wilshire, by John Sullivan, AdvisorOne 04.11.2013)

While the goal should be to have a funded ratio of 100%, rating agencies use this statistic as a factor in judging the soundness of programs. The scale is as follows – Strong Funded Ratio >= 90%; Above Average > 80% but < 90%; Below Average > 60% but < 80%; and Weak <= 60%.

Based on this rating scale, on average, defined benefit pension assets for S&P 500 Index companies are below average.

In response, companies are setting aside large sums of money to fund programs, rather than invest or issue dividends to shareholders. “Between 2009 and 2012, companies in the Russell 3000-stock index have added $1 trillion in assets to their pension plans through investment returns and contributions, but their overall deficit still increased to an estimated $441 billion from $392 billion over that period, according to data from J.P. Morgan Asset Management.” (WSJ, Why the Corporate Pension Gap Is Soaring, 02.26.2013)

However, “Pension sponsors can’t sustain having to make large contributions year after year to finance their pension plans; they have to depend also on favorable investment markets and reasonable interest rates to contribute toward funding.” (Pension & Investments, The cost of low rates, 02.20.2012)

A protracted low rate environment will continue to make this pension plan structure a drag on corporate balance sheets for some time.  The likely impact will be a further decline in the usage of this pension plan structure.  According to the U.S. Department of Labor, the number of defined benefit plans fell 55% from 103,346 plans in 1975  to 46,543 plans in 2010.

Results are similar within the public sector –

According to Morningstar (The State of State Pension Plans A Deep Dive Into Shortfalls and Surpluses) using the rating scale revealed that in 2011,  70% of state pension funds were below average or weak: 7 programs were  strong with Wisconsin the strongest. 8 programs above average, 23 programs below average; and 12 programs weak with Illinois the weakest.

The only way to counteract this trend is to enter an environment with sustained, higher rates.

What are your thoughts?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Accounting Discretion or Earnings Management?

Surveys completed by 169 CFO’s showed , “…CFOs believe that in any given period about 20% of firms manage earnings…only about 60% of earnings management is income increasing, while 40% relates to income-decreasing activities…CFOs believe that it is difficult for outside observers to unravel earnings management…” (Earnings Quality: Evidence from the Field, September 2012).

There are policies and practices within GAAP, that allow for a certain amount of flexibility, i.e. where reasonable individuals may disagree , such as revenue recognition timing; depreciation and amortization policies; allowance for doubtful accounts projections; pension expense estimates; and inventory valuation.

These discretionary practices are also causing issues within the Auditing community.  Based on a recent report issued by the Public Company Accounting Oversight Board – REPORT ON 2007-2010 INSPECTIONS OF DOMESTIC FIRMS THAT AUDIT 100 OR FEWER PUBLIC COMPANIES (PCAOB Release No. 2013-001 February 25, 2013), audit deficiencies identified include – auditing revenue recognition; auditing fair value measurements; auditing accounting estimates; and, auditing procedures to respond to the risk of material misstatement due to fraud.

Issues arise when these policies allow for abuse.  Private companies may wish to increase expenses and lower earnings, to minimize taxes; while public companies may wish to decrease expenses and increase earnings, to achieve a higher stock valuation.  These strategies primarily move earnings from period to period.  To sustain the desired approach, successive quarters will need to be manipulated.  Regardless of your initial reason to manage the earnings, the end result will be a strategy where you mislead investors and lenders, i.e. commit fraud.

Additionally, there are also policies within GAAP that make targeted manipulation possible.  Common manipulation techniques include – over-accruing “cookie-jar reserves”; and establishing a reserve for restructuring charges “big-bath reserves.”

To avoid this situation – institute a strong control environment; and, retain a CFO with sound ethical convictions.  While it may be difficult to identify earnings management for an outsider looking in, an insider with the proper training in Accounting, Finance, that understands the business model, should easily identify the issue and implement corrective measures going forward.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

5 Steps to Effective Segregation of Duties Analysis

Re-Post of a blog written by Teresa Bockwoldt, first posted on www.vibato.com

If you are like most finance executives, you probably would like to minimize the risk of fraud and financial mistakes within your organization. You probably also would like to reduce the chance of an audit-related surprise like a material weakness or waste time and resource effort with out-of-scope situations.

One way to achieve these objectives is to complete a Segregation of Duties (SoD) analysis at the beginning of each fiscal year. This relatively simple process, which takes only a few hours with the right information and tools, can yield big rewards, especially for small or rapid growth companies, or nonprofit organizations where there is an imbalance between number of staff (low) and workload (high).

The SoD analysis describes all the tasks related to your financial transactions and lists the employee or title responsible for handling each of those tasks. And when we say all the tasks, we mean all the tasks, from the most mundane (who opens the mail) to the most strategic (who signs payroll checks). This analysis emphasizes who not how: the SoD focuses on people and tasks, not policies and procedures.

The SoD identifies points in your financial processes where fraud or mistakes might occur and go undetected because one person is completing several finance-related tasks that conflict with each other (segregation conflict). For example, consider the opportunity for fraud if the accounting personnel have access to both your check stock and your signature stamp or if the same shipping and receiving manager receives inventory and investigates inventory discrepancies.

In a good SoD analysis, you would identify these segregation conflicts and develop a way to mitigate them – such as dividing the responsibilities or incorporating a monthly review of transactions by a higher level manager. The goal is to make it harder for anyone who works at your organization (including employees, consultants, volunteers, and Board members) to be tempted to commit fraud. Essentially, you are minimizing organizational risk by removing the opportunity, and hence the temptation, to commit fraud.

Since audits focus on risk and how it is mitigated, the SoD analysis will help both your fraud prevention and audit preparation efforts. Your auditor will be looking for holes within your organization where there might be opportunities for mistakes or concealment. If you can show the auditor you’re identifying and plugging those holes, by providing a copy of your SoD plus a list of follow-up actions, you can reduce the work your auditor needs to do and demonstrate the integrity of your organization’s financial reporting efforts.

A segregation of duties analysis is always completed as part of an audit; so if you do not complete one and show the results to your auditors, your auditor will complete one for you — and charge you for it. We recommend that organizations complete their SoD analyses, either on their own or with help from an objective third party, for several reasons. The biggest advantage in this approach is that an organization will be able to identify and remediate conflicts before the annual audit, thus minimizing the risk of a negative opinion. Another benefit is that if you can show your auditor that you are identifying and mitigating segregation conflicts, it increases their belief that you are running your organization properly and will lower their perception of your organizational risk – this can benefit you in other ways as well.

We recommend a five (5) step approach to completing an SOD analysis:

Step 1: Choose Your SoD Approach

Your executive team has decided to conduct an SoD analysis; now you must determine whether to complete the analysis using only internal resources or with help from a qualified third party.

We strongly recommend bringing in third-party assistance unless your internal audit or accounting team has both the experience and the tools to complete this process efficiently and cost-effectively. As is always the case when hiring a consultant, you’ll need to weigh the consultant’s fees and experience against the time and costs your in-house team would spend creating an in-house tool, researching your auditor’s requirements, collecting the information, and compiling the results.

Another tip: If you plan to do the analysis internally, do some research on the best tools/methods available that you can leverage. There is no reason to create this process from scratch, since a little knowledge will get you a long way towards understanding where you need to focus, and how to collect/analyze/remediate any issues. The more automated you can make your approach, the more reliance your auditors will tend to place on it because you are minimizing the risk of human error.

Finally, you will need to understand what risk levels are acceptable or unacceptable, not just to your organization but to your auditor. So before you start your SoD, review the notes from prior audits and/or ask your external auditors about their top concerns. This proactive approach will help you prioritize the conflicts you find and take action only on the ones that matter to your auditor.

Step 2: Tap Your Knowledge Network

Now that you have a methodology, some tools, and a team, you need to acquire information about who does what within your organization.

Remember, many finance-related activities happen outside the finance organization itself. For example, your receptionists “touch” the finance department if they’re responsible for receiving, opening, and sorting the mail. Similarly, your warehouse staff also “touch” the finance department when they ship products or receive inventory and invoices. For a comprehensive SoD analysis, then, it is extremely important to bring in representatives from the human resources, operations, IT, and finance departments, as well as directors or managers from satellite offices or manufacturing facilities.

Gather all representatives for an in-person meeting or conference call, during which your internal audit leader or consultant will go step-by-step through each finance task, and ask for information about who completes these tasks. It is important to assign titles, rather than individual names, to ensure the analysis stays consistent regardless of the day-to-day human resources changes in the organization (such as absences, resignations, or promotions).

Step 3: Identify and Prioritize Conflicts

Once you’ve assigned titles to tasks, you need to see where your segregation conflicts lie and prioritize them according to your organization’s risk limits. As a general rule, you should pay close attention to conflicts in tasks related to receiving or disbursing cash or checks; wire transfers; managing inventory; and posting journal entries.

Here’s where using an automated, visually-oriented approach pays off. Imagine the time you’d spend sifting through hundreds of pages of documents, manually checking titles and tasks, creating graphics to show the conflicts, and then ranking those conflicts according to risks. Some auditors and consultants still use this manual approach, which makes completing the SoD time-consuming and expensive. You’ll save time and money, and likely get a better result, by using an automated tool that synthesizes the information and provides a graphical output with conflicts highlighted and ranked according to the risks your organization and your auditor have identified.

Step 4: Develop Mitigation Plans

During this step, keep in mind that every organization has some SoD conflicts. Your goal is not to get to zero conflicts but rather to recognize which conflicts you have and to address those conflicts according to the risks they pose to your organization.

Your mitigation options include reassigning responsibilities, hiring more staff, increasing the frequency of cross-checks (like monthly closes), or introducing new approval or reviews either within or outside the finance department. A nonprofit or small company, for example, might ask a board member to review financial transactions, in lieu of hiring another staff member.

Occasionally, your auditor might disagree with how you’ve prioritized conflicts or want a more aggressive mitigation (such as hiring a new employee) that goes against your business realities. In these situations, it’s important to go back to your SoD analysis and prior years’ audits and provide evidence that backs up your assessment. If you have a third party consultant, they should be able to argue your case.

Step 5: Apply Your Analysis Beyond the Audit

You’ll want to share your SoD analysis with your auditors twice – when you’ve first completed it, to ensure that all areas of business risk are covered, and again when they are completing your year-end audit. Meantime, you can apply the lessons learned from your SoD analysis to other areas of your business. Since this analysis will highlight where existing duties are distributed unevenly throughout the applicable resource pool, the tool also helps you make more informed decisions during company-wide or departmental reorganizations. This analysis can be used to justify staffing recommendations to the management team or Board of Directors.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Mid-Year Look-Back and a Look-Forward

July is a perfect month to look back at the full-year plan established in January and re-forecast the balance of the year.  While a “best practice” for any business is to monitor success monthly, at reaching targets established at the beginning of the year (Communicating and Monitoring Success at Reaching Strategic Goals http://cfotips.com/?p=26); there is additional value in reviewing your full-year plan to understand if you are reaching your goals?

Look Back

Items for your consideration with references to topic specific CFOTips blog posts are as follows —

Review company success at generating revenue through marketing and sales

– Marketing Economics http://cfotips.com/?p=226.

-Activity Based Costing and Sales Management http://cfotips.com/?p=57.

-Bridging the gap between Sales and Finance http://cfotips.com/?p=133.

Review your company’s financial health

– For a Business – Cash Flow is King http://cfotips.com/?p=139.

– Bad Debt Strategies http://cfotips.com/?p=69.

Review if your company is operating efficiently and as expected

– Process Improvement to Eliminate/Contain Non-Value Added Costs in the Services Industry http://cfotips.com/?p=42.

-Internal Audits – “Inspect what you Expect”  http://cfotips.com/?p=325.

Review customer accounts

-Relationship Development after the Sale http://cfotips.com/?p=353.

-The Voice of the Customer http://cfotips.com/?p=154.

Review your position in the market

– How You Compare, i.e. Competitive Analysis Tactics http://cfotips.com/?p=328.

Look Forward

If after this review you are confident that you understand the reason for any variance, plan for the balance of the year –

-Re-forecast your projections.

-Evaluate if strategies identified at the end of last year make sense for the balance of this year.

-Ensure optimal tax planning – state and federal.

Finish the year strong!

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Is Tax planning even possible in this environment?

With six months remaining in 2012, a sound recommendation would be to review expiring tax provisions (individual and business) and plan accordingly, to ensure you are prepared.  Are there tax benefits today that you would like to take advantage of before the opportunity passes?

Every year the Joint Committee on Taxation produces a list of expiring tax provisions over the next ten years (https://www.jct.gov/).  The most recent version was published January 6, 2012. According to this document, the number of expiring provisions, by year, is as follows –

List of Expiring Federal Tax Provisions
Joint Committee on Taxation
2011 60
2012 41
2013 8
2014 6
2015 0
2016 5
2017 1
2018 1
2019 0
2020 1

Now consider the proposed 2013 federal budget which extends, enhances and adds new tax provisions.  Some of the business recommendations include: extending first-year depreciation deductions for certain property; granting a temporary income tax credit for job creation and wage increases; offering tax incentives for locating business activity in the US and prohibiting tax deductions for shipping jobs overseas; changing the Research & Experimentation credit; and, increasing the amount of deductible start-up expenditures.

Are there activities that you are considering implementing in 2012 that if you waited until 2013 would allow you to take advantage of proposed tax benefits?

How do you plan if you do not know for sure what will end and what will be enacted? You can expect that during the last four months of 2012, while the US is focused on the Presidential election, Congress will be considering approving a 2013 Federal Budget, which may include extending expiring tax provisions.

As recently as June 6, 2012, Bloomberg reported, “Former President Bill Clinton said Congress may have to temporarily extend all expiring tax cuts and spending into early 2013 to give lawmakers time to reach a deal on deficit reduction.”  While extensions are common, the suggestion of extending “all” seems very aggressive, but plausible.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Relationship Development after the Sale

The amount of time and energy, not to mention money that is required to develop a relationship can be quite large, depending on what you are selling.  All too often do Sales professionals make a sale and move on to the next potential customer, rather than further cultivating the relationship.  The very best Sales professionals recognize – a customer today can be a great source of referrals; maintaining a customer is less expensive than cultivating a new customer; if they purchased today they are likely to purchase again in the future; and a current customer offers the best opportunity to cross-sell other products and services.

In my experience, I have heard multiple excuses for not contacting a current customer.  Quick Test – If you ask your Sales Force about their most recent contact with their customers and they respond with any of these statements, you have a problem – My product is intuitive, this customer understands. They have my phone number if there is an issue.  I haven’t had a reason to call.

Following is an approach that has been very successful in the past, for a Service provider –   

Pick up the phone.  Do not send an e-mail.  It is very easy to ignore e-mail.

Prior to any call review the customer’s situation.

-Review dates of last service – What occurred?

-Review billing history – payment status.

-Check files to see if all documentation is up to date.

-Ask staff of any recent conversations with this client.

Call the Customer

Hi. My Name is ____________________ from _________________________.

General Customer Satisfaction

I see from our records that we provided service to you on ______________________ at the ___________________ location. Please tell me about this experience.

Were you satisfied? Why or Why not? What could we have done to improve your satisfaction?

We send out a customer satisfaction survey periodically. Your feedback is very important to us. I want to confirm that this survey should be going to the _______________________@ ______________________.

Billing

I see from our records that your current outstanding balance is $_______________.

Either thank the customer for timely payments or ask If there any problem with the billing?

Files

I see from our records that we are missing an updated and accurate Client Information sheet. If you do not have one, please give me your e-mail address and I will send it to you now. But before we hang-up, there are a couple of pieces of information I would like to get from you right now.

Our records show that __________________ is the General Manager, please confirm that this information is still accurate. Our records also show that the phone and e-mail address are _____________________________.  Ask this same question for the Controller and Accounts Payable Manager.

I know that we send all invoices to ______________________ at ________________________ e-mail address. Does this process work for you?

After Call

-Document the conversation.

-If a problem was discovered, refer the issue to the appropriate Manager for resolution.  Never leave it to the customer to call.  Once the issue is resolved, call the customer and discuss the outcome.

By touching these three areas (satisfaction, billing, records) you will discover information about your customer you did not know; as well as identify future issues prior to them becoming a large distraction.

Author: Regis Quirin
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Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Accounts Payable Best Practices

There are various ways a company can implement an Accounts Payable (A/P) program utilizing internal or external resources.  Just keep in mind that the process will evolve.  The approach you establish to process 100 invoices/month will not be the same approach you establish to manage 1,000 invoices/month.

Following are three Best Practices that should be part of any program you implement, regardless of the size, to manage this activity.  Note, if the A/P process is not managed properly, the expense to correct deficiencies can be very high.  Best Practices include —

Establish Policies and Procedures –Document the entire A/P process.   This step ensures consistency in processing, i.e. everyone needs to work within the same established guidelines.  Clearly outline an exception process and a problem resolution process.  Caution – Do not let the exception become the rule.

Provide Vendors with your payment policy (abridged version) with payment dates, so as to set expectations of when payment will be made.  For example – “All invoices should be forwarded to the area ordering services for validation and approval.  Invoices will be processed twice a month, based on the date of receipt…”

Invoice Processing – Maintain a database of all preferred vendors, with complete information.  This information should include a valid W-9, current executed Purchase Order, and invoice identification information (invoice#, amount, and date).  Track the cumulative expense.  If it is large enough, you should be able to negotiate preferential pricing with the service provider.

Approved invoices should be processed in one central location, if possible.  Payment requests should fall into one of two separate groups, i.e. leases with a set amount paid monthly or quarterly as identified in a contract, or invoices with variable amounts.

Audit – Audit the process annually to understand if the documented policies and procedures are being followed.  It is also at this time that the process should be reviewed to potentially improve it.

There are pain points internal to the A/P department and pain points external to the A/P department, which include:

Internal Pain Points – Recurring Payments associated with contracts – Proper management of this area, will avoid over payments to terminated contracts and missed payments to new vendors. Any situation that can disrupt the A/P department’s flow should be eliminated.

External Pain Points – Multiple Offices – if your organization is composed of multiple offices around the country, another area of concern is ensuring those branches forward bills to the A/P department on time, to avoid the creation of out of cycle payments.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Complying with State Tax Requirements for Non-Residents, i.e. Nexus

Nexus is the way in which a connection can be established between the state and the taxpayer.  If a nexus exists, the taxpayer may be liable to the state for taxes, regardless if the taxpayer is a non-resident or only works within the state for part of the year.  You would think that the clearest nexus standard is “physical presence”, i.e. work performed within the state.  But treatment varies –

According to the Mobile Workforce Briefing Book by the Council on State Taxation (09.09.2009) –

  • In 25 states, nonresident employees are subject to Withholding Tax on first day they enter the state; vs.
  • In 16 states, nonresident employees are subject to Withholding Tax after reaching a threshold which varies among the 16 states involved.

In the age of the World Wide Web, Consultants can market their services and generate revenue from customers in a state without maintaining a physical presence.  In response, some states are developing the concept of “economic nexus.”

Based on a random review of state tax laws, I found the following citation interesting –

Source income “…Attributable to compensation for services performed in Connecticut or income from a business, trade, profession, or occupation carried on in Connecticut, including income derived directly or indirectly by athletes, entertainers, or  performing artists from closed-circuit and cable television transmissions of irregularly scheduled events if the transmissions are received or exhibited within Connecticut;”

For a Consultant that transacts business in multiple states, a compliance nightmare exists which is burdensome and expensive to manage, i.e. a non-value added expense associated with an administration burden.  Disparate laws established by states are causing nexus confusion –

  • Standards are inconsistent for employees, i.e. personal income tax filings;
  • Standards are inconsistent for employers, i.e. withholding tax administration; and,
  • Penalties for non-compliance may result.

Help may be coming with the passage of H.R. 1864 – “Mobile Workforce State Income Tax Simplification Act of 2011 – Prohibits the wages or other remuneration earned by an employee who performs employment duties in more than one state from being subject to income tax in any state other than: (1) the state of the employee’s residence, and (2) the state within which the employee is present and performing employment duties for more than 30 days during the calendar year.”  (http://thomas.loc.gov/cgi-bin/bdquery/z?d112:HR01864:@@@D&summ2=1&)

However, until this bill becomes law, best practices are few – maintain records of when you performed work for customers, in which state, for how long; and retain all receipts.  When you prepare your personal state taxes, check if tax code thresholds exist, i.e. wage/income, days within state, reciprocal agreements.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The International Financial Reporting Standard (IFRS) is coming. When and how should you prepare?

The adoption of IFRS standards is well underway globally.  PWC has a great map which provides integration details by country (http://www.pwc.com/us/en/issues/ifrs-reporting/country-adoption/index.jhtml).  How these changes will affect your company specifically is not obvious. The impact varies based on business complexity, industry and geographic presence.

Following is a recommended approach on how to integrate the standard within your US Company.  The approach is broken down between pre-approval and post approval –

Pre-Approval, i.e. now

  • Collect available information and analysis from AICPA, SEC, and the Big 4.
  • Determine the appropriate form of IFRS to adopt, based on your company, i.e. IFRS for Small and Medium Size Entities (entities without public accountability) vs. full IFRS.
  • Identify the standards that represent a change in the way you track the financial success of your business, i.e. revenue recognition, expense recognition, assets, liabilities, financial liabilities and equity, derivatives and hedging, Consolidation, business combinations…
  • Choose a team of experts within your company that will integrate the new standard, once approved.

These four activities can be completed internally, with little or no budgetary impact.

Within the US, the SEC reaffirmed its commitment to a global standard, but has yet to establish a timetable.  The plan is expected in the next couple of months.

Post Approval, i.e. 2012

  • Consider potential IFRS integration issues –
    • Data gaps, i.e. new standards may require the tracking of data not previously collected;
    • Entity consolidation not previously required; and,
    • Accounting policy choices.
  • Test the impact of these changes within your company.
  • Develop a project plan and budget, with appropriate deliverable dates.
  • Present the plan to your company Board of Directors to gain approval.
  • Integrate the standards into your business through plan implementation.
  • Issue IFRS 1 – established approach to issuing the first IFRS financial statements for your company.

In conclusion, with the time remaining prior to the SEC accepting the IFRS standard, a CFO should be studying the issue and increasing his/her knowledge base.

How are you preparing?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Rules are Changing

The market turmoil of 2008 changed the business landscape dramatically.  In addition to integrating new rules into the business, today’s CFO, must keep up to date on rules still yet to be implemented.

Following are some of the federal rules affecting Human Resources, Finance, Accounting and Financial Management.  This list is in no way exhaustive.  There may be additional rules specific to your industry or at the state/local level that require your attention.

2012 Regulation Table

Note – it is not unusual for implementation dates to be delayed for various reasons.

It is true, currently, that depending on the size of your company, implementation of these rules may be delayed, if even required at all.  But keeping up to date on the latest regulations can only benefit you and your company.

If these rules must be integrated, my suggested implementation approach is as follows –

  • Review the requirements with your General Counsel;
  • Identify the items that will impact your company;
  • Collect data from your industry affinity organization i.e. how are competitors integrating these rules; and,
  • Develop a plan to implement the rules within your company – implementation, monitoring effectiveness, altering policies & procedures…

Caution – new rules have the immediate impact of increasing your expense base either through new processes, requiring additional headcount and/or training staff on the new requirements.

What has worked for your company?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Employment Status Determines Tax Liability

According to the IRS –

“Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.”

Originally the IRS determined if an individual was an employee or an independent contractor, based on a “Twenty Factor” test.  But in January 2006 the process was simplified.  Factors considered now fall into one of three categories, i.e. behavioral control, financial control, type of relationship.

IRS Test Category Employee (W-2) Independent Contractor (1099)
Behavior Control Location On premises Off premises
Behavior Control Work Time Co determined – standard Contractor determined – non-standard
Behavior Control Staffing Resources Co determined Contractor determined
Behavior Control Direction Provided Direct work process and output Direct work output only
Behavior Control Training Co provided Contractor responsibility
Behavior Control Supplies and Equipment Company provided Contractor provided
Financial Control Business Expenses Generally  Reimbursed Generally Unreimbursed
Financial Control Investment in Process Insignificant Significant
Financial Control Degree of Availability Co is sole customer Multiple Co customers
Financial Control Pay Consistent Not consistent
Financial Control Profit or Loss No p&l outcome p&l outcome
Type of Relationship Contract Describing Relationship What parties call it What parties call it
Type of Relationship Benefits Eligible Yes No
Type of Relationship Degree of Permanence Permanent work Temporary work
Type of Relationship Importance of Services Performed Business critical Non-business critical

If after reviewing the IRS established testing you cannot determine the employment  status, you have the option of completing and filing a form SS-8, requesting an IRS ruling on the status.

As you can see, in some circumstances employees fall clearly in one or the other camp.  However, there can be a very large grey area.

In 2000, the Department of Labor investigated the degree at which mis-classifications occurred.  At that time it was determined that 30% of firms mis-classified employees and independent contractors.

In response, federal and state authorities are beefing up auditing to investigate these situations and levying fines against law breakers.  Please note the federal government’s newly re-introduced H.R. 3178; and California’s newly enacted SB459.

If it is determined that an employee was misclassified, the employing company will be assessed back taxes, penalties, interest, unpaid personal incomes taxes of the misclassified worker, overtime, benefits, leave entitlement, and other rights and protections due to employees.

If your company has any independent contractors, it may make sense to review the arrangements based on the criteria above.

Please let me know your experiences.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The CFO Analyst

The CFO office should function as a source of process improvement ideas; as well as business development recommendations.  It is in this location where production data meets financial data.  It is expected that your CFO will perform the necessary analysis to understand why actual results differ from Plan results.  But the analytical process does not stop there.

By comparing actual results between you and your competitors (benchmarking) or comparing activities within different regions of a company, you should be able to identify variations in revenues and expenses.  There may be perfectly good reasons for the disparities, but the questions must be asked.  More often than not, differences will be explainable.  But if not, you may have found a process that needs improvement to save the company real dollars.

This analytical discipline is also needed when considering new products and services, or expanding the distribution of current products and services.  The initial concept review is performed by the CFO – analysis, modeling, and planning.  Once approval is provided by the CEO, the CFO will pull in the affected departments, to implement the plan, i.e. HR, IT, Compliance, Legal, Sales…

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Should your CFO be a CPA?

It only makes sense for my first blog post to be an issue that is controversial.

The correct answer to the question…not necessarily.

A CFO is a well-rounded management executive, whose primary role is “advisor” to the CEO, regarding strategy and direction of the company. He/she is a finance expert that must interact with internal groups (HR, IT, Accounting, Sales) and represent the company with external groups (banks, investors, reporting agencies, auditors).

I am in no way dismissing the knowledge and experience gained in public accounting, by a CPA. However, a CPA would be a Subject Matter Expert in only one area that requires attention from a CFO.

While the CFO need not be a CPA; he/she must certainly be able to understand the issues and ramifications of decisions. He/she needs a strong understanding of GAAP; and be skilled in financial statements, the general ledger, and the day-to-day technical skills.

Experience is the primary requirement for a company’s top Finance post. A CFO with hands-on experience and exposure to different situations and complex challenges enables them to quickly analyze and assess any situation.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.