Finances

Though many have tried, few have succeeded in creating a budget and sticking to it. Most individuals think that creating a budget means making a detailed list of how much money each aspect of their lives will cost. The truth is a budget should be developed to itemize your fixed and elective costs; it should also be used to locate wasteful spending.

There are ways to take advantage of this economy and put your family in a better financial position as mortgage rates are at all-time lows, credit card companies are raising their interest rates for even their best clients and auto dealers are offering zero percent financing. Every part of your budget should be examined and possibly renegotiated. From health club memberships to weekly landscaping rates, no service fees should be overlooked.

Insurance and investments

Term insurance rates are at all-time lows and, assuming that you are insurable, it is quite possible that you can rewrite your life insurance policy for a lower rate for a longer period of time. From State Farm to Chubb, the property and casualty insurers have introduced new programs at lower costs. Examine every aspect of your policies and seek additional credits in order to save money without reducing coverage.

With regards to investments, these down markets have caused many to alter their retirement strategies. It is important to examine where your money is invested, the timeframe in which you plan to access it and the likelihood of your success. If these aspects of your investments are not in line, seek help. Regardless of whether you are examining your investments on your own or utilizing an investment advisor, make sure you are on track to meet your goals.

Lifestyle

Until recently, many Americans believed that being entitled to a certain lifestyle was a God-given right. Debt is the reason for our current economic situation, and in order to turn this economy around, we must control our debt. We must reexamine our lifestyles and what it costs to maintain these lifestyles, and make any appropriate adjustments. Conversely, those of you burying your head in the sand and refusing to live are making the same mistakes as those who are spending foolishly. Living within your limits is not a difficult task—it simply means you must accept who you are.

Savings

America was built on a savings rate of more than 10 percent of a family’s gross income. Throughout the past decade, not only have we not achieved that rate, but we also had a negative savings rate during several of those years. The average individual in this country carries credit card debt of more than $2,000. However, certain reports indicate this debt could be as high as $4,000 per person. Others say that one of the main causes of the banking crisis (i.e., the mortgage dilemma) was that the average American has no reserves. A savings program is not only imperative to moving the economy forward, but also to securing your well-being and that of your family. We must start saving as our finances, investments and lifestyles are all dependent on savings programs.

Recessions come and go. How we live through them, what we learn from them and how we react in the future will determine the severity of future recessions. We must reset our lifestyles in order to be prepared in the future. Now is the time to work harder, spend responsibly, examine fixed costs carefully and get back on track. Like every recession, this one will end, the markets will go up again and people will return to work. Hopefully though, we will not repeat the mistakes from the past.

Where is your company’s value lurking?

In combination with mapping the value of the entity or benchmarking, an owner must ascertain other aspects of the business that differentiate it from the pool of existing industry participants.

A professional business valuation, conducted by an objective expert, is the vehicle that identifies where a company’s underlying intangible value is lurking to help sellers increase shareholder wealth, as well as obtain a better deal price and identify strategic buyers.

In some cases, the intangible value of the business is far more valuable than the actual tangible value of the business. There are two ‘types’ of intangibles: Blue Sky and Goodwill. Blue Sky is the difference between the reported book value of the business and the asking price for the business. Goodwill is the remaining difference in the value of the company, as determined by a professional valuator, after all intangible and tangible assets are quantified.

For acquisition purposes, intangible value means the difference between:

• An attractive, lucrative investment and a profit for the seller; and
• An asset purchase and a breakeven or loss for the seller.

A strategic plan, which includes regular business valuations, is key if the owner ever hopes to receive desired shareholder wealth or a desirable price upon the sale of his or her business. An owner must develop a plan, execute that plan, monitor the results achieved and continually modify the plan. Not only does a business owner need to gauge the health of the business on a regular basis, the owner must also monitor the business’s attractiveness with each strategic step toward the planned exit and enhance that attractiveness to prospective outside buyers whenever possible.

From a business valuator’s perspective, there are certain intangible value drivers that make a company more valuable, and these drivers make the company a more atractive investment from a buyer’s perspective. Owners must also examine the anti-drivers, or those factors that decrease the investment value. Intangible value varies not only by company, but by industry as well.

The construction contracting industry. Contractors may be largely comprised of asset value; however, for all contractors, and especially those who do not have a substantial balance sheet (electricians, plumbers, etc.), intangible value is seen in these drivers.

• Bidding process: Is the company invited to bid? Invitations indicate community and industry goodwill.
• Bonding: Does the company qualify for sufficient bonding? Is the company required to be bonded for the contract service provided? As a bonded contractor, does the company gain contracts competitors may not?
• Clientele and diversity: Who is it comprised of (government, commercial, residential) and is it transferable? A diverse base enhances intangible value.
• Contracts and billing: The value of signed contracts to be completed and how a company bills work in progress is important. Do signed contracts exist and are they transferable to an unrelated new owner?
• Working capital: Many construction companies can be difficult to replicate due to the amount of working capital required to fund long-term projects. Maintaining sufficient working capital is critical to funding existing projects and gaining new contracts. Many construction contractors fail from lack of working capital despite showing profitability.
• Marketing and new sales techniques: How is new business generated?
• Diversity and nature of specific contracting service: Do the services offered allow for repeat business?
• Experience of management and personnel: Are managers and personnel certified?
• EEOC and workers’ compensation claims: Has the company experienced any significant litigious claims/issues?
• Longevity in industry: The business’s history is important. How long has the company operated in the industry, and is the name well-respected and recognized in the community as well? Those companies that are established with many years of operation are typically more marketable than those that are less rooted in the community.
• Union affiliated: In some regions and circumstances, union affiliation drives value down.

The retail industry. In many ways this industry is similar to wholesalers; however, retailers have a higher dependence on the immediate community and clientele base. In addition to many of the intangible value drivers of wholesale businesses, retailers must focus on improving these drivers.

• Accessibility, convenience and aesthetics of retail location: The location must be easily accessible, conveniently located and aesthetically pleasing (clean, organized, well-maintained) to visit. Along those same lines are sales per square foot and sales per employee, which are two very important benchmarks for a retail operation.
• Pricing and inventory: For retail operations, the amount of inventory can be substantial. Keeping inventory current and free from obsolescence is important.
• Branding and recognition: This coincides with marketing and clientele. Name recognition within a local community is essential to viability. The name must be associated with the customer needs.
• Marketing, advertising and sales techniques: How effective are current marketing and advertising techniques at attracting new customers? How do these techniques compare to local competitors? How often are new techniques employed?
• Repeat clientele: Repeat clientele are essential value drivers for the companies within the retail industry, and a high volume of referred clientele signals efficient operations management and a core position within the community and industry at large.

The manufacturing industry. Many small, closely-held job shops have slim margins and high costs. Therefore, the company must be seen not only as an investment vehicle but one that can provide a living wage for a buyer. Owners desiring to sell their manufacturing company should consider growing the business’s intangible value so that a future acquisition (synergistic or otherwise) significantly exceeds the value of the machinery and equipment.

• Machinery and intellectual property: Does the company stay abreast of technological trends, and is it able to maintain those trends? Manufacturing facilities should maintain technologically advanced machinery. The age of equipment is also important. Moreover, trademarks, patents and intellectual properties are all intangibles that increase the value of a manufacturing operation.
• Growth: Growth or improvements must be consistent for several years (preferably three or more), not just one or two.
• Bad debts and uncollected, lost accounts: This is a significant problem with job shops. Does this exist and if so, how are these issues overcome so that the expense rarely occurs?
• Certification: Is the company ISO certified (preferred) or ISO compliant?
• Clientele and diversity: Who is it comprised of (government, commercial), and is it transferable? A diverse revenue base enhances intangible value, whereas a concentration of clientele increases risk. Again, client concentration increases business risk. Be leery of maintaining equipment specific to any one particular client.
• Competition: If applicable, how does the company overcome competition from foreign (overseas) manufacturers who have substantially less production costs and expenses?
• Contracts: Do they exist, and are they transferable to an unrelated new owner?
• Employee benefits: If benefits are offered, is the company able to maintain the expense?
• Employee costs and retention: High labor costs in the United States, relative to foreign labor costs, have affected the manufacturing sector. What is the turnover rate, and how does the company retain productive, experienced employees?
• EPA, EEOC and workers’ compensation claims: Has the company experienced any significant litigious claims/issues?
• Experience of management and personnel: Is management and personnel certified and/or are they experienced journeymen? Buyers want to know who and how many have technical skills.
• Job costing: Does management track the cost of productivity per employee and per machine to assess profits and future growth?
• Marketing and new sales techniques: How is new business generated, and how are existing clients retained?
• Union affiliated: Again, union affiliation can drive a company’s value down.
• Working capital: Does the company maintain a sufficient ratio of sales to working capital? Steep working capital requirements create barriers to entry. Sufficient working capital is imperative for a manufacturing operation, as it implies effective operations management and an adequate turnover of receivables and inventory.

The transportation/trucking Industry. Companies within the transportation and trucking industry can be classified as either contract or service related. Typically the capital assets are held within the company itself and therefore the majority of ownership value tends to be derived from the balance sheet. To achieve a value above the fair market value (or market value) of the assets, an owner must enhance the goodwill of the company by examining those intangible value drivers listed for service entities and contractors. Trucking companies may be acquired by existing competitors to expand regional markets. However, in many cases, anti-drivers (listed as follows) hurt the investment value of a trucking enterprise.

• Cargo and freight: Does the company transport hazardous materials or freight? If not properly managed, this type of transport service could be a detriment to the company as fines and litigious matters could consume the company’s goodwill.
• Customer relationships and revenue growth: Routes and solid customer relationships contribute significantly to a transportation company’s bottom line. Also, what is the annual revenue mileage per vehicle?
• Employee retention: Long-haul truck drivers vs. short-haul, sleeper cabs versus day cabs; although the ranks of long-haul drivers expanded almost two percent over the past two years, short-haul drivers typically have a lower percentage of employee turnover. What employee retention tools does the company have in place to retain experienced and low risk drivers?
• Citations, fines, penalties, extraordinary property damage: How effective is management at controlling and reducing these types of expenses, including insurance costs (and claims) and property damage (cargo or personal). Citations and fines many times become a matter of permanent and public record.
• Licensing, permit, and the upkeep of maintenance: How effective is management at maintaining licenses, permits and tractor upkeep and maintenance records? Losing control or poor management of these areas will not only financially devastate a company but are many times a matter of permanent record if violated.
• Regional vs. multi-regional versus international: Does the company operate in multiple states or cross country borders (Mexico and Canada)? If so, how effective is management at maintaining multi-regional licenses, permits and international requirements?

The wholesale industry. Many entities within this industry are acquired to expand product diversity and regional market areas. Typically, closely-held wholesale entities have slim profit margins; therefore, to attract outside buyers, the intangible value must be enhanced and maintained. As with the other industries, the intangible value drivers for wholesalers are dependent on a basic set of factors.

• Clientele, repeat clientele and diversity: Who is it comprised of (government, commercial, residential), and is it transferable? Repeat clientele are essential value drivers, and a high volume of referred clientele signals efficient operations management and a core position within the community and industry at large. A diverse base enhances intangible value.
• Competition: Are products priced competitively? How does the company offer competitive prices and still maintain high-quality, timely wholesale services?
• Contracts: Do they exist, and are they transferable to an unrelated new owner?
• Diversity of products, inventory and pricing: A diverse product base alleviates dependence on a product, for example, with profits dependent on the health of the economy (regional or national) or industry trends and existing technology. Inventory should be current or free from obsolescence. In addition to the size of the operation, the quantity and quality of product lines is important. Pricing and purchases should focus on achieving a gross profit margin of 25 percent or more.
• EPA, EEOC and workers’ compensation claims: Has the company experienced any significant litigious claims/issues?
• Operations and facilities: Maintain adequate logistical distribution channels, good supplier pricing and terms with adequate facility size and location.
• Marketing and sales techniques: How are new contracts generated, and how are existing contracts renewed? Does the company also market via a well- constructed Web site to capture the everincreasing Internet sales business?
• Method of delivery: How are products delivered and shipped, and how effective is management at overseeing the efficiency and cost-effectiveness?
• Union affiliated: In some regions and industry sub-categories, union affiliation drives value down.
• Working capital: Does the company maintain a sufficient ratio of sales to working capital? Sufficient working capital implies effective operations management and an adequate turnover of receivables and inventory. Inventory must also be maintained at levels of profitability and consumer/ seasonal demand.

A business has intangible value drivers and anti-drivers, respectively, which make a company more valuable or decrease its value. Additionally, a company’s intangible value and goodwill are also directly correlated to the particular industry in which the company operates. Utilizing business valuation, owners must monitor the business’s attractiveness with each strategic step toward their planned goals. Overall, owners must recognize where their company’s underlying intangible value is lurking to maximize shareholder wealth, as well as maximize sell price.

While large-scale business fraud and breaches of business ethics seem to dominate the front pages of newspapers and the 11 o’clock news, fraud can, touch the world of almost any business.

Employee fraud costs businesses $400 billion in annual losses, and 75 percent of that goes undetected.

Fraud occurs because most companies don’t have the ability to track what is going on. They don’t have the right internal controls, and they don’t understand the key matrices within their business. Many companies are constantly shocked by the fact that while they think little things are walking out the back door, big things are running out the front door.

An example is a plumbing or electrical subcontractor with numerous crews on various job sites. If management does not believe that plumbing supplies, electrical fixtures, wire, piping and small tools are disappearing and that employees are moonlighting on the side, they are under a false perception. Not having the ability to track what inventory is in the field each day and verify its whereabouts creates an opportunity for fraud.

Business Today Magazine readers asked Steinberg about how to prevent fraud and implementing an ethical policy.

Do business owners take theft personally?
While business owners do take theft personally, most do not understand or believe the extent to which theft and fraud take place within their business. As such, most business owners do not truly understand that fraud has a major drain on their profitability. After all, it may just be small tools that disappear from a construction company or various types of inventory from auto repair and mechanical shops, or it could be items that walk out of dry and cold storage for food and beverage operations.

For most small businesses, the cost of materials is a key component that can dictate a profitable or losing year. Just a small amount, such as $100 of potential fraud per day, costs the company $25,000 per year in lost bottom-line profit.

Does a corporate ethics policy make a difference?
While an ethics policy may have a short-term impact, it really comes down to corporate culture and the ability to track exactly what is taking place each day. It comes down to meetings with employees. It comes down to management demonstrating leadership relative to ethics and morals that exist within the company. It comes down to management putting systems and controls in place so the employees know they are being watched on a pro-active basis.

It means creating incentives for employees to act in a way that is beneficial to themselves and the team as a whole, and letting them know that they individually can enhance profit, cash flow and quality.

Corporate culture will dictate whether or not there may be one bad apple in the barrel or whether fraud is rampant. In either case, an organization with tracking systems in place will be able to determine whether there is fraud at any level. The system must proactively track what is going on daily in key potential fraud areas within the company.

What can small business owners and managers do to prevent fraud?
One way to prevent fraud is to provide appropriate incentives and compensation plans.

A lot of companies compensate only on flat salary types of systems. However, if they compensate based on individual performance and how employees work with peers and the company as a whole, the behavior that is expected will be promoted. It engenders a teamwork spirit throughout the entire organization, which causes everyone to watch each other.

What else might be done?
The key to stopping fraud from occurring is to have some form of proactive, not reactive, deterrence in place. Always measure the company’s key matrices. Identify clearly within the organization what their hot points are, what key items make them successful and what the key trends are. If the trends get out of line, management can clearly understand that some type of fraud or theft is possible.

One of the easiest ways to identify losses is in the bottom line, not only in terms of profitability but also in terms of additional cash flow in the business. Ultimately that leads to higher morale within the company, less stress and a much happier enterprise overall.

It really comes down to how you measure success. It is measured by a company being profitable in business and employees being prosperous in life.

The famed Peter Drucker, widely considered to be the father of “modern management,” wrote about change in his book, Management Challenges for the 21st Century (1999).

The period of upheaval Drucker wrote about was minor compared to what we are experiencing today. Regardless, his view of the necessity for change could not be more accurate.

As a business manager or owner standing on the sidelines and watching, hoping that all will right itself without intervention is a baseless dream. That dream will turn into an owner’s worst nightmare. These turbulent times require swift, decisive action on a proactive strategic basis.

Management’s inability or lack of willingness to pull the trigger on change will most definitely translate to endangering success.

“Whosoever desires constant success must change his conduct with the times,” wrote Machiavelli. That was as true some 500 years ago when he wrote that and it is true today.

The word “change” has taken on visual meaning in today’s world driven by President Obama’s eloquent words. His macro view of needed global change can be replicated in the global view of one individual company. Change is never easy. The view from the side of the unknown is always less comfortable than the view from the side we know—even if that side is broken. Because of this, most managers are reluctant to implement change. In good times this does not work, and companies barely survive by struggling on a daily basis. In today’s world, companies simply go out of business.

Dr. Martin Luther King, Jr. made this point clear when he said, “Change does not roll in on the wheels of inevitability, but it comes through continuous struggle.”

Even though Dr. King said the words in the context of human and civil rights, they are just as appropriate when applied to business. Given the economic challenges faced by businesses today, the time to struggle with decisions around change has passed. Now is the time to embrace change and march forward without looking back over one’s shoulder.

In The Prince written in 1532 by Machiavelli, we can find this quote:

“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.”

Some 477 years later, there is nothing more perilous in business than not taking the lead in introducing a new order. Refusal to implement immediate, well thought out strategic change is tantamount to pre-designating a quick demise. The choice is simple. Success or failure. Which will you choose?

Time is money! Learn how to communicate more effectively.

Communication will always be an important responsibility of business owners as they spend significant potions of their time interacting with employees. Meetings are usually a necessary means of communication; however, business owners must keep in mind that time is a limited resource for them and their employees. Since time is money, business owners must improve their usage of time, especially during an economic downturn. Before scheduling a meeting, be certain it is necessary by asking the following questions:

• Could the necessary information be communicated via e-mail, telephone conversation, conference call or memo?
• Could the number of participants be reduced?
• Could the meeting be shortened?

If the meeting proves to be necessary, the individual planning it must set clear objectives, roles and guidelines for the participants.

Preparation

Maintain a clear objective. Establish written objectives for your meetings and communicate them to attendees in advance. Discussing and agreeing on meeting objectives in advance will help the entire group remain focused and on track.

Always use an agenda. Agendas help to manage time, maintain focus and reduce the likelihood of “hidden agendas.” Assign a reasonable amount of time for each item on the agenda. More importantly, always strive to conclude the meeting on time.

Ask others to prepare. If information is provided in advance, participants will typically come prepared to contribute. Circulate the objectives, agenda and any homework in advance. Inform attendees they will be asked to actively participate. The goal is to get people thinking about the meeting’s objectives prior to the meeting.

Practice conference room courtesy. If necessary, reserve the meeting room or location in advance, and cancel the reservation if plans change.

Role establishment

The meeting leader organizes the meeting, schedules the time and location, confirms attendance, encourages diversity of opinion, promotes problem solving, manages conflict and commends and supports the contributions of all participants. The meeting leader usually assigns the following roles.

The facilitator, or “air traffic controller,” should concentrate on the meeting process, not the content. The role of the facilitator is not to actively participate in the discussion, but to provide an objective ear regarding the pace, tone and flow of the meeting. If the meeting strays from the agenda, the facilitator alerts the meeting leader. This allows the meeting leader and attendees to focus solely on the discussion and not worry about the management of the agenda.

The recorder, or secretary, is responsible for writing a summary of the meeting. This alleviates participants from having to take notes. As such, participants are free to listen and contribute. A flip chart is an effective vehicle for posting notes during the meeting as it keeps the group focused, helps participants avoid repetition and later serves as a permanent record of proceedings.

Subject matter experts should be present to provide background information and serve as a resource for the group. In an effort to accommodate the experts’ time, they should only be scheduled to join the meeting for the appropriate portion of the agenda.

One meeting participant can take on more than one of the aforementioned roles; however, the role of facilitator should only be taken on by one individual as he or she must be free to concentrate solely on the meeting’s process.

Guidelines for meeting leaders

It is important for meeting leaders to learn and use the guidelines for effective meetings. However, meeting leaders also have other responsibilities.

Value everyone’s time. Begin the meeting at the scheduled time and conclude at the time indicated on the agenda (or earlier, if possible). Generally, you should not delay a meeting due to late arrivals. In addition, you should not recap for late arrivals. Instead, request that these individuals catch up after the meeting’s conclusion.

Stay on track. Open the meeting by restating the meeting’s objective and reviewing the agenda.

Prepare thought starters. An effective way for meeting leaders to jumpstart creative sessions is to create a draft of potential ideas. This serves as a thought provoker and conversation starter, and also speeds the brainstorming process by providing a point of departure for items on the agenda.

Keep the discussion moving. Do not allow one person to dominate the discussion. Ask open-ended questions such as, “What do you think about that?” and paraphrase responses by saying, “In other words, you’re saying…”

Discourage disruptions. With the exception of emergencies, do not allow phone calls or interruptions. Designate an individual not in attendance (such as the company’s receptionist) to allow only specified interruptions.

Let creative juices flow. If you and your staff members are in the middle of a productive discussion or important problem solving session, do not interrupt it simply to satisfy an arbitrary agenda. If the meeting strays from the initial agenda, interaction between the facilitator and meeting leader becomes key. The facilitator may inform the meeting leader that the meeting has wavered from the agenda; however, the meeting leader retains the authority to allow the productive discussion or problem solving to continue if he or she deems it significant. Creative juices sometimes create issues that must be addressed at another time. These issues are commonly known as “parking lot issues.” Parking lot issues are discussed in the follow-up portion of the meeting described below.

Follow up and follow through. The success or “return on investment” of the meeting will almost always be determined by the processes, procedures, etc. implemented or improved as a result of the meeting. Issues requiring attention must be addressed by the conclusion of the meeting in order to resolve unanswered questions and do the following:

• Confirm the recipient of each responsibility assigned or delegated.
• Confirm completion deadlines for each responsibility.
• Determine how parking lot issues (those topics that arose during the meeting that were not part of the agenda) should be handled.
• Plan the next meeting’s preliminary agenda, objectives, roles, etc., if appropriate.
• Review the overall meeting. Discuss what worked and what should be changed for the next meeting.
• Ensure the recorder has captured key points and follow-up items (including the names of those responsible for certain projects and the deadlines of those tasks) in a meeting summary.

Guidelines for meeting participants

Meeting participants can use the following tips to help stimulate meeting participation and overall involvement.

Do your homework. Review the agenda and jot down thoughts and questions in advance. Also, prepare your portion of the Agenda/Action Plan.

Be on time. If you do not arrive to the meeting on time, do not ask or expect the group to recap for your benefit. Instead, get the necessary information from the recorder during a break or at the conclusion of the meeting.

Bring an open mind. The purpose of a meeting is to generate and exchange ideas, not to defend the status quo. Come preprepared to hear new ideas and, more importantly, contribute some of your own.

Be an active listener. Pay attention to comments from all participants, participate when appropriate and rely on the recorder for notes.

Use group time for group issues. Do not use group meeting time to discuss issues or details affecting only a few members of the group. Domineering members should avoid monopolizing the group’s time for their personal agendas.

Additional meeting ground rules

The following additional rules should be utilized by everyone in attendance.

Strive for the win-win situation. Focus competitive energy on solving issues and beating the competition, not each other. The group will create better ideas and solutions if everyone works collaboratively and cooperatively. Take advantage of the group’s diversity, approaches and experiences.

Create holding patterns when necessary. Only one person should have the floor at any given time. Those with questions or something further to add enter into a “holding pattern.” This provides everyone with the opportunity to have their thoughts heard, and allows the group to fully concentrate on the current dialogue.

Capture thoughts on paper. If you find yourself in a holding pattern, write down any questions or thoughts so you can remain involved in the current dialogue without forgetting what you want to say.

Steer clear of heat seeking missiles. Avoid the natural tendency to react defensively to new ideas and shoot them down. Ideas should be evaluated based on their merits, not their drawbacks

Avoid distractions. Stick to the agenda. Limit side conversations, phone calls and casual stories. Defer non-agenda items (or issues not urgent or pertinent) to a parking lot for post-meeting discussion.

Explain your point. When making a presentation to the group of attendees, inform them of the point you want to make. Then take time to establish your point and explain your logic.

Clarify and paraphrase. Everyone should be allowed to completely clarify the point(s) they want considered. One way to accomplish this is to have the meeting leader (or another participant) paraphrase the point being made to ensure comprehension.

Encourage “baby” ideas. During creative sessions, new and innovative ideas should be encouraged. These ideas, though probably not fully developed, should not be dismissed prematurely. Take baby ideas at face value and work with the positives. If the negatives can be overcome, the positives may provide the breakthrough you are seeking. Baby ideas may be handled in the same manner as parking lot issues.

Conclusion

The primary objective for all meetings should be to maintain productivity and generate a return for the investment in time— and time is money. As such, it is critical for the person calling and/or leading the meeting to have a plan or agenda. The meeting leader should also follow the schedule if possible, and start and end on time. More importantly, all attendees should participate. Finally, a great way for the meeting leader to ensure participation and obtain tangible results is to utilize the Agenda/Action Plan.

Remember, a meeting leader’s keys to a successful meeting are summarized as follows:

• Prepare
• Stay on track
• Encourage participation from everyone
• Start and end on time
• Use the issues discussed and learned to improve the meeting’s results

Today, increasing sales, reducing costs, bringing new products/services to market and increasing market penetration force business owners to function within a heavily regulated employee environment. The list of complex laws and regulations, such as ERISA, COBRA, EEOC, OSHA, ADA, FCRA, HIPAA, FMLA and FLWA/FLSA, begins to resemble alphabet soup.

In addition, regulations and interpretations of Title VII determine exempt and nonexempt status, unemployment, age discrimination, sexual harassment, immigration reform and control (both state and federal) and worker’s compensation, just to name a few. If these topics do not provide you with enough to worry about, then add other equally important human resource considerations into the mix such as substance abuse; corporate policies and procedures; recruiting, interviewing and hiring; organizational training and development; job descriptions; performance evaluation; discipline; termination; team building; payroll management and a myriad of employee benefit administration issues.

The monetary costs incurred as a result of the aforementioned factors are typically discovered when reviewing the damages related to an outside legal issue. Noncompliance problems are frequently the basis for financial risk and damage. Companies wanting to take proactive measures to prevent these types of problems are instituting an audit of their own human resources department and functions. Performing an audit will help your company avoid potential legal liability and the related costs, time and distraction to management and the organization. The benefits are immeasurable in terms of the potential penalties and settlements that can be avoided, in addition to the improved productivity, reduced absenteeism/turnover, increased retention, etc.

A human resources audit will help develop a framework of analysis with which you can identify and prioritize management issues. A properly constructed audit will also identify related practices and policies that are missing, are inadequate or are not legally defensible. Additionally, it will assess and measure the actual performance of your employees and the necessary action needed to reduce performance deficiencies. Finally, a human resources audit will allow you to determine if your human resources practices are effective, efficient and assisting and supporting your business planning and strategic development.

A human resources compliance audit generally consists of three main parts:

• A focus on the key human resource issues that affect your company’s performance. Those key areas may consist of recruiting, selection and retention; compensation and benefit administration; performance related issues and management; or training and development issues. Are your policies, procedures and actual practices in step with your organizational desires and goals?
• A review and analysis of the current performance indicators as they relate to the aforementioned areas. These may include the number of unfilled positions, the length of time to fill positions, employee turnover rates in various departments, number of legal complaints, internal complaints handled, amount of absenteeism, etc.
• A questioning of the legal compliance of an organization’s policies, procedures and practices. This portion should be performed by a human resources specialist knowledgeable in federal and state employment laws. This step is crucial for that proactive approach to defending your overall employment practices and policies.

So, what are the areas likely to raise their ugly heads during the auditing process? Regarding the avoidance of litigation, topics to be dealt with may include employee interaction during hiring, performance evaluation, disciplinary issues and termination. In general, you will be reviewing the written documentation of the job descriptions, application forms, performance appraisals, disciplinary processes, complaints, grievances, etc. If you do not have written documentation, then you have uncovered a major problem in need of rectification.

In addition, areas in which companies seem to make the most mistakes include the misclassification of employees with respect to their exempt status for overtime compensation; inadequate and/or incomplete personnel files; policies that do not comply with federal or state laws and regulations; inaccurate, incomplete or nonexistent time records; and insufficient or inadequate documentation regarding hiring procedures. (The latter issue typically relates to I-9 forms.)

Human resource practices can make a significant difference in a company’s business results. Human resource audits can be worth the cost if they keep your company running efficiently and effectively, if they help you guard against legal challenges and if they assist in the achievement of your organization’s goals. The human resources audit can be time consuming; however, it is a critically important part of protecting any company from legal liability. In addition, a human resource audit will provide clear direction for developing and implementing effective human resource strategies, practices and policies to further the overall success of your company and its employees.

Contractors are urged not to overlook issues that help determine profitability.

For many businesses, on-the-job training can be an important part of success. No matter how well a student learns the craft, the teacher still retains a certain amount of critical information. If a secret technique or important concept is withheld, the student can lose his or her edge. Never underestimate the importance of on-the-job training. It takes good business sense to sustain growth and profitability.

In the construction industry, most contractors come up through the ranks with little or no formal business training. They must rely on what former employers have imparted to them. In this model, critical issues such as effective bidding procedures and professional management skills must be addressed.

Can a contractor guarantee increased profit?
Increasing the percentage of jobs awarded does not necessarily guarantee higher profits. Consistently underbidding the competition without taking into account the entire cost structure can cause a business to run out of working capital and face difficult times. A contractor should not just add up the cost of materials and labor and then add another 10 percent for overhead. Unexpected expenses must be considered when figuring out the bottom line in order to avoid underbidding on future jobs.

What should be considered when developing a bid?
There are two main components that should be considered: direct job costs and overhead.

Direct job costs are the estimated variable costs associated with completing the project, such as labor, labor burden, materials, subcontractors and equipment rental. These costs vary in proportion to the size of the project.

Overhead includes direct business costs such as administration, wages, insurance, rent, utilities and owners’ wages. Indirect costs include transportation and consumables that must be allocated across all of the company’s jobs.

When calculating overhead, simply adding a percentage of a job’s direct costs does not make sense. Overhead costs for a certain time period, usually one year, are divided by job costs over that same period. New businesses should use best estimates for jobs first and then adjust them on a quarterly or more frequent basis. All costs must be included to determine the break-even point.

Using break-even calculations in the bidding process helps determine the true cost of doing business and provides a return on risk. Profit margins may vary depending on the situation. Contractors must be aware of competitive bidding practices, credit histories and other factors.

For example, if a new client is being groomed for future business, it can be beneficial to keep profit margins low. But once the break-even point is determined, the bid should not fall below that number. That could put the business at risk.

What is the importance of motivation and incentive programs?
This is yet another aspect that many business owners fail to share with their employees. Here are some key points to consider.

• Without an incentive program, employers risk internal fraud.
• Keep it simple. Employees must understand how the program works to be motivated by it.
• Incentives must be tied to specific cost areas where the employee has control. Example: A worker or crew of workers is given an estimate of 500 hours to complete a job. If the job is done in fewer hours, they are rewarded with a percentage of the overage.
• The incentive plan must reward a group as a whole. A good solution is a bonus pool that covers the incentives for all jobs in a certain time period. As employees function more efficiently, the bonus pool grows.
• Two sides: The incentive plan must consider all outcomes, helping employees focus on costs. In the 500-hours example, if the job is done in less time, it adds to the bonus pool. However, if costs exceed that figure, a percentage is subtracted from the pool.
• Incentive payouts should be made often enough to provide motivation but not become an administrative burden. Bonuses should be paid at the end of the entire job or on a regular basis such as quarterly or monthly. Smaller time frames are likely to increase administrative overhead.

A key consideration is why the merger is taking place rather than how a merger is taking place.

Al stood peering out his office window. His daughter had just graduated from the MBA program at a prestigious Texas university and now wanted to join him in the family business. The family business, originally formed by Al in the early 1970s, is located in the highlands of western North Carolina and manufactures quality upholstered furniture. The business had been good to Al and his family, and he was content operating the business at the status quo. Al knew his daughter had the education and, having grown up in the furniture business, the experience to join the company and become productive within a short period of time. The problem, as Al saw it, was there was no room for his daughter, or her salary requirements, at the company. Al decided to call his daughter and break the bad news to her.

Kim was sitting in a chair on her patio and she felt great! With her MBA program now complete, she was ready to take on the world. When the phone rang, it was her dad on the other end of the line. After some pleasantries, her dad broke the news. “Honey, you know I would love to have you come back and help, but right now the business cannot support the additional overhead and our marketing efforts are in place,” said Al.

“Dad, what if we expanded our product offerings, found new markets and/or went global,” asked Kim.

Al thought this might be a solution, but was not sure how he would be able implement this idea without putting a financial strain on the company.

“Sounds like something we should look into,” said Al. “How do we pull this off ?”

Kim’s reply was somewhat shocking to her dad.

“Well Dad, you know my MBA concentration was in marketing so I am sure that if we can find a way to make it work from an operational and financial standpoint, I can make it work from a marketing standpoint,” said Kim. “Let me talk to my friend as her MBA concentration was in finance—maybe she will have some ideas.”

Exchanges similar to this take place every day in the world of business. Owners of small to mid-sized businesses are feeling the effects of a phenomenon referred to as “globalization.” Financial-minded individuals use the term “flattening” since trade between countries is increasingly easier. Knowledge communication, via transoceanic cables or satellite by means of the Internet, occurs in a matter of minutes. Products can be shipped anywhere in the world in days as opposed to weeks or months. Gone are the days when business owners need only to worry about local, or regional, market conditions. Gone are the days when the status quo was enough to keep pace with the economy and assure business owners, like Al, the success achieved in the past.

Many business owners forced to solve these riddles are confused where to turn. Some believe that if they could simply borrow additional money, and put that money into production, they would be able to remain competitive. However, greater production simply means the business owner is tying up more money in inventory. Some business owners will also try to utilize increased production as a means to produce greater profit. Producing more profit may be appealing to a financial neophyte, but it will not make a sound business. It is cash flow—in particular, operational cash flow—that assures the future success of the business.

When looking at cash flow, business owners should focus on methodologies that reduce, not increase, the debt position of the company. In closely held companies, the business owners should consider converting closely held loans to equity, restructuring the debt and seek new equity investors. They should also explore avenues to increase profit margin. The most commonly used benchmark for determining a company’s performance is profit margin, and unfortunately, many business owners equate this with profit; however, they are not the same. To increase profit margin and positively affect cash flow, be sure to focus on sales, direct cost and overhead.

Obviously, increasing sales while controlling the direct cost will have a positive impact on cash flow, but it begs the question: how can sales be increased? If Al knew the answer to that question, he would have gladly welcomed Kim into the family business. Increasing sales is accomplished by expansion—that is, expansion through various methods such as adding products, adding channels to deliver the products, increasing the geographical area where the products are delivered (i.e., take advantage of the globalization phenomenon), implementing advertising strategies and much more. However, increasing sales without controlling the direct cost is counter productive. This situation is similar to a car stuck in the sand. More pressure can be applied to the accelerator causing the wheels to spin faster. The wheels continue to spin faster; however, the car remains stuck. Real control of direct cost means that labor cost, production cost and efficiency cost, among others, are controlled.

Kim’s friend provided an additional twist that Kim and Al had not taken into consideration. Instead of building from scratch, they should consider the possibility of merging with another company. The reason why major M&A deals grab headlines is because there are millions of dollars at stake. The chemistry behind mergers is that the value of two companies combined into a third company is greater than the sum of the two companies standing alone. An important factor to consider regarding mergers is that companies will come together to gain by adding products, increasing the geographic area where the products are sold and so forth.

Known in financial arenas as an improvement in market reach and industry visibility, mergers quite often expand opportunities for new distribution channels thereby allowing revenues and earnings to increase. Mergers also help in controlling and often reducing direct cost. For example, mergers tend to lead to job losses. After all, this new company will not need twice as many staff members in accounting, marketing, sales and other departments. In Al and Kim’s hypothetical situation, a merger could mean the marketing departments of both organizations are scratched and Kim is placed in a position of building a dynamic marketing department while, at the same time, saddled with the responsibility of controlling direct cost (labor burden for the marketing department and advertising expense).

When properly structured, mergers can also help control direct cost through economies of scale. In the corporate world, purchasing power equates to greater ability to negotiate pricing with key suppliers. A merger that is well conceived should produce greater purchasing power. In essence, the big dog gets to eat first! Another direct cost savings can be found in the incremental cost associated with producing one more widget. For example, if Al could locate and strike a deal with another upholstery manufacturer, the cut and sew operation could be consolidated. This consolidation could lead to a reduction in the overhead expense associated with production as well as a reduction in labor cost. The reduction in overhead stems from the fact that utility expense, salaries for management, etc. will not be doubled.

So, exactly what is a merger? Ask a lawyer and he or she will most likely say it is typically referred to as a statutory merger and is driven by state law. Ask a tax accountant and he or she will most likely say, “this appears to be a statutory merger, but there may be specifics required by state law and when looking at Federal taxation we should look at section 368(a)(1) (A) of the Internal Revenue Code.” Ask a finance professional and he or she will say that it is an opportunity to enhance shareholder and enterprise value if the appropriate synergies exist. After all, synergy is the secret ingredient that allows for revenue enhancement (sales increase) while, at the same time, producing cost savings (reduction of direct expense). It is this synergistic effect that truly allows merging companies to see dramatic and positive results practically overnight.

From a transactional perspective, there are a variety of ways mergers can be constructed. Typically, mergers fall into three categories: straight mergers, reverse triangular mergers or forward triangular mergers. However, it is important to consider why the merger is occurring as opposed to how a merger is occurring. Al’s company manufactures high-end upholstered furniture in the highlands of western North Carolina and ships products to the continental United States. Let us assume that Kim is able to locate an upholstered furniture manufacturer in El Paso, Texas, which has manufacturing facilities in El Paso as well as Mexico. Let us also assume that the majority of the furniture manufactured in these facilities is distributed in Mexico and South America. It would appear that these two companies manufacture and sell essentially the same product in very different markets. From a transactional standpoint, a merger between these two hypothetical companies can be accomplished using a straight merger, reverse triangular merger or forward triangular merger.

From a financial perspective, mergers are more appropriately defined by the premerger relationship of the companies.

In addition to defining mergers based on the pre-merger relationship, the finance perspective also considers financial obligations associated with a merger. From this perspective, a merger is classified as a purchase merger or a consolidation merger. A purchase merger is distinguishable from a consolidation merger in that a purchase merger involves one company buying another. If the consideration used in the purchase is the stock of the acquiring company, this will typically be a tax-free transaction. On the other hand, if the consideration paid is cash, or some form of debt instrument, the transaction will be viewed as a taxable sale. With a consolidation merger, a new company is formed, and two or more companies are then brought into this new company. Many involved in investment banking will refer to consolidation mergers as “roll ups.” From a tax perspective, consolidation mergers are taxed depending on the consideration received, similar to purchase mergers.

As fortune had it, Kim’s friend was able to provide some valuable insight into mergers as a growth option. Al and Kim were able to locate an upscale retail home furnishings company headquartered in Dallas, Texas. The retail outlets were located in the southwestern area of the United States and in Mexico. Coincidentally, the owners of this home furnishings company were in retirement mode, but wanted to stay somewhat active in the business. A deal was struck, and Kim was put in charge of the retail aspects while Al was re-energized. As for Kim’s friend, she is working diligently to find the next opportunity for Al and Kim.

As with a child, upon the birth of a business, the owners must “dress” their business by selecting an entity structure from which to operate.

While most of us would smile at seeing a baby waddle through a park While most of us would smile when seeing a baby waddle through a park wearing only a diaper, the sight of a fully grown man wandering through the park clothed only in a diaper would result in a much different reaction. I have never witnessed such a sight, but I imagine laughter and ridicule would be the most common responses. Fortunately, this is a rare occurrence as our parents adjust to our changing needs by dressing us in more socially acceptable manners.

Unfortunately, the “parents” of a business (i.e., the owners) are often unaware that they must take care of their business in a similar manner as it grows and matures. Upon the birth of a business, the owners must “dress” the business by selecting an entity structure from which to operate. The choices are numerous and generally include a sole proprietorship, general partnership, limited liability company, S corporation, C corporation or a multiple-entity structure. But just as parents dress their children differently as they age, business owners must take care to ensure that their business is operating from a structure that fits its current needs. It is especially important for an owner to consistently question whether the structure fits the business’ changing needs because, unlike a child, a business will not protest and complain when its clothes no longer fit.

For example, a business often begins simply, with a single individual working from his home. During this beginning stage, the company may have very few assets, no employees (aside from the owner) and will generally realize small amounts of profits or losses. A simple structure, such as a sole proprietorship, is common for such a business in its infancy. The sole proprietorship is common as corporations’ administrative burdens (i.e., additional tax returns, additional bank accounts, etc.) are avoided. Additionally, a sole proprietorship’s flaws are not yet critical if the business has not acquired assets, there are no employees (aside from the owner) and the business is not yet profitable.

Once the business grows, acquires assets, employs workers and generates significant profits, the sole proprietorship may not be the best entity structure as it could lead to excessive and unnecessary taxes, and expose the owner to personal liability. Instead, an S corporation is commonly recommended as the business owner’s personal liability will be minimized. In this case, the burdensome administrative tasks that must be performed, in order for the business to operate in corporate form, may be far outweighed by the legal and tax advantages provided by the corporation. However, the same business may soon outgrow the single corporation structure as the revenues and profits grow, or if the company changes its line of business, acquires a second or third line of business, acquires substantial equipment, etc. Any of these changes may prompt a shift to a multiple-entity structure for tax and legal purposes. A multiple-entity structure can dramatically increase protection for a business’ assets as well as minimize the disadvantages of any particular entity; however, it must be adopted carefully as the potential tax and legal issues surrounding a multiple-entity structure are complex.

When meeting with clients, I always ask, “Why are you operating as an S corporation?” or, “Why are you operating as a sole proprietorship?” Generally, the client gives me a blank look and replies one of two ways: “My company has always operated this way,” or, “My CPA organized the business under the current structure upon its inception.” One of my clients indicated that he started his business as a C corporation in 1979 and discussed electing S corporation status with his accountant at that time; however, the accountant left on a two-week vacation before the paperwork could be filed and the topic was never re-addressed. Another client of mine formed a machine shop in 1993 as a sole proprietorship and was interested in forming an LLC to conduct the business. However, his CPA had advised against the LLC as it was “too difficult” and would not provide any more asset protection than a sole proprietorship (both incorrect conclusions). In each of these cases, the businesses changed from infant companies with little assets, to more mature businesses with substantial amounts of equipment and employees—yet no change had been made regarding structure.

The point of this article is not to suggest that sole proprietorships and S corporations are poor choices, or that multiple entities are the optimal structures for every business. Rather, the point of this article is to strongly suggest that an entity structure is not a one-time decision that should be made at the birth of a business, or in its early stages. Instead, a business owner should be aware that the needs of the business will change as the business matures.

Working in conjunction with professional advisors, the business owner should continually consider the business’ current structure and whether it facilitates business goals, whether personal assets are exposed to business liabilities, whether business assets are fully exposed to judgments against the business, whether the structure creates unnecessary taxes, whether any legal or tax changes impact the current structure and whether the structure facilitates any succession or estate planning goals. Failure to critically analyze how the business is “dressed” may cause a mature and adult business to, figuratively, be caught wearing a diaper in the park. While this may not result in laughter and ridicule, failure to properly dress the business may lead to extremely unfortunate legal outcomes and excessive taxes.

The burden of rising health insurance costs.

Since the year 2000, the average portion that employees must pay towards benefits has risen dramatically. This is due to both reduced employer contributions, as well as rising health care costs. In the roaring 90’s, part of this was covered by salary increases and overtime compensation. Over the last five years, salary increases have drastically slowed, overtime has been cut and the net take home pay has decreased. Many employers are having to look for sustainable alternatives now or risk dropping health coverage as a benefit altogether. We have approached the breaking point much quicker than most had predicted.

The health care products that are being sought out as the lifesavers of the industry are Health Reimbursement Accounts (HRAs) and Health Saving Accounts (HSAs). These new products have partially been developed due to the shrinking market share of HMO plans. Most insurance carriers argue that the HMO model is outdated. Dollar first benefits are not only expensive, but are also difficult from an insurance standpoint to price out. Due to this pricing predicament, in many areas of the country, an HMO plan is actually more costly than a comparable PPO plan. The largest issue is that healthy employees receive very little benefit from this costly coverage, yet these are the people that need to be enrolled in the health insurance plan in order to help spread the risk over a large population so that premium and renewal rates are controlled.

The answer may lie in the HRA/HSA solution. Is it possible that if employees have some money at risk and are encouraged to actively participate in their own health care, the cost may come down due to competition? The question of “Is it covered by my co-pay?” may be replaced by, “Do I really need this procedure?” and “How much does it cost?” The fear is that employees will begin to question their doctors and the regimen that is required. It may just make the employee an educated consumer and aid the health care system as a side effect.

Let’s review the marketplace as most employers see it today. The typical PPO plan has a relatively low deductible and is loaded with token co-pays which cover doctor visits, prescription drugs and even emergency room visits. Most employees have now come to consider this the cost of health care. Employees pay virtually nothing at the “point of sale.” Not only does the healthy employee perceive little benefit except for peace of mind, but the active health user is disengaged with the process and concerned mostly from an ‘out of pocket expense’ view point.

The new HRA plans offer a higher deductible with decreased co-pays, while the HSA plans have taken out most co-pays altogether. In a perfect world, this will create an incentive for the employee to be engaged in his health care due to the fact that at the point of treatment there will be a larger out of pocket expense. This system is designed so that the reduction in health premiums will subsidize this increase. The healthy employee will see a benefit of reduced health care costs and a limit of expense to the employee or family, which still provides peace of mind. Realize that not only does the employee save money, but in some instances, so does the employer.

Health Reimbursement Accounts are an agreement by the employer to pay out money (usually toward the deductible) with a set cap. However, the arrangement is a nonfunded liability. The employer only needs to fund the reimbursement in the event these claims are incurred. HRA legislation is specific in the fact that they can only be employer funds, which means the employer retains complete ownership of any non-used funds. There is no required accumulation of credits of any non-used funds and most employers reset the reimbursement amount every year. Health Reimbursement Account regulations also state that the partners or shareholders of an LLC or S-Corporation cannot take the same tax benefits of the HRA as the average employee. Most feel that HRAs do an effective job of reducing the high initial cost of health care and also are effective in controlling renewals; however, there is a flaw. It has not fully engaged the employee due to the fact it is still employer money—whether realized or not.

The HSA concept has the employee accumulating employer money in their name, whether a claim is realized or not. The HSA will accumulate, grow tax-free and is fully portable. This means that the employees are 100% vested in the plan and can move their employer-provided funds upon termination whether it was voluntary or involuntary. The issue is that the funding of these vehicles could put the cost of health care in the same total range as today’s PPO product. The theory is that the base premium will be lower and that renewal increases will be controlled. The total cost to the employer, however, may not be. Presently we are not seeing the reduction in costs that had been first expected.

Industry experts predict that 40 million Health Savings Accounts will be opened in the next ten years. But those predictions were seen with Flexible Spending Accounts (FSAs) as well as Medical Saving Accounts (MSAs). Both are considered flops by industry standards. The resistance to change, as well as the learning curve of how to effectively use these options, will determine their fate. The public is resistant to change and in most areas of the country there are still demands for first dollar health care.

Although many feel that the new “consumer driven” health plans are actually cost sharing plans, the jury is still out. The learning curve on these plans is certainly not moving at the speed predicted and in some states where the cost savings is substantial, the cost to the employee who does not utilize full reimbursement is much greater than expected. Remember that if the company has continued users of health care, but the users do not have any major health conditions, what appears to be a savings to the company, may actually be a drain on the employees. It is important to understand your group and their use of your health plan in order to design the most effective plan, whether it be one of the new consumer driven plans or a dollar first PPO or HMO plan.

The design of a health care plan and what is implemented is imperative to health care being perceived as a benefit instead of an entitlement. The plan must effectively cover the needs of the company as well as the employees. We have certainly moved from the early 90’s model of “one size fits all.”