ESOPs can Help Business Owners with Succession Planning

Devising and executing the right succession plan is challenging for most business owners. In worst-case scenarios, succession planning is left to chance until the last minute. Chaos, or at least much confusion and uncertainty, often follows.

The most foolproof way to make succession planning easier is to give yourself plenty of time to develop a plan that suits the intricacies of your situation and then gradually implement it. One vehicle that can help “slow your roll” into retirement or whatever your next stage of life may be is an employee stock ownership plan (ESOP).

Little by little

An ESOP is a type of qualified retirement plan that invests solely or mainly in your company’s stock. Because it’s qualified, an ESOP comes with tax advantages as long as you follow the federally enforced rules. These include requirements related to minimum coverage and contribution limits.

Generally, the company sets up an ESOP trust and funds the plan by contributing shares or cash to buy existing shares. Distributions to eligible participants are made in stock or cash. For closely held companies, employees who receive stock have the right to sell it back to the company — exercising “put options” or an “option to sell” — at fair market value during certain time windows.

Although an ESOP involves transferring ownership to employees, it’s different from a management or employee buyout. Unlike a buyout, an ESOP allows owners to cash out and transfer control little by little. During the transfer period, owners’ shares are held in the ESOP trust and voting rights on most issues other than mergers, dissolutions and other major transactions are exercised by the trustees, who may be officers or other company insiders.

Appraisals required

One big difference between ESOPs and other qualified retirement plans, such as 401(k)s, is mandated valuations. The Employee Retirement Income Security Act requires trustees to obtain appraisals by independent valuation professionals to support ESOP transactions. Specifically, an appraisal is needed when the ESOP initially acquires shares from the company’s owners and every year thereafter that the business contributes to the plan.

The fair market value of the sponsoring company’s stock is important because the U.S. Department of Labor specifically prohibits ESOPs from paying more than “adequate consideration” when investing in employer securities. In addition, because employees who receive ESOP shares typically have the right to sell them back to the company at fair market value, the ESOP provides a limited market for its shares.

Drawbacks to consider

An ESOP can play a helpful role in a well-designed succession plan with an appropriately long timeline. However, there are potential drawbacks to consider. You’ll incur costs and considerable responsibilities related to plan administration and compliance. Costs are also associated with annual stock valuations and the need to repurchase stock from employees who exercise put options.

Another potential disadvantage is that ESOPs are available only to corporations of either the C or S variety. Limited liability companies, partnerships and sole proprietorships must convert to one of these two entity types to establish an ESOP. Doing so will raise a variety of tax and financial issues.

In addition, it’s important to explore the potential negative impact of ESOP debt and other expenses on your financial statements and ability to qualify for loans.

Not a no-brainer

ESOPs have become fairly popular among small to midsize businesses. However, the decision to create, launch and administer one is far from a no-brainer. You’ll need to do a deep dive into all the details involved, discuss the concept with your leadership team and get professional advice. Contact FMD for help evaluating whether an ESOP would be a good fit for your business and succession plan.

Embrace the Future: Sales Forecasting for Businesses

So, how are sales looking for next year? It’s not a rhetorical question. Your business should be able to look ahead and accurately estimate how its future sales are shaping up. This practice is called sales forecasting, and doing it well is key to better managing your company’s financial performance.

Why it’s important

Formally defined, sales forecasting is a comprehensive process for estimating future revenue in a given period based on carefully chosen metrics and, often, human input.

The advantages of sales forecasts go far beyond simply establishing your sales team’s confidence level. Done properly, forecasts can help you and your leadership team set ambitious but achievable sales objectives in relation to broader strategic goals.

As a result, you can create more accurate budgets across the business and better allocate resources to ensure you’ll meet those objectives. In addition, sales forecasts often reveal strategic and operational risks before they become crises.

Quantitative vs. qualitative

Generally, two broad models are used for sales forecasting: quantitative and qualitative.

Quantitative forecasting involves gathering numerical data and applying statistical methods to generate revenue estimates. This usually starts with looking at historical sales results and identifying past trends. You can, for example, break down sales data by time periods, product or service lines, or regions to spot patterns and seasonal fluctuations.

Other internal business metrics also factor into quantitative forecasting. These may include:

• Return on investment of marketing campaigns,

• Measures related to productivity and staffing levels, and

• Inventory metrics.

And the data points don’t stop there. Sales forecasts can incorporate additional quantitative information drawn from global, national and local economic indicators; industry and market trends; and consumer behavior.

Qualitative sales forecasting relies less on hard data and more on the input of pertinent parties inside and outside your company. Such parties include your executive leadership team, as well as members of your sales and marketing departments. However, you can also gather qualitative feedback from customer surveys, focus groups and consultants.

Most businesses combine the quantitative and qualitative models to arrive at an optimal sales forecasting process. Start-ups and companies with limited operating histories may need to rely largely on qualitative input.

Best practices

There’s no one-size-fits-all sales forecasting process. The right one depends on your business’s distinctive features, operational requirements and strategic goals. Nonetheless, certain best practices generally apply to all companies. These include:

Defining the time frame. Most businesses generate sales forecasts monthly or quarterly. Newer companies or small businesses may be able to get away with annual sales forecasts because they have less data to work with. As a company grows, however, it will likely need to perform sales forecasts more often.

Choosing data points carefully and consistently. Quantitative sales forecasts generally must measure the same things over time so you can compare, contrast and pick up trends. When using the qualitative model, you may add contributors as necessary and feasible, but be careful about information overload.

Finding the right analytical method. You can crunch the numbers in various ways. Trend analysis, for instance, is suitable for businesses with stable and sizable historical data. Regression analysis can help you understand relationships between variables, such as marketing budget and sales. There are other approaches to consider as well.

Leveraging technology. You may be able to use software you already own to generate sales forecasts. For example, many customer relationship management platforms offer reporting functions that can help with forecasting. There’s also dedicated sales forecasting software available. Artificial intelligence is having a major positive impact on these products.

Continuous improvement

If your company is already generating sales forecasts, give yourself some credit. However, remember that you must continuously improve your current process to refine its accuracy, adapt to changes and incorporate evolving best practices. FMD can help you create a sales forecasting process or improve the one you have in place.

How to Evaluate and Undertake a Business Transformation

Many industries have undergone monumental changes over the last decade or so. Broadly, there are two ways to adapt to the associated challenges: slowly or quickly.

Although there’s much to be said about small, measured responses to economic change, some companies might want to undertake a more urgent, large-scale revision of their operations. This is called a “business transformation” and, under the right circumstances, it can be a prudent move.

Defining the concept

A business transformation is a strategically planned modification of how all or part of a company operates. In its broadest form, a transformation might change the very mission of the business. For example, a financial consulting firm might become a software provider. However, there are other more subtle variations, including:

• Digital transformation (implementing new technologies to digitalize every business function),

• Operational transformation (streamlining workflows or revising processes to change operations fundamentally), and

• Structural transformation (altering the leadership structure or reorganizing departments/units).

The overarching goal of any transformation is to boost the company’s financial performance by increasing efficiencies, improving customer service, seizing greater market share or entering a new market.

Making the call

Choosing to undertake a business transformation of any kind is a major decision. Before making the call, you and your leadership team must evaluate your company’s market position and identify what’s inhibiting growth and possibly even leading toward a downturn. Common indicators that a transformation may be needed include:

• Declining revenues with little to no projections of upswings,

• Outdated processes that are creating errors and upsetting customers,

• Intensifying competition that will be difficult or impossible to counter, and

• Shifts in customer expectations or demand that call for substantive changes.

To decide whether a business transformation is appropriate, you must conduct due diligence through measures such as analyzing financial data and market trends, gathering customer feedback, and obtaining the counsel of professional advisors.

5 general steps to follow

So, let’s say you do your due diligence and decide to move forward with a business transformation. Generally, companies follow five steps:

1. Set a clearly worded objective. The more specific you are in describing how you intend to transform your business, the more likely you are to accomplish that objective. Set aside the time and exercise the patience needed to find specificity and consensus with your leadership team, key employees and professional advisors.

2. Forecast the financial, legal and operational impacts. You must paint a realistic picture of how the big change will likely affect the business during and after the transformation. This is another step in which your professional advisors are critical. With their help, generate financial forecasts related to expenses and revenue changes, identify potential compliance risks and so forth.

3. Map out the road ahead. With a clear vision in mind and a wealth of information in hand, create a detailed roadmap to the transformation. A phased approach is typically best. Define milestones and align performance metrics to each phase. In addition, develop contingency plans in case you wander off course.

4. Communicate with stakeholders. Devise a communication strategy that addresses all key stakeholders — including employees, independent contractors, customers, vendors, suppliers, investors and lenders. Tailor the strategy to each audience, promoting transparency and encouraging buy-in.

5. Monitor progress and adapt as necessary. To increase your odds of success, you and your leadership team need to “stay on it.” Track metrics, allocate time to discussing progress, and be ready to overcome internal and external challenges.

Bold move

Business transformations are difficult to achieve. Insufficient planning, lack of financial oversight and employee resistance can derail efforts. Meanwhile, the necessary investments may strain cash flow. Worst of all, if you fail, you’ll have squandered all those resources.

On a more positive note, a successful business transformation can be a bold and powerful move toward achieving substantial growth and resilience. If you’re considering one, FMD can help you evaluate the concept and undertake the appropriate financial analyses.

Companies can Shine a Light on Financial Uncertainty with Flash Reports

Managing the financial performance of your business may sometimes seem like steering a ship through treacherous waters. Perhaps your voyage goes smoothly for a while until, quite suddenly, you hit a concerning dip or abrupt swell — either of which creates considerable operational pressure.

Your financial statements should provide keen insights into how your company is performing and where it’s headed. However, you probably generate them only monthly, quarterly or annually. That leaves lots of time in between when you may be sailing through a fog of uncertainty. Creating flash reports is one way to shine a light on the situation.

Take a snapshot

A flash report is a brief summary of a business’s current financial performance based on a few carefully selected metrics. The word “flash” is meant to evoke a camera taking a snapshot of key figures, such as cash balances, receivables aging, collections and payroll.

During seasonal peaks or when undertaking a turnaround, some companies create daily flash reports to track key activities such as sales, shipments and deposits. Otherwise, businesses generally create weekly or monthly reports, depending on their needs.

Flash reports should be as simple as possible. Those that take longer than an hour to prepare or take up more than one page are likely too complex. Flash reports should also be comparative — that is, they need to note significant trends or budgetary deviations that may call for corrective action.

Including graphs or tables can help nonfinancial staff who receive the reports, such as marketing and operations managers, read them more easily.

Use as directed

Flash reports can help you and your leadership team better catch and respond to financial performance developments that demand your attention. However, they have limitations.

First and foremost, flash reports provide a rough measure of financial performance within a short period. Therefore, they may not give a completely accurate picture of where your business stands. It’s common for items such as cash balances and collections to ebb and flow throughout the month, depending on billing cycles. So, you and your fellow report users must guard against overreaction.

Because of their “quick and dirty” nature, flash reports are best used for internal purposes only. Most companies don’t share them with investors, creditors or franchisors unless required under a bankruptcy or franchise agreement.

The risk is real: If shared flash reports deviate from what’s subsequently reported on your financial statements, stakeholders may wonder whether you’re:

• Exaggerating financial performance,

• Running into serious problems, or

• Mismanaging your financial reporting.

That said, some lenders may ask for flash reports if a borrower fails to meet liquidity, profitability or leverage covenants. Should you decide to share reports for any reason, consider adding a disclaimer that the results are preliminary, may contain errors or omissions, and haven’t been prepared in accordance with U.S. Generally Accepted Accounting Principles (if you normally do so).

Get the info you need

Although you can probably find some flash report templates online, proceed cautiously. It’s imperative to design yours to provide the most relevant data for your company in the most readable format for your users. You may also need to occasionally revise the content and look of reports to keep up with changes to your business. Contact FMD for help developing flash reports, evaluating your current ones or improving any aspect of your financial reporting.

Choosing the Right Sales Compensation Model for Your Business

A strong sales team is the driving force of most small to midsize businesses. Strong revenue streams are hard to come by without skilled and engaged salespeople.

But what motivates these valued employees? First and foremost, equitable and enticing compensation. And therein lies a challenge for many companies: Choosing the right sales compensation model isn’t easy and may call for regular reevaluation. Let’s review some of the most popular models and note a recent trend.

Straight salary (or hourly wages)

The simplest way to pay sales staff is to offer a “straight salary,” meaning no commissions or other incentives are involved. (Some businesses may pay hourly wages instead, though this generally occurs only in a retail environment.)

The straight salary model’s advantage is that it’s easy for the company to administer and keeps payroll expenses predictable. It also provides financial stability for employees. The approach tends to work best in industries with long sales cycles and for particularly collaborative sales teams.

As you may have guessed, the downside is that it offers no financial incentive for salespeople to go beyond the status quo. This can result in flat sales and difficulty drawing new customers.

Commission only

Quite the opposite is the commission-only model. Here, sales team members earn income as a predetermined percentage of sales revenue. There are various ways to do this, but the bottom line is that staffers are compensated purely through sales wins; they don’t receive salaries.

The advantage is that they’re strongly motivated to succeed — one could even say it’s a “do or die” approach. This model often suits start-ups or businesses looking for quick growth without a big payroll budget. The risk for companies is that commission-only positions tend to have high turnover rates because salespeople lack income stability and may change jobs frequently.

Salary plus commission

Traditionally, this has been among the most popular compensation models. It combines the stability of a salary with the financial incentive of commissions. Generally, the salary will be relatively lower because sales staffers can make up the difference through the commissions.

For the business, this model may reduce turnover while still helping motivate employees. Its chief downsides are that salaries add to payroll expenses, and there’s a relatively high degree of administrative complexity involved in tracking and calculating commissions.

Salary plus performance-based incentives (hybrid)

If you’re interested in “what’s hot” in sales compensation, look no further. This model is often called “hybrid” because it combines a salary with various performance-based incentives tailored to the company’s needs.

Just last month, cloud-based sales software provider Xactly released the results of its annual Sales Compensation Report. Of 160 companies surveyed, 62% identified performance-based pay structures for sales reps as the biggest factor driving changes to sales compensation.

Like “base salary plus commission,” a hybrid model offers employees income stability — but it allows them to earn much more through multiple incentives. For businesses, the model may strengthen employee retention while motivating sales team members to meet targeted strategic objectives, such as increasing market share or driving top-line growth.

Companies have a wide variety of performance-based incentives to choose from, including:

• Financial bonuses for acquiring new customers or expanding into new territories,

• Profit-sharing plans that tie additional compensation to the company’s overall success, and

• Long-term incentives, such as stock options, restricted stock units and performance shares.

However, it’s critical to design a hybrid model carefully. One major risk is becoming “a victim of your own success” — that is, running into cash flow problems because you must pay salespeople substantial amounts for earning the incentives offered.

No pressure

If your sales compensation model works well, don’t feel pressured to change it just to keep up with the Joneses. However, as your business grows, you may want to adjust or revise it to sustain or, better yet, increase that growth. FMD can help you evaluate your current model and make necessary adjustments that fit your company’s needs and budget.

Businesses have Options for Technology Leadership Positions

To say that technology continues to affect how businesses operate and interact with customers and prospects would be an understatement. According to the Business Software Market Size report issued by market researchers Mordor Intelligence, the global market size for commercial software is projected to reach $650 million this year and $1.10 trillion by 2029.

And that’s just software. Companies must also contend with technological issues such as hardware, skilled labor, strategy and cybersecurity. Just one of the resulting demands that this pressure is putting on businesses is a keen need for tech leadership.

If your company has grown to the point where it could use an executive-level employee with specialized knowledge of and laser focus on technology issues, you have plenty of options.

Positions to consider

Here are some of the most widely used position titles for technology executives:

Chief Information Officer (CIO). This person is typically responsible for managing a company’s internal IT infrastructure and operations. In fact, an easy way to remember the purpose of this position is to replace the word “Information” with “Internal.” A CIO’s job is to oversee the purchase, implementation and proper use of technological systems and products that will maximize the efficiency and productivity of the business.

Chief Technology Officer (CTO). In contrast to a CIO, a CTO focuses on external processes — specifically with customers and vendors. This person usually oversees the development and eventual production of technological products or services that will meet customer needs and increase revenue. The position demands the ability to live on the cutting edge by doing constant research into tech trends while also being highly collaborative with employees and vendors.

Chief Digital Officer (CDO). For some companies, the CIO and/or CTO are so busy with their respective job duties that they’re unable to look very far ahead. This is where a CDO typically comes into play. The primary purpose of this position is to spot new markets, channels or even business models that the company can target, explore and perhaps eventually profit from. So, while a CIO looks internally and a CTO looks externally, a CDO’s gaze is set on a more distant horizon.

Chief Artificial Intelligence Officer (CAIO). Did you really think you were going to make it through a technology article without reading about AI? Yes, more and more businesses are taking on executives whose primary responsibility is to create the company’s overall AI strategy and ensure it:

• Aligns with the business’s overall strategic goals, and

• Enhances the company’s digital transformation, which many businesses are continuing to undergo as they adapt to new technologies.

CAIOs are also typically responsible for understanding the global and national regulatory environments regarding AI, as well as ensuring the business uses AI ethically.

Big decision

Adding an executive-level position to your company is clearly a big decision. Along with making a sizable outlay for compensation and benefits, you’ll likely spend considerable time and resources on the search and onboarding processes. So be sure to discuss the matter thoroughly with your existing leadership team and professional advisors. FMD can help you identify and project all the costs involved.

5 Steps to Creating a Pay Transparency Strategy

Today’s job seekers and employees have grown accustomed to having an incredible amount of information at their fingertips. As a result, many businesses find that failing to adequately disclose certain things negatively impacts their relationships with these parties.

Take pay transparency, for example. This is the practice, or lack thereof, of a company openly sharing its compensation philosophy, policies and procedures with job candidates, employees and even the public. It typically means disclosing pay ranges or rates for specific positions, as well as clearly explaining how raises, bonuses and commissions are determined.

You’re not alone if your business has yet to formalize or articulate its pay transparency strategy. In its 2024 Global Pay Transparency Report, released in January of this year, global consultancy Mercer reported that only 19% of U.S. companies have a pay transparency strategy. Here are five general steps to creating one:

1. Conduct a payroll audit. Over time, your company may have developed a relatively complex compensation structure and payroll system. By meticulously evaluating and identifying all related expenditures under a formal audit, you can determine what information you need to share and which data points should remain confidential.

You may also catch inconsistencies and disparities that need to be addressed. Ultimately, an audit can provide the raw data you need to understand whether and how your company’s compensation aligns with the roles and responsibilities of each position.

2. Define or refine compensation criteria. To be transparent about pay, your business needs clear and consistent criteria for how it arrived — and will arrive — at compensation-related decisions. If such criteria are already in place, you may need to refine the language used to describe them. Again, your objective is to clearly explain to job candidates and employees how your company makes pay decisions so you can reduce or eliminate any perception of bias or unfairness.

3. Develop a communications “substrategy.” Under your broader pay transparency strategy, your company must have a comprehensive substrategy for communicating about compensation with job candidates, employees and, if you so choose, the public. There are many ways to go about this, and the details will depend on your company’s size, industry, mission and other factors. However, common aspects of a communications substrategy include:

• Providing written guidelines explaining your compensation philosophy and structure,

• Supplementing those guidelines with an internal FAQs document,

• Holding companywide or department-specific Q&A sessions, and

• Using digital platforms to share updates and issue reminders.

4. Train and rely on supervisors. Your people managers must be the frontline champions and communicators of your pay transparency strategy. Unfortunately, many companies struggle with this. In the aforementioned Mercer report, 37% of U.S. companies identified managers’ inability to explain compensation programs as their biggest challenge in this area.

Naturally, it all begins with training. Once you’ve defined or refined your compensation criteria and developed a communications substrategy, invest the time and resources into educating supervisors (and higher-level managers) about them. These individuals need to become experts who can discuss your business’s compensation philosophy, policies, procedures and decisions. And it’s critical that their messaging be accurate and consistent to prevent misunderstandings and misinformation.

5. Get input from professional advisors. Before you roll out a formal pay transparency strategy, ask for input from external parties. Doing so is especially important for small businesses that may have only a few voices involved in the planning process.

For example, a qualified employment attorney can help ensure your strategy is legally compliant and limit your potential exposure to lawsuits. And don’t forget FMD — we’d be happy to assist you in conducting a payroll audit, identifying all compensation-related expenses and aligning your strategy with your business objectives.

Are Your Employees Suffering from Retirement Plan Leakage?

Today’s small to midsize businesses are often urged to help employees improve their financial wellness. And for good reason: Financially struggling workers tend to have higher stress and anxiety levels. They may be less productive and more prone to errors. Some might even decide to commit fraud.

One hallmark of an employee facing serious financial trouble is “retirement plan leakage.” This term refers to the withdrawal of account funds before retirement age for reasons other than retirement. If your company sponsors a qualified plan, such as a 401(k), be sure you’re at least aware of this risk — and strongly consider taking steps to address it.

Potential dangers

Some business owners might say, “If my plan participants want to blow their retirement savings, that’s not my problem.” And there’s no denying that your employees are free to manage their finances any way they choose.

However, retirement plan leakage does raise potential dangers for your company. For starters, it may lead to higher plan expenses. Fees are often determined on a per-account or per-participant basis. When a plan loses funds to leakage, total assets and individual account sizes shrink, which hurts administrative efficiency and raises costs.

More broadly, as mentioned, employees taking pre-retirement withdrawals generally indicates they’re facing unusual financial challenges. This can lead to all the negative consequences we mentioned above — and others.

For example, workers who raid their accounts may be unable to retire when they reach retirement age. So, they might stick around longer but be less engaged, helpful and collaborative. Employees not near retirement age may take on second jobs or “side gigs” that distract them from their duties. And it’s unfortunately worth repeating: Motivation to commit fraud likely increases.

Mitigation measures

Perhaps the most important thing business owners can do to limit leakage is educate and remind employees about how pre-retirement withdrawals diminish their accounts and can delay their anticipated retirement dates. While you’re at it, provide broader financial education to help workers better manage living expenses, amass savings, and minimize or avoid the need for early withdrawals.

In addition, one recent and relevant development to keep in mind is the introduction of “pension-linked” emergency savings accounts (PLESAs) under the SECURE 2.0 law. Employers that sponsor certain defined contribution plans, including 401(k)s, can offer these accounts to employees who aren’t highly compensated per the IRS definition. Additional rules and limits apply, but PLESAs can serve as “firewalls” to protect participants from having to raid their retirement accounts when crises happen.

Some companies launch their own emergency loan programs, with funds repayable through payroll deductions. Others have revised their plan designs to reduce the number of situations in which participants can take out hardship withdrawals or loans.

Pernicious problem

It’s probably impossible to eliminate leakage from every one of your participants’ accounts. However, awareness — both on your part and those participants’ — is critical to limiting the damage that this pernicious problem can cause. FMD can help you identify and evaluate all the costs associated with your qualified retirement plan, as well as other fringe benefits you sponsor.

How businesses can better retain their salespeople

The U.S. job market has largely stabilized since the historic disruption of the pandemic and the unusual fluctuations that followed. But the fact remains that employee retention is mission-critical for businesses. Retaining employees is still generally less expensive than finding and hiring new ones. And strong retention is one of the hallmarks of a healthy employer brand.

One role that’s been historically challenging to retain is salesperson. In many industries, sales departments have higher turnover rates than other departments. If this has been the case at your company, don’t give up hope. There are ways to address the challenge.

Lay out the welcome mat

For starters, don’t focus retention efforts only on current salespeople. Begin during hiring and ramp up with onboarding. A rushed, confusing, or cold approach to hiring can get things off on the wrong foot. In such cases, new hires tend to enter the workplace cautiously or skeptically, with their eyes on the exit sign rather than the “upper floors” of a company.

Onboarding is also immensely important. Many salespeople tell horror stories of being shown to a cubicle with nothing but a telephone on the desk and told to “Get to it.” With so many people still working remotely, a new sales hire might not even get that much attention. Welcome new employees warmly, provide ample training, and perhaps give them a mentor to help them get comfortable with your business and its culture.

Incentivize your team

Even when hiring and onboarding go well, most employees will still consider a competitor’s job offer if the pay is right. So, to improve your chances of retaining top sales producers and their customers, consider financial incentives.

Offering retention bonuses and rewards for maintaining or increasing sales — in addition to existing compensation plans — can help. Make such incentives easy to understand and clearly achievable. Although interim bonus programs might be expensive in the near term, they can stabilize sales and prevent sharp declines.

When successful, a bonus program will help you generate more long-term revenue to offset the immediate costs. That said, financial incentives need to be carefully designed so they don’t adversely affect cash flow or leave your business vulnerable to fraud.

Give them a voice

Salespeople interact with customers and prospects in ways many other employees don’t. As a result, they may have some great ideas for capitalizing on your company’s strengths and shoring up its weaknesses.

Look into forming a sales leadership team to help evaluate the potential benefits and risks of goals proposed during strategic planning. The team should include two to four top sellers who are given some relief from their regular responsibilities so they can offer feedback and contribute ideas from their distinctive perspectives. The sales leadership team can also:

• Serve as a clearinghouse for customer concerns and competitor strategies,

• Collaborate with the marketing department to improve messaging about current or upcoming product or service offerings, and

• Participate in developing new products or services based on customer feedback and demand.

Above all, giving your salespeople a voice in the strategic direction of the company can help them feel more invested in the success of the business and motivated to stay put.

Assume nothing

Business owners and their leadership teams should never assume they can’t solve the dilemma of high turnover in the sales department. The answer often lies in proactively investigating the problem and then taking appropriate steps to help salespeople feel more welcomed and appreciated. FMD can help your company calculate turnover rate, identify and track its hiring and employment costs, and assess the feasibility of financial incentives.

3 Areas of Focus for Companies Looking to Control Costs

Controlling costs is fundamental for every business. But where and how to address this challenge can change over time based on various economic and logistical factors.

Earlier this year, global consultancy Boston Consulting Group published a report entitled The CEO’s Guide to Costs and Growth. Within it were the results of a survey of 600 C-suite executives that found, among other things, cost management was a top priority for respondents heading into 2024. According to the survey, three of the top categories for cost-cutting initiatives were:

1. Supply chain / manufacturing. Not every company incurs manufacturing costs, but most have a supply chain. Costs and delays in this area soared during the pandemic because of global disruptions and backups. Since then, some sense of normalcy has returned, though that doesn’t mean managing supply chain costs has become easy.

Many companies find that most of their spending is done with just a few vendors. By identifying these vendors and consolidating spending with them, you may be able to put yourself in a stronger position to negotiate volume discounts. Consolidating your supplier base also tends to streamline the administrative work associated with purchasing.

It also pays to really know your suppliers. One way to gather an abundance of relevant information is to conduct a supplier audit. This is a formal process for collecting key data regarding each supplier’s performance to manage quality control and ensure you’re getting an acceptable return on investment.

2. Labor/nonlabor overhead. Controlling labor costs is tricky in today’s environment. Many industries are facing skilled labor shortages, meaning businesses would love to spend more on labor if they could find people to fill those positions. Nevertheless, with payroll being such a dominant expense category for most companies, it’s critical to monitor these costs and prevent overspending.

A logical first step in managing labor costs is to know how much you’re spending. And the answer isn’t as simple as looking at the total gross wages you pay out every month or year. You need to know the actual and total amount of these costs. Fortunately, there’s a metric for that. Labor burden rate reflects the additional costs that companies incur beyond gross wages. These generally include expenses such as payroll taxes, workers’ compensation insurance, and fringe benefits. Knowing your labor burden rate can enable you to truly “right-size” your workforce.

Beyond that, outsourcing remains an option for mitigating labor costs — especially given the vast pool of independent contractors now available. Although you’ll obviously incur costs when outsourcing, the time and labor cost that it saves you could end up a net gain. Carefully chosen and implemented technology upgrades can provide similar results.

3. Marketing/sales. Much like labor, strong marketing, and sales are critical to most businesses operating today. So, skimping on their related costs typically isn’t going to pay off. But, of course, you also need to ensure a strong return on investment.

Again, choosing and monitoring the right metrics can prove useful here. The optimal ones tend to vary by industry and company type, but some of the most widely used for marketing purposes include lead conversion rate, click-through rate for online ads, and cost per lead. Popular sales metrics include total revenue, year-over-year growth, and average customer lifetime value.

Whether it’s sales metrics, labor burden rate, or supply chain management, getting objective, professional advice can help you and your leadership team obtain an accurate picture of what’s going on with your costs and target feasible solutions. Please consider the FMD team for assistance.

Does Your Company Have an EAP? If so, be Mindful of Compliance

Many businesses have established employee assistance programs (EAPs) to help their workforces deal with the mental health, substance abuse, and financial challenges that have become so widely recognized in modern society.

EAPs are voluntary and confidential work-based intervention programs designed to help employees and their dependents deal with issues that may be affecting their mental health and job performance. These may include workplace stress, grief, depression, marriage/family problems, psychological disorders, financial troubles, and alcohol and drug dependency.

Whether your company is considering an EAP or already offers one, among the most important factors to keep in mind is compliance.

Start with ERISA

Several different federal laws may come into play with EAPs. A good place to start when studying your compliance risks is the Employee Retirement Income Security Act (ERISA). The law’s provisions address critical compliance matters such as creating a plan document and Summary Plan Description, performing fiduciary duties, following claims procedures, and filing IRS Form 5500, “Annual Return/Report of Employee Benefit Plan.”

Although most people associate ERISA with qualified health care and retirement plans, the law can be applicable to EAPs depending on how a particular program is structured and what benefits it provides. Generally, a fringe benefit is considered an ERISA welfare benefit plan if it’s a plan, fund, or program established or maintained by an employer to provide ERISA-listed benefits, which include medical services.

The category of ERISA-listed benefits most likely to be provided by an EAP is medical care or benefits. Mental health counseling — whether for substance abuse, stress, or other issues — is considered medical care. Accordingly, an EAP providing mental health counseling will probably be subject to ERISA. On the other hand, an EAP that provides only referrals and general information, and isn’t staffed by trained counselors, likely isn’t an ERISA plan.

Bear in mind that EAPs that primarily use referrals could still be considered to provide medical benefits if the individuals handling initial phone consultations and making the referrals are trained in an applicable field, such as psychology or social work. If an EAP provides any benefit subject to ERISA, then the entire program must comply with the law — even if it also provides non-ERISA benefits.

Check up on other laws

EAPs considered to be group health plans are also typically subject to the Consolidated Omnibus Budget Reconciliation Act (commonly known as “COBRA”) and certain other group health plan mandates, including mental health parity.

Also, keep in mind that EAPs that receive medical information from participants — even if the programs only make referrals and don’t provide medical care — must comply with privacy and security rules under the Health Insurance Portability and Accountability Act (HIPAA).

In addition, EAPs providing medical care or treatment could trigger certain provisions of the Affordable Care Act (ACA). EAPs meeting specified criteria, however, can be defined as an “excepted benefit” not subject to HIPAA portability or certain ACA requirements.

Cover all bases

Given the rising awareness and acceptance of mental health care alone, EAPs could become as common as health insurance and retirement plans in many companies’ employee benefit packages.

Whether you’re thinking about one or already have an EAP up and running, it’s a good idea to consult an attorney regarding your company’s compliance risks. Meanwhile, please FMD for help identifying and tracking the costs involved, as well as understanding the tax impact.

IRS Issues Final Regulations on Inherited IRAs

The IRS has published new regulations relevant to taxpayers subject to the “10-year rule” for required minimum distributions (RMDs) from inherited IRAs or other defined contribution plans. The final regs, which take this year, require many beneficiaries to take annual RMDs in the 10 years following the deceased’s death.

SECURE Act ended stretch IRAs

The genesis of the new regs dates back to the 2019 enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. One of the many changes in that tax law was the elimination of so-called “stretch IRAs.”

Previously, all beneficiaries of inherited IRAs could stretch RMDs over their entire life expectancies. Younger heirs in particular benefited by taking smaller distributions for decades, deferring taxes while the accounts grew. These heirs also could pass on the IRAs to later generations, deferring the taxes even longer.

The SECURE Act created limitations on which heirs can stretch IRAs. These limits are intended to force beneficiaries to take distributions and expedite the collection of taxes. Specifically, for IRA owners or defined contribution plan participants who died in 2020 or later, only “eligible designated beneficiaries” (EDB) are permitted to stretch out payments over their life expectancies. The following heirs are considered eligible for this favorable treatment:

• Surviving spouses,

• Children younger than “the age of majority,”

• Individuals with disabilities,

• Chronically ill individuals, and

• Individuals who are no more than 10 years younger than the account owner.

All other heirs (known as designated beneficiaries) are required to take the entire balance of the account within 10 years of the death, regardless of whether the deceased died before, on, or after the required beginning date (RBD) of his or her RMDs.

Note: In 2023, under another law, the age at which account owners must begin taking RMDs increased from 72 to 73, pushing the RBD date to April 1 of the year after the account owner turns 73. The age is slated to jump to 75 in 2033.

Proposed regs muddied the waters

In February 2022, the IRS issued proposed regs addressing the 10-year rule — and they brought some bad news for many affected heirs. The proposed regs provided that, if the deceased dies on or after the RBD, designated beneficiaries must take their taxable RMDs in years one through nine after death (based on their life expectancies), receiving the balance in the tenth year. A lump-sum distribution at the end of 10 years wouldn’t be allowed.

The IRS soon heard from confused taxpayers who had recently inherited IRAs or defined contribution plans and didn’t know when they were required to start taking RMDs. Beneficiaries could have been hit with a penalty based on the amounts that should have been distributed but weren’t. This penalty was 50% before 2023 but was lowered to 25% starting in 2023 (or 10% if a corrective distribution was made in a timely manner). The plans themselves could have been disqualified for failing to make RMDs.

As a result, the IRS issued a series of waivers on enforcement of the 10-year rule. With the release of the final regulations, the waivers will come to an end after 2024.

Final regs settle the matter

The IRS reviewed comments on the proposed regs suggesting that if the deceased began taking RMDs before death, the designated beneficiaries shouldn’t be required to continue the annual distributions as long as the remaining account balance is fully distributed within 10 years of death. The final regs instead require these beneficiaries to continue receiving annual distributions.

If the deceased hadn’t begun taking his or her RMDs, though, the 10-year rule is somewhat different. While the account has to be fully liquidated under the same timeline, no annual distributions are required. That gives beneficiaries more opportunity for tax planning.

To illustrate, let’s say that a designated beneficiary inherited an IRA in 2021 from a family member who had begun to take RMDs. Under the waivers, the beneficiary needn’t take RMDs for 2022 through 2024. The beneficiary must, however, take annual RMDs for 2025 through 2030, with the account fully distributed by the end of 2031. Had the deceased not started taking RMDs however, the beneficiary would have the flexibility to not take any distributions in 2025 through 2030. So long as the account was fully liquidated by the end of 2031, the beneficiary would be in compliance.

Additional proposed regs

The IRS released another set of proposed regs regarding other RMD-related changes made by SECURE 2.0, including the age when individuals born in 1959 must begin taking RMDs. Under the proposed regs, the “applicable age” for them would be 73 years.

They also include rules addressing:

• The purchase of an annuity with part of an employee’s defined contribution plan account,

• Distributions from designated Roth accounts,

• Corrective distributions,

• Spousal elections after a participant’s death,

• Divorce after the purchase of a qualifying longevity annuity contract, and

• Outright distributions to a trust beneficiary.

The proposed regs take effect in 2025.

Timing matters

It’s important to realize that even though RMDs from an inherited IRA aren’t yet required, that doesn’t mean a beneficiary shouldn’t take distributions. If you’ve inherited an IRA or a defined contribution plan and are unsure of whether you should be taking RMDs, contact us. We’d be pleased to help you determine the best course of action for your tax situation.

3 Ways Businesses Can Get More Bang for Their Marketing Bucks

Most small to midsize businesses today operate in tough, competitive environments. That means it’s imperative to identify and reach the right customers and prospects.

However, unlike large companies, your business probably doesn’t have a massive marketing department with seemingly limitless resources. You’ve got to pursue savvy campaigns while also controlling costs. Here are three fundamental ways to get more bang for your marketing bucks.

1. Set a budget, rinse, repeat

Many companies, particularly start-ups and small businesses, engage in “marketing by desperation.” That is, they throw money at the problem haphazardly and hope for good results. A better strategy is to take a step back and set a realistic marketing budget based on factors such as:

• Projected annual revenue (one rule of thumb is to allocate 5% to 10% of annual gross revenue to marketing, but this may not always be applicable),

• Industry benchmarks (such as what similar-sized businesses in your industry spend on marketing), and

• Growth goals (more aggressive growth may call for more dollars allocated).

Unfortunately, you can’t take a “set-it-and-forget-it” approach to your marketing budget. Every quarter, or at least at year end, compare your “marketing spend” to return on investment (ROI) using clear, verifiable financial metrics. Look for both 1) wasteful spending that you can eliminate or reallocate to other parts of the business, and 2) successful spending strategies that you can use for future campaigns. Regular budgetary reviews and adjustments will help your company adapt to industry and market changes without over- or underfunding marketing efforts.

2. Use metrics and technology to assess campaigns

One of the great things about marketing today is that many different metrics can help fine-tune your efforts. Examples include number of leads generated, lead conversion rate, and customer acquisition cost. An analytics-driven approach allows you to precisely measure the performance of your marketing campaigns.

Calculating these and other metrics shouldn’t involve pen and paper! You can use various technology tools to gather data, generate reports, and track progress. For example, if you use Google Business, it offers Google Analytics. This tool helps businesses track and analyze website traffic and visitor behavior. Other platforms, including most social media apps, offer similar functionality.

To take things to the next level, assuming you haven’t already, consider investing in customer relationship management software. Carefully selected and implemented, one of these solutions can allow you to input, gather, track, and analyze massive amounts of data to support marketing campaigns.

3. Avoid common mistakes

As you look to increase marketing ROI, watch out for common mistakes. First, don’t ignore the importance of meticulously defining your target audience. Although casting a wide net may seem like a good idea, doing so often leads to inconsistent results and wasted spending.

Second, don’t go overboard on paid ads. There are many forms of these online — including ads associated with search engines, websites, social media platforms, and video channels. On the plus side, they may yield quick results. However, they can also drain your marketing budget if you don’t manage them diligently. A best practice is to start with a small number of paid ads (even just one), test different ways to use them, and scale up based on positive results.

Last, never lose sight of the power of referrals. Word of mouth remains perhaps the most cost-effective way to market your business. Encourage satisfied customers to leave positive reviews on your website and social media channels. Consider offering discounts or freebies for referrals or online shout-outs.

Maximize positive impact

At the end of the day, getting a solid ROI from marketing is much more than simply cutting costs. You have to maximize the positive impact of your spending. Contact your FMD advisor for help creating and maintaining marketing budgets that align with your strategic goals and integrate well with your company’s other operational areas.

So Many KPIs, So Much Time: An Overview for Businesses

From the moment they launch their companies, business owners are urged to use key performance indicators (KPIs) to monitor performance. And for good reason: When you drive a car, you’ve got to keep an eye on the gauges to keep from going too fast and know when it’s time to service the vehicle. The same logic applies to running a business.

As you may have noticed, however, there are many KPIs to choose from. Perhaps you’ve tried tracking some for a while and others after that, only to become overwhelmed by too much information. Sometimes it helps to back up and review the general concept of KPIs so you can revisit which ones are likely best for your business.

Financial Metrics

One way to make choosing KPIs easier is to separate them into two broad categories: financial and nonfinancial. Starting with the former, you can subdivide financial metrics into smaller buckets based on strategic objectives. Examples include:

Growth. Like most business owners, you’re probably looking to grow your company over time. However, if not carefully planned for and tightly controlled, growth can land a company in hot water or even put it out of business. So, to manage growth, you may want to monitor basic KPIs such as:

• Debt to equity: total debt / shareholders’ equity, and

• Debt to tangible net worth: total debt / net worth – intangible assets.

Cash flow management. Maintaining or, better yet, strengthening cash flow is certainly a good aspiration for any company. Poor cash flow — not slow sales or lagging profits — often leads businesses into crises. To help keep the dollars moving, you may want to keep a close eye on:

• Current ratio: current assets / current liabilities, and

• Days sales outstanding: accounts receivable / credit sales × number of days.

Inventory optimization. If your company maintains inventory, you’ll no doubt want to set annual, semiannual or quarterly objectives for how to best move items on and off your shelves. Many businesses waste money by allowing slow-moving inventory to sit idle for too long. To optimize inventory management, consider KPIs such as:

• Inventory turnover: cost of goods sold / average inventory, and

• Average days to sell inventory: average inventory/cost of goods sold × number of days in period.

Nonfinancial Metrics

Not every KPI you track needs to relate to dollars and cents. Companies often use nonfinancial KPIs to set goals, track progress, and determine incentives in areas such as customer service, sales, marketing and production. Here are two examples:

1. Let’s say you decide to set a goal to resolve customer complaints faster. To determine where you stand, you could calculate average resolution time. This KPI is usually expressed as total time to resolve all complaints divided by number of complaints resolved. In many industries, a common benchmark is 24 to 48 hours.

2. Perhaps you want to increase the number of sales leads you close. In this case, the KPI could be sales close rate, which is typically calculated by dividing number of closed deals by number of sales leads. Benchmarks for this metric vary by industry, but somewhere around 20% is generally considered good.

Nonfinancial KPIs enable you to do more than just say, “Let’s provide better customer service!” or “Let’s close more sales!” They allow you to assign specific data points to business activities, so you can objectively determine whether you’re getting better at them.

Scalable measurements

The sheer number of KPIs — both financial and nonfinancial — will probably only grow. The good news is, you’ve got time. Choose a handful that make the most sense for your company and track them over a substantial period. Then, make adjustments based on the level of insight they provide.

You can also scale up how many metrics you track as your business grows or scale them down if you’re pumping the brakes. FMD can help you identify the optimal KPIs for your company right now and integrate new ones in the months or years ahead.

Business owners: Be sure you’re properly classifying cash flows

Properly prepared financial statements provide a wealth of information about your company. But the operative words there are “properly prepared.” Classifying information accurately isn’t always easy — especially as the business grows and its financial transactions become more complex.

Case in point: your statement of cash flows. Customarily, it shows the sources (money entering) and uses (money exiting) of cash. That may sound simple enough, but optimally classifying different cash flows can be complicated.

Under U.S. Generally Accepted Accounting Principles (GAAP), statements of cash flows are typically organized into three sections: 1) cash flows from operating activities, 2) cash flows from investing activities, and 3) cash flows from financing activities. Let’s take a closer look at each.

Operating activities

This section of the statement of cash flows usually starts with accrual-basis net income. Then, it’s adjusted for items related to normal business operations. Examples include income taxes; stock-based compensation; gains or losses on asset sales; and net changes in accounts receivable, inventory, prepaid assets, accrued expenses and payables.

The cash flows from operating activities section is also adjusted for depreciation and amortization. These noncash expenses reflect wear and tear on equipment and other fixed assets.

The bottom of the section shows the cash used in producing and delivering goods or providing services. Several successive years of negative operating cash flows can signal that a business is struggling and may be headed toward liquidation or a forced sale.

Investing activities

If your company buys or sells property, equipment or marketable securities, such transactions should show up in the cash flows from investing activities section. It reveals whether a business is reinvesting in its future operations — or divesting assets for emergency funds.

Business acquisitions and disposals are generally reported in this section, too. However, contingent payments from an acquisition are classified as cash flows from investing activities only if they’re paid soon after the acquisition date. Later contingent payments are classified as financing outflows. Any payment over the liability is classified as an operations outflow.

Financing activities

This third section of the statement of cash flows shows your company’s ability to obtain funds from either debt from lenders or equity from investors. It includes new loan proceeds, principal repayments, dividends paid, issuances of securities or bonds, additional capital contributions by owners, and stock repurchases.

Noncash transactions are reported in a separate schedule at the bottom of the statement of cash flows or in a narrative footnote disclosure. For example, suppose a business buys equipment using loan proceeds. In such a case, the transaction would typically appear at the bottom of the statement rather than as a cash outflow from investing activities and an inflow from financing activities.

Other examples of noncash financing transactions are:

• Issuing stock to pay off long-term debt, and

• Converting preferred stock to common stock.

In those two instances and others, no cash changes hands. Nonetheless, financial statement users, such as investors and lenders, want to know about and understand these transactions.

Help is available

As you can see, deciding how to classify some transactions to comply with GAAP can be tricky. Whenever confusion or uncertainty arises, give us a call. We can work with you and your accounting team to make the best decision. We can also help you improve your financial reporting in other ways.

© 2024

Marketing your B2B company via the right channels

For business-to-business (B2B) companies, effective marketing begins with credible and attention-grabbing messaging. But you’ve also got to choose the right channels. Believe it or not, some “old school” approaches remain viable. And of course, your B2B digital marketing game must be strong.

Press releases

It doesn’t get much more old school than this. Launching a new product? Introducing a new service? Opening a new location? When your company has big news, getting the word out with a press release can still pay off.

Be sure to follow best practices when writing them. Include the topic’s who, what, where, when and why. Add a quote of at least two sentences from you (the business owner) or another leadership team member. If appropriate and feasible, also incorporate customer or industry expert testimonials.

In addition, maintain an updated contact list of press release recipients. Customarily, these include media outlets, business news aggregators, key customers, prospects, investors and other stakeholders.

Authoritative articles

Do you know of one or more industry publications that would be a good fit for sharing your knowledge and experience? If so, and you’re comfortable with the written word, submit an idea for an article.

Getting published in the right places can position you (or a suitable staff member) as a technical expert in your field. For example, write an article explaining why the types of products or services that your company provides are more important than ever in your industry. Or write one on the technologies that are most affecting your industry and what you expect the future to look like.

But be careful: Publications generally won’t accept content that comes off as advertising. Write articles as objectively as possible with only subtle mentions of your company’s offerings.

There are other options, too. You could pen an opinion piece on how a legislative proposal will likely affect your industry. Or you might write a tips-oriented article that lends itself to an online publication looking for short, easy-to-read content. For any type of article, insist on attribution for you and your business.

Digital marketing

Over the last couple of decades, digital marketing has taken the business world by storm. This holds true for B2B companies as well. Virtual channels are many, with possibilities including your website, blogs, various social media platforms and podcasts.

In fact, there are so many digital avenues you could travel down, you may find the concept overwhelming. There’s also a high risk of burnout. Many businesses add blogs to their websites or open social media accounts, post a few things, and then disappear into the ether. That’s not a good look for companies trying to establish themselves as industry experts.

To be successful at digital marketing, or even just to keep your website up to date, create an editorial calendar and stick to it. Devise a strategy to push out quality content regularly on your optimal channels. It can be authored by you, one or more qualified staff members, or a content marketing provider.

Critical role

Companies that provide B2B products or services must establish credibility and demonstrate expertise in whatever industry they operate. Marketing plays a critical role in this effort, so choose your channels carefully. We can help you identify, quantify and analyze all your marketing costs.

© 2024

Surprise IT failures pose a major financial risk to companies

It’s every business owner’s nightmare. You wake up in the morning, or perhaps in the middle of the night, and see that dreaded message: “We’re down.” It could be your website, e-commerce platform or some other mission-critical information technology (IT) system. All you know is it’s down and your company is losing money by the hour.

A report released this past June by cybersecurity solutions provider Splunk drove home the financial risk of unanticipated downtime for today’s businesses. Entitled The Hidden Costs of Downtime, it was produced in partnership with Oxford Economics researchers who surveyed 2,000 large-company executives worldwide. They found that the total cost of downtime for responding businesses, including direct and hidden costs, was a staggering $400 billion annually. The biggest direct cost was revenue loss, averaging $49 million annually per company.

More than revenue

Of course, such losses for large businesses will be proportionately higher given the bigger amounts of revenue they generate. However, small to midsize companies are arguably at even greater risk because they may not be able to readily absorb any substantial revenue losses.

Diminished revenue is just one of the direct costs of surprise IT failures. Others include regulatory fines, blown IT budgets from coping with crises and elevated insurance premiums. Hidden costs may arise from diminished shareholder value (for publicly traded businesses), reduced productivity and brand/reputational damage.

Common threats

Worried yet? The good news is that your business can proactively address the threat of unanticipated technological downtime. The first step is to conduct a formal risk assessment to identify the most likely causes of IT failures based on the distinctive features of your systems and users.

Spoiler alert: You’ll probably find cyberattacks, such as phishing and ransomware scams, are your biggest threat. Unfortunately, these crimes have become so common that you should probably operate under the assumption that you’ll incur attacks fairly often, be they minor or major.

Indeed, the Splunk report attributed 56% of downtime incidents to cybersecurity breaches. Not far behind, however, were software or IT infrastructure failures. These caused 44% of reported downtime. And whether it was a cyberattack or a technological gaffe, human error was identified as the chief underlying cause. So, don’t be surprised if a risk assessment also identifies your employees as a major threat to your company’s ability to stay up and running.

Key strategies

Once you’ve pinpointed the IT risks with the greatest probability of occurring, you can address them. Just a few key strategies to strongly consider include:

Tracking incidents carefully. When downtime occurs, you should have an incident response plan in place to investigate and resolve the matter — as well as to record all pertinent details. Look for trends: As incidents happen more often, the likelihood of a major crisis increases.

Investing wisely in cybersecurity. Today’s companies need to look at substantial investment in cybersecurity as a cost of doing business. However, you must still scale these expenditures to your actual needs and risk level.

Training new hires and regularly upskilling employees. The Splunk report highlighted an essential truth: No matter how technologically advanced businesses become, people still make the difference.

Establishing a disaster recovery plan. As the saying goes, expect the best but plan for the worst. Implement a comprehensive plan involving sound backup policies and procedures, as well as recovery time and point objectives.

Assessing and testing regularly. The risk assessment mentioned above shouldn’t be a one-time thing. Adhere to a strict schedule of assessments and “stress tests” of mission-critical systems.

Continuous improvement

To prevent surprise IT failures at your company, apply a mindset of continuous improvement to all aspects of your policies, procedures and infrastructure. Our firm can help you identify and manage your technology costs.

© 2024

Turnaround acquisitions are risky growth opportunities for today’s companies

When it comes to growth, businesses have two broad options. First, there’s organic growth — that is, progress made through internal efforts such as boosting sales, expanding into other markets, innovating new products or services, and improving operational efficiency. Second, there’s inorganic growth, which is achieved through externally focused activities such as mergers and acquisitions (M&A), and strategic partnerships.

Organic growth is, without a doubt, imperative to the success of most companies. But occasionally, or more often if you pursue M&A proactively, you may encounter the opportunity to acquire a troubled business. Although “turnaround acquisitions” can yield considerable long-term rewards, acquiring a struggling concern poses greater risks than buying a financially sound company.

Due diligence

Generally, successful turnaround acquisitions begin by identifying a floundering business with hidden value, such as untapped market potential, poor (but replaceable) leadership or excessive (yet fixable) costs.

But be careful: You’ve got to fully understand the target company’s core business — specifically, its profit drivers and roadblocks — before you start drawing up a deal. If you rush into the acquisition or let emotions cloud your judgment, you could misjudge its financial condition and, ultimately, devise an ineffective course of rehabilitative action. This is why so many successful turnarounds are conducted by buyers in the same industry as the sellers or by investors, such as private equity firms, that specialize in particular types of companies.

During the due diligence phase, pinpoint the source(s) of your target’s distress. Common examples include excessive fixed costs, lack of skilled labor, decreased demand for its products or services, and overwhelming debt. Then, determine what, if any, corrective measures can be taken.

Don’t be surprised to find hidden liabilities, such as pending legal actions or outstanding tax liabilities. Then again, you also might find potential sources of value, such as unclaimed tax breaks or undervalued proprietary technologies.

Cash management

Another critical step in due diligence is identifying cash flows, both in and out. Determine what products or services drive revenue and which costs hinder profitability. Would it make sense to divest the business of unprofitable products or services, subsidiaries, divisions, or real estate?

Implementing a long-term cash-management plan based on reasonable forecasts is also critical. Revenue-generating and cost-cutting measures — such as eliminating excessive overtime pay, lowering utility bills, and collecting unbilled or overdue accounts receivable — can often be achieved following a thorough evaluation of accounting controls and procedures.

Reliable due diligence hinges on whether the target company’s accounting and financial reporting systems can produce the appropriate data. If these systems don’t accurately capture transactions and fully list assets and liabilities, you’ll likely encounter some unpleasant surprises and struggle to turn around the business.

Buyers vs. sellers

Parties to a business acquisition generally structure the deal as a sale of either assets or stock. Buyers usually prefer asset deals, which allow them to select the most desirable items from a target company’s balance sheet. In addition, buyers typically receive a step-up in basis on the acquired assets, which lowers future tax obligations. And they’re often able to negotiate new contracts, licenses, titles and permits.

On the other hand, sellers generally prefer to sell stock, not assets. Selling stock simplifies the deal, and tax obligations are usually lower for sellers. However, a stock sale may be riskier for the buyer because the struggling target business remains operational while the buyer takes on its debts and legal obligations. Buyers also inherit sellers’ existing depreciation schedules and tax basis in target companies’ assets.

Reasonable assurance

For any prospective turnaround acquisition, you’ve got to establish reasonable assurance that the return on investment will likely exceed the acquisition’s immediate costs and ongoing risks. We can help you gather and analyze the financial reporting and tax-related information associated with any prospective M&A transaction.

© 2024

How businesses can better retain their sales people

The U.S. job market has largely stabilized since the historic disruption of the pandemic and the unusual fluctuations that followed. But the fact remains that employee retention is mission-critical for businesses. Retaining employees is still generally less expensive than finding and hiring new ones. And strong retention is one of the hallmarks of a healthy employer brand.

One role that’s been historically challenging to retain is salesperson. In many industries, sales departments have higher turnover rates than other departments. If this has been the case at your company, don’t give up hope. There are ways to address the challenge.

Lay out the welcome mat

For starters, don’t focus retention efforts only on current salespeople. Begin during hiring and ramp up with onboarding. A rushed, confusing or cold approach to hiring can get things off on the wrong foot. In such cases, new hires tend to enter the workplace cautiously or skeptically, with their eyes on the exit sign rather than the “upper floors” of a company.

Onboarding is also immensely important. Many salespeople tell horror stories of being shown to a cubicle with nothing but a telephone on the desk and told to “Get to it.” With so many people still working remotely, a new sales hire might not even get that much attention. Welcome new employees warmly, provide ample training, and perhaps give them a mentor to help them get comfortable with your business and its culture.

Incentivize your team

Even when hiring and onboarding go well, most employees will still consider a competitor’s job offer if the pay is right. So, to improve your chances of retaining top sales producers and their customers, consider financial incentives.

Offering retention bonuses and rewards for maintaining or increasing sales — in addition to existing compensation plans — can help. Make such incentives easy to understand and clearly achievable. Although interim bonus programs might be expensive in the near term, they can stabilize sales and prevent sharp declines.

When successful, a bonus program will help you generate more long-term revenue to offset the immediate costs. That said, financial incentives need to be carefully designed so they don’t adversely affect cash flow or leave your business vulnerable to fraud.

Give them a voice

Salespeople interact with customers and prospects in ways many other employees don’t. As a result, they may have some great ideas for capitalizing on your company’s strengths and shoring up its weaknesses.

Look into forming a sales leadership team to help evaluate the potential benefits and risks of goals proposed during strategic planning. The team should include two to four top sellers who are given some relief from their regular responsibilities so they can offer feedback and contribute ideas from their distinctive perspectives. The sales leadership team can also:

• Serve as a clearinghouse for customer concerns and competitor strategies,

• Collaborate with the marketing department to improve messaging about current or upcoming product or service offerings, and

• Participate in developing new products or services based on customer feedback and demand.

Above all, giving your salespeople a voice in the strategic direction of the company can help them feel more invested in the success of the business and motivated to stay put.

Assume nothing

Business owners and their leadership teams should never assume they can’t solve the dilemma of high turnover in the sales department. The answer often lies in proactively investigating the problem and then taking appropriate steps to help salespeople feel more welcomed and appreciated. We can help your company calculate turnover rate, identify and track its hiring and employment costs, and assess the feasibility of financial incentives.

© 2024

Working capital management is critical to business success

Success in business is often measured in profitability — and that’s hard to argue with. However, liquidity is critical to reaching the point where a company can consistently turn a profit.

Even if you pile up sales to the sky, your bottom line won’t flourish unless you have the cash to fund operations to fulfill all those orders. The good news is there’s a tried-and-true way to stay liquid while you grow your company. It’s called working capital management.

Multifunctional metric

Working capital is a metric — current assets minus current liabilities — that’s traditionally used to measure liquidity. Essentially, it’s the amount of accessible cash you need to support short-term business operations. Regularly calculating working capital can help you and your leadership team answer questions such as:

• Do we have enough current assets to cover current obligations?

• How fast could we convert those assets to cash if we needed to?

• What short-term assets are available for loan collateral?

Another way to evaluate liquidity is the working capital ratio: current assets divided by current liabilities. A healthy working capital ratio varies from industry to industry, but it’s generally considered to be 1.5 to 2. A ratio below 1.0 typically signals impending liquidity problems.

For yet another perspective on working capital, compare it to total assets and annual revenue. From this angle, working capital becomes a measure of efficiency.

Working capital requirement

The amount of working capital your company needs, known as its working capital requirement, depends on the costs of your sales cycle, operational expenses and current debt payments.

Fundamentally, you need enough working capital to finance the gap between payments from customers and payments to suppliers, vendors, lenders and others. To optimize your business’s working capital requirement, focus primarily on three key areas: 1) accounts receivable, 2) accounts payable and 3) inventory.

High liquidity generally equates with low credit risk. But having too much cash tied up in working capital may detract from important growth initiatives such as:

• Expanding into new markets,

• Buying better equipment or technology,

• Launching new products or services, and

• Paying down debt.

Failure to pursue capital investment opportunities can also compromise business value over the long run.

3 critical areas

The right approach to working capital management will obviously vary from company to company depending on factors such as size, industry, mission and market. However, as mentioned, there are three primary areas of the business to focus on:

1. Accounts receivable. The faster your company collects from customers, the more readily it can manage debt and capitalize on opportunities. Possible solutions include tighter credit policies, early bird discounts and collections-based sales compensation. Also, continuously improve your administrative processes to eliminate inefficiencies.

2. Accounts payable. From a working capital perspective, you generally want to delay paying bills as long as possible — particularly those from noncritical suppliers, vendors or other parties. One exception to this is when you can qualify for early bird discounts. Naturally, delaying payments should never drift into late payments or nonpayment, which can damage your business credit rating.

3. Inventory. If your company maintains inventory, recognize the challenge it presents to working capital management. Excessive inventory levels may dangerously reduce liquidity because of restocking, storage, obsolescence, insurance and security costs. Then again, insufficient inventory levels can frustrate customers and hurt sales. Be sure to give your inventory the “TLC” it deserves — including regular technology upgrades and strategic reconsideration of optimal levels.

The right balance

It isn’t easy to strike the right balance of maintaining enough liquidity to operate smoothly while also saving funds for capital investments and an emergency cash reserve. Our firm can help you assess precisely where your working capital stands and identify ways to manage it better.

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