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  • 1. SOFTWARE: Taking the pain out of fixed assets page 26 SMBFINANCE SMALL & MIDSIZED BUSINESS JULY 2006 Don’t Sell Yourself Short To sell his company, Hugh Glidewell didn’t clean up his books — he made the business better. VoIP The bottom line on Internet telephony SMB Finance, PO BOX 530, Congers, NY 10920 Address Service Requested: Outsourcing Feel like farming out finance functions? Incentives Creative ways to lower turnover
  • 2. I Am Expertise. I Am Spherion. – I am an accounting and finance recruiter with Spherion®. – Before joining Spherion, I spent five years as a senior accountant for a Fortune 500 company. – Once a month, I take a fishing excursion with some of my colleagues. – To date, I have helped more than 100 companies find the skilled finance and accounting professionals they need. Who are we? We are a network of talent experts able to rapidly source and deliver full-time financial analysts, CPAs, compliance officers, risk managers and corporate finance experts. Who are we? We’re Spherion: nearly 60 years of experience, excellence and exceptional talent. Contact us today at 888-223-6935 ©2005 Spherion Pacific Enterprises LLC All Rights Reserved.
  • 3. contents 22 DEPARTMENTS 2 Editor’s Letter SMBFINANCE Our July lineup. July 2006 4 Eye on Operations Painless tax payments v New business credit cards from Discover FEATURES v CFOs own risk management 12 Preening Yourself for an Acquisition 6 Tech Briefs Forget “cleaning up the books” and slashing expenses: If you want to make Sage’s new Quantum v A network in your company an attractive sale prospect, you need to concentrate on strategy, a box v QuickBooks and Web stores timing and growth — things a good finance officer should focus on anyway. v Accounting software’s triumvirate 9 Benefits Focus 18 The Economics of VoIP Phone service over the Internet holds out the promise of rock-bottom prices. Show that you care, with a Find out if the promise holds true for you. care-management program. 11 Risk & Regulatory 22 Inside or Outside? Now’s the time to buy business Outsourcing financial functions is a hot topic these days — but is it right interruption insurance — not after for your company? disaster strikes. 24 Anything But Cash 30 Verticals The more innovative you are in rewarding and encouraging employees, the Inspecting the foundations of the more innovative they’ll be in their work — and the longer they’ll stay at it. homebuilding industry. 32 Parting Shot 26 Software Review: Fixed Assets Our reviewer surveys the field of fixed asset software to find the applications Manship Media CFO Ralph Bender on that can give you the most help with this often-painful process. Louisiana’s recovery, and the evolution of the CFO. JULY 2006 SMBFINANCE 1
  • 4. fromtheeditors Editorial Phone (212) 803-8200 Fax (646) 264-6828 Group Editor Bill Carlino (212) 803-8855 Managing Editor Daniel Hood (212) 803-8858 Contributing Editors Paul Demery, Stuart Kahan, Melissa Klein The First Year Aguilar, Carolyn Hirschman, Ted Needleman, Gail Perry, Roger Russell, Jeff Stimpson, Richard Stolz, Howard Wolosky Design Is the Hardest Creative Director Justin Torrento Art Director Mike Vella Associate Art Director Gillian Reinhard Executive Director of For those of you whose responsibilities Creative Services Sharon Pollack I overlap with your company’s IT unit, you may already be considering a Voice over Production Production Manager Brooks Rice t’s hard to believe that almost a Internet Protocol system to get cheaper year has gone by since the launch of telephone service. In this issue, technology Executive Director of Manufacturing SMB Finance. We’re not big on fan- writer Lisa Spinelli helps you determine Stacy Ferrara fare, so we’ll celebrate the completion for yourself the feasibility and economics Advertising of our first year with the knowledge of transitioning from plain old telephone Group Publisher that we’re fulfilling our mission state- service to VoIP . Tim Murphy Advertising Sales Director ment of bringing you the stories and No matter what service line your busi- Jack Lynch (212) 803-8803 information you need to succeed ness provides, ratcheting down employee in today’s highly charged and turnover is a universal dilemma. Alicia Sales Managers Collene Ellenberger (212) 803-8802 competitive market. Korney documents a host of small and mid- In our humble opinion, the line- sized companies that have implemented Kurt Martin (212) 803-8801 up for our July issue does just that. creative, and often low-cost, employee Much like a first date, where the incentives with startlingly effective results. Patrick O’Leary (212) 803-8848 process for making a good impres- Find out how incentives can translate into Classified Sales Manager sion involves equal parts preening that elusive singe-digit percentage in Peter Sorice (212) 803-8804 and preparation, priming a business employee turnover. to become an acquisition candidate And last, but by no means least, writer Sales/Marketing Associate Susan Korcynski (212) 803-8810 involves a similar to-do checklist. and CPA Gail Perry offers up examples of In this month’s cover story, Rich SMBs that’ve mined efficiency and lowered Group Circulation Director Stolz examines various strategies for costs by outsourcing financial functions Michael O’Connor (212) 803-8324 making your business appealing to such as reporting, payroll and bank recon- Fulfillment Director Jessica Reid (212) 803-8246 those on the M&A prowl, while pre- ciliation to various providers. Customer Service senting some successful examples of As usual, we welcome your comments owners who made the decision to sell and suggestions at smbfinance@source- Phone (800) 221-1809 Fax (212) 803-1592 their businesses and how they went about it — and how their finance One year down — here’s hoping for executives were critical to the process. many more! James M. Malkin Chairman & CEO William Johnston Chief Financial Officer All editorial correspondence, manuscripts, etc., should be sent to SMBFinance, SourceMedia Inc., One State Street Plaza, Jeff Scott Chief Technology Officer 27th Floor, New York, NY 10004. While the utmost care will be given to material submitted, we cannot accept responsi- Bruce Morris Pres., Banking & Corp. Groups bility for unsolicited manuscripts. POSTMASTER: Send all address changes to SMBFinance/SourceMedia Inc., P.O. Frank Quigley Pres., Securities Group Box 530, Congers, NY 10920. To order, call: (800) 221-1809, or e-mail Publisher’s Copy Celie Baussan SVP, Operations Protection Clause: Advertisers and advertising agencies assume liability for all content (including text, representation and illustrations) of advertisements and responsibility for claims arising therefrom made against the publisher. © 2006 Robert DeNoia VP, Human Resources SMBFinance and SourceMedia Inc. All rights reserved. No part of this publication may be reproduced in any form by Richard Antoneck VP, Finance microfilm, xerography or otherwise, or incorporated into any information retrieval system without the written per- Anne O’Brien EVP, Marketing & Strategic Planning mission of the copyright owner. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in render- REPRINTS/WEB RIGHTS/PERMISSIONS ing legal, accounting or other professional services. If legal or accounting advice or other expert assistance is Godfrey R. Livermore required, the services of a competent professional should be sought. Director of Reprints & Alternative Media Sales Tel. (888) 909-6366 Fax (212) 843-9624 2 SMBFINANCE JULY 2006
  • 5. Checkpoint ® Corporate Reporting & Compliance “We use Checkpoint® for critical financial reporting, SOX compliance and corporate governance answers from names we know and trust – like WG&L, RIA and now PPC. Best of all, everything on Checkpoint® is linked together, so now we can easily get from all our key source materials – SEC, GAAP, FASB, GASB, AICPA, IASB, even COSO – to the guidance and analysis we need to get the job done. Since everything is in one place, we find what we need right away. Even updates we can’t get anywhere else, like PCAOB Interim Standards and daily news e-mails. All the financial tools we need for our company are right here, on Checkpoint®.” NEW Resources for Corporate Reporting and Compliance Only on Checkpoint® from Over 85% of the Fortune 1000 rely on RIA and PPC. Checkpoint® for their research needs Checkpoint® is one of the leading accounting research platforms available – and relied on by over 90% of the Top 100 Accounting Firms “ “ The CPA Technology Advisor [2004, 2005, 2006] Research • Guidance • Workflow Tools • CPE 1.800.950.1216 ® 2006 RIA. RIA and Checkpoint are trademarks used herein under license. PPCRIA_CORP_ACCTTECH06/06
  • 6. eyeonoperations IMAGE PUNCHSTOCK ness owners have a business credit card. series of challenges in its loan program, The new card has a feature allowing according to a report from the Government FASB, AICPA eye business owners to write special checks to Accountability Office. private co. reporting pay merchants and suppliers who don’t The report said that with respect to The Financial Accounting Standards Board accept credit cards. The card doesn’t carry using technology to monitor loans made by and the American Institute of CPAs have an annual fee and includes a cash-back 7(a) lenders between 1997 and 2002, the issued a proposal aimed at improving the rewards program on office supplies, gaso- SBA had been unsuccessful in developing financial reporting process for private com- line and other purchases. More information its own system to establish a risk manage- panies. The groups are asking for feedback is available at ment database, as required by law. on changes to FASB’s standard-setting pro- Meanwhile the GAO’s preliminary find- cedures, which would allow the board to ings from ongoing evaluations of the SBA’s consider differences in accounting stan- An owners’ retirement plan response to the 2005 Gulf Coast hurricanes dards for private companies within general- CCA Small Business Group, a provider of indicated that the SBA’s workforce and new ly accepted accounting principles. retirement plans for sole proprietors and loan-processing systems were overwhelmed Under the proposal, FASB would imple- small businesses, has unveiled its new by the volume of loan applications. ment certain improvements to enhance OurMax plan, a Web-enabled, high-deferral the transparency of its standard-setting retirement plan for small business owners. process for private companies and consid- A type of defined-benefit plan that allows Filthy accountants er input from private company con- business owners to save up to $200,000 Of the more than 600 cubicles in nine dif- stituents. The seven-page proposal is avail- annually for retirement, CCA’s OurMax can ferent professions examined by able at a joint Web site maintained by the work in addition to an existing 401(k) plan. researchers from the University of Arizona, two groups, The comment More information is available online at the bacteria levels found in accountants’ period, which is open to anyone, ends offices finished second only to the levels August 15. found in schoolteachers’ classrooms. Dr. Charles Gerba, a microbiologist at the SBA loans face challenges University of Arizona, said that the phones, Painless tax payments While the Small Business Administration desks and keyboards regularly used by Well, as painless as possible: Under new has improved oversight policies and con- teachers, accountants and bankers har- temporary and proposed Internal Revenue trols for its flagship 7(a) loan program since bored nearly two to 20 times more bacte- Service rule changes, nearly 950,000 small the 1990s, the organization still faces a ria per square inch than other professions’. businesses are eligible to file and pay taxes once a year using the new Form 944, rath- er than quarterly using Form 941. Eligible Because your plate Who owns the risk? businesses are those with an estimated wasn’t full enough employment tax liability of $1,000 or less. Corporate success has a thousand fathers, but corporate risk has to make do, at best, with one — CEO 20% Other and it’s often a company’s chief finance executive. Executive CFO 44% 9% Discover targets small biz According to a recent survey of 230 financial Discover Financial Services, a business unit executives by internal controls software vendor Chief of Morgan Stanley, is the latest company to Oversight Systems, if a company held a single Auditor try to secure a piece of the business credit executive explicitly responsible for overseeing 5% card action. It is targeting businesses with the management of all risk across the enter- Chief Risk Officer/ No Single VP of Risk 8% up to $1 million in annual revenues, esti- prise, CFOs were more than twice as likely to Executive 14% mating that only 35 percent of small-busi- be tapped for the task than CEOs. SOURCE: OVERSIGHT SYSTEMS 4 SMBFINANCE JULY 2006
  • 7. Driving the Success of Small and Midsized Business Our readers buy your products and services and we've got the results to prove it! Within the next 2 years, SMB Finance readers intend to purchase the following products and services*: 45% Copiers/Scanners/General Office Equipment 33% Accounting/Finance Software 31% Accounting/Auditing Services 31% General Hardware/Software 31% Employee Benefits 28% Insurance 22% Bank Relations 20% 401k/Pensions/Defined Contribution Services 20% Phone Systems Reach 60,000 influential financial 86%of our readers either 60%of our readers say executives who look make or influence their company plans to to SMB Finance for final purchasing INCREASE technology information about decisions*. spending*. new products, services and solutions. *March 2006, Publisher survey results For more information, contact: Jack Lynch, Advertising Director Collene Ellenberger Patrick O’Leary (212) 803-8803 (212) 803-8802 (212) 803-8848
  • 8. techbriefs up fee of $59.95; prices for Web store plans small and midsized accounting and enter- range from $7 a month up to $250, prise resource planning software markets. Sage rolls out depending on the provider. However, the Boston-based firm did Peachtree Quantum note that integrated business application In conjunction with the launch of the suites from NetSuite and SAP also gained Peachtree by Sage Accounting 2007 line, TaxWare certified for SSTP increased presence and penetration. Sage Software has announced the new Taxware, a provider of global transaction The report says that the market oppor- Peachtree by Sage Quantum, which can tax calculation and compliance solutions, tunity for vendors is growing. Many SMBs support up to 10 named users in delivering announced that its flagship products — still maintain and manage their financial additional performance, data security and Taxware Enterprise and TaxSolver — have data on Excel spreadsheets, which pro- larger transaction volumes. been certified by the states that are mem- vides vendors with opportunities to seize More than 150 small business owners bers of the Streamlined Sales Tax Govern- greater market share. Additionally, the participated in usability and design studies ing Board. Taxware is the first company to increasing need to electronically exchange conducted by Sage’s in-house Customer- gain both Certified Automated System and information with larger customers and Connected Design Center. Included in this Certified Service Provider status, providing partners adds to the demands to improve information gathering process were businesses with a choice in how they wish operational efficiency. Peachtree customers, small businesses to deploy certified sales tax compliance Within the market, the Yankee Group that utilize paper and pencil to manage technology. Both models protect business- said that Intuit’s QuickBooks and Quick- accounting, and customers of competing es from liability through the use of state- Books Online still dominate companies accounting software packages. supplied data and ongoing testing and re- with between two and 99 employees, fol- More information about Quantum is certification testing by state regulators. lowed by Sage Software. Microsoft leads available at the 100-to-999 employee midsized comp- Sage has also rolled out new versions of any market, followed by Oracle and Sage. its Peachtree software for the construc- Easy networking tion, manufacturing, distribution and non- Not everything in life or IT has to be hard. profit industries; information is available at Take Chili Systems’ ChiliBox, a network Warehouse Automation server appliance for small businesses that for MAS 500 makes setting up a network for a small Business software developer Sage office or even a home simple and painless. Software unveiled a new Warehouse Minding the e-store The ChiliBox server links from two to 20 Automation module for its Sage MAS 500 Just as QuickBooks makes accounting easi- computers, and acts as your router, e-mail ERP enterprise resource planning software. er for small businesses, Intuit’s new server, firewall, back-up server and more. Intended for distribution companies that QuickBooks Merchant Service for Web It even allows for secure remote access use wireless networking equipment, the Stores (www.quickbooksmerchantservice) over the Web, and now comes in a wire- module transfers data gathered from hand- should make e-commerce easier. Intuit has less version. held barcode scanners and radio frequency partnered with leading online store For more information, visit www.chilisys- communication devices and enters it auto- providers to create an end-to-end, or call (866) 532-4454. matically into the Sage MAS 500 ERP sys- QuickBooks-compatible solution that lets tem. Handheld devices supported by the businesses create a Web store, sell online, Warehouse Automation module include the accept credit card payments and link all Accounting software Intermec CN2 Series, the Intermec 700 IMAGE ARTVILLE the business data directly with their ruled by triumvirate Series, and the Intermec CK60 Series, plus QuickBooks accounting software. Market research firm the Yankee Group any handheld device utilizing Microsoft There’s a monthly fee of $17.95 for the announced that Intuit, Sage and Microsoft CE.Net or Windows Mobile 2003/2005 QB Merchant Service, plus a one-time set- have reconfirmed their dominance in the operating systems. 6 SMBFINANCE JULY 2006
  • 9. benefitsfocus You’re Never Too Small to Care Care management’s not just for the big guys anymore. By Carolyn Hirschman It didn’t take a fancy claims analysis or premiums have forced many of them to much shopping around for John Keach to raise employees’ costs or to eliminate add a wellness program to the employee coverage. This cost pressure has prompt- benefits offered by his small bank. He ed some small employers to look for Many on when the bank’s health insur- signed small and midsized compa- long-term savings with care-manage- watch larger employers plow the field. anceare taking a measuredprogram. to nies company offered the approach ment programs. have decid1(k)s. Others, however, the“We just thought it made sense,” says buzz over consumer-drive approach Such programs aren’t as common at That’s what MMany small and mid- to the buzz over consumer-driven health the chairman and chief executive of 280- small companies areat large a measured sized companies as taking ones, but person Home Federal watchin Colum- benefits, preferring to Bank larger their use is growing. Among employers approach to the buzz over consumer- bus, Ind. “We thought it would behowev- employers plow the field. Others, a good with 10health benefits, preferring to driven to 499 employees, 41 percent er, have decid1(k)s. way to control [health] costs, and it was offered at least one disease management watch larger employers plow the field. That’s what MMany small and mid- a way to provide an additional benefit.” program last year, compared with 31 per- Others, however, have decid1(k)s. sized companies are takingjust for big Care management isn’t a measured cent in 2004, reports Mercer Health That’s what MMany small and mid- approach to the buzz over consumer- companies. An increasing number of Benefits. Nurse advice lines a measured sized companies are taking were offered driven health benefits, preferring to small employers are adding wellness, dis- by 41 percent in buzz over consumer- approach to the 2005, up from 35 per- watch larger employers plow the field. ease management and similar services, cent in healthThe proportion using driven 2004. benefits, preferring to IMAGE PHOTODISC even as however, have decid1(k)s. Others, some drop basic health coverage. health-risk assessmentsplow from 13 watch larger employers rose the field. That’s what MMany small and mid- percent however, have decid1(k)s. Others, to 18 percent. MAKING THE CASE sized companies are taking a measured Wellness programs strive to prevent That’s what MMany small and mid- When it comes to health benefits, small approach to the buzz over consumer- at-risk workers from developing diabetes sized companies are taking a measured employers have it rough. Their fast-rising driven health benefits, preferring to and other to the buzz over consumer- approach chronic diseases. Disease JULY 2006 SMBFINANCE 9
  • 10. benefitsfocus management helps ill people better manage their conditions so they don’t get Not just for the big guys worse. Weight-loss programs and man- Percentage of employers offering wellness programs agement of complex and catastrophic cases are also part of the mix. ALL SIZES 62% Many employers offer these programs to save money, but saving money isn’t the only reason to offer care manage- SMALL (1-99 EMPLOYEES) 48% ment, especially since programs often don’t yield a return on investment for two years or more. Firms also want to MEDIUM (100-499 EMPLOYEES) 61% boost employee health and productivity and to create a caring culture. “We thought it was important to let LARGE (500 OR MORE EMPLOYEES) 76% our employee population know their health care was important to us,” says 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Valerie Witt, a benefits specialist at SOURCE: SOCIETY FOR HUMAN RESOURCE MANAGEMENT Johnson Memorial Hospital in Franklin, Ind. The 850-employee hospital added a aggregate data for the employer to guide SHOPPING AROUND wellness program last year to keep its future wellness efforts; and a health- Care-management programs historical- benefits competitive with those of other coaching program to motivate and guide ly haven’t been available to small firms, area hospitals, she adds. “We did a lot of lifestyle changes in workers at high risk but that’s starting to change, consult- communication at the beginning,” Witt for chronic conditions. ants say. Providers pool the business of says, because some employees were con- “We really don’t recommend just one small groups, making programs more cerned about confidentiality. of these,” says Chas LaPierre, director of affordable for small businesses and Principal Wellness Co. in Indianapolis. more profitable for vendors. Still, WHERE TO START “Without all those things, you’re really options may be limited. To pick a cost-effective program that’s just adding to the cost of health care.” Employers that buy health insurance best for your workforce, first determine For disease management, employers from Principal Life Insurance Co. get its your needs based on employee demo- can analyze medical and drug claims to wellness services for free if they reach 75 graphics and medical-cost drivers, figure out which programs to offer, but percent participation in the wellness experts say. Most small groups should the effort is justified only for groups of program, LaPierre says. Otherwise they focus on wellness for all workers, rather 500 and up, which are large enough to pay a variable rate. than disease management for a relative generate reliable numbers, says Joseph Self-insured companies generally buy few, says Jack Bastable, who heads the Marlowe, Aon Consulting’s vice president care-management services on a per- health and productivity management of health and welfare. member basis through a third-party practice at CBiz Inc., a Cleveland-based Most large national carriers offer dis- administrator, with disease management business-services administrator. ease-management services as part of costs varying by program. Johnson “The greatest savings long-term come their health plans, but “it may not be a Memorial Hospital pays Principal about from the opportunity to keep people comprehensive program. It may be limit- $12 per member per month for its well- who are healthy from getting sick,” ed to case management,” he adds. ness program, Witt says. Bastable explains. Consultants and brokers can help To judge a program’s success, com- At a minimum, companies can dis- small companies assess program quality pare participants’ average number and tribute or guide employees to free health before diving in, Marlowe says. Aon, for cost of medical claims before and after information and host seminars with local example, has negotiated a small-busi- the program began, Bastable says. health professionals. A full-fledged well- ness price for disease management with Vendors also regularly report participa- ness program typically includes on-site Matria, the vendor it has used and vetted tion rates, aggregate clinical data and clinical screenings for blood pressure, for large employers. other information for employers. cholesterol, body mass index and other Whatever the program, incentives — “We also want to see behavior change basic indicators of health-risk assess- usually, lower health premiums — help trend the right way. We can track that,” ments, in which people self-report smok- drive participation. Home Federal Bank LaPierre says. Did more people partici- ing, exercise and other habits; one-on- reduces workers’ premiums by $40 per pate in high-risk interventions, for exam- one consultations to explain results to month and gets 95 percent participation ple? He advises waiting at least two years individuals and suggest changes, such as in its program, plus a 3 percent lower to judge wellness results. “It’s not a quick weight loss or more exercise; a report of health insurance premium, Keach says. fix,” he says. SMB 10 SMBFINANCE JULY 2006
  • 11. riskregulatory added to a property insurance policy or included in a business insurance policy as a rider or an endorsement. For smaller businesses it can be sold by itself, but it’s usually rolled in with a general business insurance or property insurance policy, explained Robert P . Hartwig, senior vice president and chief economist at the New York-based Insurance Information Institute. “You need to make sure that it’s part of the business or property policy,” he emphasized. “About 85 percent had it after 9/11, but many did not have enough. Their assumption was that they didn’t need more than two or three weeks’ worth of insurance, but they did not envision a terrorist attack that kept parts of the city cordoned off for weeks.” In practice, policies contain elements that make it difficult to determine whether a specific loss is covered. “A business interruption policy usually requires physical damage as a trigger, but in today’s world e-damage is often a trig- Business interruptus ger. There’s no coverage for it unless you have it endorsed,” said Chesler. He also noted the fine line between a partial Don’t wait for the big one to hit before buying business shutdown and a slowdown or productiv- interruption insurance. By Roger Russell ity loss. The partial shutdown is typically covered, while a productivity loss is not. Most businesses are ignorant of the activities due to a casualty, according to need for business interruption insurance Michael Levy, chair of, PICKING YOUR POLICY until it’s too late, according to experts. an Atlanta-based lead-generation service. It’s critical that businesses assess their “Many companies don’t pay attention “Water is one of the most common needs in the event of a business-sus- to business interruption insurance at causes of physical damage to businesses pending incident, said the III’s Hartwig. all,” said Robert D. Chesler, an attorney today,” he said. “A severe but rarely con- “Many businesses buy enough to repair and chair of the insurance law practice sidered cause is sprinkler discharge. or rebuild their buildings and restore group at the Roseland, N.J.-based firm of Sprinklers can go off easily. ... Gutters can inventory, but do not have enough cover- Lowenstein Sandler PC. “The basic cov- clog and cause an overflow. Computers age to tide them over the loss of income erage you get is very thin.” and other electronic devices such as and higher expenses,” he said. “Business interruption insurance is phone systems can suffer serious, irre- Among the factors to consider in critical to us because of our multiple versible damage.” selecting coverage is the financial sites,” explained Tiffany Hott, chief exec- strength of the insurer, the size of the utive of TestQuest, a tutoring and testing SCATTERED COVERAGE deductible and the amount of the premi- service with locations in New York, New Chesler, who advises companies on their um payments. Jersey and Florida. “Insurance costs have insurance programs, noted that not And now may be the time to buy. skyrocketed, but you can never foresee every contingency is covered in such “Nationally, business interruption insur- every unexpected possibility. You can policies. “The best advice is to go over a ance pricing is soft,” said Trey Hutt, never be over-insured, but you have to policy very carefully, and make sure it owner of the Hutt Insurance Agency in IMAGE PHOTODISC balance the cost against the risk.” matches potential injuries to the busi- Panama City, Fla. “It’s fairly soft now Business interruption insurance cov- ness. After 9/11, a lot of companies were nationwide, but it’s very different along ers the profits that would have been surprised they didn’t have it.” the coast, and that’s growing. The hurri- earned and operating expenses that con- Business interruption coverage is typ- cane issue is working its way up along tinue despite the absence of business ically not sold as a separate policy, but is the East Coast.” SMB JULY 2006 SMBFINANCE 11
  • 12. coverfeature 12 SMBFINANCE JULY 2006
  • 13. Caveat vendor: When it comes to selling a business, you have to do more to get your ducks in a row than just smooth out your ruffled financials — but knowing how to make your company an attractive prospect can be a real feather in your cap. By Rich Stolz Preening yourself for an acquisition Photography by James Warwick/Getty Images JULY 2006 SMBFINANCE 13
  • 14. P icture the scene: Your chief exec- might like a little change of pace. “I had been struggling might- utive invites you into his office, ily at this business, and for whatever reasons, the business had shuts the door firmly behind you become more successful than I had ever really dreamed.” and asks you to take a seat. Although Glidewell didn’t relish the financial management You know something’s up. end of the business, his systems were in good shape — due in Then he lowers his voice and part to the fact that securing commercial landscaping con- says, “I’m thinking about selling tracts often requires posting performance bonds. “The bond- the business. Can you help me ing companies were very strict about getting the kind of through this process?” detailed financial information” that a prospective purchaser You swallow hard, think quickly about your future, then — (or broker) would demand, Glidewell says. possibly with manufactured self-confidence — reply, “Sure.” But when Glidewell began discussing the possible sale with Your ability to be useful will not only greatly influence the Harkins, he quickly learned what a strategic-minded and ana- success of the transaction, but perhaps determine whether lytical financial executive could do to help him fetch top dollar you land on your feet after the deal closes. for Pro Landscapes. “I was very tied up in the day-to-day oper- Indeed, the sale of a business may represent the ultimate ations of the business; the larger, macro things you tend to get opportunity for a financial executive to demonstrate his value to rather slowly” — if at all, he says. to the organization and its shareholders — not to mention future employers, including the new owners of the business. GO FOR THE TWO IN THE BUSH Conversations with business brokers and owners make one And yet those “macro things” tend to be the ones of greatest thing very clear about what’s required for a smooth business value to buyers. “People buy businesses because they feel they sale: It’s not really about having “clean” financials. can expand them pretty significantly. Otherwise, why not just “My belief is, you can’t ‘clean up’ the books,’” says Jeff Snell, buy a risk-free government bond?” Harkins asked. president of Enlign Business Brokers, in Raleigh, N.C. “The When he sought out the financial expertise of Harkins, whole notion is hokey to me. “If I’m looking at three years of Glidewell believed that he had “already done about as much as accounting data and the owner is saying, ‘We have this note I could to position the company” for a sale. And he had good here,’ or ‘We have this customer who pays cash,’ or ‘I use mul- reason to think so: Pro Landscapes had racked up a very tiple accounting systems that never get integrated into a final impressive financial track record. After its first year of opera- report,’ he’s really doing that because he’s washing something tion, the company grossed about $1 million. After a dozen out of the system.” years, its gross exceeded $12 million (with an average annual Odds are, a jury-rigged accounting system really can’t — or growth of about 23 percent). In addition, Glidewell’s operating won’t — be cleaned up. When Snell sees the telltale signs, “I’m margins remained consistent, so profit growth was as impres- not likely to work with them.” sive as the top-line picture. Adds Patrick Harkins, who spent over 20 years as a chief But Harkins wasn’t content to let Pro Landscapes rest on financial officer before launching Anchor Business Advisors those numbers: “As a CFO, you really have to help the CEO Inc., in Atlanta, clean books “are a given.” “You’d better hope think strategically.” you’re generating good financial information; otherwise you’ve When he served as CFO of a middle-market manufacturing got a whole set of other problems.” company in Chicago, Harkins helped to facilitate a leveraged buyout of the company by the management team. Before THE EARLY BIRD TAKES HIS TIME approving the loan needed to swing the deal, the lender The biggest requirement for a successful sale isn’t even finan- required managers to work with a business strategy consult- cial. It’s time. ant. In that process, Harkins and others analyzed the company “I like to start working with a company two or three years from top to bottom, clarifying which pieces of the business before the sale,” Harkins explains. And it is during that period were truly profitable and had growth potential. that financial executives (and perhaps others on the senior The ultimate result was a consolidation of divisions and the management team) can take the steps and perform the analy- curtailment of some operations. The loan was approved, the ses that will help the sale succeed. deal was consummated, “and we paid off the debt pretty One of Harkins’ clients is Hugh Glidewell, who came to him quickly,” Harkins recalled. two years ago with the notion of selling Pro Landscapes, a $12 Flash forward to 2004. million, 60-employee Atlanta-based regional commercial land- Harkins guided Glidewell to think about — and identify — scaping business that he had been building from the ground new growth opportunities for Pro Landscapes. One idea was up since 1993. “I had vaguely thought about selling the busi- landscaping new housing developments on military bases. ness for a year or two before I met Pat,” he recalls. Glidewell realized that he had several residential construction After some 30 years of working in the landscaping business, clients that were beginning to do a booming business on mili- and a dozen years in Atlanta, Glidewell concluded that he tary bases. “It was enough that we could realistically project 14 SMBFINANCE JULY 2006
  • 15. CALLING ALL SMALL MEDIUM BUSINESS BENEFITS AND HR PROFESSIONALS! September 17-19, 2006 REGISTER BEFORE AUGUST The Hyatt Regency Chicago Hotel | Chicago, IL 4TH AND SAVE! TACKLE YOUR KEYNOTE PRESENTERS TOP CONCERNS Michael La Bianca VP, Human Resources AND BOOST YOUR BOTTOM LINES 2005 Fortune 500 list – #95 2006 Fortune magazine’s “100 Best Companies to Work For” list – #5 (Companies with over 10,000 employees) KEYNOTE ADDRESS From Parent to Partner: The Changing Role of the Company and the Government in the Employee HOT TOPICS Benefits Equation How to make your employees become a partner in N New Ways to Save on Pharmaceutical driving down benefit costs. A lawyer and accountant Benefits by training, Mike La Bianca will discuss the changing N Mini-Medical: roles of employees, employers and government in The New Low-Cost Group Health Plan this process. N Little Things That Mean a Lot to Your Employees Mark Shields N Communication for a Multicultural Syndicated Columnist and Political Analyst Workforce PBS’s The NewsHour With Jim Lehrer N Mini-Medical: “Wittiest Political Journalist in America” The New Low-Cost Group Health Plan The Wall Street Journal N The Latest Strategies in FSA, HRA, Mark Shields will share first-hand accounts and and HSA Plans impressions of the current state of Washington politics N What your CFO Wants from You and will present them against the backdrop of political history. Washington is the seat of benefits compliance N New Formulas for Calculating and regulation. How are changes there affected you Benefits ROI and your company? N Communicating to Employees Through Cell Phones S. Gary Snodgrass N Clearing the Legal Hurdles EVP and Chief Human Resources Officer to Disease Management Exelon — Nation’s largest utility company N Using Incentives to Boost Health Plan Outcomes Fortune 500 list – #145 KEYNOTE ADDRESS Critical Challenges Facing HR Today How do great organizations best leverage their human capital to win? How to foster positive employee relationships while moving from a state of entitlement to a state of earning? | 800-803-3424 | 212-803-6093
  • 16. coverfeature that the company would double in size over the next two or enterprise. In Glidewell’s case, projecting rapid growth from three years with that new operation,” Glidewell says. landscaping military bases no doubt got the attention and Of course, a buyer needs some evidence that such a dream whetted the appetite of the entrepreneur who bought Pro is more than, well, a dream. But because Glidewell wasn’t hell- Landscaping last year. bent on an immediate sale of Pro Landscapes, he had the time “It’s a good selling tool,” he says. “But the price was to land a few military base contracts to demonstrate that this totally driven by EBITDA [earnings before interest, taxes, was indeed a serious growth opportunity. depreciation and amortization]. Without the EBITDA, you’re “If you want to get full value for cash flow from a new com- not going to get a buyer.” ponent of revenue, you need to do it for at least a year. One OK, but what is true EBITDA? On this matter, financial month is not ‘real,’” says Enlign’s Snell. executives can rely on basic number-crunching skills to help prospective buyers get an accurate (and, one hopes, attractive) DON’T FOUL YOUR OWN NEST picture of profitability. Just as buyers are looking for real growth opportunities, they Jandali helps that process along by recasting financials. “We also, of course, want to see real profitability. Thus the tempta- calculate what we call ‘seller-discretionary cash flow,’ basically tion arises when a sale is looming to hastily slash expenses. the free cash flow that a company has.” In addition to adding Doing so may seem like a quick-and-dirty recipe for higher such expense items as interest, depreciation and other items operating income, but if pursued too crudely, it can backfire, used for a standard EBITDA calculation back to the bottom brokers warn. line figures reported on tax returns, Jandali also cranks back in For one thing, you could spoil all the “fun” for the “discretionary” business expenses. new buyer. A company’s tax returns are used as the starting point Lou Phelps, of Phelps, Cutler Associates, in Savannah, because, as Pat Harkins points out, skeptical buyers under- Ga., who serves as a strategy and financial consultant to stand that “nobody’s ever reported more income on a tax media companies, points out that buyers “love to buy prop- return than they have earned.” erties where they can say, ‘Oh, gosh, we could cut this. We Discretionary expenses may be in the eye of the beholder, could cut that. We can make it much more profitable than he notes. Sellers will try to add back in as much as possible to [the current owners].’” raise reported cash flow, and buyers (and bankers) will scruti- “When you’re already running a totally Cadillac, pencil-sharpened operation, and therefore you want Top myths on selling a business top dollar, the buyer is going to ask himself, ‘Where do I take it from here to recoup the top dollar that you’re Jeff Snell, president of want to buy my business. A too-high listing price with asking me to pay you?’” Phelps says. Raleigh, N.C.-based Enlign Reality: For non-public an unsubstantiated valua- Phelps’ comments are echoed by Business Brokers, is on a companies, what a com- tion will either invite an Malek Jandali, CEO of VR Business mission to shatter what he petitor is buying is rarely offer from an uneducated Brokers in Atlanta. The issue isn’t so considers to be myths what the seller thinks he is buyer (which will likely ulti- much cutting costs, he says, as about selling a business. selling. He is generally look- mately fall apart), or con- knowing how to run a company with While several “myths” point ing for something specific, sume a lot of time and the optimum level of resources — to the need for a broker, such as additional geo- effort without eliciting a something that a financial executive their validity is not neces- graphic coverage or a key qualified offer. should be helping a company sarily undermined by their employee. ✱ Now is (or is not) the achieve with or without the self-serving nature. ✱ The more people that time to sell my business. prospect of a sale. Following are highlights know that my business is Reality: “Timing is every- “Cutting costs doesn’t mean firing from five of Snell’s Top 10 for sale, the better. Reality: thing,” but your business people or having crappy technology,” list, available in full on his Selling a business is not goals will dictate the right Jandali said. “It means working more web site, like selling a product or time to sell. The average efficiently. It is achieved with the ✱ I know what my busi- service. You can only time to properly value a right management, the right goals ness is worth. Reality: Such accommodate one buyer, business, market it, identify and working as a team. It’s not only “gut feelings” are often and bidding wars more a qualified buyer and per- about the figures. Most numbers based on incomplete or often result in both poten- form due diligence is longer come from behavior where people outdated information, and tial buyers walking. than most business owners have a stake in profitability.” don’t take into account the ✱ Throwing out an unre- think. A business is worth In the end, the key to a successful myriad differences alistically high price and the most when the owner sale will be the buyer’s sober assess- between businesses. seeing what happens is probably least likely to be ment of the basic profitability of the ✱ A competitor will sometimes works. Reality: considering selling. 16 SMBFINANCE JULY 2006
  • 17. the company’s post-sale management team will have “the depth, breadth and Glidewell was able ability” required to keep the company to prove to buyers successful after the owner checks out or fulfills a post-sale employment contract. that a new line of The seller should be prepared to pro- business could duce an organizational chart, plus pro- files of key managers, noting their double the size tenure with the company and compen- of his company sation history. — because In some situations, it will be hard to put a good face on the management he had already bench-strength and finances of the landed a few company. Not everybody can point to contracts to the kind of stellar financials that Pro Landscapes was able to put out. demonstrate What then? its potential. Jeff L. Peskind, managing director of the New York-based JLP Credit Opportunity Fund, specializes in evalu- ating companies whose financial per- formance is lackluster — or worse. Peskind’s advice? “Investors know nobody’s perfect. They know people make mistakes. The best thing to do is lay out your plan [for improving finan- cial performance] as clearly as possible, to get people comfortable that, first, you have a plan, and second, that you are aware that you have problems.” LET A LITTLE BIRD TELL THEM ... With any luck, however, the CEO won’t chose a period of acute financial distress to ask you to lead the cheerleading squad for the sale of the company. Not surprisingly, that role, according to busi- ness brokers, should be left to them, in bad times or good. nize all add-backs, and possibly disregard them. “You just have In addition to all the expected (and often legitimate) why- to ask yourself if the expense was really necessary for the busi- you-need-a-broker arguments — access to buyers, market ness to generate revenue.” knowledge, negotiating skills, etc.— is the suggestion that a For example, the cost of sending an executive to a confer- broker can help you by running you down. Well, sort of. ence at a luxury hotel in Hawaii, or a limo service for the CEO, “Owners often will brag about how phenomenal their are good add-back candidates, he suggests. company is,” notes Phelps of Phelps Cutler. The ironic result is that they’ll get a lower price, she maintains. “The broker, PAY AND THE PECKING ORDER away from the seller’s management team, can say, ‘Yes, sales A bigger item, in the case of a company run by its principal have been good, but truthfully you could put in an even owner, is chief executive compensation. If he’s paying himself stronger team over time and really bump this thing up more. a $500,000 salary but a competent general manager could be And let me show you how.’” recruited by the new owners for half that amount, there’s a Which suggests that when you are asked, in that solemn legitimate $250,000 add-back. private meeting with the CEO, to help with the process of Which brings up another key issue in facilitating the sale: preparing the company for a sale, you place “golden parachute management structure. contract for the CFO” at the top of the list of ingredients Harkins points out that buyers will want assurances that required for a successful sale. SMB JULY 2006 SMBFINANCE 17
  • 18. VoIP The Economics of VoIP GETTING CHEAP TELEPHONE SERVICE OVER THE INTERNET SOUNDS GREAT — EXCEPT WHEN IT DOESN’T. BY LISA SPINELLI T erry Rogers, CFO of Smith Newspapers using VoIP and predicted that 50 percent of all SMBs will sub- , in Fort Payne, Ala., heard Voice over scribe to a digital voice service by 2008. Research groups like Internet Protocol telephone services can the Boston-based Yankee Group, on the other hand, say that save companies thousands of dollars. only 5 percent of SMBs today use Internet phone services, and But after researching a switch from his the numbers are not likely to shoot up any time soon. company’s traditional phone service to VoIP he just could not find the savings. , INFORMATION, PLEASE “I’ve done some looking at it, and we’re Just as e-mail can be cheaper than a phone call, VoIP services getting such a cheap long-distance rate that it didn’t pay to give can bring significant cost savings. Offices that have multiple it up,” said Rogers, whose company pays $45 a month for their branches or a number of remote workers who constantly call telephone service. “There’s really no need to upgrade the hard- across different area codes may find thousands of dollars in ware and spend money on headsets to switch to VoIP .” savings when using VoIP . Many small and midsized businesses feel the same way But these benefits won’t necessarily materialize for all busi- ILLUSTRATION RYAN ETTER about the cost-efficiency of switching to VoIP according to a , nesses. SMBs that do not make many long-distance calls survey of 560 SMBs conducted by Boston-based technology between offices, or to clients, and yet try to use IP networks for concern Savatar. The study found that 85 percent of those all their calls, can find themselves with telephone calls of poor polled did not see a value in switching over to a VoIP network. quality, slower Internet connectivity and minimal savings. Statistics vary significantly on the penetration of VoIP in the “I don’t understand [major VoIP provider] Vonage’s business SMB space. In one study performed last year, Phoenix-based model, to tell you the truth,” said Gary Ritacco, president of InfoTech Research Group claimed that 23 percent of SMBs were Ecomm, a voice, video and data communications provider 18 SMBFINANCE JULY 2006
  • 19. CHoICES, CHoICES A selection of VoIP providers’ plans for businesses. COMPANY/SERVICE FEATURES MONTHLY FEE OTHER COSTS NOTES CONTACT BroadVoice / Unlimited calls in the U.S. $29.95 $39.95 activation Other fees may apply. Unlimited or Canada. Users can add fee; $14.95 for ship- Additional lines cost the Business Plan up to two “remote” offices ping/handling of same as a new line. in other cities using alter- adapter. Alternate nate numbers. numbers $1.95 a month each. CableVision/ Unlimited calls in the U.S., $34.95 for one Available only to Optimum www.optimum- Optimum Voice for Canada and Puerto Rico. line; $29.95 for Online customers. Business four or more. (866) 482-0091 Covad VoIP/PBXi Unlimited nationwide call- Flat rate – Per-minute pricing – Designed for up to 100 ing up to 101,000 minutes. $36.95 to $26 to $32 per employees. (866) 365-2923 Interoffice calls are free. $59.95 per station and 3 to 5 phone (depend- cents per minute, ing on number depending on call of stations) volume. Net2Phone/VoiceLine Unlimited calls in the U.S. $29.99 U.S. or U.K. inbound U.S. Canada and Canada, and unlimited toll-free calls cost Unlimited inbound minutes. VoiceLine 4.9 cents a minute. to VoiceLine calls are free. Packet8/Virtual Unlimited in the U.S. and $39.99 per $99.99 equipment; Requires three exten- Office, Unlimited Canada, and free worldwide extension. $39.99 activation sions. Additional lines cost (866) TRY-VOIP Extension network calls for any sub- fee; $18.99 ship- the same as a new line. scriber. ping. Various other fees may apply. Packet8/Virtual 250 minutes of outbound $19.99 per $99.99 equipment; Requires three exten- Office Metered calls to the U.S. and extension. $39.99 activation sions. Additional lines cost (866) TRY-VOIP Extension Canada. fee; $18.99 ship- the same as a new line. ping. 3.9 cents per additional minute. Other fees may apply. Verizon/VoiceWing Unlimited local and long- $24.95 $19.95 set-up fee. No specific business plan Unlimited distance calls in U.S., Puerto offered. Requires one- (800) 270-5369 Rico and Canada. Unlimited year commitment. VoiceWing to VoiceWing calls. Vonage/Small Unlimited local and long- $49.99 Additional lines $12.99 Business Unlimited distance calls in the U.S., each, with 500 outgoing (800) 980-1455 Plan Puerto Rico, Canada and minutes in the U.S., Europe. Dedicated fax line. Puerto Rico and Canada. 3.9 cents for each addi- tional minute. Vonage/Small 1,500 free outgoing min- $39.99 3.9 cents for each Additional lines $12.99 Business Basic Plan utes a month to the U.S., additional minute. each, with 500 outgoing (800) 980-1455 Puerto Rico and Canada. minutes in the U.S., Dedicated fax line. Puerto Rico and Canada. JULY 2006 SMBFINANCE 19
  • 20. VoIP headquartered in Lancaster, Pa. “Long-distance carriers like Verizon give you a $35 or so unlimited line with voicemail, The 411 on Internet telephony caller ID and all the same features. Vonage has technological VoIP, or digital voice, works in much the same way as e-mail, by challenges. On the business side, there is little, if any, advantage transmitting information over the Internet. A regular phone can be to switching over to a Vonage-type service.” plugged into a company’s Internet outlet and, after paying a month- ly service fee, the phone calls travel over the company’s bandwidth. CAN YOU HEAR ME NOW? There is more than one model for VoIP service, though, and The information is broken into packets of data, and when the per- prices vary depending on the service plan and provider (see son receiving the call picks up the phone, the packets are reassem- table, page 19). IP-only vendors, such as Vonage, run on any bled in the order they were transmitted. Ideally the voice comes Internet provider’s connection, making the service cheaper, but through on a digital voice line just as it would sound on a normal also less reliable. Other digital voice providers like BellSouth POTS, or “plain old telephone service,” line. and Verizon use normal “plain old telephone service,” or POTS, lines for calls outside the office and VoIP services for interoffice require weeks before the system is up and running. VoIP sup- calls. The quality therefore remains high with client calls, and porters point out that their system requires little capital to install interoffice calls are reduced significantly in price. beyond the cost of service, and can be done within a few hours. “VoIP is misunderstood in a couple of respects,” said “To invest in a regular phone system is very expensive,” said William Fleenor, chief financial officer and partner at business David Immethun, director of marketing at Packet8 Business and technology consulting group K2 Enterprises, based in Services, “and small businesses are looking at their total return Hammond, La. “One is that it saves a ton of money. Certainly, if on investment very closely. Phones don’t have a payback peri- you have multiple branches or remote workers, this can be a od, they’re a cost, but with virtual offices, the cost is paid for up huge savings, but the savings come because the calls between front and you don’t pay for any set-up.” the branch offices are running over the Internet. There are two Most companies find themselves looking seriously at VoIP major considerations when looking at VoIP services — cost and when they are moving from one office to another, need to quality. Vonage and the other pure IP networks, they beat replace an old phone system, or face expensive phone bills. everyone on price, but ... you can’t be assured to get as good When K2 moved its headquarters last April, Fleenor decided quality once it leaves the walls of your office.” that it was a perfect opportunity to look into cost savings for Pure-IP network VoIP providers also operate over the same their long-distance bill and switch to VoIP “We had a tradition- . lines as the company’s Internet access. Unless a company has al PBX system for the last 10 years that needed to be replaced, enough money to buy two separate channels — one for their but we could have moved it over to the new office,” he said. “It’s Internet and e-mail use, and another channel just for voice — a small office with four lines coming in. For one thing, [switch- the quality of the VoIP calls will be significantly compromised. ing to VoIP] eliminated the need for more outside phone lines.” E-mail and Internet usage will also be compromised. Now when K2 executive vice president Randy Johnston calls VoIP phones remain a bit cumbersome, and the most from Georgia, or chief executive officer Val Steed calls from expensive option for digital voice services. When purchasing Utah, their calls are interoffice and therefore don’t cost the com- the actual phone, the IP address is static, so it can be plugged pany long-distance fees. And calls from Johnston and Steed are into any existing Internet plug (though experts say that a DSL not tying up outside phone lines — leaving the channels open line or better helps the quality of the call), and the phone num- for customers to call. The ROI on that alone, said Fleenor, is ber will stay the same. However, the phones cost anywhere worth the switch, but the savings of not installing more expen- from a hundred to several thousand dollars. sive phone lines has proved a key attraction for SMBs. Donna Mackenzie, senior vice president and chief financial officer at Florida-based Channel Intelligence Inc., a marketer of THE PHUTURE OF PHONE SERVICE? online shopping solutions, is not worried so much about the “The [POTS] market leaders, who own most of the business, price of digital voice services as she is about losing communi- what they will do is try to slow the transition as much as possi- cation with clients or branch offices if the Internet goes down. ble to VoIP What that translates to is them dropping prices,” . “The biggest concern for us is if the Internet is down, the phone said Wes Rogers, vice president of marketing and sales at VoIP is then down — everything could come down at the same provider nexVortex, in Herndon, Va. “But VoIP tends to run 30 time,” said Mackenzie. to 50 percent lower than the regular phone bills, and the mar- ket leaders are not lowering their prices that far.” FASTER, CHEAPER INSTALLATION Even though POTS providers aren’t yet being replaced by VoIP proponents are quick to indicate a number of instances VoIP services just yet, some, like Ecomm’s Ritacco, feel it is only where the economics of VoIP make sense. a matter of time. He believes that VoIP will become so cheap Installing a private branch exchange system — a system and of high enough quality that the global unrelated telephone found in many offices, where local extensions branch off a main networks will have to join together to create one backbone switchboard number — can run to thousands of dollars and phone system — a VoIP system spanning the world. SMB 20 SMBFINANCE JULY 2006
  • 21. outsourcing finance Inside or Outside? SMBS MULL OUTSOURCING FINANCIAL FUNCTIONS. BY GAIL PERRY F or small and midsized businesses Barnes Motor and Parts owns and operates 17 NAPA auto that are looking for ways to cut costs, it parts stores in eastern North Carolina, and hires the profession- might seem like doing all the financial als at RSM McGladrey Financial Process Outsourcing to prepare work in-house would be a no-brainer. After financial statements, LIFO inventory pools and payroll. all, hiring a professional for work that you “It reduces the workload in our office, where we can either can muddle through on your own costs concentrate on any number of things that we have to do in- money. But many businesses are finding house, be it collections, accounts payable or whatever the case that the cost of hiring an outside profes- may be,” Walston said. ILLUSTRATION RYAN ETTER sional person or firm to perform various financial functions not “Outsourcing can be a very attractive option, because the only saves money but provides many other benefits as well. cost of maintaining a financial operation both in terms of “I think it’s a prudent business decision if you think you can technology and in terms of people can be disproportionately get a professional job done at hopefully a reduction in costs,” high,” said Mark Jones, chief business development officer at said Henry Walston, president of Winston, N.C.-based Barnes RSM McGladrey Financial Process Outsourcing. “For example, Motor and Parts Co. Inc. “It gives you another set of eyes to if you think about a business that might have five or six people review things.” in their accounting department, they’ve got a controller/CFO, 22 SMBFINANCE JULY 2006
  • 22. and maybe a couple of accountants in different functional areas and a couple of clerks. Typically there’s no bench Why go out? strength. If one of these people, particularly the controller/ CFO leaves, there’s not any replacement there, so it can be Advantages to outsourcing financial functions: extremely disruptive.” ✱ Reduced personnel costs. ✱ Reduced training costs. LEARNING TO LET GO ✱ Reduced concerns about personnel turnover or the cost of Financial functions are among the leading outsourced services. hiring new employees. Currently some of the most frequently outsourced financial ✱ Opportunity to hire specialized, high-quality service providers. areas include payroll processing and payroll taxes, accounts ✱ Pass the day-to-day responsibility on to a professional, while payable, billing and collections, and bank reconciliations. retaining oversight and strategic overall responsibility. Jericho, N.Y.-based Outsourcing Institute, a non-partisan ✱ Reduced capital costs. association dedicated to outsourcing, estimates that approxi- ✱ Reduced expenses and expertise related to technology. mately 22 percent of small and midsized businesses outsource ✱ Additional controls by separating the responsibility for financial payroll and other accounting functions. According to a recent services. report from technology consultancy IDC, outsourcing of accounting functions should increase by an average of 9.6 per- Partners LLC, suggested that, “The companies that benefit cent per year through 2008. One impetus to increased financial most from outsourcing are those that have experienced signifi- outsourcing is the availability of professional resources overseas. cant growth or change in their business and turnover in their Several U.S. companies with branches in India have accounting department.” emerged to provide offshore accounting services. Analysis A company that already works with an outside accountant or shows that the cost of trained accounting professionals in India accounting firm for year-end projects, taxes and other func- is about one-eighth the cost of workers with a similar back- tions, will find that its outsource service provider speaks the ground in the U.S. same language as the accountant, and that the two of them will Mansal Financial Consultants Private Ltd., an outsourcing work well together. “Typically that’s a happy relationship,” company based in Mumbai, India, that provides services for explained Jones of RSM McGladrey. U.S. companies, outlined a series of questions that a company should ask itself if it’s considering outsourcing: PICKING THE RIGHT OUTSIDER ✱ If you were starting the company today, would you elect to When choosing a financial services provider, Walston recom- perform this function internally? mended finding someone with expertise in the particular field ✱ Are you so good at performing this activity that others of business. “I’d also like to have some personal references from would hire you to do it for them? people within your industry that you may have a long-term ✱ Will tomorrow’s CEO come from that skill-set? relationship with, so you can get a honest opinion on how it’s Mansal suggests that if the answers to the above questions worked with them, preferably somebody of your own size.” are “No,” outsourcing should be considered. When a company decides it is ready to consider outsourc- Outsourced financial functions come in many shapes and ing some financial functions, it’s important to determine sizes, starting with where the services are performed. “These specifically which functions, and how that outsourcing will services can be performed at the client’s site, in our office or via integrate with existing in-house financial work. According to the Internet,” said Joanna Eggett, associate director of SSG Jones, the first step is to “clearly deconstruct the tasks, the Financial Services Inc., in Cleveland. SSG is a full-service processes, and understand specifically what things are going accounting, consulting and management firm that includes to be done by an outside provider and what things are going to outsourcing as one of its divisions. stay in-house. Then you build integration into those processes Some people might think of outsourcing as an either/or sit- so that the interaction and the hand-off and the flow of infor- uation: Either you outsource your financial functions or you mation in and out is as seamless as possible.” don’t. But Eggett points out several situations in which a com- Outsourcing isn’t always the perfect solution. Even though pany might benefit from outsourcing its financial functions for Barnes Motor and Parts Co. utilizes outsourced services, a temporary term. For example, companies that can benefit Walston pointed out that, “You can’t walk into an office right from interim outsourcing include companies that have: down the hall and sit down and talk with somebody. The ✱ Suffered significant turnover in their accounting staffs; human element is somewhat diluted.” ✱ Lost an employee and need temporary support until they Handing off the work to an outside financial services find a replacement; provider takes care of the processing part of the workload, but ✱ A special project that the current staff does not have the processing is only the beginning. Company management is time to perform; or, ultimately responsible for the financial work produced, and so ✱ Current financial information in disarray. must constantly monitor and analyze the work, just as if Mitchell Weintraub, managing partner of ProSourcing employees were doing it. SMB JULY 2006 SMBFINANCE 23
  • 23. incentives Anything But Cash COMPANIES ARE GETTING INNOVATIVE IN THE STRUGGLE TO KEEP EMPLOYEES PRODUCTIVE AND ON THE JOB. BY ALICIA KORNEY eeping employees content without the human resources at Runzheimer International in Rochester, bottom line taking a hit isn’t easy, but with Wis. “Well, we’re not a large company.” The management con- voluntary turnover rates of well under 10 sulting and professional services firm has offered service award percent in recent years, some small and trips for many years, beginning when an employee reaches the midsized companies have found ways to five-year mark, by giving a weekend trip for the staff member, foster a connection with employees that’s plus a guest, to Chicago. With every five-year milestone, vital to the business’ ultimate success. employees receive a trip that builds in value. After 20 years, it’s The companies profiled here all a trip to London; at 25 years, it’s a five-day cruise in the stressed that the key to growing their business came from recog- Caribbean. At 30 years, it’s a trip of the worker’s choosing. nizing the value of their people. The incentives may not be cash, While the firm doesn’t release sales figures, Ghislain said that but they do incur some cost. But their managers recognize the the incentive programs that the company offers pay for them- very real bottom-line benefits that arise out of low turnover and selves when management considers the benefits of continuity. PHOTO GETTY IMAGES not having to spend on training and recruitment costs. The average tenure at 160-employee Runzheimer is 10 years, and Ghislain estimated that every year between 20 and 30 people are SEND THEM AWAY reaching the travel milestone in one category or another. “I used to look at larger companies and say, ‘I can’t afford those In recent years, voluntary turnover at the company has aver- kinds of programs,’” said Mike Ghislain, vice president of aged between 3 and 6 percent, and Runzheimer has started to 24 SMBFINANCE JULY 2006
  • 24. offer a number of in-house development programs, including also allows workers to pursue their own individual passions. what it calls “Blue Sky Group” opportunities to anyone interest- More uniquely, Green Mountain also organizes regular ed in visiting any business, large or small, within 100 miles for weeklong trips for its employees to visit the regions where it the day. Workers return to give a presentation at a brownbag buys its coffee beans — including many countries in Central lunch, usually centering on what best practices Runzheimer America, and locations in South America, the Caribbean, Africa may be able to make its own. and the Pacific Basin. About 30 to 35 employees from across all And then there’s a variety of smaller, less-structured perks — departments attend a given trip, totaling about 50 to 150 peo- including a community gas grill on the back patio, a fitness ple traveling each year. center in the building, mountain bikes that workers can borrow “Seeing how hard it is to grow one pound of coffee is really to ride into town for running errands, and a basketball hoop. an eye-opening thing,” Whalen said. “Many people come back “We say that we’re trying to pick up a little bit,” Ghislain and describe the trip as a life-changing thing. It results in a dif- said. “Everything we do is aimed at picking up another five or ferent level of focus to your work, whether your job function is 10 employees. Hopefully, there’s enough variety for everyone in sales or equipment maintenance.” that each employee feels some connection to the company.” In 2004 through 2005, Green Mountain averaged about 6 percent voluntary turnover. TIME IS FREE Norwalk, Conn.-based B.I.N. Sales Marketing Inc., a distribu- THE COMPANY LAUNDRY ROOM tor for a variety of natural products, offers employees an Lisa Velte, director of human resources for software company extremely generous vacation schedule. On top of six calendar Analytical Graphics Inc. in Exton, Pa., said that its employee holidays, the company — whose sales rang up at about $9 mil- incentive programs are founded on a basic philosophy. lion last year — offers 20 days of vacation to first-year employ- “We’re a knowledge business,” Velte said of the firm, which ees. In addition to the four weeks of paid time off, employees had sales of about $40 million last year. “Our assets are between can add on an additional day for each year they’re with the the ears of our employees.” company, up to 30 days, and they can accrue up to 65 days. After first starting with the occasional free lunch, the com- “We want people to be able to use their time when they need pany now offers three square meals a day to its more than 250 it, not to be forced at the close of the year to either use it or lose employees, specifically keeping the demands placed on work- it,” said human resources manager Emily Kilgore, who revealed ing parents in mind. Family members are allowed to join work- that employee turnover at B.I.N. was “very low” in the past year. ers for dinner time. “We want to make the rest of our workers Of the business’ 90 employees, about two-thirds are in sales lives easier, so they can be more focused while they’re at work,” and merchandising, mostly working from home. In total, B.I.N. Velte said. estimated that about 95 percent of its staff operates on some Analytical Graphics also offers a variety of perks, ranging sort of flextime schedule. from an on-site gym and personal trainer, to florists, shoe cob- The company also has an open-door policy, and anyone blers and dry cleaners that stop by the office a few times a week with a concern or suggestion is encouraged to just pick up the to offer their services. More recently, the company added a phone and call the president directly. “We’re a big proponent of laundry room. “We have a lot of younger, single engineers right getting feedback,” Kilgore said, “whether that’s for choosing a out of college who were talking about how many hours they dental provider or drafting a new performance-appraisal tem- spent at the laundromat,” Velte said. “The president of the com- plate. People have a voice.” pany asked how much a couple of machines and dryers would cost and we installed them. It’s something that a lot of people MAKE THEM BETTER PEOPLE use, multi-tasking throughout the day. It’s about just that much At Green Mountain Coffee Roasters in Waterbury, Vt., the com- more quality time with your family on the weekend.” pany culture extends far beyond simply manufacturing and pro- Velte said that the company’s “Space Cadet” program, a viding beverages. T.J. Whalen, the vice president of marketing three-month job rotation, often results in a better set of tools for the $140 million business, said that when it comes to train- for workers to use in their original job, as well as a deeper ing its more than 700 employees, Green Mountain focuses on understanding of other departments’ missions. Professional engagement, mindfulness and general life skills — an approach development is also encouraged, and the company has gone that he said some might find “pretty unconventional,” but he out of its way to receive close to $200,000 in federal grants in notes that it is reflected in the business’ double-digit growth. recent years for specialized employee tech training. Velte said “Smart business folks understand the importance of that turnover during the company’s 17 years in business has workers feeling a stake in the outcome of their work,” averaged 3.3 percent. Whalen said. “Our broader mission — to better the world — “Management is always walking around, talking to employ- is reflected in a lot of our incentives.” Green Mountain ees,” Velte said. “In the end, a lot of these things come back to allows employees to take off between 20 and 50 hours a year really caring about work-life balance. That concept has snow- to dedicate time to volunteer work. Last year, the company balled over the years into very real, tangible things that help organized participation in a national river cleanup, but it our workers live both their work and their home lives.” SMB JULY 2006 SMBFINANCE 25
  • 25. softwarereview Taking the Sting from a Painful Application BY TED NEEDLEMAN Running any business is a complex And that’s not only legal, but necessary. In selecting a fixed assets package, undertaking. There are some applica- here are a number of things to consider: tions that, while necessary, leave you DON’T TRY THIS AT HOME Know your needs. To select the right wondering whether you might be better Many companies keep their fixed asset package, you’ll first have to know what off in another career altogether. Payroll is records on an Excel spreadsheet. If you capabilities you will need. Will you need one of those applications, and fixed have only a few assets, and use fairly to maintain a large number of assets? assets is another. One of the big reasons straightforward depreciation/amortiza- Stratify assets from different locations? people cringe when they hear either of tion methods, this is a practical approach. Just how many sets of “books” will you these applications mentioned is the With large numbers of assets to keep need to maintain? Most fixed asset pack- complexity involved in both. track of, and arcane and complex ages have similar capabilities, but some Fixed assets, however, is in a class calculation methods, the situation can handle a larger number of assets or by itself. Back in the “good old days,” it changes dramatically. In this case, it’s more complex asset numbering and wasn’t all that hard. You had the straight- easy to make errors in computing the grouping schemes than others. line and declining-balance methods, correct balances for different purposes, Keep in mind that different types of and if you wanted an accelerated meth- and you’ll have to spend a fair amount entities may view depreciation and amor- od, double-declining balance could be of time keeping abreast of changes tization differently, and have differing rules used. It’s been quite a while since things promulgated by the IRS and other and time periods for performing compu- were that simple. regulatory entities that can affect your tations. Make sure that the software pack- A good part of the complexity of the computations, selection of methods, age that you select is capable of accommo- current depreciation and amortization and even the correct period, disposal dating the requirements of the entities and rules is actually due to the Internal and other asset treatments. agencies that you will have to report to. Revenue Service’s desire to better match This is where software comes in. Fixed Work with your accountant. At some the deduction of an asset with its eco- asset software is based around a database point in time, your company’s account- nomic life. If that weren’t complex that handles the acquisition, disposal and ant is going to have to use the asset and enough, different reporting requirements ongoing maintenance of your company’s depreciation/amortization records that for federal, state, municipal and other fixed and amortizable assets. These pack- you maintain to close your books and organizational entities mean that you ages contain complex computation prepare tax returns and other reports. might wind up keeping five, six or even engines, and a second database of cur- Most fixed assets applications play well eight different sets of books for asset rent rules and procedures for selecting with other vendors’ tax preparation and depreciation and amortization. The same the correct method and time period to ancillary applications, so you don’t nec- IMAGE ARTVILLE asset can have several different amounts use with a specific type of asset, as well as essarily have to purchase the fixed assets of depreciation allowable for different the rates to use in computing the actual package from the same vendor that your reporting needs, and with different book depreciation or amortization for the asset accountant uses for tax preparation. values — talk about “cooking the books!” and for a specific “book.” At the same time, it doesn’t hurt to 26 SMBFINANCE JULY 2006
  • 26. softwarereview consult with your accountant before making a purchase — she The current versions have been on the market for seven can advise you if there are any special circumstances that years. A new version based on Microsoft .Net was due before would influence your selection, and it may just save you a few now, but is currently in beta-testing and should be available dollars in professional billings if you do decide to go with the soon. This will be an addition to the product line, so you won’t same vendor that your accountant uses. be risking anything by not waiting to make a purchase. Make sure to maintain the software. Fixed asset software is only useful if it is kept up to date. Different entities, including BNA FIXED ASSETS DESKTOPPRO the IRS, as well as state and local authorities, change the rules BNA is much better known for its reports on tax legislation, but often. Frequently, you won’t know about a change in rate, appli- this vendor also has a sophisticated line of software that cability or period until you are caught in a mistake. As with includes applications for performing fixed assets computa- payroll, fixed assets is an application that requires a service tions. This product has been available for a while, and has been contract and frequent checking for updates. Make sure the ven- continually updated and improved to the point where it is one dor that you select can provide this level of service. of the premier packages for this area. The application benefits Do you want or need the bells and whistles? Fixed asset from BNA’s own extensive research staff, which ensures that the packages almost universally provide some assistance in selecting calculation engine remains accurate and up to date. the correct depreciation and amortization calculations, rates and As with a number of vendors included in this roundup, BNA’s time periods. Packages vary in how much assistance they render Fixed Assets is available in several different versions. We tested in making these decisions. If the person responsible for setting the DesktopPro version, which is aimed at midsized-to-large up and maintaining assets is not somewhat knowledgeable companies. For those entities with even greater needs, there’s an about fixed assets and making the necessary choices, you’ll want Enterprise version, which can handle up to 5 million assets, the software to provide the most assistance possible in this area. compared with DesktopPro’s 10,000-asset limit. The less expen- We tested five fixed asset systems. Two of these, Fixed Assets sive Small Business Edition is somewhat more entry-level, and CS and ProSystem fx Fixed Assets, are part of application suites eliminates several features, such as consolidation. SBE has a targeted towards accountants. We included these for two rea- limit of only 500 assets, which is surprisingly easy for many sons — your accountant may very well be using software in- companies to exceed. You can define up to 99 different books, house that is part of one of these suites, and both of these offer- which gives you a lot of flexibility in how you maintain assets. ings function very well as stand-alone applications. While DesktopPro can handle all current depreciation and amortization methods, you can also define your own (if you can BASSETS FIXED ASSET SYSTEM justify using a custom method to the appropriate authority). Bassets comes in several versions. We tested the middle version There are 30 wizards to help you enter assets, select a method with unlimited asset capability, but there is a “Lite” version that and even walk you through asset disposal. There’s an extensive has a 1,000-record cap, and the Bassets Plus edition, which uses selection of reports, and these can be printed in a variety of for- the Microsoft SQL database. A number of add-ons are available mats, including HTML and PDF. Reports can be filtered to show to the fixed assets, including 4-4-5 weeks/13-period accounting, only those fields that you are interested in, and an optional easy construction in progress, expense allocation, foreign currency writer lets you produce templates for use with Crystal Reports. conversion, an enhanced general ledger interface, lease-asset tracker, units of production, accounts payable import, and bar CCH PROSYSTEM FX FIXED ASSETS code inventory control. Suites offering Bassets or Bassets Plus The ProSystem fx Office Suite, of which Fixed Assets is a part, is and two or more optional modules qualify for a price break. primarily aimed at accountants, rather than corporate users. You’ll want to consider these options carefully, as some fea- Regardless of its primary market, ProSystem fx functions very tures that are options with the Bassets software are standard in nicely as a stand-alone fixed asset application. If your account- some of the other vendors’ offerings. Depending on what capa- ant does happen to be a ProSystem fx user, that’s great. If they bilities you require, the total acquisition cost could run you use another vendor’s applications, the excellent import and substantially more than the base price of the application. export features that ProSystem fx provides will make it easy to Navigation through the system is easy, and input screens get your fixed asset data into their other applications. are uncluttered and fast in use. You can attach an image of the None of the packages included in this roundup are entry- asset to its record, which is a useful feature if you have several level, either in price or capabilities. While ProSystem fx Fixed similar assets. You can use up to seven different books, and the Assets is priced at the bottom of the bunch, it’s still not inex- software provides 23 standard reports, as well as a report pensive, nor do you give up any features. All of the standard writer for ad hoc reporting. depreciation and timing methods are provided, and these can JULY 2006 SMBFINANCE 27
  • 27. softwarereview be customized should you require it. We liked that the applica- tion provides the units of production method, which is useful Vendor CCH ProSystem fx Fixed Assets for manufacturing entities and a feature that some of the other CCH Tax and Accounting vendors charge extra for. You can use up to eight sets of books, information 21250 Hawthorne Blvd. and you can define up to three of these. Torrance, Calif. 90503 Some vendors price their applications according to the num- Bassets Fixed Asset System (800) PFX-9998 ber of assets that the software can manage. That’s not the case Decision Support Software with ProSystem fx Fixed Assets — the software will manage as P.O. Box 665 Pricing: Single user — $1,550. many assets as you can fit on your hard disk. With the new Ramsey, N.J. 07446 750GB hard disk drives, that’s quite a few. The software, howev- (201) 995-9500 Fixed Assets CS er, does not provide a wizard to help you choose the proper Creative Solutions Inc. asset life or a depreciation method — that’s entirely up to you. Pricing: Single user — $2,495; 7322 Newman Blvd. Most of the packages we tested have good reporting capabil- Bassets Lite, single user — $995; Dexter, Mich. 48130 ities, and ProSystem fx Fixed Assets does not disappoint in this Bassets Plus, single user — (800) 968-8900 area either. There is a comprehensive selection of reports avail- $3,095. able, and you can use filters and move fields to get just the out- Pricing: $1,100. put that you need. You can also output reports in PDF format, BNA Fixed Assets DesktopPro should you desire. BNA Sage FAS 100 Asset 1231 25th Street NW Accounting FIXED ASSETS CS Washington, D.C. 20037 Sage Software As with ProSystem fx Fixed Assets, Fixed Assets CS from (800) 372-1033 2325 Dulles Corner Blvd. Creative Solutions is primarily marketed to accountants who Herndon, Va. 20171 will use it as part of a suite of applications. This has no bearing Pricing: Single user — $2,495; (800) 368-2405 on running the application in stand-alone mode, except that it each additional network user — is particularly easy for your accountant to integrate the output $225. Pricing: Single user — starts at from Fixed Assets CS if they are using other Creative Solutions $2,295. programs. Even if they aren’t a CS user, Fixed Assets CS has excellent input and output capabilities. frequent renaming of the product. This time around, Sage stuck If you feel that you need some help on the appropriate asset the “100” tag into the product name. This is to differentiate the life and depreciation method, you’ll love Fixed Assets CS. Enter application from the somewhat less expensive FAS 50 Asset the asset type, and a wizard (which is not enabled by default) Accounting, formerly FAS First Step, which is a bit more entry- automatically fills in the life and method. You can, of course, level, but by no means low-cost. override these assumptions if you wish. You can also customize Sage’s fixed assets applications are a family of packages with the data entry screens, moving or hiding fields to streamline Asset Accounting in the center. Optional ancillary applications the process or adapt it to your organization’s documents. include an Asset Inventory with bar coding, a custom report Fixed Assets CS has all of the standard depreciation meth- writer, and versions of the software for government and nonprof- ods, including units of production, for which some of the ven- it entities. Various bundles of these applications are available. dors attach additional charges. The asset record screen also While the application may have received a new name, the provides a tab for an image, which is useful if the asset is simi- upscale features haven’t changed. You can use up to seven lar to others, or, conversely, if the asset is unique. This image books, two of which you can define yourself. All of the standard can also be a document, such as a purchase record or bill of calculation methods are supported, and while there are no wiz- sale when the asset is disposed. An optional application called ards to help you select a method, there is a link to an internal Filing Cabinet CS provides additional document and image reference to help you in your decision-making. management capabilities if required. As with the other packages we tested, set-up and navigation is Fixed Assets CS includes a good selection of reports, many quick and easy. Screens are well laid out, and you can edit the of which can include graphics. You can also use a variety of fil- input fields by moving them on the screen or even hiding them. ters and sorts to customize these to your needs. FAS 100 Asset Accounting is a polished product. The As with several other packages included in this roundup, included reports are comprehensive, and there are numer- Fixed Assets CS does not contain an integral bar code capabil- ous filters that you can use to produce these reports, ity. This is available as a stand-alone from a number of third- with just the data you need appearing on them. Should you party vendors should you require it. find that the filters don’t provide enough control over the reporting process, Sage includes a report writer utility that SAGE FAS 100 ASSET ACCOUNTING can be used to generate ad hoc reports. With both the Not only does software giant Sage bring out a yearly update of standard and ad hoc reports, you can include graphics FAS Fixed Assets, but this vendor also seems to go through a to enhance understandability. SMB 28 SMBFINANCE JULY 2006
  • 29. verticals: homebuilders Squeezing the Bubble FEWER HOUSING STARTS AND RISING COSTS ARE SQUEEZING HOMEBUILDERS’ MARGINS BY BILL CARLINO Following years of robust growth in new housing starts, serves as president of the Home Builders Association of the housing “bubble” has inarguably been jabbed and prodded Maryland. “But it’s slower. We went through several very good in 2006 — but it’s not ready to burst just yet. years, and now it’s almost like the market is leveling off to a A combination of rising interest rates, skyrocketing prices more realistic pace.” on premium tracts of land and higher costs of raw materials “I think if we didn’t see a slowdown, we may have had have helped brake — but not halt — a six-year cycle of growth. another dot-com explosion,” opined Ken Ryan, chief financial “There is still a lot of development going on,” said Stephen officer at Burke, Va.-based homebuilder Van Metre. On an Melman, director of economic services at the National Assoc- annual basis, Van Metre builds anywhere from 300 to 600 hous- iation of Home Builders, a Washington-based trade group. “But es, primarily in the northern Virginia market, and boasts rev- much of that depends on location. Builders in the middle part enues of $390 million. of the country, like Texas, are helped by a strong employment “Land prices had been getting out of hand,” Ryan contin- picture. In areas like Michigan and Ohio, where you also have ued. “People now are not going forward with some projects. fallout from the auto industry, it’s lower. In south Florida, par- There were a lot of folks who entered this field who saw it as a ticularly in the high-rise condo sector, clearly investors have get-rich-quick scheme. Sometimes it’s a lot more painful than IMAGES DENNIS NOVAK/GETTY IMAGES begun to pull out of that. Builders sometimes couldn’t deliver you think. I’ve been here 22 years and have seen all the cycles. the building in two to three years.” Normally, we sell two-thirds of the homes we build in the first According to the NAHB, new home starts are expected to dip third of the year, but that hasn’t been the case lately.” roughly 6 percent in 2006, to 1.935 million. That slide represents Steve Friedman, CPA, JD and national director of the home- the first drop in new housing starts since 2000. Since then, starts building unit at global accounting firm Ernst Young, said that for single and multi-family homes have soared 28 percent. when the homebuilding market slows, small and midsized “We’re still building and selling homes,” reports Linda builders have to be careful not to repeat the mistakes that their Veach, president of Bob Ward Cos., a Maryland-based home- predecessors made in the 1980s and early 1990s, including one builder that erects between 150 and 170 homes a year and gen- of the most serious — an asset-liability mismatch. erates annual revenues of roughly $70 million. Veach also “At that time, you had builders taking on substantial land 30 SMBFINANCE JULY 2006
  • 30. commitments — long-term commitments — and if they can go forward,” he said. “Permits are getting expensive. then financing them with short-term debt,” Some of the smaller builders don’t have either the expertise or Friedman said. “In a normal housing market, a builder is tradi- working capital to get through that. As a result, some of the big- tionally in and out of a piece of dirt in a year. But if that stretch- ger builders are taking those five-to-10-lot parcels.” es out to three to five years, a business plan that once made Spurred by the dwindling land inventory, homebuilders incredible sense on the front end now doesn’t have the have sometimes been forced to go beyond their traditional financing to cover the debt.” radius to find available land. In the case of Bob Ward Cos., Friedman explained that another key issue is ensur- the company recently began expanding its development ing that as builders map out their business models over schedule in southern Pennsylvania. the next several years, they need to build in “healthy” “[Extending a company’s reach] creates its own set of chal- assumptions for sales price appreciations. “Builders have to be lenges,” said Veach. “It’s farther from the office and therefore careful about what their contracts say on pricing — most con- harder to manage. A lot of the time your sub-contrators won’t tracts don’t let them build in price escalations,” he explained. travel that far, so you have to get local trades. And their time “We’re starting to see land sellers renegotiate options on prop- frame and quality standards may be different from yours.” erties, and some companies will walk away from the options Homebuilding consultant Steve Maltzman said that the and lose that money, instead of incurring a loss down the road.” years-long bull run in the housing market was a doubled-edged sword — companies made money, but there was an influx of SHORTAGES OF GAS, LAND new and often inexperienced players entering the market. The soaring price of fuel quickly hits a homebuilder’s overhead “What you’ve had [previously] in many markets is home- by elevating ancillary and raw materials costs. “Everything is builders making money in spite of themselves,” said Maltzman, going up,” said R. Kent Thomas, CPA and partner at Maryland- a principal at SMA Consulting in Colton, Calif. Maltzman’s based accounting and advisory firm KAWGF, which advises a company provides consulting and outsourced financial func- number of homebuilders through its Construction and Real tion services to the homebuilding industry. “They’re buying the Estate Services Group. “Even just to get people to the job site. right land in the right markets. When the industry takes a And then remember, you have to operate and move all that downturn, they either have to become smarter heavy equipment.” business people and smarter builders, or else Profits are also affected by stringent zoning guidelines they’re in a lot of trouble.” and uncooperative municipalities. Builders often relate horror stories of having obtained all the necessary permits REMAINING COMPETITIVE and hired the contractors for a development, only to find So what does a small or midsized builder with- the project shut down due to a town or community enacting out the capital and labor resources of industry a building moratorium, citing overcrowded schools and bur- titans such as Toll Brothers or Hovnanian do to dens on infrastructure services, such as sewer and water. remain competitive? Compounding those problems are instances of vocal Become more efficient, say homebuilding experts. protests from environmental and similar activist groups. Bob Ward Cos. employs a “value engineering” strategy, e.g., “Sometimes community groups have a very different idea of standardizing the sizes of items such as windows in many of what they want on an available piece of land,” said Bob Ward their new home models, a practice that allows them to buy in Cos.’ Veach. “They don’t realize that if you pay several million bulk, much the way the national builders do. dollars for a piece of property, the builder is simply not going to Other strategies include entering into joint ventures with put in a dog park or a swimming pool.” larger builders. KAWGF’s Clingerman pointed out that, on Chris Clingerman, Thomas’ colleague at KAWGF, said that occasion, the local builder has a relationship with landowners the Maryland, Virginia and Washington, D.C., corridor is one of or local officials, both of whom don’t necessarily want to part- many areas afflicted by a shortage of land inventory. “As the ner with a national firm. Others suggested placing a cap on number of land parcels shrink, smaller builders are wondering loans to heighten efficiency, and to have at least six months of cash reserves to help weather stagnant periods. Despite the slowdown, both builders and industry observers Fewer foundations feel that after the segment goes through a cycle correction, 2007 may see an upswing. “I’m a believer in a soft landing,” said Annual housing starts, in millions Friedman of Ernst Young. “I don’t believe there is a bubble. 2005 2006* 2007* The business press tends to focus on housing as a national TOTAL STARTS 2.066 1.935 1.868 phenomena, but I believe that it’s a local issue.” SINGLE FAMILY 1.713 1.595 1.533 Says Clingerman, “In the areas we serve, the economy MULTI-FAMILY 0.353 0.340 0.335 remains strong. Some 15,000 jobs will be coming to Maryland * ESTIMATED over the next two to five years, and you need homes and apart- SOURCE: NATIONAL ASSOCIATION OF HOME BUILDERS ments to put those people in.” SMB JULY 2006 SMBFINANCE 31
  • 31. parting shot ✴ ✶ ✴ Formerly a public accountant, Ralph Bender now serves as CFO at Baton Rouge, La.-based Manship Media, which operates newspapers and TV stations in Louisiana and the Rio Grande Valley in Texas. A board member of the International Newspaper Financial Executives Association, Bender recently received the 2005 Distinguished Public Service Award by the American Institute of CPAs. He spoke to SMB Finance on Louisiana post-Hurricane Katrina and the growing role of the CFO in strategic planning. SMB Your company publishes a daily paper, so it was vital that your business interruption as a result of Katrina be shorter than most. How did you get back up to speed? RB Actually, we were fortunate with both Katrina and Rita and never missed an edition. We even were able to assist some of our sister communication companies. A number of the New Orleans ABC affiliate’s news personalities participated in our coverage until they were able to resume broadcasting, and a number of employees from the [New Orleans] Times Picayune worked out of our disaster recovery site. Our staff brought many of these people into their homes, as well as assisting and hous- ing reporters and photographers from all over the country. Balancing Act SMB How has the recovery progressed in Baton Rouge and regions outside New Orleans? RB Baton Rouge continues to boom. You can’t travel a mile in any direction and not see construction. Roads have reached incredible congestion levels. Essentially, an increase in population has created a huge demand for services. Hotels are full, abatements are full, the housing market is tight, creating a demand for more housing and new facilities. This bodes well for our newspaper, since the help wanted, real estate and automotive ads are the three biggest components of the classified section. SMB You have worked in both public and private accounting. Is your job harder now than it was, say, 10 years ago? RB Certainly the job is more demanding in terms of time than 10 years ago, but it is also more rewarding. For example, with major capital improvements and buyouts of older stockholders, our companies have moved from a debt-free era to one in which we operate significant credit lines. This certainly creates more demands, regulatory and reporting- wise, but also has tremendously increased my skills and horizons. SMB CFOs have evolved to where they are clear- ly key contributors to developing strategy. How involved are you in strategy at Manship Media? RB I’m sought out for input into strategies that impact our circulation, advertising revenues and long- term infrastructure, including capital demands and PHOTO DAVID HUMPHREYS decisions. I think in our size companies, it is critical that the CFO be well-rounded and understand and advise on business. My days of [pure] number-crunching are prob- ably over. SMB 32 SMBFINANCE JULY 2006
  • 32. Defining Public Accounting in the 2 Century 1st Trusted information for influential accounting professionals.