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| Partner's Perspective |
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| By Cindy S. Johnson, CPA, Partner |
 Executive
compensation can be a challenge for family businesses. As in other
businesses, it may be desirable to offer performance-based incentives
(e.g., stock options, stock bonuses) to attract and retain quality
executives. These incentives allow executives to share in the company's
growth and encourage them to adopt a long-term perspective. But
equity-based compensation also dilutes the family group's ownership
interests.
There are a number of ways to tie compensation to performance without
giving up ownership interests. Here are a few examples:
Phantom Stock/Stock Appreciation Rights
Stock appreciation rights (SARs) give an executive the right to a bonus,
at a specified future date, based on the appreciation in value of the
company's stock between the date the SAR is granted and the date of
exercise.
In a phantom stock plan, executives don't actually own the company's
stock. Instead, they receive credit for hypothetical shares of stock. As
the value of the stock increases, so does the value of the phantom
stock. If the company pays dividends, the phantom stock account is
credited with the amount the executive would have received had he or she
actually owned stock in the company.
Typically, the value of the phantom stock account is paid to the
executive at the time of a specified event - such as retirement,
termination of service, death, or disability - or after a specified
number of years.
Performance Shares
A disadvantage of phantom stock, SARs, and other incentives tied to
stock values is that a closely held company's stock may be difficult to
value. In addition, the growth in value of the stock may not accurately
reflect the executive's contribution to the company. A performance share
plan may avoid this problem.
Typically, the initial value of performance shares is tied to the value
of the company's stock (e.g., book value). But the future growth of
these shares is tied to the company's earnings. There are numerous ways
of measuring earnings growth and applying this growth to increase the
value of performance shares.
Example: ABC, a family-owned business, awards
Tim 1,000 performance shares initially valued at $10 per share (the book
value of ABC's stock at the time). During a five-year "incentive
period," ABC measures the amount by which its earnings exceed its
earnings during a "base period" (the preceding five-year period). If the
company's earnings increase by 25 percent or more, the value of the
performance shares increases by a similar percentage.
For example, if earnings increase by 50 percent, then at the end of the
incentive period ABC pays Tim $15,000.
Restricted Stock
For companies that wish to give executives a true equity interest in
the company while protecting against undue dilution of family interests,
restricted stock may be the answer. Stock is issued in the executive's
name but is held by the company and is subject to restrictions on
voting, transferability, etc. To tie the executive to the company, the
stock becomes vested gradually over time. For example, if the executive
leaves the company in less than two years, he or she forfeits all the
stock. If the executive leaves in less than three years, he or she
forfeits 75 percent.
These are just a few examples of the many ways in which creative
companies can design incentive plans that allow executives to share in
the company's success while keeping the business in the family. If
you're contemplating such a plan, be sure to consider the tax
implications for both employer and employee. Please call or email me at cindyj@bobermarkey.com
if you would like to
consider one of these plans for your company. BMF&C
Strategies for making the
right decisions on people in your company:
- When in doubt, don't hire - keep looking. (Corollary: A
company should limit its growth based on its ability to
attract enough of the right people.)
- When you know you need to make a people change, act.
(Corollary: First be sure you don't simply have someone in
the wrong seat.)
- Put your best people on your biggest opportunities, not
your biggest problems. (Corollary: If you sell off your
problems, don't sell off your best people.)
Source: Jim Collins, "Good to Great" © 2001
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By Michael J. Moldvay, CPA, Manager
 Your most valuable customers are those who contribute significantly to
your company's bottom line over the long term. Top customers buy more
frequently, spend more money, cost less per sale and often refer other
buyers to your business.
By gathering the information needed to identify the customers who are
most profitable for you, you can make business decisions that maximize
the profit they bring you. The insights you gather will help you work
more effectively with all your customers. You should analyze data on
customer profitability as thoroughly and carefully as you evaluate the
overall financial performance of your business.
Gauging customer profitability isn't easy. Determining the profit on a
product is a straightforward assignment, but doing the same for
customers is trickier, especially for those who buy multiple products or
services.
What Are Your Customers Worth?
So how do you get a true picture of customer profitability? Don't be
satisfied with looking at periodic dealings with customers or one-time
events. Carefully examine all customer "touchpoints" - those ordinary
business functions that bring the customer into contact with your
company in the normal flow of operations.
First, do your ABCs. To achieve more profitable revenue, you must
profile your best - and worst - customers. Activity-based costing (ABC),
in which costs are assigned to individual customers, will help you
determine how much it costs you to acquire and retain each of your
customers. This is the most accepted method to determine customer
profitability.
With ABC, you use a two-stage approach to break down your business
processes into specific activities, such as order fulfillment and
technical support, and identify the costs of the resources and materials
used for those activities.
In the first stage, resource costs are assigned to activities based on
the amount of resources consumed in performing the activity. Totaling
all the resources used for an activity provides an activity cost.
In the second stage, link your activity costs to products, services or
customers based on how frequently the activity is performed.
Quality, not Quantity
Some companies that have started down this path have been surprised to
discover that a relatively small percentage of their customers account
for most or all of their profits, while the majority make no
contribution to the bottom line - or worse, erode it.
Even customers who consistently purchase relatively high-margin products
may demand so much extra attention and service that they can become
unprofitable.
Should companies try to discourage less profitable customers? The answer
is yes, but tread cautiously and be politically savvy about it. For
outright unprofitable customers, you might explore passive options of
substantially raising prices or surcharging them for extra work.
Another option is to use the information you gather to create service
programs for different value segments. In the financial services
industry, for example, customers get different levels of service
depending on the size of their accounts.
Tailor Service
Tailor service to meet a customer's individual needs. Some customers may
be under-served while others may receive more attention than they want
or need.
If an unprofitable customer is willing to pay a higher price for your
premium service, strive to move him or her to that higher level. For
profitable customers, you might be able to reduce the costs of providing
service by identifying and eliminating causes for unnecessary extra
work.
Customers who view your company's products or services as commodities
may not need weekly sales calls. On the other hand, customers who depend
on special services you offer may appreciate some extra attention - and
are often willing to pay for it.
Become Irresistible
Making people feel appreciated is easy and does wonders to boost their
affinity toward your brand. It's no secret that customers prefer to
stick with businesses that have provided them positive experiences
rather than switching over to an unknown competitor. Make sure everyone
in your organization understands the benefits of customer service.
Don't keep the customer profitability data that you collect the closely
guarded secret of the sales and customer service staff. Share what you
learn with others in the company, including marketing and senior
management. They may want to seek additional operational efficiencies by
allocating resources toward activities such as consumer marketing,
branding or equity development.
Finally, remember to keep in touch with your customers. Regularly
request, evaluate and respond to their needs.
Get To Know Them
Understanding which customers are most profitable to you is important,
but ensuring a strong relationship with those customers means
understanding how they operate and what they need from you.
You'll find that a little understanding goes a long way to improving not
only your relationships with
your customers, but also your own bottom line. If I can be of any
further assistance, please don't hesitate to call or email me anytime at
mikem@bobermarkey.com. BMF
&C
By David C. Armour, CPA, Manager
 Effective business plans are not just for startups. They are essential
for every company, no matter how large or small. Ultimately, the success
of employees and the company depends on a sound business plan.
A business plan communicates where your company is today and where you
want it to go tomorrow. Many successful companies create a three- to
four-year strategic plan with annual reviews.
A plan can be used to:
- Raise equity
- Support a loan application
- Identify desired goals
- Grow the business
- Prepare for Sale
It takes a commitment of time and effort to produce a quality business
plan. All key employees should feel they co-own the plan and are
responsible for different parts.
In a large company, key employees could include the executive team or
management staff. In a small business, key employees would typically
mean the owner and accountant, as long as they have a broad perspective
on all functional areas of the company, including such areas as sales,
customer service, operations and human resources.
In the preparation of a good plan, active participation by key parties
is essential. Without input from all appropriate employees, a plan is
likely to be ineffective and lopsided.
A Demanding Task
Writing an effective business plan is a demanding task. Business plans
are not just for your management and finance directors - they are
created for all your business' decision makers and should be living,
breathing documents reflecting the day-to-day realities of your
company's operation.
In most cases, it's appropriate to seek outside help from a consultant
who can add value and objectivity to the process. A consultant can help
you identify your goals and alternative strategies and ask the tough
questions owners may not want to tackle on their own. To find a
qualified advisor, ask your banker, accountant or attorney for
recommendations.
While it's important to dream and set your goals high, it's equally
important to be realistic, especially if you are seeking funding from a
bank or investors. If your goal is not to find funding but to motivate
employees or garner support for an objective, your business plan can
include a morale-building component.
Specific Goals
Many people do a good job of outlining the financial information in
their business plans, but fall short of establishing strategies or
spelling out goals, action plans and time frames.
For example, if your goal is to achieve a 10%
increase in profits, explain how you identified that number, why it's a
realistic goal, what action plans you'll use to reach it and, if you
reach it, what performance measures you will use to evaluate it.
Wealth of Information
A business plan includes a wealth of information but it doesn't have to
be a dissertation to be meaningful. Place supporting documents -
anything relevant to the plan, such as resumes, letters of reference,
job descriptions, leases and contracts - in the appendix.
For more information about business plans, visit the U.S. Small Business
Administration Web site at www.sba.gov.
Or feel free to call or email me
at davida@bobermarkey.com anytime.
BMF
&C
What To Include in Your Business Plan
A good business plan should be comprehensive but not so long as
to burden anyone. It should describe the business and articulate
strategies for marketing, financial management, human resources,
technology and operations. And remember that a plan is only as
good as the effort that goes into implementation.
Business Description
Explain what the business is or will be.
If you've decided on a particular location for your
business, tell why you chose that location
Describe your products and services, how
they will be produced, costs, selling price and sales
strategy.
Explain who your potential customers are
and why they would buy your products.
Marketing Plan
Describe the market you intend to serve,
including its size and your expected share.
Consider technology issues or other significant current
concerns
facing your industry.
Identify the specific market niche or niches you plan to
pursue.
Describe your major competitors and indicate what strengths,
weaknesses, threats and opportunities you have.
Explain how you expect to serve your
market better than your competition.
Examine the market's potential for growth.
Financial Plan
Describe how outside investment will help to make your business
profitable. Specify the amount requested, why it is needed
and how it will be repaid.
Include a current and pro
forma balance sheet, income statement and cash flow
analysis.
Management Plan
Describe relevant experience of management and other personnel.
Explain how and where you intend to find good employees and what you will
do to retain them.
Describe compensation plans for key employees, including benefits.
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Q What are the most important elements of a corporate security strategy to
guard against computer viruses and worms?
A Five lines of defense will reduce the threat of these problems but
nothing can completely prevent them.
-
Install an Internet firewall. This is a piece of software or hardware
that helps protect computers against intruders. Make sure it is installed and configured
properly.
-
Install intrusion-detection software. It monitors and logs any
suspicious activity on a network or individual workstations. If an
intruder makes it past the firewall, the software won't stop the activity, but will
help you identify security holes that you need to close. The information
it captures can also be used to find and prosecute hackers.
- Invest in a top-notch
antivirus program. Renew subscriptions and set software to grab virus
updates (definitions) automatically.
- Get computer updates. Service releases and patches, especially for
Windows operating systems, are critical.
- Finally, use strong passwords. Your dog's
name won't cut it. The longer a password, the better, and use different
cases, plus numbers and symbols.
Q What can the company do about eliminating spam?
A Sophisticated filters and challenge-response software are the anti-spam
weapons of choice today. Filters block suspicious e-mail before it
enters your in-box, while challenge-response software requires
recipients to approve e-mail from unknown senders before it will be
delivered.
Q What are regulatory authorities doing to combat these abuses?
A The Bush administration has released a strategy for
combating network attacks and viruses and Congress is exploring
proposals on ways to can spam. BMF
&C
In this feature of InfoLetter, each quarter we provide a profile of one
of our professionals who is available to work with our clients and
friends.
Dale A. Ruther, CPA, CIT, Partner
 Dale A. Ruther is Director of our Construction Services Group and also
serves as the partner in charge of our tax-exempt organizations
practice. Dale's construction expertise includes performance of contract
reviews, helping contractors budget for profit enhancement, job costing
systems, risk management assistance, change order control and
management, litigation support including construction claim
documentation, long-term contract revenue recognition, alternative
minimum tax planning, ownership transfer and management succession
planning, performance measurement systems, and productivity
enhancements. Additionally, Dale represents a number of manufacturing,
wholesale/distribution and franchise businesses within the Firm.
A 1981 magna cum laude graduate of Walsh University with a Bachelor of
Arts Degree in Accounting and Management, Dale was with Main Hurdman
(now KPMG Peat Marwick) from 1981 - 1982. Dale joined Bober, Markey,
Fedorovich & Company in late 1982 and was elected as a Partner in 1992.
Dale is Vice President of the Cleveland Chapter of the Construction
Financial Management Association and Past President and current
Treasurer of Evant, a non-profit organization with group homes for the
developmentally disabled. He is also Treasurer for Nazareth Housing
Development Corporation, Past President and Honorary Board Member of Big
Brothers and Sisters of Akron, a member of the United Way Community
Investment Committee and Past Instructor for Junior Achievement.
"A key to success is keeping things simple which I feel includes four
steps: planning, communicating the plan, executing and most importantly
reviewing the results. The debriefing should include everyone on the
team, be rankless and should include discussions on all successes and
failures to determine what to change next time." BMF
&C
In order to support continued growth in our practice, the Partners of
Bober, Markey, Fedorovich & Company are pleased to announce the
following additions to our professional staff:
- Raymond H. Boyd, Jr., CPA, Senior, Tax Services. Ray has three years
of experience with a national CPA firm in Akron. Prior to entering
public accounting, Ray worked as an auditor for the State of Ohio. Ray
is a graduate of Youngstown State University.
- Shay M. Music, Staff, Tax Services. Shay has two years of experience
with a national CPA firm in Cleveland and is a graduate of The
University of Akron.
Jim Merklin has been appointed to the Accountancy Advisory Board for
Undergraduate and Integrated Study Programs at the Weatherhead School of
Management at Case Western Reserve University.
Marcy Venarge has earned her Certified Valuation Analyst (CVA)
certificate.
Paula Kimmel has passed the Certified Public Accountant's (CPA)
examination.
Rick Fedorovich has been appointed to the Board of Trustees of Akron
Tomorrow. Akron Tomorrow is a local group, comprised mostly of CEOs,
that seeks to provide leadership on issues of public policy, economic
development, and the quality of life in the Greater Akron community.
Mark Bober will serve as 2004 co-chairman of the Leadership Campaign for
the United Way of Summit County.
Lori Sheets has been appointed Treasurer of Weaver Industries, Inc.
The Firm sponsored the Center of Nonprofit Excellence's program "Social
Entrepreneurship: The Promise & The Perils" on January 27th.
Paula DiVencenzo has been appointed Treasurer of the Tri-County Employee
Assistance Program.
Mike Moldvay has been appointed Treasurer of the Tuscora Park Health &
Wellness Foundation and has been appointed to the Board of Directors for
the Akron/Canton Regional Foodbank.
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