| Winter 2005 |
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INFOLETTER
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Partner's Perspective |
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How to Build a Strong Relationship With Your
Business Banker
By Dale A. Ruther, CPA, CIT, Partner
Success in business is contingent on surrounding yourself with a great team.
This includes not only your employees, vendors and business associates, but also
your team of professional advisors.
For most small business owners, this team should consist of their CPA, their
attorney and their banker - often referred to as the small business
"professional triad." Here, we take a closer look at how you can build a
successful partnership with the third member of this triad, your business
banker.
More Than Just a Lender
Many small business owners think of their business banker only when they need
to borrow money. This is a big mistake, because your banker can do so much more
to help your business than just lend money.
An experienced business banker has worked with many other businesses like
yours and can bring invaluable knowledge to the table in many areas of
management, not just financial. This includes offering a wide range of business
banking products and services, such as business checking, savings and investment
accounts; cash management services; payroll processing; online banking services;
and export financing, to name just a few.
But to take advantage of all the expertise your banker has to offer, it's up
to you to take the initiative to build a strong relationship with your banker -
a relationship based on trust, openness and honesty. To promote such a
relationship, communicate openly and honestly with your banker when things are
good and when they are bad.
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Some Do's and Don'ts
Do
- Be prepared.
- Ask questions.
- Keep your banker informed.
- Tell it like it is.
- Have a plan, but be flexible.
Don't
- Be impatient.
- Ask "How much can I borrow?"
- Make promises you can't keep.
- Surprise your banker.
- Change banks solely for a better
interest rate.
- Underestimate the value of a
relationship.
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Meeting With Your Banker
Treat your banker with the courtesy and professionalism you would any other
professional. This means calling to make an appointment when you want to meet
and letting your banker know the purpose of your meeting. It also means being
thoroughly prepared. Preparation goes a long way toward ensuring a positive
outcome for your business, especially when you're borrowing money.
One of the most basic - but often overlooked - aspects of your preparation
should be determining exactly why you need to borrow money and how much you need
to borrow. There are any number of reasons why a small business may need to
borrow funds: to bridge working capital or cash flow gaps, finance equipment or
capital expenditures, purchase real estate, or acquire another business. Be
prepared to discuss your specific need for financing and detail specific sources
of loan repayment, including available collateral.
Be aware that your banker will also probably ask you for detailed personal
financial information, such as personal financial statements and tax returns,
and will likely require you to personally sign or guarantee your loan request.
In addition to the practical, there's an important psychological aspect to this
requirement: It demonstrates your personal commitment, support and dedication to
your business and, hence, provides the bank with greater assurance of your
repaying the loan. After all, if you're not willing to take any risk yourself,
why should the bank take a risk on your business?
On the business financial side, there are a number of different kinds of
financial documents and reports your banker will probably want to see. These
generally include your past three years' financial statements and tax returns, a
projected balance sheet and income statement and a cash budget. You'll also need
to present a written business plan that includes detailed and current
information on your management, markets, customers, competition, creditors and
finances.
To be better prepared financially, keep the following points in mind as you
plan to meet with your banker:
- Keep all your corporate financial records up to date.
- Make sure your accounting and bookkeeping systems are current.
- Manage your accounts receivable and collections efforts diligently.
- Keep your federal and state tax obligations current.
- Learn and apply the art of cash flow forecasting.
The Five Cs of Credit
In your preparations, also keep in mind what bankers often refer to as the "5
Cs of credit." These are factors that your banker will pay especially close
attention to:
Character - What is the character of your company's management and
its reputation in the community and industry? How you treat your employees and
customers, how you take responsibility, and your timeliness in fulfilling
obligations are all indications of your character.
Capacity - This refers to how much debt your company can handle.
Your banker will look at various financial ratios and compare them to industry
benchmarks to evaluate your capacity to service debt.
Capital - In determining how well capitalized your company is, your
banker will likely look to see how invested you are personally in the
business. Your business and personal financial statements will help shed light
on this.
Collateral - As discussed earlier, collateral is an important
secondary source of repayment that banks will usually require from all but the
most established businesses. Most collateral is in the form of hard assets,
such as real estate or equipment. If yours is a service business without many
hard assets, you may have to pledge personal assets as collateral for your
loan.
Conditions - This refers to the current economic conditions in the
general economy and in your specific industry at the time of your loan
request. If your company is sensitive to economic downturns, for instance,
this could be a factor in your bank's credit decision.
The Role of the CPA
Finally, don't underestimate the value of having a good CPA in your corner
when it comes to building a strong relationship with your banker. Make time for
your CPA to sit down with you and explain your financial statements, which helps
you better understand your business' financial condition. This, in turn, better
enables you to communicate the information more clearly to your banker, which
builds your banker's confidence in you and your business.
If you're looking to establish a strong relationship with a business banker,
please call or email me at
dale@bobermarkey.com, or your Partner/Manager contact, for assistance. We
may be able to refer you to the right banker who can meet your company's
specific banking needs. BMF&C
Seek Options for Funding
Lifelong Learning
By Paula S. DiVencenzo, CPA, CIT, MT, Senior
Manager
 Family
business owners know the value of lifelong learning, and the
Internal Revenue Code provides businesses and individuals an
array of incentives and credits to help fund it. The difficulty
is figuring out which options are available to you. Many options
have income thresholds and other restrictions.
Businesses have several ways to assist employees with funding
education. Individuals have even more alternatives.
Section 127 Plans
Section 127 plans are educational assistance programs that allow
businesses to provide employees up to $5,250 of education
benefits tax-free annually. Employers deduct the costs as
business expenses, yet the education doesn't have to be
job-related (although sports, games or hobbies won't qualify).
Reimbursable expenses include tuition, fees, books, equipment
and supplies, and the plans cover degree programs as well as
courses or conferences.
Note that Section 127 plans cannot discriminate in favor of
highly compensated individuals, and cannot pay more than 5
percent of program benefits to more-than-5 percent shareholders
or owners, their spouses or dependents. Therefore, Section 127
is a great option when many employees participate. However, if
most of the employees in the business are family members, it may
be difficult to overcome the 5 percent requirement.
Fringe Benefit
Treating educational assistance as a working condition fringe
benefit is a common way for businesses to fund employee
learning. However, the courses must help the employee maintain
or improve job skills, and the course can't lead to the
individual qualifying for a new trade. The upside of this
benefit is that there's no annual limit, it's not subject to
nondiscrimination requirements, and the cost of travel, meals,
lodging, certain tools and supplies may qualify. It's also
possible to treat job-related education expenses in excess of
the Section 127 limit of $5,250 as a fringe benefit.
Income Shifting and Education Credits
Families have many ways to shift income to minors to maximize
college funds, from gifting under the Uniform Gift/Transfer to
Minors Act to employing the child in the family business.
Gifting stock, transferring business ownership interests and
creating trusts are also possibilities.
Other incentives are education tax credits and deductions that
are limited by income thresholds and other provisions. Section
529 plans are a popular way to shift income to college-bound
beneficiaries. With no income thresholds and relatively high
contribution limits, 529 plans also allow the account owner to
retain control over the beneficiary designation and reclaim
funds if necessary.
Interested in exploring education-funding options for employees
or family members? We can help you sort through plans,
incentives and credits to arrive at the best solution. Please
call or email me at paula@bobermarkey.com to discuss
this. BMF&C
Words to the Wise: How to
Handle Family Gift Requests
By Cindy S. Johnson, CPA,
CIT, Partner
 Bob's
cousin asks him to fund Section 529 tuition programs for her children.
Bob is wealthy, and could certainly make the contributions. But what
about his other cousins' children? If he creates funds for all of them,
he won't be very wealthy for very long. How can he nicely say no?
Susan's brother-in-law wants to open a retail franchise and asks for her
financial backing. She's really not interested, but how can she get out
of this request without damaging their relationship?
It's strange how even a hint of wealth can make you suddenly very
popular. If you're feeling besieged and embarrassed by requests for
financial aid, you're not alone. We work with clients every day who
field frequent requests from others to help them financially.
Sometimes the requests for gifts or loans come from close friends or
dear relatives, adding a difficult emotional layer to an already
sensitive situation. Other requests come out of the blue from distant
relatives or mere acquaintances. In either case, turning them down can
be tough.
We recommend that you spend time with your financial advisors
considering how you want to handle these requests. That way, when the
requests come - as they inevitably will - you will be prepared to
respond in a way that fits your own values and financial goals.
Stick to The Plan
In Bob's case, he had an easy out because he and his CPA had discussed
standing "policies" to handle gift requests - both from qualified
non-profits and from random family members. In the family arena, Bob
felt strongly about treating all of his relatives fairly. Unless he
could do for all what he did for one, he - or his CPA - would reject the
request.
Have a Go-Between
Susan also turned to her CPA for help. She asked him to run interference
for her so that she didn't have to be the "bad guy." The CPA was able to
do a quick review of the brother-in-law's business plan, check out the
franchise and assess the numbers.
The CPA was the one who ultimately let her brother-in-law know that
Susan was rejecting the investment. The third-party involvement gave
Susan some much-needed distance from the situation and a way to preserve
the relationship with her brother-in-law.
Know How to Say Yes
Every now and then, though, you may get a family request you want to
fulfill. That's fine, of course, but be aware that you may be setting a
precedent - and once word of your generosity gets out, the flow of
requests may increase.
For this reason, we recommend that before you agree to a gift, loan or
investment, you should discuss it with your financial and tax advisors.
Together, we can figure out how to fulfill the request in the most
discreet, equitable and tax-advantageous way.
We know you've worked hard to build your business, and it's our goal to
help you preserve your wealth. Please call or email me at
cindyj@bobermarkey.com
to set up a time to talk about how you can best handle gift
requests. BMF&C
The Fight Against Fraud - Beware of
New Email Scams
By James E. Merklin, CPA, CFE, M.Acc., Partner
 Email
spam is bad enough, but the latest wave of email scams has the potential
to be much worse than just annoying. Falling victim to an email scam can
cost you a lot of money, time and aggravation spent trying to repair the
considerable damage that these scams can cause.
In 2002 (the most recent year for which data are available), the
Internet Fraud Crime Center received a total of 48,252 complaints of
Internet and email fraud, a three-fold increase over the previous year.
The total dollar loss from all referred cases was $54 million, up from
$17 million in 2001, with a median dollar loss of $299 per complaint.
In the latest scam, an email is sent that appears to be from the FBI
that requests the recipient's assistance in catching a supposed "email
scam artist." The email asks recipients to feign interest in buying
products online from this person, but to actually make payment to the
person via a Western Union wire transfer, promising that the person will
be arrested by the FBI when trying to pick up the funds.
This scam is similar to another one supposedly from the Federal Deposit
Insurance Corporation (FDIC) that tells recipients that Department of
Homeland Security Director Tom Ridge has advised the FDIC to suspend all
deposit insurance on the recipient's bank account due to suspected
violations of the U.S. Patriot Act. The email further indicates that
deposit insurance will be suspended until the recipient's personal
identity, including bank account information, can be verified.
These emails are not sent by the FBI or FDIC and are fraudulent attempts
to obtain personal information or cash. If you receive either one, do
not reply to it or try to access the links contained in it, and do not
provide any personal information. You can report any incidents of emails
like these online at the Internet Crime Complaint Center at
www.ic3.gov.
According to the FBI, these scams are similar to other email/Internet
scams in the past in which recipients are directed to phony Web sites
(most often, the supposed sites of banks or well-recognized national and
Web retailers) and prompted to provide personal information.
Unfortunately, scam artists have become very adept at disguising emails
and Web sites to make them look authentic, which is one reason why this
type of fraud (sometimes referred to as "phishing") is becoming so
prevalent.
If you have any concerns regarding the risks of fraud, please don't
hesitate to call or email me at
jimm@bobermarkey.com anytime so that we
can help you mitigate those risks. BMF&C
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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.
Mary Taylor, CPA, MT
Senior Manager - Taxation Services |
Mary Taylor's experience covers a wide range of tax-related matters and makes
her well suited to identify potential tax-saving opportunities and to resolve
potential tax issues before they become problems. In addition, Mary has
extensive experience with closely-held corporations, including professional
service and construction corporations, C-corporations and S-corporations. Mary
continues to be the Director of the Pension and Benefits tax practice area for
the Firm. She is also currently a member of the Ohio House of Representatives
serving residents in southern Summit and southwest Portage counties, having
recently been elected to a second term.
Mary graduated from The University of Akron with a Master's of Taxation
Degree in August 1998. She is also a 1990 graduate of The University of Akron
with a Bachelor of Science Degree in Accounting. Mary was with Deloitte & Touche
from 1990-1994. She joined Bober, Markey, Fedorovich & Company in late 1994.
Mary is a member of the American Institute of Certified Public Accountants
(Tax Division), the Ohio Society of Certified Public Accountants (Akron/Canton
Chapter), a member of the Taxation Committee of the Akron/Canton Chapter of the
Ohio Society of Certified Public Accountants, former Chair of the Professional
Forums Committee of the Akron/Canton Chapter of the OSCPA, the Akron Tax Club,
former member of the ASPA Benefits Council of Cleveland, the International
Foundation of Employee Benefit Plans, the Akron Pension Council, and a former
member of the United Way Allocations Committee. In addition, Mary was an adjunct
professor at Walsh University where she taught accounting and tax courses.
BMF&C
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