Spring Cleaning …from the Business Perspective

1. Spring Cleaning…from the Business Perspective May 18, 2011

2. Why this topic and Why now? • Leading economists indicate we are out of the “great recession”. • There were a lot of lessons learned or to be learned from the “great recession”. • Opportunities exist for well positioned companies to prosper and expand their business presence.

3. Who are We? • Nichols Cauley & Associates, LLC – Certified Public Accountants and Advisors • William Sammons, CPA, PFS, CIA, CFP™, Managing Partner – Atlanta Office • William (Bill) McDevitt, CPA, Manager - Tax

4. A discussion of hot topics: • Balancing risks and opportunities • Utilizing risk assessments as a tool in strategic planning • Using performance reviews as an engine for meeting business goals • Budgeting, the key to tracking success • Designing internal controls to minimize risks • A “new lease on life”…lease accounting changes which will impact all businesses

6. What is Risk? • Risk, by definition, is the possibility of suffering harm or loss, which is why many see risk as an overall bad thing. However, it is not all bad because with risk comes opportunity. • Conducting business in general can be seen as a risk, and like conducting business, taking on new risks can yield exponential returns for those who manage it effectively. • The key to success is understanding the risk associated with your business. • We can first look to history to see examples of what happens when businesses fail to identify, properly manage, and even take advantage of certain risks.

7. Business Risk Versus Finance Risk • Business risk generally involves a Company’s strategic decisions other than finance. • Business risk measures the dangers of operational choices – introducing new product lines to the market, entering into merger or acquisitions, vertical or horizontal integration, etc.

8. Business Risk Versus Finance Risk • Financial risk deals primarily with the structure of the company’s finances. • Accurate measurement of risk is needed to formulate strategies and gain a competitive advantage. • Business Risk and Financial Risk go hand-in-hand. It takes a growing economy and companies using leverage to finance its operations and increase its operating/manufacturing footprint to take advantage of growth. In periods of a decline as in the recent recession it is hard to maintain the leverage because of the timing needed (and costs) of downsizing to meet the current economic trends. • Real Examples – Construction Company-Good and Bad and Manufacturing

9. Risk Management Tools • Transferring the risk to another party – i.e. insuring risk such as credit insurance or entering into a joint agreement to share the risk with another party. • Avoiding the Risk – In avoiding the risk you must understand and quantify the risk – this does not mean identifying the risk. • Reducing the negative effect of risk. • Accepting some or all of the negative risk.

10. Polaroid & IBM • Polaroid was founded in 1937 as an international consumer electronics company • The company single-handedly revolutionized the instant camera industry • Experienced changes in photography technology throughout the years • Failed to position itself in digital imaging and lost its drive for instant photography • Filed Chapter 11 bankruptcy in October 2001

11. Polaroid & IBM • IBM was founded in 1911 as a computer systems and hardware company • It came to revolutionize the computer technology industry • Effectively adapted to technological changes throughout the years • In 2010, was ranked the 20th largest firm in the U.S. by Fortune and the 33rd largest globally by Forbes

12. What happened? • Polaroid was a globally successful brand, but it failed as a corporate entity due to the inability to recognize the need to adapt to the changing market. The company did not anticipate the magnitude of risks associated with the digital revolution. • On the other hand, IBM positioned itself to thrive off of the technological changes the future brought and was on the forefront of leading the world into the digital age.

13. Risky Business

14. Risky Business • Because of the economic downturn, many businesses believe they cannot afford to take risks or even invest in risk management. Won’t it just increase costs, bog me down, and make me less competitive? • It should be understood that effectively managing risks will make your business more flexible and competitive. As noted before, this is one of the things Polaroid failed to do. • With the worst of the recession over, economists are projecting a new economic season of growth and recovery. • The recessionary business strategies of cutting costs, shrinking operations and inventory, and minimizing risk have served their purpose in allowing companies to survive through the recession. Now, it’s time to look forward.

15. How Full is your Glass?

16. Out with the old, in with the new • With the future looking brighter, it is time for companies to throw out their old strategies (or relook and redefine) to make room for the development of new strategic visions. • Executives need to capitalize on the opportunities presented in this new economic season and promote future growth and success. • Risk represents opportunity, and avoiding risk means avoiding opportunities, which, by definition, is a risk itself. In other words, risk can be a good thing! • Those who choose to take on new risks now present themselves the possibility of exponential returns.

17. Mapping your business risk • Risk must be assessed in the overall context of business strategic planning. • A strategic risk management approach will help identify the core processes that drive a company’s earnings. • This approach allows you to monitor both internal processes and external events to ensure risk and reward are continually rebalanced. • Risk can and should be quantified. • From there, you can generate a strategic vision of where you want your company to be in the future and develop a detailed road map to guide your business toward making that vision a reality.

18. Strategic risk management • To incorporate this strategy, businesses must take several steps: • Prioritize the earnings drivers most susceptible to changes in the risk environment • Identify infrastructure (people, processes, practices) most essential to those earnings drivers • Find the critical areas on which all of the others depend and identify the weak spots • Develop adaptation/response strategies for decisions to accept or reject risks/opportunities • Finally, monitor the risk environment on a continuous basis and make changes accordingly.

19. Balancing Risks and Opportunities

20. Balancing Risks and Opportunities • Businesses must make informed and rational decisions about the risks and opportunities they want to undertake in pursuit of their strategic vision. • Aligning strategic planning and risk management processes can allow organizations to achieve a competitive advantage. • However, it is important to understand how much risk you are willing to take while understanding how you plan to balance risks and opportunities.

21. Balancing Risks and Opportunities • An appropriate level of risk appetite and tolerance must be established and defined by management. • From here, it should be communicated to the rest of the organization. • Risk appetite and tolerance must be updated constantly to adapt to changes in the company’s external environment, strategy, and performance.

22. Balancing Risks and Opportunities • Important risk targets can be monitored and managed by using indicators that are linked to key performance indicators. • Integrating risk factors and risk management into the company’s performance management tool is an effective way to measure and monitor risk and performance at the same time. • A healthy risk appetite used in conjunction with performance management tools can be a great basis for balancing opportunities and risks.

23. Considerations in the Strategic Planning/Initiative Execution Process • Regardless of the Strategic Vision of Your Company proven tactics for achieving your goals include: • Setting clear and concise targets • Creating a clear structure • Maintaining energy and involvement throughout the organization and • Exercising strong leadership

24. Most Important in Strategic Initiative Accomplishments • According to Forbes Article (McKinsey Quarterly), What Successful Transformations Share, April 18, 2010 the most successful transformations included: • Importance of engaging employees collaboratively throughout the Company and transformation journey. • Building capabilities – especially leaders. • Focusing on Strengths and Accomplishments, not just problems, through the entire process.

25. Performance Reviews

26. Performance Reviews • Performance reviews are an opportunity to assess the strengths and weaknesses of your employees – This is what most people think in the employee performance review process. This is a short sided approach which will often yield few results to the overall performance of the Company. Alternatively consider each Performance review to be meaningful in helping the organization achieve its strategic initiatives though employee reviews. • This will help identify how each employee can best fill particular roles in the strategic vision you have developed for your business. • It can also be seen as an opportunity to communicate the strategic vision as well as the benefits of taking on particular risks to the organization.

27. Performance Reviews • This review process also serves to reiterate the importance of each employee’s role in the strategic vision you have set and the rewards that can be attained by helping achieve that vision. • From an employee’s stance, performance reviews serve to develop goals for that individual and tend to instill a sense of ownership in the company’s vision. • Most importantly, it aligns organizational activities and processes with the goals of the organization. This realignment is crucial for taking on the new risks/opportunities that will present themselves.

28. Performance Reviews • Rules of Engagement • Be in writing • Involve others in preparing (we have experienced better reviews, feedback, and results with more input from including others in the evaluation process) • Be timely • Ask for feedback • Clearly articulate Company Goals and Vision and how their role plays into this success. • Set goals • Establish opportunity for future feedback

29. …the key to tracking success

30. …the key to tracking success • Budgeting is the key to tracking your progress and evaluating your success in achieving the company’s strategic vision. • It provides important insight into areas where the strategic plan may need adjustments or tweaking. • Identifying these strategic missteps can allow you to make strategic changes sooner rather than later. • An effective tool for saving time and money or identifying areas in which more time and money may be needed to achieve top-line results.

31. …the key to tracking success • Budgeting can also prove to be an important tool for providing insight into areas where new opportunities exist for your organization. • A carefully designed budget is an integral part of your strategic roadmap. • It can align the broad ideas and concepts of your strategic vision with a set of quantifiable financial goals as well as a financial blueprint of how to achieve that vision.

32. …the key to tracking success • Although significant time and effort are required to properly construct budgets, you will find the benefits outweigh the effort put into the process. • As we know, budgets translate your strategic plan into actions, but a number of additional benefits exist as well. • The most successful budgets we see are those that are a living document as opposed to a static one time a year budget.

33. Benefits of Budgeting • Serve as your formal financial plan • Combined, your strategic plan and budget can project your goals for one year, five years, or even twenty years. • Establish benchmarks • Budgets allow you to see what you must do to have the resources available to meet your financial goals and stay in line with your strategic vision. • Help identify deviations from your vision • When these benchmarks are not met, your budget serves as the tool to determine why so you can make adjustments before it can negatively affects your entire business.

34. Benefits of Budgeting • Reinforce accountability • Your budget can reinforce accountability by establishing a record for the goals you have set. The reasons for variances can then be used to resolve problems effectively. • Help allocate resources • Use your budget to prioritize those projects that most fit your strategic plan based on the resources available.

35. Internal Controls

36. Internal Controls • What should companies think about regarding internal controls? • As you undertake new opportunities, you will always face a level of risk. As you know, without risk, there is no reward. • Carefully designed internal controls can provide a means to minimize and mitigate the risks these new opportunities bring to your company.

37. Designing Internal Controls • The process of identifying and implementing these controls should be incorporated in your risk assessment procedures. • The process will also serve to further your knowledge and understanding of the business and its related risks. • These internal controls should be carefully designed and communicated to all levels of the organization. • They are only effective if everyone in the company follows them.

38. Designing Internal Controls • To ensure everyone is on board, lead by example and set a tone at the top that highlights the importance of the controls. • Tie in the big picture by aligning them with and relating them to the company’s strategic vision. • Implementing, following, and reviewing an effective set of internal controls today will position your company to capitalize on the unique opportunities presented to you during this economic season of growth.

39. Final thoughts • Risk is all around you and your business • The best way to deal with it is to use risk and risk mitigation tools to your benefit • Capitalize on the unique opportunities the current economic environment presents to your company • These tools will allow you to understand the risk your company operates in and use it to prosper in the future • Create a strategic plan – indentify goals which will make your Company more profitable • Re-engineer your employee performance evaluations – Don’t fall back into the same old routine • Budgeting – don’t just dust off last years model – align with your established strategic vision – use key performance indicators – make your budget a living document.

40. Tax Advantages – Credits for the Growing Business May 18, 2011

41. Begin Positioning Your Business Now To Take Advantage of Tax Credits WOTC • Congress has extended and enhanced a federal tax credit for private-for-profit employers called the Work Opportunity Tax Credit (i.e.,WOTC). • During 2011 employers can hire from the following targeted groups to qualify: • Qualified TANF (Temporary Assistance for Needy Families) Recipients • Qualified Veterans • Qualified Ex-Felons • Qualified Vocational Rehabilitation Referrals • Qualified Food Stamp Recipients • Qualified Supplemental Security Income (SSI) Recipients • Qualified Long-Term Family Assistance Recipients

42. Begin Positioning Your Business Now To Take Advantage of Tax Credits WOTC (Continued) • For 2011 qualifying employees, WOTC can be $2,400 for each new hire up to as much as $9,000 for each long-term TANF recipient. • Before the employer/taxpayer can claim the federal Work Opportunity Tax Credit on its federal tax return, the employer must request and receive certification from its state workforce agency (which in Georgia is GA Department of Labor).  The purpose of this request is to certify that the new hire is a member of one of the WOTC target groups. • To request certification, the employer should have the job applicant complete page 1 of the IRS Form 8850 “Pre-Screening and Certification Request for the Work Opportunity Credit” by the date of the job offer, and then the employer themselves complete page 2 of the IRS Form 8850 once the person is hired. • The employer should also have the job applicant complete the US Department of Labor Form ETA 9061, “Individual Characteristics Form” by the date of the job offer.

43. Begin Positioning Your Business Now To Take Advantage of Tax Credits • Immediately upon hiring the individual, the employer should send via registered and return receipt mail both the original (no copies accepted) signed/dated IRS and ETA forms to the state workforce agency’s WOTC coordinator no later than 28 days after the date of hire.  • The Mailing Address for the GA Dept of Labor WOTC Coordinator is: WOTC Unit 148 Andrew Young International Boulevard Atlanta GA 30303 • For further questions, one can also call the Georgia Dept of Labor WOTC Coordinator at 404-656-3157.  They are very helpful over the phone.

44. Begin Positioning Your Business Now To Take Advantage of Tax Credits R&D Credit • Another popular federal and state credit available for 2011 is the Credit for Increasing Research Activities (i.e., R&D Credit). • If your business is spending considerable time and money to develop new products and or processes, these activities may qualify as increasing research expenditures leading to significant tax credits. • Successful claim of the credit requires the company to identify and track qualified research activities and the expenses associated with these activities. Project based accounting (versus cost center accounting) should be set up now to provide a tracking mechanism to adequately document the nexus between qualified research activities and their related costs.

45. Begin Positioning You Business Now To Take Advantage of Tax Credits GA Retraining Credit • 50% of direct investment in retraining full-time employees, up to $500 per employee per approved training program per year; with a cap of $1,250 per year per full-time employee who has completed more than one approved retraining program. • Credits claimed, but not used may be carried forward 10 years. • Training programs must be approved by the Technical College System of Georgia and be for quality and productivity enhancements and certain software technologies. • The credit can be used to offset up to 50% of a company’s state corporate income tax liability.

46. Begin Positioning You Business Now To Take Advantage of Tax Credits • See GA Tax Credits handout for details of other available GA Tax Credits.

47. The New and Improved Lease Standards? May 18, 2011

48. A new lease on life

49. A new lease on life • The lease accounting models currently in place have come under much criticism for failing to meet the needs of users of financial statements. • Certain criticized aspects include: • The distinction between operating (rental contracts) and capital leases • Omission of relevant information regarding rights and obligations that meet the definitions of assets and liabilities • Lack of comparability • Undue complexity regarding accounting treatments • Accordingly, the FASB and IASB initiated a joint project to develop a new approach to lease accounting to ensure assets and liabilities arising under leases are appropriately recognized.

50. A new lease on life • It will apply to all companies that lease plant, property and equipment. • Consider – airlines, transportation companies, multiple site retail companies, etc. • According to some estimates the new rules could bring $1.2 trillion of leased assets onto corporate balance sheets.