We have highlighted a few of the key aspects in the JOBS Act and commented on their impact on public companies and their requirements:

What are key aspects of the JOBS Act?

• Establishes a new category of public company referred to as “Emerging Growth Company” (EGC). This new classification is available to qualifying issuers for a five-year period after IPO (IPO on-ramp period).
• Exempts the EGC from certain public company requirements during the on-ramp period. For example:
• Provides more than two years of audited financial statements and selected financial data in its IPO registration statement.
• Adopts new or revised accounting standards effective for public companies (private company effective dates apply)
• Gives private companies greater access to capital:
• Increases the number of record holders that trigger public registration obligation to 2,000 investors (accredited investors, except for bank issuers) from 500 investors.
• Allows small investor “crowd-funding” limited to $1 million within a 12-month period; “Crowd-funding” refers to raising equity capital from multiple small investors (e.g., equity sales via internet, subject to caps based on investor net annual income/net worth) without adding to the record holder count.

What qualifies an issuer for “Emerging Growth Company” status?

• Revenue test: less than $1 billion in annual gross revenues during the most recently completed fiscal year.
• Cease to qualify during on-ramp period, when:
• annual revenues exceed $1 billion, and/or
• market capitalization exceeds $700 million thus deemed to be ‘large accelerated filer’, and/or
• issued more than $1 billion in non-convertible debt during the previous three year period.
• Effective date: first sale of common equity securities, pursuant to an effective registration statement, must occur after December 8, 2011 (cannot qualify if on or before this date).
• Determination date: issuer must qualify as an EGC at the time of submitting a confidential draft registration statement and each subsequent amendment submitted confidentially.
• Issuer must also determine whether it qualifies at the time it engages in permissible test the waters communications.
• Disclosure: issuer should disclose EGC status on the cover page of its prospectus included in both its confidentially  submitted draft registration statement and in its publicly filed registration statement.

What is the impact on SOX requirements?

• SOX 404(a) – management’s assessment requirement for internal controls over financial reporting remains applicable.
• SOX 302/906 – CEO and CFO quarterly certifications remain applicable.
• SOX 404(b) – EGC is exempt from auditor attestation requirement for internal controls over financial reporting (JOBS Act, Title I, Section 103).
• SEC Division of Corporate Finance Staff has indicated EGCs should consider discussing their status and related risks, including exemption from SOX 404(b) auditor attestation requirement for internal controls over financial reporting, in confidentially submitted draft registration statements and in publicly filed registration statements.

What are some of the concerns for investor protection?

• Not requiring SOX 404(b) compliance (auditor attestation) for EGC issuers will decrease the rigor around internal controls over financial reporting and disclosures.
• Enabling submission of confidential drafts of IPO documents to the SEC decreases investor transparency.
• Exemption from new accounting rules will lead to disparate financial reporting.
• “Crowd-funding” investments will create an opportunity for fraudsters to take advantage of this leniency in raising funds.

What’s next?

• Private companies need to consider how the JOBS Act affects their plans for accessing private or public market capital, and whether to opt in or out for ECG status, if qualifications are met.
• Reference should be made to the JOBS Act H.R. 3606 available at http://www.govtrack.us/congress/bills/112/hr3606.
• Reference should be made to the SEC Division of Corporate Finance Staff’s recent and forthcoming additional guidance available at http://www.sec.gov/divisions/corpfin.shtml.

 About the author:

David Roe is the Director of Bridgepoint Consulting’s Governance, Risk and Compliance practice that provides companies with internal audit and SOX services. If you have questions or would like more information, please contact him at 512-437-7903 or DRoe@BridgepointConsulting.com.

We wish each finalist the best of luck and are proud to be affiliated with such innovative leaders!

Dan Graham, BuildASign.com

Glenn Garland and Jim Stimmel, CLEAResult

Allen Gilmer, Drilling Info, Inc.

Brian Sharples, HomeAway, Inc.

Jonny Jones, Jones Energy Ltd

John Arrow, Mutual Mobile

Kevin Cunningham and Mark McClain, Sail Point

The discussion covered recent topics and trends in fraud prevention and detection. Dave Holody, Freescale Director of  Internal Audit and his security and fraud team provided insight and examples of their challenges and approach which contributed to a interactive discussion among the group.

Highlights of these discussions:

• Fraud is an issue that organizations always have to deal with. Estimates by the Association of Certified Fraud Examiners (ACFE) are that organizations experience fraud of 5-7% of top line revenue on average. If you think your organization doesn’t have fraud issues, you’re kidding yourself.
• Potential types of fraud include, but are not limited to,:
  • Cybercrime – IT system access
  • Intellectual property
  • Cash misappropriation
  • Kickbacks and bribes
  • Financial reporting misstatement

Best Practices:

• A formal Fraud Risk Assessment process with frequent updates is critical to understanding the fraud risks and audit coverage needed; the ACFE fraud risk assessment framework was used by several audit professionals
• Develop a formal continuous monitoring program
  • IT systems – continuous monitoring of security and access  control effectiveness
  • Data Analytics – develop continuous monitoring scripts for identifying unusual and suspicious types of transactions

• Increase automation of key processes and controls to mitigate manual adjustments/intervention
• Watch for and immediately investigate large/unusual downloads of data
• Difficult employee terminations – be aware of any malicious or vindictive behavior
• Deterrents internal audit functions have deployed –
  • New hire and annual acknowledgement by existing employees of having read Code of Conduct and responsibilities for reporting unethical/potential fraudulent behavior
  • Issue routine communications to increase  employee awareness of your Fraud programs, including summaries of fraud findings – situation and outcome (e.g., newsletter)
  • Provide whistleblower/ethics hotline ready access to employees, vendors and customers for reporting of known or potential fraudulent behavior
  • Routinely “walking the halls” and asking questions about the business creates awareness even if it’s not specific fraud inquiry
• Implement training program for the Audit Team on Fraud prevention/detection skills
• Establish and execute a formal documented process for timely coordination with internal and/or external  investigators and legal professionals, leading to prosecution for actual fraud occurrences

The presentation and discussion included:

• overview and history of SOX;
• new requirements;
• external auditor expectations;
• IT security issues and challenges in a “cloud computing” environment;
• common challenges and benefits for Emerging Growth Companies (ECGs) as defined by recent passed legislation;
• leading practices and methodologies.

Resounding themes discussed by the group for successful SOX implementation included:

• Organizational buy-in to implement and sustain an effective SOX program;
• Start SOX readiness early – it always takes longer than anticipated;
• Apply top-down, risk-based-approach focusing first on pervasive entity-level and IT internal controls over financial reporting and disclosures;
• Identify key internal control design gaps and deficiencies timely for remediation; and
• Involve your external auditor throughout the process.

For more information, please contact David Roe, Bridgepoint Consulting Director of Governance, Risk & Compliance at 512-437-7903 or Droe@bridgepointconsulting.com.

Throughout my career, I’ve seen all kinds of corporate hiring approaches—many simple and straightforward—others strategic and methodical. Panel interviews. Formal PPT presentations by candidates to management teams.  Even three hour tests that many an MBA can’t pass.

The following is a compilation of some key reminders, insights and lessons learned to help ensure a successful, pain-free hiring experience.

Planning the Hire

A hiring process that is well scoped and organized on the front end can pay huge dividends in the long run.  Many times employers underestimate the impact of planning, organization, internal communication, and setting a realistic timeline for the interview process.  It’s critical that the department has all their “ducks in a row” before starting the process, or it could result in wasted
time, effort, and resources with an uncertain end result.

Ready or not? If a company is not ready to hire full-time or commit to the position, I often recommend considering an interim consultant for the role. This can remedy short-term needs while also giving the organization time to fully vet the scope of the position. As we see in many cases, the consultant may become so ingrained within the organization that they are asked to join on a full-time basis.  Additionally, an experienced consultant may even provide valuable insight about the job in which the
decision makers weren’t previously aware.

Newly-created positions. If the position is a new one, make sure that all decision-makers agree on how the position will fit within the company’s priorities. Focus in on the job description and analyze how each credential, skill or personal quality fits into your company’s operating structure. If the
stakeholders are in agreement and there is an accurate perception of what is needed for the job, a company is more likely to identify professionals who fit the bill. If you are still working out the job description, budgeting for the position, organizational structure, or other politics, you are better off waiting to start the hiring process until that is complete.

Existing positions. If the opening is for an existing position that has proven to be essential over time, the hiring process can go relatively smoothly. The budget is set. The job description is in place. And the office and computer are ready to go. There may still be a few “bugs” in the system though, that should be overcome before posting the job or calling the recruiter. For instance, if the previous person in the role was terminated, had performance issues, or expressed frustration prior to leaving the company, management should take a long look at the challenges the position faces on a day-to-day basis to ensure that expectations for the position are realistic and that the support structure is adequate. A recent example I encountered was a client that had three different Senior Accountants leave the same position within a two-year period.  In that case, I recommended the hiring manager take a step back and re-evaluate the internal and external challenges for the position.  While this set the search timeline back about a month, my client was able to address some major challenges with the position and actually modified the job description and requirements.

Two Critical Virtues:  Patience and Timing

In my experience as a Finance/Accounting Executive Recruiter in the Austin metroplex, I’ve seen that companies are all across the board when it comes to the timeline for filling a position. A candidate might be hired on the spot, or it could take six months to fill a position.  Most companies aim to fill an advertised position within 30 to 90 days of a job’s posting.  Generally, a Staff/Senior level position
should be filled (offer accepted by candidate) between two to five weeks of the search officially beginning.  Mid-level roles (Finance Manager, Assistant Controller, etc.) on average take four to eight weeks to close.   Corporate Controller, Director, and VP positions take the longest, for good reason, and
this lag is created not only by the challenge of identifying the right person to hire, but also a more thorough interview process.

Can time be the enemy? The number one frustration I hear expressed from both candidates and clients is that it’s taking too long to pull the trigger.  No matter what level of position, it’s in the candidate’s and company’s best interest to make sure they are, in fact, hiring the right person for the job. You don’t
want rush to hire someone and have them wash out in six months, which I have seen happen on occasion when a company fails to take the proper measures.  On the flip side, when does process and due diligence overkill kick in and time become the enemy in a search?

Small company situations. Overall, small businesses are generally lighter on their feet when it comes to hiring, even with the challenges imposed by limited HR & Internal Recruiting resources.  At Bridgepoint, many of our clients are indeed in the start-up or small company demographic.  The value we are able to bring to these types of companies extends far past simply locating the person for the job.  In many cases, we are truly able to create and manage the hiring process, and this provides the opportunity for us to instill and train best practices within the client organization.

Large company challenges. While large companies might be able to afford tools that make their talent identification process easier – such as specialized recruiting software or advanced resume databases, a full-scale HR team or external recruiting fees built into the budget – they often have a lot more red tape to cut through before they can formally make a job offer.  This might include strict rules regarding
internal advertising for the position, more defined salary ranges, or a complicated bureaucracy that needs to sign off on the final candidate. They’re also more apt to conduct personality and skills assessments, extensive background checks, and drug tests, which may add a week or two to the process.

How long is too long? In my experience, when a search goes over 90 days, it’s generally a sourcing
issue.  I see this scenario when the position is very specific and technical in nature, or when a company is out to find a “rock star”, the best of the best in the market, so to speak.  I think it’s admirable for an organization to set it’s standards high; however, when doing so, it should also recognize that an enhanced talent identification approach will be required.  Some of the searches Bridgepoint Recruiting
has engaged in during the last year or so have been openings that the client company had been trying to fill for 3-4 months before turning it over to us.  The sourcing challenge the company faced was
due to the fact that the top potential candidates for the job were not actively looking, applying for jobs, or currently networking.  The top candidates were busy working at their current jobs, and had to be proactively vetted by a recruiter who knew where they were “hiding”.

Managing the patience of candidates. While not always the case, in general, companies don’t do a good job of clueing candidates into how long they plan on taking with their search, and also about their status in the process.  Advice I give to companies doing the slow hiring: Professionals understand challenges; they may not understand procrastination or avoidance.  Try to keep the communication as direct and upfront as possible, without giving away all of the cards you need to hold tight in any hiring process.

Candidate advice.  Here is the advice I give to candidates involved in a lengthy interview process with
a company hesitating to move forward:  Make the assumption that they are not sold on you. That doesn’t mean they won’t eventually come around, but you need to go out of your way to show them that you are the top candidate, rather than playing the wait-and-see game.  Assume that there is one person at the company who wants to keep looking, probably someone in the hierarchy above the hiring manager. So go to the hiring manager and ask what you need to do to win over the indecisive executive. It may include proactively writing a plan for transitioning into the job, or asking an influential professional reference to contact the executive.  In cases where indecisiveness is creating the time lag, I try to encourage both the hiring managers and the candidates to meet again, even for 30 minutes over coffee.

Wrapping It Up—Time to Hire

Here are a few pointers that will position your company “a step above the rest” by promoting an efficient offer process, communication with top candidates, and on-boarding the chosen candidate once an offer is accepted.

1. 1. A critical principle of hiring is to keep the time between the final interview and offer short. Keep the momentum going.  History has shown time-and-again that if you extend an offer to the chosen candidate in a timely manner, you are likely to get a positive response. If the lapse between interview and offer is too long, candidates will develop anxiety and puzzling interpretations of the process.  Put your organization at the head of the pack by making your process efficient. Reap the rewards of careful planning, which will give you every advantage in the offer-and-acceptance process. A hiring manager should iron out the details of the upcoming offer’s salary range, bonus target, benefits, etc. prior to conducting interviews. This way, you can minimize delays due to organizational bureacracy that typically affect the production of an offer letter.
2. 2. Stay in touch with runner-up candidates that you identify as competent, who also possess the “soft skills” to fit your company culture. Send them brief updates from time-to-time (networking for the purpose of networking never hurts, and can pay off for you personally in the future, too). Notify them of significant company successes.  Keep the channels of communication open and their interest in company alive.  You never know when you may need to contact them again–for referrals or to gauge their interest in a new opportunity. Good relationships mean good business.
3. 3. Once a candidate accepts an offer, as a hiring manager, you should make it a point to create a direct line of communication.  Be open to questions, and try to explain any internal politics before they arrive.  Inform the team of the hire.  Prep their staff, direct reports and supervisors so that the team will receive them openly and with positive expectations. Be upfront about your expectations and the candidate’s readiness to deliver measurable results.  Also, do not forget the little details.  Make sure that all office equipment and furnishings are in good working order.  Complete as much paperwork as possible before the new hire comes on board.  Introduce him or her to the team via email or in-person by organizing a lunch — before the start date, if possible.

Communication: The Secret Weapon

If I had to pick one word to summarize the most important component of the hiring process, it would be communication. Communication with key stakeholders to create the best job description. Communication with department employees so they feel like they are part of the process. Communication across company channels to identify obstacles. Communication with candidates throughout the hiring process. Excelling in the communication aspect in all stages of the hiring process will give your company a competitive advantage when seeking out the top talent in the marketplace.

About the author: Spencer Epley is the Executive Recruiting Manager at Bridgepoint Consulting, an Austin-based finance, management and IT professional services firm. He has more than six years of
experience placing finance and accounting professionals in the greater Austin area, and is a former CPA with a Big Four accounting firm. He can be reached at sepley@bridgepointconsulting.com.

Bridgepoint Consulting friend, Jim French, Office Managing Partner of PwC in Austin, spoke to an audience of 30+ local CFO and financial execs at Bridgepoint’s CFO roundtable on March 8, 2012 about pending revenue recognition standards that are scheduled to be rolled out by 2015. He did a great job informing the group about the proposed new model, including what the significant changes are, and how to prepare for them.

A little background:
The core principle of revenue recognition is to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. Simply put, however, current revenue recognition rules are very cumbersome, inconsistent and hard to manage. Therefore, the FASB and IASB created a task force in 2002 to address the challenges of the current standards. Their goal was to create one universal standard for revenue recognition, applied to all industries and capital markets. It was agreed upon that the new revenue recognition standards be principles-based versus the current rules-based model. The new standards are also intended to include: enhanced disclosures, a robust framework, clear principles and comparability measures across industries.

Revenue recognition changes – significant or not? There is a broad scope of changes for different steps in the new process. In some instances, there will be little modification to existing practices. However, in other cases, there will be major changes that finance execs may consider good or bad. The following outlines the decision process that will need to be followed. Each step includes a high level description, including the significance of change compared to current practices.

Step 1: Identify the contract with the customer.

It is a single, contract-based asset/liability model. The contract may be written, verbal or implied based
upon customary business practices.

Level of change: Elimination of written contract will have interesting ramifications, but otherwise not
major changes.

Step 2: Identify the separate performance obligations in the contract.

More items may be identified and separated as promised goods or services (for example: loyalty points, free product or discount on future sales, service-type warranties, in-transit risk of loss coverage, when and if available software upgrades, etc.).

Level of change: The results may vary for this. This may allow for earlier recognition of revenue that
previous guidance allowed.

Step 3: Determine the transaction price.

Judgment will be required to assess the components of the transaction price including estimates of variable consideration and whether a significant finance component exists when recording initial revenue.

Level of change: Expected contingent consideration anticipated to be paid included in initial recording
of revenue rather than subsequently when ultimately realized.  Collectability will no longer be a hurdle of
recognition and will impact gross margin.

Step 4: Allocate the transaction price.

Price for each component of transaction will be determined based upon estimated selling price of each
component. The hurdle for estimating sales price for various components is no longer dependent upon VSOE. Application of the residual approach will require judgment and is limited to cases when the standalone selling price of goods or services is highly variable or uncertain.

Level of change: Determining sales process for various components will be easier under new rules.

Step 5: Recognize revenue when a performance obligation is satisfied.

Revenue recognized when the customer obtains control over the promised item. In certain cases, revenue is still recognized over a period of time. It is expected that some entities will recognize revenue earlier under the proposed guidance because they will be able to recognize amounts before all contingencies are resolved if the entity has predictive experience.

Level of change: The current model is now based on control of the “asset” being transferred. Introduction of “reasonably assured” constraint.

During French’s presentation, the following were also identified as items creating significant levels of change in to the rules:  Onerous losses; Licenses – recognition based on transfer of control; and Disclosures, which will be much more extensive.

When will new rules take affect? It is anticipated that new rules will be applied beginning January 1, 2015 with retroactive application to as early as 2013!

So what should you be doing now? According to French, awareness and preparedness are essential for implementing new revenue recognition standards. Given the timeline, companies should be thoughtful and measured in their approach as they consider this complex challenge. Below are his suggestions on what you should be doing now to prepare for a successful transition:

• Perform a high-level assessment to determine significant impacts on your company
• Educate key stakeholders, including investor relations, the board and audit committee
• Consider impact of the new rules upon major company initiatives including processes, systems, and compensation plans
• Consider impact on strategic business initiatives such as changes in bundling, pricing, go-to-market strategy, new product and service offerings

 A few years ago, “cloud” or Software As A Service (SaaS) offerings, were limited to a few  solutions such as Salesforce, ADP and Quickbooks online. These solutions were effective for smaller businesses or for a point solution, but still left a void for larger enterprises.

 Based on our experience the last two years, Bridgepoint has seen increased client demand for true enterprise solutions that are cloud hosted. It seems that over time, our clients’ “willingness to consider” has turned into “an insistence on pursuing” a cloud solution. In fact, in several recent system selection engagements, our clients have opted to limit their choices exclusively to cloud solutions over the alternatives.

 So why is the cloud so popular and what are the benefits? Our clients consistently have sited the following reasons for preferring a cloud solution:

• Ease of deployment – no hardware, no network. All you need is an internet connection and a browser.
• No maintenance – the system is maintained and supported by the software vendor
• IT staff focus – many organizations use their IT resources to develop technology that they sell. These revenue producers must focus on external projects.

Sounds great, but what’s the catch? Well, yes, there are also some concerns to consider with cloud solutions:

• Security – how can I be sure that my sensitive sales, customer and financial data is protected?
• Functionality – cloud solutions tend to be less functional than their on-premises competitors
• Integration – mature organizations may have many internal solutions that need to talk to the enterprise system

Is a cloud enterprise system the right solution for you?

The only way to know for sure is by conducting a careful and broad assessment of the current market alternatives and evaluating them against your specific needs.

Be a hands-on leader. The CEO has significant challenges to confront in this environment, with both employees and external third-parties looking for assurances, guidance and direction. The CEO must lead by example.  It is important to demonstrate intellectual honesty and facilitate an understanding of the company’s current reality, and not allow management to swim in the river of denial.  Optimism can be valuable, but a misguided focus about better times or an unrealistic future recovery may paralyze the organization and impede real focus on solutions.  Leaders must think strategically about what the company needs to accomplish now and convey a clear vision. They must promote the development of ideas and creativity among the management team. Status quo is not an option. Company leadership must motivate people towards action with active, hands-on leadership, and cannot do so sitting behind closed doors or by merely sending emails.

Communicate, then communicate more. A sense of urgency to address the company’s challenges must be conveyed both to the leadership team and downstream in the organization.  It is not business as usual.  Ongoing programs and initiatives must be reevaluated, while new initiatives and an execution plan must be developed.  Decisions regarding realignment may have to be made with limited or imperfect information. Some mistakes may be made, but incremental successes with ongoing adjustments are better than inaction.

The CEO must lead the change and motivate everyone to step-up.  They must encourage the team to go beyond any fears and envision a stronger future.  An immediate, not tentative plan should be crafted; speed of implementation and execution matter.  There can be no sacred cows with respect to people, products, divisions, projects or processes; everything must be reevaluated for its impact on short-term liquidity, and it may require some measure of pain.  Managers that are not up to the task of critical thinking, reengineering or implementing change are often part of the problem, not the solution.  Difficult decisions may have to be made, or the business will be at risk.  Keeping all stakeholders up to date is critical, and promotes credibility.

Time for assessment.  Realigning the company’s strategy requires an assessment of the financial and operational condition of the business.  The first step in crafting a realignment plan involves an assessment of the sources and uses of cash, timing of each, and an analysis of real profitability.  Information reporting in this regard is essential.  If sufficient, detailed reporting is not being produced or available, then the CEO must ensure finance and IT personnel work together to generate the desired information quickly.  This is not a task force assignment to install new systems or design the most comprehensive reporting.  It is an urgent collaboration of key personnel to determine what can be produced to give management critical information necessary to make the required assessment. It is imperative this information be centralized and controlled by the finance department, which already understands reporting integrity and cost allocation issues.  Reports generated by department heads are often less reliable and may not contain critical elements of related revenue and expense.

The devil is in the details. It is also important that reporting information be detailed enough to enable management to evaluate profitability, cash requirements and trends of each product produced, each store managed, each operating plant, each service provided, each office location, each project constructed, each division, and so on.  Leadership must be able to take a fresh look at each of these and see what is profitable and what isn’t, what is consuming cash versus throwing off cash, and assess what positive or negative trends are likely to continue in the near term.

Working capital is critical too.
It is not sufficient to analyze only revenue and expense.  Working capital components and other elements of the balance sheet are equally important.

Inventory – The amount of inventory required to produce a product, as well as slow-moving or obsolete inventory, can materially impact the company’s liquidity. Inefficient inventory turnover can be due to deficient IT systems and reporting in tracking inventory, overbuying related to purchase discounts, excessive SKU’s, and inadequate gauging of promotion response, among other things.  Excessive inventory levels creates many costly issues and can lead to increased warehouse space, higher shrink, spoilage, markdowns and margin erosion.

Inventory needs to be reduced, or liquidated at a discount in the case of slow moving or obsolete products and converted to cash. Additionally, SKU’s should be reduced to what generates the
most revenue.  Just-in-time inventory tracking and ordering processes should be implemented, together with a strategic sourcing program, where practical.  EBITDA improvements will be realized through all of these measures, however, attaining these benefits may require additional expenditures in the form of IT and systems investment.  The return on such related costs will be realized through increased analytical capability, enhanced visibility of gross profit by SKU, improved order accuracy and reduction in space and payroll requirements.

Accounts Receivable –  Accounts receivable collection efforts may need to be improved in order to increase timeliness of collections and decrease days outstanding.  Be aware of who may be at risk themselves and be at the head of the line to get paid.  In some cases discounts may provide incentives to customers to pay sooner. Conversely, some customers may need to be culled, either because they are not good payers, or because they are not sufficiently profitable based on the resources they consume.  Again, there can be no sacred cows; everything must be evaluated with a fresh perspective.  Even if a company has been a long-term and loyal customer, if they are creating a drain on cash flow, terms must be adequately renegotiated.

Accounts Payable – Stretching out payables would seem to be an elementary step in maximizing cash flow, but it is surprising the number of companies that don’t change their payment policies, even as their own customers have slowed payment to the company.  Often a significant bump in cash flow can be achieved by increasing payable days outstanding across the board. The number of customers and vendors the company uses should also beevaluated.  Costs  of time, resources and supplies to order/pay/process an unnecessary number of vendors is often overlooked, and can dilute volume discount potential.  In some cases, the company must recognize where it has an effective partnership with certain suppliers and negotiate changes in terms or credit such that the company does not bear losses alone, benefiting short-term liquidity.

Review non-core assets.  Non-core assets must be assessed for both their current cash value and their borrowing capacity.  Planes, non-essential vehicles, extra parcels of land or buildings, certain leases and equipment may all have some amount of current cash value.  If the company owns its headquarters, store locations, warehouses or distribution centers and this real property is essential to the business, it should be evaluated for sale-leaseback transactions to bring cash into the business today.  In the case where core or non-core assets are not pledged to a lender and fully liened, they should also be evaluated as a source of additional collateral and borrowing if reasonably favorable terms can be achieved.

Take a hard look at corporate overhead. It is understandably difficult for any CEO whom has been with the company for a number of years to step back and look at corporate overhead objectively.  Many times the CEO has presided over certain program and cost build-ups, and has established personal relationships with management as well as line employees. This may affect the CEO’s thought process and impact objectivity.  Other times, the CEO may know the course of action necessary, but due to emotional or personal ties may prefer someone else, such as a CRO, be the “bad guy” recommending or implementing necessary reductions. Objective assessments of personnel and outputs, such as divisions/services/products/locations, can be some of the hardest to tackle for long-term management.  Where a CRO is relied upon to execute a realignment strategy, the appropriate authority must be vested in that person or implementation will fall flat.

Personnel – People who have managed successfully in the past may not be up to the task going forward, and the CEO cannot afford to keep those who are indecisive or frozen in “analysis paralysis”
if they are going to effectively realign the business.  Retain people who don’t have parochial interests – ones that will take initiative and rise to the challenge, who can motivate and encourage people, and build the company’s future.  Be on the lookout for lower level people who have leadership capability and can step up. While it can be difficult, it is important to cut from the top down and for leadership to set the example for the rest of the company.  Evaluate whether the job function is necessary, not the person in it. If the rank and file perceive inherent unfairness in personnel realignment, productivity, quality and moral will suffer.  Furthermore, people remember how they were treated and certainly will be communicating with customers, suppliers, competitors and other employees as they exit. So it is critical to be fair and clearly communicate the company’s challenges and plan, especially if a reduction-in-force, or RIF, will be part of the realignment.

Personnel realignment should be attacked surgically and intelligently, not piecemeal, and can be achieved through combining functions, reducing layers, removing indecisive managers or those not current with technology, and intensifying resources where the company focus.  In addition, people would rather lose benefits than their job, so it is also important to evaluate benefit plans for cost reduction, employee contribution increases or increases in qualifying benchmarks, or in some cases benefit elimination.

Programs, Products & Locations – “Economics 101” teaches us to ignore sunk costs, which means it doesn’t matter how much the company has spent on something in the past. A determination to continue spending must be made based on expected future profits and cash flow.  While management might be emotionally wed to a historical program, that cannot color today’s assessment of whether or not that program/product/location should continue.  Closure of negative contributing stores or products, and walking away from significant sunk costs, is understandably difficult but necessary for a company’s survival in turbulent times.  Assets from shuttered programs/locations may be deployed elsewhere, or sold and converted to cash.

SG&A -There are a multitude of SG&A items that vary across industry and geography that must be evaluated for impact on liquidity and profitability, including office space, equipment, leases, contracts and services, commission and incentive structure, manufacturing, distribution and logistics, property taxes, and many others. These are critically significant and must be individually considered in any business realignment assessment.

What is your capital spending?  The CEO must judge capital projects by what they consume and what they generate, and as previously discussed, ignore sunk costs and emotional ties.  Projects that won’t earn the cost of capital or reduce resources, such as with IT investment, or won’t come on-line and generate net cash flows for several years, need to be evaluated for deferment or termination.  Management should not, however, defer regulatory or safety issues, or maintenance spending where feasible.  The CEO and finance team should also scrutinize capitalized expenses to ensure they represent true capital projects, and that department costs have not been masked as capital expenditures, artificially distorting operating results.

Summary

Realigning the company’s strategy and focus from revenue generation to cash conservation is essential in these uncertain times.  It requires preparing for downside scenarios, not misguided optimism, functional realignment of responsibilities, and streamlining processes. The CEO must set a bold course and convey confidence to all stakeholders that the company is monitoring events, tackling problems and developing solutions.  Management must promote awareness, establish aggressive budgeting and tracking, and enforce accountability across the organization.  Understanding cash implications of decisions must take priority over blind pursuit of revenue growth or continuation of sub-par historical initiatives.  Announcements regarding cutbacks and retrenchment should be made alongside good news of the company’s future stability.  Maintaining communications with stakeholders, key suppliers and customers will provide credibility to management and position the company to emerge stronger and better positioned for both the short- and longer-term.

About the author: Dawn Ragan has 20 years of experience in financial services and turnaround management. She is currently the Director of Business Turnaround & Restructuring Services at Bridgepoint Consulting, a Texas-based professional services firm. Previously, Ragan was a principal of a national advisory firm. She was also a senior manager and a member of the restructuring practice of a Big Four accounting firm and vice president of a Wall Street investment bank. She is a member of the American Bankruptcy Institute, Turnaround Management Association, Association of Insolvency and Restructuring Advisors, International Women’s Insolvency and Restructuring Confederation, and Texas Wall Street Women.  You may contact her at dragan@bridgepointconsulting.com.

What do you need to do?

• Employers are obligated to inform employees by January 31^st of the market value at the time of exercise so they can prepare their personal returns correctly. The easiest way to do this is by sending employees a letter. Click here for a sample.
• In addition, the company must file Form 3921 with the IRS to notify them about the exercise by February 28th. Click here for IRS link instructions for Form 3921 and a link to the form itself.

 New Year’s Checklist:

• Accounting Updates – Accounting standards issued the past few years have refined the methods and requirements for a number of accounting methods: revenue recognition for particular industries, such as software and hardware sales; variable interest entities (VIEs); lease accounting, both for lessee and lessors; financial statement presentation etc.
• Intangible Assets – Have you reviewed your intangible assets and performed required impairments tests?
• Clean up and reconcile accounting data from 2011 – Have you addressed all of the “miscellaneous” accounts you promised yourself to address by 2011 and still haven’t?
• Finalize 2012 budget – Budgeting in today’s world is a dynamic exercise. Have you finished your 2012 Budget?
• Complete Information Technology system check – With your IP accessible through your netork, IT security is more critical than ever. Isn’t it time to get around to an IT security update?
• Prepare for auditors – Save time and money by being 100% ready for your auditor’s 2012 visit.
• Address HR issues and staffing for 2012 – Have you addressed the HR issues you know are a problem? In 2011, the IRS specifically targeted businesses who mis-classified employee/contractors. In addition, undocumented workers can also be a target.
• Banking Relationships – Are you up to date and current with all of your reporting to your bank and other creditors? Are you in compliance with all loan covenants?

It’s time to get organized for the New Year. Please contact us for more information about Bridgepoint Consulting’s 60+ professionals whose range of experience includes accounting and finance, internal controls, SOX compliance, and IT consulting.