Growth

Your business is growing (revenue increasing and customer base expanding). The business is seeing a lot more competition. Training and development of people are critical to take your business to another level.

1. Benchmarking. Benchmarking is understanding how your final results compare with industry standards as well as the results you as an owner expect. Because everyone is different and they will want to run their business differently be sure that deviations from standard benchmarks for the industry correspond for the results you want.
   
   How you compare to the industry? Before you can distinguish the deviations in Benchmarking to Industry standards or norms, because of the uniqueness of any individual business, management needs to understand the tools. The general categories used in benchmarking are:
   
   
   1. Liquidity - Generally these are performance measures to determine the company's ability to meet obligations as they become due.
       
   2. Profits &. Profit Margin - Simply stated are your profitability trends for gross margin as well as net income favorable to your own benchmarks, as well as the industry.
       
   3. Sales - Companies generally prefer to see sales growing over most periods. The company should be building on an existing customer base at all times, adding new customers and returning old ones.
       
   4. Borrowing - Are you borrowing money profitably? A business always needs to be sure that its profit base is increasing in order to have sustainable debt to equity ratios. Also the cost of borrowing relative to net income should be considered.
       
   5. Assets employed – Is the company using its assets properly, especially if growing?
       
   6. Employees – Hire effectively. The objective of hiring employees is to improve net profitability. If profitability is falling and hiring is increasing, what is the plan to increase sales?
   
    
2. Employee Retention (and attraction of new employees). Obviously there are many ways to retain and attract employees - with baby boomers retiring and good people hard to find there are different programs that can be utilized in order to keep employees or attract needed employees as you grow your business. It may also be important to develop the future leaders of your business. It is evident that there is a shortage of leaders in most industries and that shortage is here to stay, so you must identify and develop the leaders needed to grow your business. Compensation and incentives are important in all companies for different reasons. For your business the point of a good compensation plan should not be to get the behavior you want from the wrong people, but to get the right people on your team from the beginning and to keep them there. The current environment is rapidly changing, often scary and confusing and very competitive. Following are some vehicles to attract and keep those employees important to your business:
   
   
   1. Executive Compensation – Executive compensation involves much more than just money. It involves your business culture and environment. It is important to understand a person's goals and what motivates them to effectively compensate them. What is very important to one person, such as work-life balance, may not be as important to another. It is critical to your success in keeping these executives that you determine what is important to each individual and compensate accordingly. Establish goals and reward reaching those goals through compensation and other benefits. It is important to note that to keep key employees you must compensate fairly in the market and provide the environment that allows these employees to thrive. You will probably pay most key employees a base pay rate that is the largest portion of their compensation then provide some other incentive which may be current or deferred.
       
   2. Bonus or Incentive Plans – While there is no perfect plan, there are many basic characteristics of a good bonus or incentive plan. Most successful incentive plans link incentive to business profits and tie the plan to an employee’s performance, both quantitative and qualitative. Other key factors in successful incentive plans are involving employees in the process and communicating often and effectively. The following questions will help you determine how to construct a bonus or incentive plan that attracts rewards and helps keep the right people for your business.
      
      
      1. Is the plan fair and easy to understand?
      2. Does it promote profitable and efficient work by employees?
      3. Does it promote a “one business” concept rather than a competitive environment of separate segments or business units?
      4. Does it encourage everyone to live the company’s core values?
      5. Does it encourage everyone to do what is best for the company and its customers?
      6. Is there flexibility to reward unusual or exceptional performance?
      7. Are performers significantly rewarded over nonperformers?
      8. Does it reward for current performance as well as building for the future?
      9. Is the plan tied to the company’s goals?
      10. Does the plan provide some level of predictability in total compensation annually?
      11. Will the plan help keep the company going after the retirement of senior management?
      
      
      An incentive plan should be constructed to help the company achieve goals and to attract, reward and keep the right people. It should also be reviewed and modified as your business changes.
       
   3. Nonqualified Deferred Compensation Plans – Nonqualified deferred compensation is an excellent tool to compensate executives and key employees. Generally, a nonqualified deferred compensation plan is an arrangement between an employer and an employee to pay compensation to the employee some time in the future. Despite the many names applied to these plans, they generally fall into four broad categories.
      
      
      1. Salary reduction arrangements which simply defer the receipt of otherwise currently includable compensation by allowing an employee to defer receipt of a portion of salary.
      2. Bonus deferral plans resemble salary reduction arrangements except they enable the employee to defer the receipt of a bonus or incentive.
      3. Top-hat plans, or supplemental executive retirement plans (SERP’s) are plans maintained primarily for a select group of management or highly compensated employees.
      4. Excess benefit plans are plans that provide benefits solely to employees whose benefits under a company’s qualified plan are limited by Internal Revenue Code Section 415.
      
      
      These plans may take many forms, including, but not limited to, the following:
      
      
      • Arrangements related to employer stock:
        
        
        • Incentive stock options meeting the requirements of Section 422 may be granted to a select group of employees. Employees granted options to purchase stock meeting the requirements of Section 422 recognize no income at the date of grant or date of exercise, except to the extent that the difference between the fair market value of the option stock and the option price, as a tax preference item, may give rise to an alternative tax liability. When an employee sells the option stock, capital gain is recognized for the excess of sale proceeds over the option price, if certain holding requirements are met. No deduction is recognized by the employer in connection with an incentive stock option if the employee satisfies the holding requirements.
        • Nonstatutory stock options (do not meet the requirements of Section 422) may be granted to a select group of employees. Employees will generally recognize income at the date of exercise or, if later, when the option stock becomes vested, and the employer is entitled to a corresponding deduction at that time.
        • A statutory stock purchase plan that meets the requirements of Section 423 will permit an employee to purchase employer stock, typically at a bargain price, and receive tax treatment similar to that under an incentive stock option plan, however, this type plan must be available to substantially all employees rather than a select group.
        • An employer can make direct awards of restricted or unrestricted shares of stock to an employee who meets certain performance goals or service requirements.
        • A restricted stock purchase arrangement allows an employee to enter into a contract with the employer to purchase stock at a discount price. In contrast to the grant of a stock option, this immediately obligates the employee to purchase the stock at the date specified in the contract and pay interest on any deferred portion of the purchase price.
         
      • Arrangements not related to employer stock:
        
        
        • Long-term incentive plan under which an employee is entitled to a cash payment if long-term performance goals are met. These plans may be tied directly to the financial performance of the company or a unit of the company. Most of these plans provide for partial payouts if greater than threshold but less than target goals are met.
        • An annual incentive plan may include a deferral component where a selected key employee earns a bonus that can be received partially or entirely in cash or deferred until a future date. (Deferral election must be made before the year in which the bonus is earned to avoid negative income tax implications).
        • An elective deferred compensation plan may permit an employee to voluntarily defer the receipt of currently earned compensation into the future. (Deferral election must be made before the year in which the bonus is earned to avoid negative income tax implications).
        • Supplemental retirement plans and private pension arrangements are often utilized to supplement retirement income of key employees that is limited by qualified retirement plans.
        • Individual employment contracts with key employees may provide for deferred compensation arrangements similar to those discussed above.
        • A company may adopt a severance plan that provides for payments to a key employee upon termination of employment under certain conditions.
      
      
      In addition to the above forms, many employers use plans that encompass elements of both type arrangements. For many reasons, small to medium business owners may wish to reward key employees with deferred compensation related to the value of capital stock but avoid the issuance of stock to employees. A common arrangement that can achieve these goals is a phantom stock plan (sometimes referred to as a stock appreciation rights plan) where an employee is awarded units whose value is related to the value of the company’s stock. The units do not represent actual stock and distributions from the plan are made in cash, often at retirement.
      
      Because of the flexibility of these plans and the wide variety of plan types, the reasons for these arrangements are as varied as the plans themselves. Although the purpose of the plan may be driven by nontax considerations, such as the need to attract and retain the people who are essential to the growth and future of a company, the tax and accounting consequences are also important elements. An employee’s objective to participate in this type plan is typically to ensure that amounts are taxed only when actually received under the agreement, to allow a greater deferral or benefit than current qualified plan limits allow, to permit deferred amounts to grow on a tax-deferred basis during the deferral period and to have amounts paid concurrently with some specific event, such as retirement. It is important to note that the company receives a deduction for the deferred amounts when they are paid or payable to the employee. To be deductible, amounts paid under a deferred compensation arrangement must be ordinary and necessary business expenses and must therefore meet reasonable compensation guidelines. The timing rules governing the recognition of income by the employee are found in the doctrines of constructive receipt, economic benefit, assignment of income, cash equivalency, transfer and property and dominion and control within the Internal Revenue Code. These plans must be designed to be in compliance with Internal Revenue Code Section 409A and to meet the requirements of exclusion from ERISA as it covers “qualified” plans.
      
      Retirement income for key employees is probably the most common reason for nonqualified deferred compensation. A nonqualified deferred compensation plan is narrow in focus and not without risk to an employee. To avoid negative tax implications of “constructive receipt” and allow deferral of income tax, the plan generally must be unfunded or may utilize limited funding vehicles such as a rabbi trust which may help the company plan for future payments, but still leaves assets subject to the claims of general creditors.
   
   
   While “cash is king” may be true, you should also provide your employees with noncash rewards and recognition. These are important factors in your overall compensation program. The best way to find out what is important to any given person is to ask them. You will find a wide range of ideas and desires and the best approach is to offer a number of choices. Such choices may include a monthly reward ceremony which provides recognition on a personal level, the more personal the better or the ability for employees to recognize and reward one another. You may also consider changing noncash rewards periodically to maintain excitement. Finally, two words go very far when people do a good job: “thank you”.
    
3. Financial Reporting – What level of service does your business need? There are a couple of factors to consider when determining what level of service best meets your needs. The expected use of the financial statements and the level of assurance, if any, required.
   
   
   1. Expected Use of Financial Statements. Are the financial statements needed to meet requirements of a bank loan, to meet the requirements of a government agency or bonding company, for the information of absentee owners, for use in negotiating a sale of the business, etc.?
   2. Level of Assurance Desired: What level of assurance do you actually need? Is an audit essential for the intended use of the financial statements or would some other level of attest or accounting service meet your needs?
   3. Attest services include not only audits, but also reviews and agreed upon procedures. Attest services can provide assurance as to the fairness and dependability of information. They can tell us whether the information on which we rely constitutes a fair picture of what is going on. In performing accounting services, CPAs provide no explicit assurance as to whether the information follows the appropriate criteria. The role is one of assisting the client and not providing assurance to third parties about the information. An example of accounting services is assisting the client in preparing or compiling its financial statements.
   
   
   Following is a brief description of some of the services that might meet your business needs:
   
   Financial Statement Audit – An audit provides the highest form of assurance about management’s assertions. The objective of an audit is to express an opinion about whether your financial statements are fairly presented, in all material respects in conformity with US generally accepted accounting principles or some other appropriate basis of accounting such as tax basis. An audit involves examining, on a test basis, evidence supporting the amounts and disclosures in your financial statements. Audit procedures might include
   
   
   • obtaining an understanding of your business and its internal control system
   • tests of documentary evidence supporting the transactions recorded in the accounts,
   • tests of the physical existence of inventories,
   • direct confirmation of certain assets and liabilities by correspondence with selected customers, creditors, and financial institutions.
   
   
   Reviewed Financial Statements – A review is substantially less in scope of procedures than an audit and is designed to lend only a moderate or limited amount of assurance about the assertion. Limited or moderate assurance is also referred to as negative assurance because the accountants’ report disclaims an opinion on the reviewed information but includes a statement such as “we are not aware of any material modifications that should be made” in order for the information to be in conformity with the appropriate criteria. The procedures performed are generally limited to inquiries and analytical procedures.
   
   Compiled Financial Statements – A compilation of financial statements is presenting in the form of financial statements information that is the representation of management without undertaking to express any assurance on the statements.
   
   Agreed Upon Procedures – If an audit or review does not meet the needs but you need some assurance on a particular element of your financial statements, the CPAs and specified user of the information may mutually decide on specific agreed upon procedures. Agreed upon procedures engagement is one in which the practitioner is engaged by a client to perform specific procedures and report findings. The practitioner does not perform an examination or provide an opinion. Rather the practitioner reports only procedures and findings.
    
4. Additional financing – refer to the Capital Funding section of the Business Life Cycle for options available for additional financing that may be needed for growth.
    
5. Additional operating system – You may need to expand or change your accounting system (it is common to outgrow a starting system).