Author: dsauder

Preface: If you know you are named as an executor for someone, consider sitting down with them while they are still alive to talk through their expectations and desires.

A Lesson Learned By An Executor—The Hard Way

Credit: Nevin Beiler, Attorney

In this article I will tell you the story of Mark, who was named as the executor for his deceased mother. This story is inspired by various true life accounts, but it (like all of my written stories) has been changed and adapted to protect people’s confidentiality and to provide a better lesson to learn from.

Mark was the oldest of six children. His parents were dairy farmers all their lives. When Mark came of age and got married he stayed on the family farm and helped his father. He also worked away some to help pay the bills. His father passed away unexpectedly when Mark was 48 years old, and Mark began working full time on the farm. Mark’s father and mother owned everything jointly, so when Mark’s father died there was no need to open a probate estate or to file in inheritance tax return.

The family discussed having Mark purchase the farm before their mother died. However, they decided as a family that to avoid disruption during their mother’s life, and to avoid capital gains tax, the farm transfer should wait until their mother died.

Mark’s mother continued to own and live on the farm for the next 5 years, and she drew an income from the farm. Mark eventually purchased all of the equipment and cows, but not the real estate. Mark and his wife also provided a significant amount of care for his mother in the later years of her life, which saved her from needing to enter a nursing home. The family discussed having Mark purchase the farm before their mother died. However, they decided as a family that to avoid disruption during their mother’s life, and to avoid capital gains tax, the farm transfer should wait until their mother died. Later, Mark’s mother and siblings also all agreed that since Mark had worked on the farm all his life and provided extensive care for his mother that he should receive the farm for a very low price, or perhaps for free.

When Mark’s mother died she owned two assets in addition to the farm: (1) an investment account with a balance of about $300,000 and (2) a checking account containing about $50,000. The investment account had a transfer-on-death designation that left the account equally to her six children. Her checking account contained an “In Trust For” (ITF) designation naming Mark as the beneficiary of the account. This meant that the bank was supposed transfer the checking account directly to Mark after his mother’s death (this is sometimes done so an account can avoid probate). Mark’s mother left a will naming Mark as the executor and stating that the farm should be given to Mark. The will also stated that all her other assets should be split equally among her other five children (not including Mark).

Mark recognized that the will and the way his mother’s financial accounts were titled contradicted each other. The will indicated that, because he was receiving the farm for free, only the other five children should get the investment account. However, the transfer-on-death instructions on the investment account gave him 1/6^th of the account. Also, the will indicated that the other five children should equally share the checking account, but the bank told him that all the money in the account was legally his because it was titled “In Trust For” his benefit. (In cases like these, how accounts are titled and their transfer-on-death instructions or beneficiary designations override the directions of a person’s will.)

To be continued….

 Disclaimer: This article is general in nature and is not intended to provide specific legal or tax advice. Please contact Nevin or another attorney licensed in your state to discuss your specific legal questions. In order to protect confidentiality and provide a better illustration, names in the above story have been changed and some facts may have been changed or added.

Preface: “How do we value all that obsolete inventory and keep on track with our earnings guidance? No worries, we can value it at a fair price and call it ‘collectors edition’ stock.” — From a business ethics discussion.

Valuing your Business – A Calculation of Value or Conclusion of Value  Valuation 

Credit: Donald J. Sauder, CPA | CVA (2015)

Business valuation is a complex field with multiple aspects in the determination of a business interest’s value. Whether you’re selling a business, buying a business interest, involved in court actions, estate planning, or filing gift taxes, a business valuator can assist you in achieving a realistic and fair valuation.

There are two types of business valuations – a conclusion of value and calculation of value.

A conclusion of value or full valuation begins when a client and valuation analyst determine the valuation approach with an engagement letter. This letter outlines the extent of the valuation with a full report according to the professional standards of the business valuations.

For a CPA certified in business valuation this would be the standards set for by the American Institute of Certified Public Accountants (AICPA). Individual appraisal organizations have their own set of professional standards. An AICPA valuation includes a client request to value a business interest, and an estimate in value according to Statements on Standards for Valuation Services No. 1, The valuation applies any needed valuation methodology as prescribed by the valuator. The valuator then publishes a conclusion of value report. A full valuation report could exceed 45 pages with defensible proofs for the determined value of the business.

A calculation of value is much more limited in scope and nature and does not require any specific methodology beyond those agreed to by the valuator and client. So a calculation of value could overlook important characteristics in valuing your business accurately. With a calculation of value, a detailed value report, providing more depth on valuation numerics, is not prepared. A calculation of value is performed with only an agreement between the valuator and client on the methodology and procedures performed on the business interest, a calculation of the business value according to the agreed upon procedures, and an opinion provided by the valuator to the client on the calculated value, such as a verbal report.

Because of the savings in cost, a calculation of value may be adequate in some instances for determining a business value, depending on why the client needs the valuation.

Calculations of value are less expensive than a comprehensive conclusion of value, but you should have an experienced business valuator advise you on what valuation option will work for your business. The thoroughness of a valuation requires that you provide the valuator with all relevant documents and financial statements to determine an accurate value for your business.

If financial statements are deficient or records inadequate, you may need to choose a calculation of value because the necessary records are not available for a conclusion of value report. Yet, with a full valuation report, there is little room for question on the thoroughness of value, and the report will be defensible in more circumstances.

In summary, business valuation is a field where you are well advised to get an expert to work with you in valuing your business interest. You understand the value of hiring an expert to file taxes for business entities; it’s the same with business valuation. If you need a valuation of your business, for a transaction, for giving, or for estate planning, talk with your CPA or attorney to obtain a trusted referral to a valuation expert.

Preface: The SECURE legislation — standing for “Setting Every Community Up for Retirement Enhancement” — puts into place numerous provisions intended to strengthen retirement security across the country.

NEW Tax Legislation Update: The Secure Act Tax Legislation

The Setting Every Community Up for Retirement Enhancement Act– A.K.A. the SECURE Act, has been under tax law construction for approximately three years. The legislation train connected to the increased spending bill to keep the government open for business pulled quietly away from the station in the recent days with new and improved retirement tax saving features.

SECURE Act Highlights:

Employer Credit for New Plan Start-ups: Before the SECURE Act, employers were at liberty to claim a tax credit equal to fifty percent of the start-up costs of a qualified retirement plan for employees, up to a maximum of $500. The SECURE Act increases this new plan credit limit to the greater of  $500 or the lesser of $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan or $5,000.

Required Retirement Plan Minimum Distributions: Under long-standing rules, participants in qualified retirement plans and IRAs were obligated to start taking required minimum distributions in the year following the year they turned age 70½. The SECURE Act pushes up the ceiling on the required minimum distribution age for retirement plan distributions to age 72 from 70½.

Improved 401(k) safe harbor rules: The tax law revision includes changes legislated to give simplicity, and improve employee retirement savings safeguard. One example is the new legislation eliminates the safe harbor notice requirement, while keeping the requirement permitting employees to make or change a 401(k) election at least once a year.

College Student Retirement Benefits: Although non-tuition expenses received by graduate and postdoctoral students didn’t qualify as earned compensation previously, therefore the funds could not be used for IRA contributions. The new tax law includes qualifying these earnings while additionally structuring penalty-free withdrawals of up to $10,000 from 529 education-savings plans for the repayment of qualifying student loans

IRA Age Limits on Contributions: Before the SECURE Act, retirement savers were not permitted to contribute to a traditional IRA once they attained the age of 70½. With the SECURE Act, this restrictive feature has clearer skies potential.

Automatic Retirement Plan Enrollment Credits: To improve employee participation in qualified retirement plans, the new law creates an additional credit of up to $500 per year for businesses that provide new 401(k) and SIMPLE plans with an automatic enrollment feature. This credit is in additional to the start-up cost credit for purposes encouraging employee automatic participation in the qualified retirements plans.

Part-time Workers Inclusion: Before the SECURE Act, small businesses did not need to include part-time workers with less than less than 1,000 payroll hours per year from participating in 401(k) plans. The SECURE Act changes this feature for retirements plans to include all employees who have completed either one year at least 1,000 payroll hours or three consecutive years of at least 500 hours of service.

Family Planning Early Withdrawals: Current tax laws exempt some retirement plan distributions from retirement plans from a 10% tax penalty on early savings withdrawals prior to age 59½. The SECURE Act improves these qualifying withdraws to include qualified child birth or adoption expenses.  The tax law now allows penalty-free withdrawals up to $5,000 from retirement plans for families with either a birth or adoption of a child.

Preface: No one is useless in this world who lightens the burdens of another. – Charles Dickens

Reflections from A Christmas Carol

It begins with credit. What does it end with but credit? It is well said that “Animals do not worry about money, only People worry about money.” Charles Dickens’s financial woes in 1843 were no doubt somewhat discouraging to the young thirty-one-year-old father and, he like a few today, was worried about money. Having recently relocated to a more spacious and higher maintenance residence to provide for his growing family of five children, money was tight, and his debt was growing. With a lack of responsible budgeting, i.e., Charles was failing to live with-in his means; the stress was multiplied with dear relatives asking him for money.

With his two recent novels resulting in lackluster sales, his publishers had cut his royalty payments, and he was strapped for cash. The stakes were high, and the financial pressures were growing. Charles Dickens that year may have perceived the Christmas Holiday Season in the following quote “What’s Christmas time to you but a time for paying bills without money; a time for finding yourself a year older, but not an hour richer?” The famous book A Christmas Carol was “A Miracle of Christmas” for the young author, which has been adapted as literary work shaping the meaning of the Holiday Season for dozens of decades following.

Today, many have no appreciation of the happiness in avoiding the debtor’s prison, that Charles Dickens knew too well. He was scarred from the childhood trauma from being pulled from school and forced to work in boot-blacking factory, to help his father in Marshalsea debtors prison. It was a burning memory for the young Dickens, and his book describes the brutal terrors of failing on debt payments in that era.

On the contrast, Mr. Scrooges’ journey from an innocent student to the kind Mr. Fezziwig’s office and then onward to the stingy miser, was perhaps or perhaps not a matter of chance. Whether it’s the saddest part of the story or not, Mr. Scrooges likely began his career with good or maybe great intentions, but his decision to remain silent when told to be happy with the life he had chosen, was the moment he realized his incremental steps forward ultimately towards eating porridge for Christmas dinner in a room lit with one candle.

Formally stated, Newton’s third law is: For every action, there is an equal and opposite reaction. The statement means that in every interaction, there is a pair of forces acting on the two interacting objects.

Newton’s law may perhaps be true of Mr. Scrooges’ business partner Mr. Marley. From Mr. Marley’s perspective, the common welfare was not his business interest or practice. He strongly encouraged Mr. Scrooge to amend his ways. And then there was also Newton’s law for Mr. Cratchit. Never allowed to put more coal on the fire to keep warm while at work, while being paid 15 shillings a week, while just caring for his family was enough. Finally, the big turkey arrived from Mr. Scrooge on Christmas Day.

No one is useless in this world who lightens the burdens of another. – Charles Dickens.

Mr. Marley was in fantasy land, pulling a chain of heavy bank boxes, as well as with his opportunity to redeem his time. Mr. Scrooge was too. We are not. Whether you feel like Charles Dickens, The Cratchit Family, nephew Fred, Mr. Scrooge, or Mr. Fezziwig say, this Holiday Season, let us genuinely remember Mr. Scrooges words “I will honor Christmas in my heart, and try to keep it all the year.” 

And to our readers, we quote the honorable Tiny Tim, “God bless ‘em, everyone” and Merry Christmas!

Giving with Trusts, Foundations and Donor-Advised Funds

Credit: Douglas A. Smith

Recent federal tax law changes pertaining to itemized deductions have caused many people to rethink how they make charitable gifts. With the increased standard deduction, far fewer taxpayers will itemize, which means that small charitable contributions may not create the tax benefit the donor anticipated. At the same time, many charitably inclined people want to go beyond simply making small annual gifts to their favorite charities, preferring instead to make more substantial gifts during life rather than under a Will so that they can appreciate and enjoy how the charity utilizes the benefits. The good news is that there are several charitable giving techniques available that address both of these issues:

Charitable Trusts, Private Foundations, and Donor-Advised Funds.

Doug practices in the areas of estate planning, estate administration, nonprofit organizations, business formation and succession planning, and tax law.

In addition to drafting wills and trusts for estate planning clients, Doug has experience structuring charitable gifts and planning for tax-deferred retirement plan distributions.  He also assists nonprofit organizations in obtaining and preserving tax exempt status and helps reinstate nonprofits that have had their exempt status revoked. Doug works with business clients from startup through succession, providing advice on choice of entity, preparing trusts and buy-sell agreements, and structuring business transactions.

Preface: [The definition for] “Customer: A person who purchases a commodity or service. Client: A person who is under the protection of another.” Quote from Jay Abraham.

Questions are the Strategic Runway Towards A Great Business

Credit: Donald J. Sauder, CPA | CVA

As the founder and CEO of the Abraham Group, Jay Abraham has been acknowledged as a foremost authority in the field of business performance enhancement with a marketing metaphor.

This testimonial of Jay’s works is derived from GaryNorth.com about a man who owned no business. Following Jay’s marketing approaches, he did his work without any money of his own. Working for a company as an employee that sold horse trailers, that’s what I would call a “niche market” he strategically developed a huge market opportunity.

What would you figure a horse trailer costs? Guess. At the top end, a horse trailer sells for around $100,000. Sell one, and the money rolls in. So were do you start selling horse trailers? His method was to bring in a crowd of people who were horse lovers. One event he held was visited with 2,900 people. He put on a bazaar, which for us non-horsey types would have been bizarre. He brought a lot of horse-related vendors under one roof: a large indoor arena. He persuaded international horse trainers to come and give free exhibitions. He charged most vendors a low price to set up a booth: $30. He sold all of the spaces. He also contacted horse groups. He did joint ventures with them. They got a free booth for promoting the event to their subscribers. They could use the crowd to recruit new members. Follow-up events that charged $5 to attend drew 1,400 attendees. The money paid for the performers. His boss sold trailers. This cost the company only the salary paid to the budding entrepreneur. The budding entrepreneur was on salary. I imagine he lifted off the runway.

Quoting Jay’s philosophy: The driver of business performance today is a surprisingly simple understanding: You are paid by the world, to think differently/critically and to solve problems or create opportunities/value in better ways than others. You are paid to think differently and more critically than your competitors think – about everything from business model, to brand position, to distribution channels, to marketing, to superior competitive market strategy.

The above testimony exemplifies effort and initiative. Whether a journeyman in business, or a businessman, now ask yourself the following business self-assessment questions, for the Marketing | Sales and Operations. If you answer any question “NO”, then follow-up and ask yourself – “WHY NOT”? Document your answers concisely. Answering “NO” isn’t necessarily wrong, but you should have an answer on “Why Not.”

Marketing | Sales

 

1. Does your business have a marketing and sales plan?
2. Do you know why your customers purchase from you?
3. Would your customers say your business is among the best in the area for its product(s) or service(s)?
4. Does your team understand how they help to solve customer problem(s) that in-turn generate sales and therefore provide them job security?
5. Do your customers purchase from you because of the excellent quality of your team’s relationships?
6. Do your customers perceive your team as competent and experienced?
7. Does your business have its own registered domain name?
8. Does your business have a strategic and effective website?
9. Does your business obtain regular feedback from customers?
10. Does your sales team provide adequate information and reasons on why customers should choose your products or services?                                                                                                                                     
    

    Operations

11. Does your business have written standard operational procedures?
12. Does your team have incentives to be effective with project management?
13. Does your business have a work environment that you’d want your daughter to work in?
14. Does your business strive to comply with its industry regulations?
15. Does your business make operational decisions that provide effective solutions instead of short-term work-arounds?
16. Does your team continuously work to improve efficiency and effectiveness of operations?
17. Does your team have the tools to complete tasks effectively?
18. Do you set clear expectations regularly on team performance effectiveness, expert project completion, team character and team attitude in the field?

Call to action: in summary, I encourage you to read the book: The Five Most Important Questions You Will Ever Ask About Your Organization. Then keep your strategic “thinking hats” on.

1. What is our mission?
2. Who is our customer?
3. What does the customer value?
4. What are our results?
5. What is our plan?

Preface:  A CFO will manage the accounting process and provide oversight to financial reporting, but the real value of a CFO is working to make your enterprise even more successful, which goes far beyond monthly reporting and period-ending statements.

Skills Every Chief Financial Officer Needs (Segment 2) (2015)

Credit: Donald J. Sauder, CPA | CVA

Capital and Cash Management. A CFO should understand cash management and budgeting. Planning for capital expenditures, debt repayment, working capital requirements, strategic acquisitions, investments in research and development, and alternative investments of profits all weave into capital and cash management. A CFO should have experience in forecasting cash sources and uses to maintain tight financial controls. Maybe your CFO can prepare a rolling forecast with updated data to improve financial decision making and track free cash flow (operating cash flow less capital expenditures and other funding such as research and development).

Well developed and managed cash flow models build a foundation for monitoring key financial performance and improve cash flow planning. Cash flow models should give the most attention to receivables, inventory, and payables to lead to the greatest effectiveness. Armed with this knowledge your CFO can manage receivables for timeliness, assess and optimize peak-to-trough inventory levels, monitor duration of cash conversion cycles, while developing key ways to measure, analyze, monitor, and manage cash flow and financial performance precisely. This gives your team greater accuracy and confidence in financial decision-making for short or long-term goals, such as an incentive plan for the sales team for this quarter.

Financing. A CFO must establish and maintain quality relationships with lending sourcessuch as banks, for existing and future credit needs. A bank will be increasingly more likely to extend credit, at least with better terms for the umbrella, when the sun is shining. When you negotiate with your lender, your CFO should request the largest line of credit the bank will extend so you’re covered beyond just seasonal inventory demands and receivable summits.

If your strategy includes acquiring businesses with 1 bolt-on acquisitions such as a competitor, vendor, or subcontractor, or 2) platform acquisitions such as new business sectors like a residential framer acquiring a commercial contractor, or 3) transformation investments–venturing into new ideas such as an auto dealership investing in an internet site for consumer-to-consumer auto financing, you will want a CFO that has experience with intrinsic values, due diligence, and business planning. Many small business entrepreneurs can defer to their CPA firm when these opportunities are on the table.

Accounting and Internal Control. This is commonly what most entrepreneurs think of when discussing the role of a CFO. Yet, financial reporting and monthly reporting are only two of the many roles a CFO can fill for your business. A CFO will monitor internal processes including segregation of duties, the expertise and experience of the accounting personnel, the independence of board members, and the entrepreneurial style of the management team. Segregation of duties will minimize fraud. Experienced accounting personnel will lead to greater accuracy and timeliness of financial reporting. A CFO will manage the accounting process and provide oversight to financial reporting, but the real value of a CFO is working to make your successful business even more successful, which goes far beyond monthly reporting and period-ending statements.

Organizational Management and Leadership. Many larger businesses will have a controller who reports to the CFO. Yet for financial reasons some businesses have all accounting staff– accounts payable department, accounts receivable department, and inventory manager–report to the CFO. The CFO should develop plans for financial personnel development, hiring, a systematic chart of accounts, financial systems and software(such as inventory modules and methods), financial management, and third-party professionals such as a payroll firm, CPA firm, management or sales consultants.

If you have a developing business, the ability to hire a CFO who can develop future accounting staff is well advised. Like Jack Welch said, “Business is about people… at the end of the day, it’s only the people that matter.”  A well- trained and competent accounting department begins at the top, and as said earlier, the real role of a CFO is to make good businesses even better. That includes making good people even better, too.

In summary, a CFO should have skills in strategic thinking, business risk planning, capital and cash management, financing, accounting and internal controls, and organizational management and leadership. This takes years of experience and years of development–easier said than hired. Continually encourage your enterprises chief financial officer to engage in activities towards further development in these key areas of CFO expertise.

Preface: An A+ culture pillars successful organizations, businesses, and communities, and is the main reason that lights people with a passion working with an enterprise.

Questions are the Strategic Runway Towards A Great Business  (Segment V)

Credit: Donald J. Sauder, CPA | CVA

Many companies take culture far too lightly. Perhaps some think it’s a trait that will simply sort itself out given enough time. Others build a kind of surrogate for culture by populating their break rooms and common areas with pool tables, pop culture tchotchkes and focus-grouped slogans.

Leaders are the key to shaping company culture — and even the culture beyond their walls……Has the company stood by these words? History often repeats itself, but it doesn’t have to. In shaping company culture, leaders must build a tightly woven collection of ideals, values, and goals — and ideally, it should be strong enough, and pro-social enough, to long outlast them.

To put it another way, “the true meaning of life” — or leadership, in our case — “is to plant trees under whose shade you do not expect to sit.” Those words are attributable to William Craig from his article, How Leaders Shape Company Culture. William specializes in writing about the secret of company culture in entrepreneurial success.

Yes, culture matters. In the business community, culture continues to matter. Greg Smith from Goldman Sachs is quoted in the article The Value of Corporate Culture as saying, “Culture was always a vital part of [the company’s] success. It revolved around teamwork, integrity, a spirit of humility, and still doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn client trust for 143 years”. 

He continued to say that he was saddened to see that the highly-respected culture of the organizations legacy had virtually disappeared with no traces remaining. Not surprising, even the most exceptional business cultures can be lost from the slow erosions formed along with the pursuit of “pouring-profits.” 

An A+ culture pillars successful organizations, businesses, and communities, and is the main reason that lights people with a passion or loyalty and excellence working with an enterprise. Think of a few successful enterprises in your sphere of contact, and then examine the culture. It’s there. Clear to the minds eye, strong and vibrant. 

Exemplify and build your business’s unique culture at every turn, every decision, and in every communication. Appreciate, develop and protect it – that is the heart of true business leadership. Endeavoring to walk the talk for long-term success requires keeping your focus on more than the money. You will likely need a strongly yoked leadership team to achieve the ideal culture. Secondly, evaluate if your enterprise cultures head and heart are above or below the clouds?  

Whether a journeyman in business, or a businessman, now ask yourself the following business self-assessment questions, for the Communications | Human Resources | Employees If you answer any question “NO,” then follow-up and ask yourself – “WHY NOT”? Document your answers, concisely. Answering “NO” isn’t necessarily wrong, but you should have clear answers to the “Why Nots.”

Communications | Human Resources | Employees 

1. Does your business have a visible culture?
2. Does your business have regular team training?
3. Does your team at all levels communicate effectively daily?
4. Does your business have an organizational chart or team accountability chart?
5. Does your business resolve internal conflicts successfully, and work proactively to mitigate them from occurring? 
6. Does your business have an effective process for all business meetings?
7. Does your business work to create opportunities for personal purpose and satisfaction for the team as a thank you for the daily services to further the organization’s mission?
8. Does your business communicate regularly to employees their specific purpose for being employed with the company?
9. Does your business have an employee handbook?
10. Does your business have an adequate and written paid time off policy?
11. Would your team say your business culture has appropriate accountability?
12. Does your management team listen to employees and ask questions to build better team relationships?
13. Does your business have employee performance evaluation meetings?
14. Does your business have any annual celebrations?
15. Does your business have clear job titles for each department?
16. Are your employees encouraged towards and rewarded for excellence?
17. Does your business only hire employees who are the best-qualified candidates for the position? 
18. Does your business have clearly defined job roles?
19. Are clearly defined performance expectations set upfront when onboarding new staff?
20. Do your employees know your business’s purpose?
21. Does your business have an employee feedback process?
22. Does your business a written onboarding plan for each department position?
23. Does your business have written compensation plans?
24. Does your business have an employee benefits plan?
25. Does your business have a company retirement plan?
26. Does your business have written processes for HR, operations, marketing, sales, and accounting?
27. Has your team heard a heart-felt “Thank you” from you this week?

Preface: Where did you begin? Where are you today? Where do you want to be in the future? What effectuation will be necessary so you will be there? Every enterprise CFO needs to ask these questions that will lead to an more accurate assessment of strengths, weaknesses, opportunities, and threats.

Skills Every Chief Financial Officer Needs  (2015)

Credit: Donald J. Sauder, CPA | CVA

The role of a chief financial officer (CFO), requires an ever-increasing need for the ability to make great financial decisions. Here are a few skill sets you should look for when hiring a CFO, and which your CFO should be encouraged to continue developing expertise in.

Strategic Thinking. A CFO should have the skill to help achieve the strategic vision of the business, a map of the business purpose, objectives, and strategy, with steps necessary to achieve that vision. Creating a vision, plan, or strategy on paper is not that difficult. Yet even a realistically achievable plan is challenging, when working to implement it. You need decisive acumen on your team. You need its leader, the CFO, to take action, to keep believing in the vision, and work tirelessly towards the achievement of that vision.

Courage to Question.   With strategic thinking skills, your CFO should have the expertise and experience to evaluate your business.Where did you begin? Where are you today? Where do you want to be in the future? This will lead to an assessment of strengths, weaknesses, opportunities, and threats. Your CFO needs to think through outcomes, while at the same time making necessary adjustments in working the plan when changes in the marketplace warrant it, such as adapting to new market conditions, innovations, opportunities, and risks. Like Jack Welch, who lead GE from a $4 billion to nearly $500 billion, says, “When it comes to strategy, ponder less, and do more.” The key is do more of the strategic. What is strategic? If you don’t want to answer that question, your CFO certainly better have an answer. Typically for entrepreneurs, the same strategy that got you from zero to $5 million in revenue (the typical sales volume when small businesses begin to think about hiring a CFO), won’t take your business to $15 million. You will probably place significant reliance on your CFO when working through strategy. Whether or not you’re a strategic entrepreneur, your CFO needs to be strategic.

You need your CFO to not only ask the right questions, but address them. He should have the courage to ask questions like, will the vision and strategy meet our objectives? Can we successfully implement the strategy? Is the strategy consistent with core values of the business and the culture of our clients? Does the business have the resources–financial capital, intellectual capital–to succeed in implementing our plan? Can we clearly envision and communicate the strategy to our employees?

Business Risk Planning. A CFO should have experience and expertise to work to identify inside and outside business risks with team discussion among company personnel. Your CFO should quantify and assess these identified risks and likelihood of the risks occurring. The risks should then be prioritized with regard to their probability and impact. Monitoring the risks should be assigned to a specific person for periodic review. As importantly, strategies for lessening the effects of those risks should be developed. Your CFO will need to balance strategy implementation with the associated risks. Sixty percent of increases in business value is built from revenue growth, so an understanding of risks in the marketplace will improve calculations on your business’s mineral vein.

In the summer of 2010, the multinational professional services firm Deloitte published a paper titled, “Risk Intelligent Decision-making: Ten essential skills for surviving and thriving in uncertainty.” The paper on risk management shows where things go wrong. This report names the following as top risks: 1) Relying on false assumptions, 2) Failing to exercise appropriate vigilance, 3) Tending to ignore velocity and momentum, 4) Failing to make key connections and manage complexity, 5) Failure to imagine failure, 6) Placing reliance on unverified sources of information, 7) Not maintaining adequate margins of safety, 8) Focusing only on the short term, 9) Failing to take enough of the right risks, and 10) Having a lack of operational discipline.

Read and act on these ten items each month, and your business will probably be in the top 10% or 15% of small business risk managers. Other risks include shortages in capital, supplier quality or concerns with timeliness, processes that are too complex or result in ineffective quality, inability to meet customer demand, human relations issues such as finding the right people for key roles, and the list goes on. These are the kinds of risks a CFO needs to constantly monitor and evaluate, finding strategies for managing those risks.

To be continued

 

Why You Need a Power of Attorney—Before It’s Too Late

Credit: Nevin Beiler, Attorney

There was a long pause. All of the people around the table were waiting for John to answer the question. The question was simple enough: “How many children do you have, and what are their names?” But for John, who was in his upper-sixties and struggling with the effects of a stroke he had about a year ago, this question was not easy to answer. He slowly listed the names of his first four children, but was unable to list the last one. He turned his head to look at his wife and his daughter, who were sitting on either side of him, but I had instructed them that John needed to answer the questions I was going to ask him by himself. This was the first question, and was supposed to be the easiest.

This was not how this meeting was supposed to go. John’s wife, Mary, had called me a few days before and said that they needed to have durable powers of attorney prepared so that their oldest daughter could help them with financial management. A durable power of attorney is a document that gives legal authority to someone else to act on your behalf. For example, an older person will often have a power of attorney that gives a responsible child or other trusted relative authority to manage their bank accounts and other property.

When Mary initially called me, she had not said anything about John having a stroke, and I had not asked her. But now, sitting and waiting to see if John could name his fifth child, it was becoming clear to me that I could not help John create a power of attorney. The fact that he could not name the town where they were living or respond to several other simple questions made this even clearer.

John probably would have willingly signed anything we put in front of him and told him to sign. He seemed to trust his wife and his daughter to do what was right and to ensure that he received proper care. But as an attorney, it would have been a violation of the Pennsylvania Rules of Professional Conduct for me to help John prepare and sign a legally-binding document if he did not understand what he was signing. If he could not remember all his children’s names and other simple information, trying to establish that he had the necessary legal capacity to sign a power of attorney document appeared hopeless. Helping John sign a power of attorney while knowing that he did not have legal capacity to do so would put my law license in jeopardy, and someone could later challenge the validity of any actions taken under his power of attorney because the document itself and the authority it tried to give would not be valid.

John’s wife and daughter were understandably disappointed to discover that John could not create a power of attorney, but they took the news graciously. Fortunately, John and Mary had both executed their Last Will & Testaments with another attorney about six years earlier, so John was not in danger of dying without a will. I had reviewed John and Mary’s wills at the beginning of the meeting. A few changes to how their charitable gifts in their wills were structured would have potentially reduced the tax bill of the estate, but otherwise their existing wills covered most of the bases. And assuming that Mary lived longer than John, it was not too late for her to update her will to take advantage of the potential tax savings.

But now, how was John’s family supposed to deal with John not having a power of attorney? Without this document, nobody could sign on John’s behalf. This would be a problem if, for example, John’s wife or daughter needed to withdraw funds from an account held only in John’s name or transfer the real estate that John and Mary owned jointly. In order to do this, they would need to file a petition for guardianship with the local court, have John declared mentally incompetent by a doctor, and have a judge appoint a guardian that could act on John’s behalf. This is generally not a pleasant or cost effective option.

Most of John and Mary’s financial accounts were owned jointly, so as long as Mary remained in good health and lived longer than John, they might not encounter too much difficulty. But if Mary would pass away before John, if they needed to sell their home, or if they would need to withdraw funds from John’s IRA account, then petitioning the court to appoint a guardian for John would be the only remaining option. I explained this to Mary and her daughter, and we discussed the best way to structure and manage their financial accounts going forward to deal with John not being able to have a power of attorney.

Near the end of the meeting, Mary was preparing to sign a durable power of attorney that would give authority to her daughter to take over her financial management in case Mary would also need help managing her finances. Just before signing the power of attorney Mary pulled a large brown enveloped out of her bag and asked, “What should I do with all these old papers?” I took the envelope, pulled a stack of documents out of it, and began looking through them. What joy! Among the papers was an original durable power of attorney document, made and signed by John! It was over ten years old, but it otherwise appeared to be validly executed and it gave authority to all the proper people to act on John’s behalf!

With this fortunate discovery, John and Mary’s world, and their children’s responsibilities, suddenly became so much simpler. Assuming that this ten-year-old power of attorney document would be accepted everywhere it was needed, no difficult and expensive guardianship proceeding would be necessary. There were no more concerns about needing to petition the court to appoint a guardian if Mary would pass away before John. What a relief!

Mary was very apologetic that she had not shown me the papers earlier, at the beginning of our meeting. While that would have made the last 90 minutes of discussion much simpler, I didn’t mind. I was just grateful that we had discovered John’s power of attorney before the meeting ended. Fortunately for them, they had planned ahead sufficiently that when the time came that they really needed a power of attorney document, there was one in their files, even though they didn’t realize it!

If they would have visited an attorney a few years earlier when John could think more clearly, they could have signed an updated power of attorney for John and updated their wills to maximize the tax savings from the charitable gifts specified in their wills. That would have been even better, but the fact that they had taken the steps to get proper estate planning documents drafted ten years ago would now save them and their family a lot of hassle.

This simple story illustrates an important point. We tend to wait to go out and get something until we need it. If we lead busy lives, sometimes it seems like only the urgent things get done. When it comes to getting a Durable Power of Attorney or other estate planning documents like a Last Will & Testament or a Health Care Power of Attorney, it is easy to keep putting it off until “later.” But when you or your family really need you to have a power of attorney, due to a mental illness or serious injury, it might be too late to get one. So plan ahead, and act while you still can.

This article was originally printed in the Plain Communities Business Exchange

Nevin Beiler is an attorney licensed to practice law in Pennsylvania (no other states). He practices primarily in the areas of wills & trusts, estate planning, and business law. Nevin is part of the conservative Anabaptist community and is committed to practicing law in a way that builds the Kingdom of God and is consistent with Anabaptist values. His office is in New Holland, PA, and he can be contacted by email at info@beilerlegalservices.com or by phone at 717-287-1688. More information can be found at www.beilerlegalservices.com.

Disclaimer: This article is general in nature and is not intended to provide specific legal or tax advice. Please contact Nevin or another attorney licensed in your state to discuss your specific legal questions. In order to protect confidentiality and provide a better illustration, names in the above story have been changed and some facts may have been changed or added.