In the wake of the highly publicized stress tests on U.S. banks, there is no shortage of commentary on concerns about credit and the environment in which banks and borrowers are operating today. Banks are in a tenuous position as they balance their role – to provide and protect capital – with the risk of performing that very function.

We’re finding that the process of credit risk examination is evolving in front of our eyes, as lenders are putting a high priority on catching warning signs of default early on. By improving the quality and interpretation of information used to determine risk, they are changing the way they approach due diligence on loans.

Lenders’ motivation is clear: even in this difficult economy, they eventually have to find a way to be comfortable lending. Yet loan delinquencies are higher than ever, as Reuters points out in this April story, “National Consumer Loan Delinquencies Highest on Record.”  The American Bankers Association notes in the article that “the fourth-quarter [delinquency] rate was the highest since it began tracking the data in 1974, with delinquencies rising in nearly every category. It said these credit trends are unlikely to improve before 2010.”

Banks have in effect woken up to the fact that the financial storm is well upon them and a greater focus on due diligence is necessary. That doesn’t mean “not lending,” it means “smart lending,” and we are encouraged to see a renewed focus on extracting and interpreting information that flags symptomatic default issues early on.

There’s nothing like a recession and economic crisis to get us all thinking about costs, efficiencies and productivity.  While it can be a painful period of time for some, this is also a fantastic period of time to re-focus and energize the business of the business.  On a daily basis, I continue to hear points of optimism - from sales professionals that see this as a time to develop new relationships, to CEOs who have gotten their troops looking for and implementing new ways of thinking.  It can be an invigorating time from which we will all learn lessons, making each of us stronger and smarter and positioned for growth in the future.

There is evidence of another by-product of current times that I’ve recently taken note of - a re-energized focus on the customer.  I see it happening in product-oriented companies, in service organizations, in non-profits and in early stage enterprises.  I’m sure that everyone reading this blog entry, myself included, would like to think that we continually and effectively maintain such a focus.  But there is a reality that when times are good and sales are brisk … discipline can wane and human nature can take over.  We may start to take ourselves and our customers for granted and complacency can settle in.  That may go unnoticed for short periods of time, or even longer when masked by new customer acquisition that offsets losses.

Try it now though, and I believe that you’ll quickly learn some expensive and painful lessons.  (more…)

The recent passage of the Stimulus Package (American Recovery and Reinvestment Tax Act of 2009) creates a wealth of tax planning opportunities for 2009 and 2010. The goal of the Stimulus Package is to provide money to taxpayers; the Government’s plan is create an incentive for taxpayers to spend their money in order to stimulate the economy and create jobs.

As the saying goes, “the devil is in the details” – most of the new rules are complicated, technical and temporary. The Stimulus Package includes a wide range of components, many of which can be broken out into three main categories intended to impact particular taxpayers and various aspects of the economy. The three main categories include Individuals, Small Businesses and Low Income/Unemployed Taxpayers.

• Individuals – Families, Education, Real Estate and Auto Industry.

• Small Businesses – Additional Depreciation Elections, Net Operating Losses, Conversion of C-Corp to S-Corp, Work Opportunity Credits.

• Low Income/Unemployed Taxpayers – Enhanced unemployment benefits, COBRA health insurance subsidy, One-time Social Security benefit payments.

Some of the more prominent tax law provisions in the Stimulus Package are available for 2009 and 2010 only; (more…)

In November of last year we called attention to pending changes to the privacy law in Massachusetts that protects state residents’ personal information, and we’ve also just come out with a Perspectives article that details the steps to compliance.  However, good news for companies who deal with this kind of personal data: On February 12, 2009, the Massachusetts Office of Consumer Affairs and Business Regulation (“OCABR”) once again revised its personal information security regulations and postponed the effective date until January 1, 2010.

This means more time to digest the new regulations and act accordingly.  To that end, we’ve scheduled a webinar to review the standards on Tuesday, March 10, and we invite you to register and listen in.  We will be sure to report back after the online event!

As we continue to adapt to the downturn, there are a number of factors around the valuation of companies that are coming into play and, in the end, motivating leaders to re-value options.  We’re seeing this trend develop in real time, and it prompted us to put pen to paper for our most recent Perspectives article, “Giving Stock Options A Second Look: The benefits of new grants at low values.”

In a nutshell, there is some opportunity that comes with economic free-fall: those companies that provide options are now in a position to get a new valuation and re-energize their workforces with incentives.  That means that even as downsizing and paycuts spread out across the country, management still has the power to provide strong compensation packages.

As we write in the article:

When the profits don’t exist to pass on in the way of high compensation, stock options are routinely used to incentivize the employee base and retain key people. With fair values near rock bottom, companies are seizing this opportunity to strategically grant additional options or reprice existing stock options.

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December’s ice storm caused major power outages in communities in the north central MA, southern NH and ME areas. This writer’s entire neighborhood was without power for eleven days. Everyone affected has stories to tell, and in all likelihood there will be others before we return to warm weather.

Here’s a valuable business lesson that’s worth passing on: a multi-million dollar client of MFA with offices in southern New Hampshire is a manufacturer of electronic components for the military and telecommunications industries. It has two facilities elsewhere in the country, however the financial and Enterprise Resources Planning (ERP) applications for all operations are maintained in NH.

The loss of power on Dec 12^th essentially shut down the entire company.

First thing Friday morning, the company’s corporate IT Manager took the initiative to purchase a portable generator, gas cans, power cord, and a 220V locking power plug needed to connect the power cord to the generator. By inputting the generated power thru the existing power conditioning - battery backup units, the company was able to restart critical application servers at the corporate headquarters. By midday the entire company returned to normal operations.

As the next several days unfolded, the equipment and supplies the IT manager purchased sold out throughout the three-state area. 220V locking power plugs that retail for $14 were being advertised on Craigslist.com for $75.

The IT manager was the hero of the day. He has realized, however, that the procedure he followed was entirely his own doing. If he had not taken those steps, there would have been significant lag time until operations restarted.

This manager is now making the smart move of documenting a disaster recovery / business continuity (DR/BC) plan for the company’s three operations. Comprehensive, yet easy-to-follow plans will be in place, instructing whoever is available on the required procedures needed to quickly restart operations, minimizing operational losses to the company.

Business life in New England – always an adventure!

The Commonwealth of Massachusetts enacted a law in September protecting state citizens’ personal information. Originally scheduled for January 1, 2009,  the law will now take effect for all Massachusetts businesses and third party providers beginning May 1, 2009, with other requirements coming into effect January 1, 2010.  The law intends to protect employee personal information from unauthorized access and possible exploitation.

Personal information to be protected includes a person’s name and address, combined with complete social security number, driver’s license or other state-issued number, complete credit card or bank account numbers.

Companies that do keep this information will need to take some prescribed steps towards compliance.  They must:

1.  Establish written policies and procedures for the protection of these files, both in the electronic and physical formats.

2.  Be able to justify the need for all such information kept in house. Obviously employee data is needed to for tax, 401K, and insurance withholdings. But for client records is it possible to only maintain the last four digits of a credit card number?

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Despite the current economic environment, many companies still have healthy balance sheets and cash reserves to manage.  Corporate investment policies are something that come up from time to time among Board members, owners, firm partners, and financial departments of a wide range of companies.  But who’s really thinking about them?

It appears that not many professionals are.  At an event held by the Financial Management Association of NH on Monday, November 10th, less than a handful of financial professionals - out of a crowd of 100+ attendees - acknowledged implementing or being aware of any such policy within their organizations.  That so few of us were up to speed on the topic was a shocking realization to me.   Certainly the executives on hand are responsible leaders at the helms of successful organizations, therefore it stands to reason that such a fundamental step is more commonly deprioritized than it is taken to heart.  Here’s a primer on investment policies, courtesy of Morningstar.

Paul Miller of Axial Financial Group, who served on Monday’s panel along with Al Romero, SVP Business Banking at Bank of America and Matt Finn, VP Finance & Operations at Bradford Networks, highlighted two case studies that underscore the importance of using an investment policy.  One of the case studies  focused on a publicly-traded company that developed an investment policy stating that the “primary objective is preservation of capital and liquidity.”  This policy, which had been vetted by the management team and Board, was credited by that company’s CFO with helping them through the volatility of the past year and keeping them out of investment options such as auction rate securities.  Because of their policy, the company knew to immediately forego any goals of high yield in favor of keeping their cash in the safest vehicles available, and as a result were able to maintain the liquidity they needed.

An investment policy need not be overly complex, but I believe it is a fundamental building block for growing organizations, whether public or private.  And if the current economic climate does not convince us of that, perhaps nothing will!

As I sat late Tuesday evening on November 4^th watching the President Elect, Barack Obama, deliver his victory speech, a reality became apparent that the Bush administration is actually approaching its close and a new administration will be entering Washington.

It’s hard to believe that eight years have passed so quickly and also, as I reflect, that such an incredible number of historic tax law changes were enacted throughout Bush’s term. From tax rate cuts to Alternative Minimum Tax (AMT) relief to economic stimulus packages, the past eight years have been an extremely active time in taxation. As the country enters its next presidential term under new leadership, tax policy will undergo significant change.

One challenge for the new administration is the daunting task of balancing taxation with the government’s commitment to fiscal and social responsibility. If it reduces taxes, vital government programs face cuts, while an increase in taxes would result in a reduction of consumer and corporate spending, thus hampering the economy. President Elect Obama has addressed this dilemma by offering to reduce taxes to families making under $250,000 per year and subsidizing this reduction with increases to families making over $250,000 per year, a reduction of government spending and the elimination of abusive tax loopholes.

Under Mr. Obama’s plan, the following tax incentives are highlighted.

Middle Class Incentives (under $250,000/family)

- Tax credits of up to $1,000 for workers

- A $4,000 refundable credit for qualified tuition expenses

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We have said before that despite the difficult market environment, “hunkering down” may invite even more trouble.  While prudence is a virtue, we always believe - in good times or bad - that efficient use of cash and resources is imperative to a successful business.  This is a time to be aggressive, not passive, in establishing a position of strength.

However, it must be acknowledged that there will be some adjustment to the times, and one area that companies can address is collections. Before considering cuts that could stall your company’s momentum, be certain that you are collecting on the profits you have already earned.

Here are a few tips on collections from Charlie Colarullo of Transworld Systems, a profit recovery agency:

1.  Regularly review all customer accounts and send written demands for accounts that are less than 6 months overdue. If you work with a collection agency, submit past due accounts on a consistent basis to ensure the recovery effort is always in motion.

2.  If you use an agency, become familiar with all the reporting tools that are available online and regularly view them to keep up to date on the performance of your account.

3.  Use verbal demands for accounts 6 months overdue and beyond.

4.  Don’t accept “payment arrangements” on accounts that are in the verbal demands stage. The debtor has already ignored your efforts to collect and written demands, therefore accepting payment arrangements now could only further delay the collection of the debt owed to you.

While it shouldn’t need to be said, please remember to take care of your business by remaining proactive on issues such as collections, business development, marketing and innovation.

Forward thinking activities are the differentiators in an otherwise difficult economy, and will set the stage now for future wealth creation and success.  Staying active in these areas will prevent stagnation, because once a business is stalled, it can be difficult to climb back into motion, regardless of market conditions.