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

- A 10% refundable credit for mortgage interest payments

- Eliminate income tax for seniors making under $50,000

- Expand Earned Income Credit, child care credits, clean vehicle credits and retirement savings incentives

Business Incentives

- Elimination of capital gains tax on investors in small businesses

- Cutting corporate tax rates for companies creating jobs in the US

- 50% refundable credit for small businesses paying employee premiums

- Making the Research and Development Credit permanent

On the flip side, Mr. Obama’s plan includes the following tax increases and reform:

Tax Increases to Families Exceeding $250,000 and an adjustment to Estate Tax

- Top tiered income tax rates restored to pre-Bush levels of 36% and 39.6%

- Long-term capital gain tax rate increase from 15% to 20% (families making under $250,000 will continue to pay 15%)

- Qualified dividend tax rate increase from 15% to 20% (families making under $250,000 will continue to pay 15%)

- Estate tax will retain a rate 0f 45% for those estates over $7M

Tax Reform

- Reforming international tax loopholes by eliminating incentives for shipping jobs overseas

- Closing domestic tax loopholes by clarifying the economic substance doctrine and increasing reporting on capital gains

- Elimination of tax incentives of oil and gas companies

- Closing other loopholes such as taxing carried interest as ordinary income and closing the CEO pay loophole

- Increase in the investigation of offshore tax havens

As evidenced by the items above, it’s easy to conclude that embodied in Mr. Obama’s plan is an underlying (and well-publicized) theme of “redistribution of wealth.” The goal is primarily to lessen the gap between the middle class and upper class — a gap that has widened to historic proportions under President Bush’s administration. Using AMT as an example, a number of middle class taxpayers become subject to a tax that was intended for the wealthy, thus subsequently forcing temporary patches included in various economic stimulus packages.

“Change” was the theme of Mr. Obama’s campaign and this will be what we can expect with taxation. We also should keep in mind that regardless of the items listed above, it is likely that events will occur that can drastically change his comprehensive tax plan. We only have to look as far back as the changes enacted by the Bush administration, and certainly we don’t need to be reminded of the famous words uttered by the elder George H.W. Bush that helped him win the 1988 presidential election.  Luckily, we were not very good lip readers.

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.

On Tuesday, September 23rd, the Financial Management Association of New Hampshire (”FMA of NH”) hosted its first event entitled “Preparing for a Successful Liquidity Event in Today’s Volatile Markets“.  I am fortunate to be among the founders of FMA of NH and to have had the opportunity to participate in the panel discussion on this very timely topic.  Peter Alternative and Bas van der Brugge of Mirus Capital started the evening’s discussion with a recap of the current market environment for merger and IPO activity, and touched on the availability of funds from the venture and investment community.  Steven Bell, Senior Director of Finance at venture-backed Vertica Systems, Inc., also particpated on the panel and gave his corporate perspective of deal activity and funding availability [in the way of full disclosure, Vertica is also an MFA client].

The evening’s discussion has me thinking more and more about this topic.  Let’s make no bones about it - the IPO market quite clearly is closed for the time being and we don’t expect to see any liquidity from that market in the near term.  Similarly, our guests from Mirus painted a pretty bleak picture on the M&A front.  However, there was a contrast worthy of note, and I continue to see anecdotal evidence in the market that suggests that all is not lost.  For example, one might think that this is not the time to be raising new money from venture or angel investors.  But as Steve fairly pointed out, companies like Vertica that have a solid business strategy, sound leadership team, and a market solution that customers are clamoring for, can still raise equity with relative ease.

I have been taking note these past few weeks of a number of examples whereby emerging technology companies have closed on new rounds with new investors, not just inside rounds.  Cash-rich investors, not just VCs, are still on the hunt for new deals and are approving and funding new deals.  Private equity investors are closing on new funds and are adjusting their models to rely less on the debt markets to get deals done.  We also have clients receiving LOI’s as early as this week from strategic buyers at healthy multiples.  An LOI doesn’t mean a deal will close, per se, but I find it to be an amazing sign of optimism in a market such as this.

I won’t deny that these are extremely difficult times for anyone looking to raise capital or execute on an exit strategy - they are.  The options have been severly limited by market forces.  But opportunities abound  in both day to day operations (as noted in Carl Famiglietti’s recent post) and capital strategy if you’re ready for the challenge of finding the right investment partner.  I encourage every entreprenuer reading this blog entry to stay true to his or her vision, focus on execution and market penetration, and continue to forge the necessary relationships to ensure success.

UPDATE:  I found this great blog post, even among others like Ron Conway’s recent email, that puts forth some great thoughts on this subject:  During Tough Times, The Echo Chamber Can Be Your Best Friend. 

The volatility on Wall Street last week was another in a long line of events that is making for an historically unstable economic environment. However, in our line of work we see a lot of the activity on the front lines, and we want to emphasize that there is still business to win and still growth to attain. Despite a climate that is financially questionable relative to recent years, the capitalist nature of the country offers opportunities for businesses to thrive – even in anxious times.

Our latest audiocast is on this very subject, and I encourage you to give a listen below or download the mp3. Feel free to drop us a comment or an email if you have any questions…as always, we’re happy to engage in a discussion about what’s happening across the business landscape.

New guidelines on fraud prevention tactics were issued this summer in a joint effort by the Association of Certified Fraud Examiners, the AICPA, and the Institute of Internal Auditors. You can check out a summary press release here; the general theme they convey is that companies need to do more to prevent fraud along a number of fronts:

Five key principles within the guidance address governance, risk assessment, fraud prevention and detection, investigation, and corrective action. Following the guidance will help ensure that there is suitable oversight of fraud risk management, that fraud exposures are identified and evaluated, that appropriate processes and procedures are in place to manage those exposures, and that fraud allegations are addressed in a timely manner.

The risk of fraud is substantial and the median loss amounts have been increasing steadily over the years. For that reason I certainly share the desire to alert company leaders to the risk, especially in the current economic climate. The pressures of fraud are increasing on individuals as consumerism meets a downturning economic environment. The credit crunch, falling housing prices and the pressures of a consumption lifestyle will turn the unlikeliest individuals to acts of misappropriation (more on that in this MFA audiocast).

Though trust and delegation of authority are integral parts of enabling an organization’s members to achieve truly remarkable levels of performance, the lack of oversight can also open up gaps that enable fraud. They can be closed, however, through sound management principles that create oversight mechanisms that will monitor activity, promote transparency, and ensure that the collective assets of the organization are protected from malfeasance.

Despite suffering loss, organizations still have the onus of proving it and recovering lost property, often without the active involvement of law enforcement. Public agencies have limited resources and are often diverted by other causes — and no preventive regulations will ever match the safeguards provided by sound management and a well laid out process.

Local PD’s don’t have the resources to conduct forensic audits, and state and federal agencies only commit to glamour cases. These glamour cases are often restricted to publicly traded companies, identity theft, defrauding investors and other public related matters…there are many gems in this area, but a regional standout was the TJX case that surfaced last year. Internal breaches of fiduciary responsibility, especially when they involve businesses, are often low on the law enforcement totem pole.

The most important starting point in fraud prevention is realizing that the responsibility rests squarely on management’s shoulders to minimize opportunities for a potential fraudster. These newly issued guidelines cite practical approaches to prompt responsible managers to institute appropriate control mechanisms into their organizations. Applying such principles of effective oversight can promote efficiency, create transparency and effectively mitigate an organization’s risks of fraud.

This summer marked the passage of some noteworthy tax reform in Massachusetts that will be on our minds as year-end strategies start to take shape. Specifically, Governor Patrick signed an Act Relative to Tax Fairness and Business Competitiveness that his office says will close some corporate loopholes while reducing income tax obligations.

Key components of the Act include a combined reporting element that goes into effect next year and will have a significant impact on multi-state operations accustomed to filing separate returns; Massachusetts conformity with federal business entity classification; and reduction in overall corporate tax rates beginning in 2010.

While the tax reform generates additional income for the state — up to $482 million, according to the Massachusetts Business Roundtable — the changes create an interesting balancing act for companies. Depending on the extent of local operations, they may need to look at how much their in-state infrastructure will affect their tax payments.

We will take a more indepth look at the reforms for our annual tax seminar in the Fall, and in the meantime will continue to monitor major developments that take effect in 2009.

My inaugural blog for MFA has me thinking about transparency in business. After all, what is a corporate blog if not the embodiment of a transparent means of communication with one’s clients, colleagues, and interested stakeholders. Transparency has been, in part, facilitated by technology, and hence the birth of tools such as this blog. My goal each week is to use this tool, like so many of the technological tools before it, to deepen our relationship with MFA’s core constituencies and encourage open dialogues on a varying degree of subjects over time.

Like business in general, change is ever-present in public accounting. We must remain expert on technical financial reporting pronouncements that are continually evolving; we must continually demonstrate our expertise of complex federal, state and international tax laws; and we must have a solid understanding of the economic environment in which we all live and operate our businesses. One need look no further than to recent FASB actions to understand how the theme of transparency continues to pervade business. More and more, FASB projects are actively addressing the questions of fair value accounting, convergence of US accounting standards with international accounting standards, and simplification of the existing bodies of accounting knowledge – all great examples of how transparency in business and reporting continues to pervade every facet of what we do.

Having grown up in the 80s, my first introduction to the use of technology to speed up business was in the form of fax machines and so-called portable computers that probably weighed fifteen pounds without a modem or network access. Many enterprises did not have local area networks, the internet was barely known to most and the World Wide Web had yet to come into existence – I lived online in the limited world of AOL and couldn’t email someone unless they, too, were an AOL member.

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